PART 2F.1 OF THE CORPORATIONS ACT

Section 232 allows the Court to give relief to an applicant where the conduct of the company’s affairs is oppressive or unfairly prejudicial to a member. This section clearly covers omissions, and extends to isolated acts, and all past, present and future conduct. The conduct does not need to be continuing. The remedy is available for acts or omissions of anyone taking part in the conduct of the company.

Section 53 provides a guide to what is included in the definition of a company’s ‘affairs’, and includes the internal management and proceedings of the company, together with any transactions, dealings and business of the company.

Section 234 provides that a member of the company have standing to bring a claim under this Part, whether in their capacity as a member, or in their capacity other than as a member.  

APPLICATION

The courts have interpreted section 232 broadly. The test of fairness is an objective one, and is a question of commercial fairness judged objectively as a commercial bystander  Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 . The assessment looks at the time of the conduct, and not on what becomes known subsequently. Fairness will be assessed in light of the context of the situation e.g. what is fair between commercial partners may not be fair between members of a family company  O’Neill v Phillips [1999] 2 All ER 961 .

There are numerous situations where the courts have found that there is oppressive conduct. One should note that even if certain conduct complies with the Constitution, or has its basis in law, the exercise of any such power might still be oppressive or unfairly prejudicial.

The courts can consider the member’s legitimate expectations arising out of agreements and understandings made between other members or directors of the company.

In a context where a member is being excluded from the management of the company, the prejudice lies not in the removal alone, but in exclusion without a reasonable offer to purchase an applicant’s shares.

In  O’Neill v Phillips,  the court found that a reasonable offer for the purchase of shares must be at a fair value, and if not agreed, should be valued by a competent valuer. Both parties should have the same right of access to information for determining the value of the shares, and both should be able to make submissions to the valuer. However, any claim for this remedy may involve the offers to purchase or sell shares, and a similar test for the offers may apply.

COMPROMISED APPLICANTS

This section of the Act is often used as a threat in other negotiation situations. If the respondent can show to the court that the applicant is not genuinely seeking relief under this section, but has instituted proceedings with the predominant motive of exerting pressure to achieve some ulterior purpose, the court will dismiss the proceedings as an abuse of process.

Further, if the use of the legal system by the applicant is deemed and abuse of process and causes damage to the company (e.g. by a detrimental announcement of the company being wound up etc.), this is actionable in tort. Such an aggrieved respondent may also consider bringing action against the applicant for malicious prosecution.

Whilst there is no requirement that the applicant bring ‘clean hands’ to the proceedings, the conduct of the applicant may render the respondent’s conduct not unfair, or may affect the relief given.  

OTHER POSSIBILITIES

A shareholder of the company may bring a similar action against the former director for similar conduct. Oppression and unfairly prejudicial conduct has been found by the courts in circumstances where there has been improper diversion of business, where a respondent diverts business from the company to another business where the respondent has an interest but the applicant does not.  

REMEDIES

Remedies that the court may order under this Part include:

• That the company’s constitution be modified or repealed;
  
  
• Regulating the conduct of the company’s future affairs;
  
  
• The purchase of shares of any member by other members or by the company;
  
  
• Directing the company to institute, defend, discontinue etc. proceedings;
  
  
• Appointing a receiver;
  
  
• Restraining or requiring a person to do a certain thing or to engage in certain conduct, or
  
  
• The company be wound up.

Whilst the courts are no longer prevented from making this order only in the event that the winding up would not unfairly prejudice the oppressed member, the courts are still reluctant to wind up a solvent company under this Part. The most common remedy is an order for the purchase of shares.  

NEED MORE INFORMATION

Behan Legal assists and advises on these important issues. For an appointment, call 03 9646 0344.