Insolvency and Directors: Protecting Yourself from Liquidator Claims
As a company director, dealing with insolvency can be one
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Disputes disrupting business? Let Boss Lawyers assist with strategic & pragmatic shareholder dispute resolution
Shareholder disputes can cripple a company. Disputes between directors and company shareholders can have serious consequences, affecting the company’s operations and long-term viability.
Dispute resolution lawyers can give strategic legal advice on complex legal challenges that may arise from a company’s constitution. Having a well-drafted shareholder agreement can help mitigate conflicts. Our commercial litigation lawyers can help ensure fair outcomes should such disputes arise.
A shareholders agreement is a binding contract between the shareholders of a company. It governs their relationship and specifies who controls the company, how ownership and management are structured, and how disputes should be handled.
A well-drafted shareholder agreement should outline:
A comprehensive shareholder agreement is essential in minimising partnership disputes and ensuring smooth company operations.
As a company director, dealing with insolvency can be one
Running a business in Queensland comes with a unique set
Business disputes are an inevitable part of running a company,
Shareholder agreements are critical in defining the rights and obligations
A shareholder dispute can arise in various situations, including:
Shareholder disputes arise for various reasons, including breaches of fiduciary duties, unfair treatment of minority shareholders, or mismanagement of company resources. If you’re facing conflicts with your business partner, our business partnership dispute lawyers can help protect your interests and resolve the matter efficiently.
The governing documents of a company, particularly the Shareholders Agreement, often outline the dispute resolution process. This may include mechanisms such as buy-out clauses, mediation, market sales, or wind-up provisions. Reviewing these documents should be the first step in any shareholder dispute.
If the governing documents do not provide a solution, or if they do not exist, relief may be sought under the Corporations Act. Claims of deadlock often involve allegations of oppression or breaches of directors' duties. Under the Act, the Court has the power to:
Shareholders involved in a dispute may apply to the Court under section 461(1)(k) of the Act to wind up a company on just and equitable grounds. Courts are generally reluctant to order a wind-up, especially if the company is solvent. However, in cases of irreparable breakdowns, a winding-up order may be granted. Courts are, however, extremely reluctant to grant such applications to wind up a company especially if the company in question is solvent. See for example the decision in International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No 2) (1994) 18 ACSR 603. Note however, that even in cases where the Courts have held that the appropriate remedy is to wind up the company, they do also, in most cases, adjourn or suspend its order to allow the parties to reach a compromise before the formal order is made.
In cases where relationships have completely broken down, an application may be made to the Supreme Court for the company’s liquidation. The Court must be satisfied that ongoing disputes prevent the company from functioning effectively.
Section 232 of the Act sets out the grounds on which a Court may make an order under section 233 if the conduct of the Company’s affairs, an actual or proposed act or omission by or on behalf of a Company or a resolution or proposed resolution is either:
In Van Wijk (Trustee), in the matter of Power Infrastructure Services Pty Ltd v Power Infrastructure Services Pty Ltd [2014] FCA 1430, a shareholder dispute resulted in a Court-appointed provisional liquidator taking control of the company. This case highlights how failure to resolve disputes can lead to a loss of control, reputational damage, and even the liquidation of the business. Learn more about bankruptcy.
The case above demonstrates that, where directors and shareholders fail to reach an agreement they may have control of the company taken away and a provisional liquidator appointed. Whilst a provisional liquidator has the power to operate the business of the company or to close the business and sell off assets, it is perceived as a negative event in the general market place and can trigger, in some cases, contractual breaches in commercial contracts.
Another possible consequence of shareholder disputes is a Court ordered winding up. In the case discussed, though the outcome of the application was not decided at this instance, Mr Van Wijk had applied for the winding up of Power under the Corporations Act 2001 (Cth) on the following grounds:
A breakdown of relations between company’s members may support a winding up on the just and equitable ground where it frustrates the commercially sensible operations of the company.
It is a real possibility that a shareholder dispute could result in the company’s winding-up.
To avoid situations like this one, we recommend companies seek to resolve issues internally, with mediation, before escalation sees the matter taken out of their hands.
The governing documents of a company, particularly the Shareholders Agreement, often outline the dispute resolution process. This may include mechanisms such as buy-out clauses, mediation, market sales, or wind-up provisions. Reviewing these documents should be the first step in any shareholder dispute.
If the governing documents do not provide a solution, or if they do not exist, relief may be sought under the Corporations Act. Claims of deadlock often involve allegations of oppression or breaches of directors' duties. Under the Act, the Court has the power to:
Shareholders involved in a dispute may apply to the Court under section 461(1)(k) of the Act to wind up a company on just and equitable grounds. Courts are generally reluctant to order a wind-up, especially if the company is solvent. However, in cases of irreparable breakdowns, a winding-up order may be granted. Courts are, however, extremely reluctant to grant such applications to wind up a company especially if the company in question is solvent. See for example the decision in International Hospitality Concepts Pty Ltd v National Marketing Concepts Inc (No 2) (1994) 18 ACSR 603. Note however, that even in cases where the Courts have held that the appropriate remedy is to wind up the company, they do also, in most cases, adjourn or suspend its order to allow the parties to reach a compromise before the formal order is made.
If you find yourself in a company or director deadlock that has caused a shareholders dispute, it’s important that you take action immediately.
Talk to our shareholder dispute lawyers and they can advise you about your rights and obligations in dealing with shareholder disputes, either through commercial negotiation or Court proceedings.
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About Mark Harley | Principal
Mark has practiced in commercial law, commercial litigation and insolvency law for almost 10 years. He established the firm in 2014.
With degrees in law and information technology, as well as being a director of several companies, Mark speaks the language of business owners and has a first hand understanding of the issues facing his clients.
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