Remedies under the Corporation Act 2006 - Essay Example

Generally, a minority shareholder has at least two sta y remedies under the Corporation Act 2006 or CA 2006. These remedies are an application to have the company wound up on the 'just and equitable' ground (s 122(1)(g) IA 1986); and (2) an application for an order from the court on the ground that the company's affairs are being conducted in a manner which is 'unfairly prejudicial' (Part 30 CA 206, ss 994-998). The second remedy allows the company to continue its business. In addition to these, there are also various other remedies for specific 'internal' situations. Considering that Quincy, despite the events, is very anxious to participate in Roar once more, then the first remedy an application to have the company wound up on the 'just and equitable' ground, while legally feasible, may not be resorted to. The most appropriate remedy that Quincy should avail is the second remedy of applying for an order from the court on the ground that the company's affairs are being conducted in a manner which is 'unfairly prejudicial' under Part 30 CA 206, ss 994-998 because this remedy allows Roar to continue its business. CA 2006 (s 994) gives Quincy very flexible solutions to disagreements within Roar without having to necessarily wind up the company under the first remedy. Specifically, s 994(1) CA 2006 provides as follows: "A member of a company may apply to the court by petition for an order under this Part on the ground - (a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. The 'Act or omission' under this Section can include either an isolated act or omission or a continuing situation, depending on the circumstances. In fact, in Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 33, this can even include an act which took place before the petitioner became a shareholder. Furthermore, the legal import of the term 'Conduct of the company's affairs' has been considered in Re Legal Costs Negotiators Ltd (1999) 2 BCLC 171 CA wherein there were originally four individuals who set up a company, each was a director and employee and each had an equal amount of shares. When the relationship with one person broke down, he was dismissed subsequently as an employee although he resigned as a director just before he was removed. Nonetheless, he remained a shareholder although he refused to sell his shares to the other three. When the majority petitioned under s 459 CA 2006 for an order that he should transfer his shares to them, the petition was rejected because of the distinction between this remedy and personal actions, i.e. in this statutory remedy, what is relevant to consider is the 'company's affairs'. In the given situation, the following facts clearly indicate that the company's affairs are being or have been conducted by Patrick and Sally in a manner that is unfairly prejudicial to the interests of Quincy, a minority; and an actual act of the company (including an act or omission on its behalf) is so prejudicial to Quincy: Patrick and Sally have remove Quincy as a director; Patrick and Sally take out any profit from the business as director's salaries; and they also decide to change the nature of the business which by the Articles of Association requires a 75% majority. In fact, the 75% requirement in amending the Articles of Incorporation was not met because Patrick and Sally only owned at least 70% of the shares. Moreover, Patrick and Sally appropriated several valuable contracts to Sally's company, Tiddles Limited (Tiddles) which would normally have gone to Roar in order to make sure that no benefit will come to Quincy from these contracts. Clearly, these events and the facts taken together not only constitute a basis to grant an application for an order based on the ground that the company's affairs are being conducted in a manner which is 'unfairly prejudicial' (Part 30 CA 206, ss 994-998) but a basis tp grant an application to have the company wound up on the 'just and equitable' ground (s 122(1)(g) IA 1986) as well. In fact, were it not for Quincy's intention to participate in the business again, a petition for winding up would have been successful. Moreover, Lord Hoffmann in O'Neill v Phillips noted that "This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in Westbourne Galleries Ltd. adopted in giving content to the concept of 'just and equitable' as a ground for winding up. Justified by the use of the word 'unfairly' (Re Saul D. Harrison & Sons plc [1995] 1 BCLC 14, CA), The court 'takes a broad view and has regard, where appropriate, to wider equitable considerations' (Farrar). Also, Lord Hoffmann in O'Neill v Phillips stated that: "It is clear from the legislative history that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles." As to the effect of agreements between the parties, Lord Hoffmann in O'Neill v Phillips stated: " I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged" This remedy is effectively suited for Quincy because the court, if satisfied that a petition under this Part is well founded, may make such order as it thinks fit for giving relief in respect of the matters complained of and without prejudice to the generality of subsection (1), the court's order may (a) regulate the conduct of the company's affairs in the future; (b) require the company - (i) to refrain from doing or continuing an act complained of, or (ii) to do an act that the petitioner has complained it has omitted to do; (c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct; (d) require the company not to make any, or any specified, alterations in its articles without the leave of the court; (e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly. Under this remedy, 'Clean hands' rule of equity does not apply because petitioner's conduct will not in itself be a reason for rejecting the petition although, it may show that the petitioner is not unfairly prejudiced, or it may effect the remedy given by the court see Re London School of Electronics [1986] Ch 211. In fact, in the given situation, it cannot be said that Quincy is guilty of any wrongdoing that would make his hand unclean under the rule of equity. Such clean hands rule, therefore, cannot be invoked by Patrick and Sally. Under this remedy, the usual order sought is for purchase of petitioner's shares by company (provided the statutory provisions are be complied with) or another shareholder and on condition that the court will fix a price without usually a discount for the shareholding being a minority. However, this alternative remedy of purchasing petitioner's shares is not acceptable because Quincy is interested in participating in business. In fact, Quincy is one of the Managing Directors. Also Quincy should also be advised that a s 122(1)(g) petition and unfair prejudice remedy can be pleaded together in the alternative. The general rule is that no winding-up order will be made if 'the court is. of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursing that other remedy' (s 125 IA 1986), eg of 'unfair prejudice' remedy or fair offer to buy shares. In this