Federal Court discretion in ordering the wind up of a company – relief for unfairly treated director

A recent decision in the Federal Court considers judicial discretion to order the winding up of a company in a situation where it is the only course of relief for an unfairly treated director.

The case of Miao v I Need A Massage Pty Ltd [2019] FCA 1199 is the nightmare story for every director, these are the facts:

• Ms Miao and Mr Luo were both directors and shareholders of the company (I Need A Massage Pty Ltd) which was used to purchase and operate a massage business.
• The directors contributed equally to the purchase of the business and therefore received equal shares in its income and contributed equally to its expenses.
• Following a dispute between the parties, Mr Luo locked Ms Miao out from the business, removed her as a director of the company and altered the company’s share register to reduce her shareholding to nothing.
• The company later sold the business and the proceeds of that sale were retained by Mr Luo.
• Ms Maio had no knowledge of Mr Luo’s conduct. She had not provided consent nor given authority for these actions to be taken.
• Ms Maio made application to the Federal Court claiming that Mr Luo’s conduct was oppressive and seeking orders that she have access to the company’s financial records, company meeting minutes, that the ASIC register be rectified and that the company be wound up.

The Decision:

• The Federal Court found in favour of Ms Maio and held that Mr Luo had engaged in oppressive conduct.
• The Court ruled that Mr Luo did not have the ability to remove Ms Miao as a director of the company, reduce her shareholding and sell the business without her consent.
• As a result, the Court ordered the winding up of the company with His Honour Justice Reeves noting that “winding up the company and appointing a liquidator to it is the only course by which Ms Miao may obtain some relief from the unfairly prejudicial manner in which Mr Luo conducted the company’s affairs.

Important take away points for directors:

1. As a director of a proprietary company, you cannot be removed or, you cannot remove another director unless there is a resolution of the shareholders.
2. You cannot reduce a shareholder’s shareholding without their knowledge, consent or authority.
3. Judges are reluctant to order the winding up of a company. There are well-established case law principles that “the winding up of a successful and prosperous company is an extreme step, and one which must require a strong case” (see Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478 at 494).
4. However, the Court will exercise its discretion to wind up a company in considering the following factors:

(a)  The relationship between the shareholders/directors and effect on the operation of the company;

(b)  The status of the company’s financial position and business activities;

(c)  Whether there is alternative relief available to an aggrieved director/shareholder.

Our Litigation & Alternative Dispute Resolution team at Burke Lawyers are able to assist in all areas of business and contractual disputes, breach of director duties, shareholder and corporate partnership disputes and disputes in relation to the Corporations Act 2001 (Cth).

Please do not hesitate to contact Meghan Warren or Rosy Dean today.