Introduction

One of the most emotionally driven, time consuming and costly aspects of owning a company in partnership is, without doubt, having a dispute between shareholders. Where there is a dispute between shareholders, an oppressive conduct claim under section 233 of the Corporations Act 2001 (Cth) (“Act”) can be made by a shareholder of the company where they believe the other shareholders are acting contrary to their interests.

Regulated under the Act, oppressive conduct occurs where the actual or proposed conduct is contrary to the interests of the shareholders or oppressive to, unfairly prejudicial to, or unfairly discriminatory against a shareholder.

From 1 October 2014, the Supreme Court of Victoria is trialling a six month pilot programme in respect of oppressive conduct applications.

Pilot programme

The Supreme Court is undertaking the pilot programme with the objective of ensuring that applications made under the programme deal solely with the issues in dispute, rather than deal with the emotional baggage that is often attached to small and medium enterprises (“SME”) or family businesses.

From 1 October 2014, applications seeking relief under section 233 of the Act are to be supported by an affidavit which:

  • is no longer than three pages;
  • clearly sets out the facts constituting the alleged oppressive act;
  • exhibits a current ASIC company search; and
  • has no additional or further exhibits.

Following the initial application, a conference before an Associate Judge is to be held where all parties (and lawyers) are expected to attend.  The conference provides the opportunity for the Associate Judge to explore and determine whether or not the application can be resolved at that time.

Should the matter not resolve at the initial conference, the Associate Judge will make directions as to how the matter is to be handled.  Options include a valuation of the business or mediation.  Importantly, in an initiative designed to save costs, no further material can be filed until the mediation has taken place.

If the mediation is unsuccessful and the matter is still unresolved, then the Associate Judge will make further directions for a hearing to take place.

Benefits

The pilot programme undertaken by the Supreme Court is likely to be of great benefit to SMEs and family businesses.  Traditionally the cost of an oppressive conduct application can far outweigh the value of the business which is in dispute.  This concern is one of the main reasons the Supreme Court is trialling the programme.

An additional benefit of the programme is that a mediation is conducted prior to voluminous supporting material being prepared and presented to the court.  This should substantially diminish the costs incurred by the parties prior to a suitably qualified mediator having the opportunity to resolve the dispute.  The potential savings are considerable.

This of course does not mean that families do not need to sit together to seek to resolve other issues.  Indeed, the legislative changes promote the cooperative approach to family business problems.

Oppressive conduct

Examples of such potentially oppressive conduct include:

  • refusal by directors (who are shareholders) to register transfers to outsiders;
  • directors issuing shares to disadvantage the minority shareholders (diluting the shareholding);
  • providing limited access to the records, financial information and books of the company; and
  • unwarranted or impermissible spending of company funds.

The above examples are all actions which fall under the oppressive or unfair conduct scope and entitle the court to make an order against the company.

Historically, and especially in family businesses, the oppressive conduct usually occurs over time and involves numerous acts by the ”oppressor”.  Accordingly, it is not unusual for the application to be made by a disgruntled family member who is emotionally invested in not only the business itself, but also with the family politics which may be a factor behind the scenes.  It is common to see affidavits in support of an originating application in excess of 20 pages, which comes at a great expense to both the business and the shareholders and does little to quickly resolve the dispute.

And lastly

The recent changes to the oppressive conduct applications are a welcome initiative by the Supreme Court and are aimed squarely at resolving the issues at the heart of the application (and dispute).  The programme provides a great opportunity for parties in dispute to have their application resolved by mediation prior to incurring substantial costs associated with a hearing.  We applaud the initiative.

 

The above article was originally published by James Garrett and Cecili Irvine-So of Moores (http://www.moores.com.au/). It can be found at http://www.moores.com.au/news/short-sharp-to-the-point-resolving-oppression-claims-without-the-hassle

 

 

Share on Facebook+1Share on LinkedInShare on Twitter

Tagged: , ,

Follow: Subscribe to this post's comments