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Winding up on just and equitable grounds: quasi-partnerships

Section 461(1)(k) of the Corporations Act gives the Court the power to wind up a company and appoint a liquidator if the Court is of the opinion that it is just and equitable for it to do so.

The situations in which it may be “just and equitable” to wind up a company are not exhaustively listed in case law. In a recent decision from Western Australia the Court found that the failure of the purpose of a single purpose company was sufficient cause for the “just and equitable” decision to wind up the company.

Likewise, the Court deemed it “just and equitable” to wind up a company that had suffered a loss in confidence in its ability to conduct its affairs, and posed a risk to the public interest.

While both these examples are in quite different circumstances, the majority of situations where the Court finds it just and equitable to wind up a company involve an irreconcilable dispute between the people who control the company. Often, these cases involve companies that have started between people who had a good personal relationship of trust and confidence. When disputes arise that sour this relationship, there are “just and equitable” obligations comparable to those present in a partnership company relationship that become important.

In these cases, often called “quasi-partnership cases”, the parties are mostly co-directors. The close or personal relationship between the parties is likely to be fundamental to the smooth running of the company in question. Importantly, a legal partnership relationship does not have had to exist prior to the incorporation for the just and equitable obligations to be relevant.

In Nassar v Innovative Precasters Group Pty Ltd (2009) NSWSC 342, the Court found that “mutual co-operation and a level of trust” was essential for the smooth running of the company’s day to day management. In that case, the Court held that “winding up is the characteristic remedy in circumstances where a working relationship predicted on mutual co-operation, trust and confidence has broken down”.

It is important to consider section 467(4) of the Corporations Act when deciding whether or not to make an application for the winding up of a company. That section obliges the Court to determine whether the applicant seeking the winding up order is doing so reasonably and whether some other remedy is readily available.

In consideration of section 467(4), the Court in Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) NSWSC 104, decided that a more reasonable remedy to the dispute was the compulsory acquisition of the applicant’s shares by the other shareholders or company. However, there have been occasions where this option is considered impractical, where the financial situations of co-shareholders would prevent this, and winding up is the only viable option to dissolving a deadlock (see Nassar v Innovative Precasters Group Pty Ltd).

It is important to note that there is no legal principle that prevents the winding up of a successful and profitable business if the Court deems that it is “just and equitable” to do so.

For more information or to get advice about your business contact our Insolvency and Dispute Resolution Team:

P 02 6215 9100

E stipe.vuleta@chamberlains.com.au

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