What are the options to resolve a shareholder dispute?
Small private companies afford a lot of control to their shareholders, for instance, some shareholders could also be involved in directorships of the company.
As such, disputes between shareholders can lead to deadlock on company decision-making. This is obviously not ideal. If you find yourself in a dispute with another shareholder you can:
- Mediate an agreement; or
- Wind up the company.
Mediate
The best outcome is to negotiate a solution to the dispute. Consider whether the dispute is one which can be resolved. This is preferable to ensure the company’s continued existence. Consider whether the dispute could be resolved mutually, or perhaps by one shareholder buying out another.
Mediation can be conducted formally or informally – see our previous blog.
If the dispute is so great that it is no longer in everyone’s best interests to continue working together, the best option may be to wind up the company.
Wind up
'Winding up' refers to liquidation of the company. This means it will be completely dissolved and cease to exist. The company can be wound by agreement. This involves appointing a liquidator agreed upon by all parties. Alternatively, it can be wound up by application to the court.
Application to the court to wind up a company
Section 461 of the Corporations Act 2001 (Cth) lists different categories for when a court may wind-up a company. Some of these include:
- If the company has passed a special resolution that it be wound;
- If this is the case, a copy of the special resolution must be lodged with ASIC within 14 days of its passing.
- If directors have acted improperly in their duties or acted in any way that is unjust or unfair to other members;
- If the company’s business is being conducted oppressively or in a way that unfairly discriminates against one or more members, or if a particular act/omission/resolution is oppressive/discriminatory;
- If the Court deems it ‘just and equitable’ that the company be wound up.
Note this list is not exhaustive, and other provisions could apply to your situation.
'Just and equitable'
These circumstances are construed by the Court and are complex. The Court will consider the seriousness of the deadlock and whether it is capable of being resolved through other avenues. This power of the Court is particularly applicable to situations of small private companies, where shareholder relationships may have experienced a breakdown of trust and confidence.
Courts are usually reluctant to wind up solvent companies, due to the effects especially on employees. Nonetheless, if the Court deems a dispute incapable of being resolved, it can bring the company’s existence to an end this way.
Winding up by special resolution
In compliance with the requirements under section 491 of the Corporations Act 2001 (Cth), a company can also be wound up voluntarily if it so resolves by special resolution. A majority of the company’s directors must make a written declaration that they have inquired into the affairs of the company and determined it is solvent. Only after the directors’ declaration has been made, the special resolution can be put to the company’s members. If passed, the special resolution allows the company’s members to appoint a liquidator of their choice.
How can I learn more?
Lu Cheng.
Principal.
- Disputes & Business Law
- 03 9890 3321
- Email Address: l.cheng@robinsongill.com.au
Lu is an Accredited Specialist in Commercial Litigation. She holds a Bachelor of Law from the University of Melbourne and was admitted to practice in 2008.
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