case, the basis for granting a petition for winding-up no wider than that for 'unfair prejudice' - should maintain a balance between the two actions. Moreover, even assuming that Quincy does not want to participate in the business anymore and would rather opt for its winding up, still Quincy still has to hurdle the requirements before a winding up petition can be made. A petition under s 122 is the end of the business life of the company, so if there is some other remedy, the court will not wind-up the company, and hence, the main alternative is s 994 CA 2006 (unfairly prejudicial conduct). The mere existence of a possibility of a Part 30 action does not exclude a winding up on the just and equitable ground: Re a company (No 001363 of 1988), ex p S-P [1989] BCLC 579) although it is unlikely that s 122 will be allowed. Where a remedy under s 994 is available (Re a Company (No 004415 of 1996) [1997] 1 BCLC 479, winding up petitions are struck out because likely that unfair prejudice petition would provide a better remedy and allow company to carry on trading. For example, petitioner might have alternative remedy available in Articles if there is a procedure to sell shares. If there is such an alternative, petitioner cannot use the remedy under s 122 (eg Re a Company (No.002567 of 1982) [1983] 1 WLR 927. Thus in Re a Company (No 007623 of 1984) [1986] BCLC 362, it was ruled that petitioner must first offer shares to the other members at a fair price while O'Neill v Phillips [1999] 1WLR 1092, the court considers what is a reasonable offer for shares. Whether there was a reasonable offer by the other members to buy out the petitioner's shares depends on circumstances: Virdi v Abbey Leisure Ltd [1990] BCLC 342, CA. If the petitioner might not have obtained proper price for shares under the procedure in Articles as his shares might have been given a discounted valuation so he was not acting unreasonably in not using that remedy. Quincy can argue that there is no such provision in the Articles of Incorporation requiring him to offer his shares. It should also be noted that the case of Ebrahimi v Westbourne Galleries also applies to s 994 petitions, thus Lord Wilberforce stated at 379: "The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure." Furthermore, it was stated that "Firstly, there has been a tendency to create categories or headings under which cases must be brought if the clause is to apply. This is wrong. Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances. Secondly, it has been suggested, and urged upon us, that (assuming the petitioner is a shareholder and not a creditor) the words must be confined to such circumstances as affect him in his capacity as shareholder. I see no warrant for this either. No doubt, in order to present a petition, he must qualify as a shareholder, but I see no reason for preventing him from relying upon any circumstances of justice or equity which affect him in his relations with the company, or, in a case such as the present, with the other shareholders." Moreover, Lord Wilberforce likewise stated at 374-375 that the "The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere." Interestingly, Ebrahimi v Westbourne Galleries must also be read in relation to older cases such as Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 on quasi-partnership where trust and confidence had ceased. In that case, two directors for life had equal votes as members and as directors with no casting vote for the Chairman. The two were in constant disagreement one sued other for fraudulent misrepresentation and refused to accept an arbitration decision on another matter but company was successful. The petition for winding-up was granted. There are also other examples where a petition was granted such as a deadlock in a quasi-partnership; director's lack of probity in conducting the affairs of the company: Loch v John Blackwood Ltd [1924] AC 783 and Re Concrete Column Clamps Ltd [1953] 4DLR 60; loss of substratum (very rare): Re Suburban Hotel Co (1867) 2 Ch App 737; and oppression. While the case of Ebrahimi v Westbourne Galleries made s 122 an important remedy for minority shareholders, it remains an effective remedy, even though 'unfair prejudice' remedy is used more. In the given situation, clearly Quincy has basis to avail of the remedy of "unfair prejudice." In succession to the abovementioned remedy, Quincy may also avail of the following other minority rights which include: 1. Alterations to the Articles - Special Resolution required; minority shareholder with more than 25% of the issued shares can block resolution (s 21 CA 2006). Since, Quincy has 30% of the shares, then she can block any resolution to amend the Article of Incorporation. Alteration must be bona fide for the benefit of company as a whole. Entrenched provisions (s 22 CA 2006) - must be done on formation or with agreement of all other shareholders, ie before problems arise. In the given problem, the alteration was done when problems started to occur. But if alteration in breach of Shareholders Agreement, there is breach of contract. Quincy may also argue that the alteration of the Articles regarding new business is a breach of their Shareholders Agreement, hence, she also has a claim for breach of contract. 2. Right to requisition an Extraordinary General Meeting ('EGM') - Minority shareholder(s) can requisition an EGM ie require the directors to call one if they hold not less than 10% of the paid-up share capital with votes (5% in certain circumstances) (s 303 CA 2006). She can request that a meeting be called to make her again as a director. 3. Notice of meetings, circulation of statements under s 307ff and 314ff CA 2006. 4. Right to restrain acts under s 40(4) CA 2006 to pre-empt any further act of Patrick and Sally that is unfair and prejudicial to the minority. 5. Right to require circulation of statement re written resolutions under the Articles or under s 292 CA 2006. 6. Power to require circulation of statements under s 314 CA 2006. 7. Right to refuse to consent to short notice for a meeting under s 307(5) CA 2006. 8. Right to call for a poll vote at a meeting under s 321 CA 2006. In summary, Quincy as a minority shareholder has at least two statutory remedies under CA 2006 against Patrick, Sally and Roar. She can apply to have the company wound up on the 'just and equitable' ground (s 122(1)(g) IA 1986) although this is not advisable because Quincy still has an interest to participate in the business. The second remedy is effective to protect her interest - an application for an order from the court on the ground that the company's affairs are being conducted in a manner which is 'unfairly prejudicial' (Part 30 CA 206, ss 994-998) because it allows the company to continue its business. As discussed above, the business of Roar was conducted by Patrick and Sally in a manner 'unfairly prejudicial' to the minority giving rise to Quincy's right to apply for this remedy. In addition, various other remedies for specific 'internal' situations can also be availed of by Quincy. Read More