Oppression is a Broad, Flexible and Pragmatic Remedy but Safe Harbours may be Another Means of Saving the Company

Keywords

• Case: Substance, not form, of the enterprise; defendants served but did not participate in the hearing; least intrusive remedy; outcome tailored to the case; sale of property ordered;

• Oppression: how Courts assess corporate conduct and craft remedies;

• Risks of Doing Nothing: loss of equity; insolvent trading and personal liability for tax debts;

• Avoiding Court: Using safe harbours to avoid the oppression jurisdiction and save the company.

The decision of Associate Justice Irving in Re J. & B. Oscari Properties Pty Ltd [2024] VSC 389 (5 July 2024) is a useful reminder of the breadth and flexibility of the oppression remedy. This article uses the case as a window into the oppression jurisdiction and then reprises an argument I introduced in 2018 and expanded in 2020 that the safe harbour regime introduced into the Corporations Act (C’lth) may offer an opportunity to address director or shareholder deadlock: see Using safe harbours and collaborative law to resolve shareholder disputes and save the company! (2018) and Finding a Safe Harbour for companies in crisis! (2020).

Case

Re J. & B. Oscari was a property-owning company that had been set up by 2 brothers and their wives to hold and lease a commercial property in Rosanna, Victoria. Each member of the group held a quarter of the shares and each was a director.

One couple separated and the plaintiff, the former wife of one of the brothers, sought to realize her interest in the company by offering her shares to the remaining shareholders, but the offer was not accepted. The plaintiff then tried to obtain the consent of the other shareholders/directors to a sale of the property. Initially, there was agreement, but the other couple later changed their mind.

Over this period, the lease of the property came to an end and when a real estate agent advised that a better price would be obtained if the property was sold with vacant possession, the property was not re-leased. Consequently, the property was not earning any income, but the other couple would not sell.

There were also issues about the management of the company, failures to pay dividends, non-payment of rates and ASIC fees leading to penalty charges and difficulties in obtaining a replacement certificate of title due to the refusal of two of the directors to provide identity verification and client authorisation.

Ultimately, the plaintiff issued oppression proceedings seeking orders that she be made sole director with the power to sell the property on the basis of the deadlock that had arisen and the plaintiff having undertaken to be bound by her fiduciary duties and to manage the company in the interests of shareholders.

The application succeeded with the Court ordering the removal of the other directors and that the property be sold on the open market, with the plaintiff as sole director and secretary to have sole conduct of the sale.

Case Takeaways: The Oppression Remedy

• The Court has a wide discretion in the relief it may give in an oppression case [47].
• However, the Court’s jurisdiction is enlivened only where one of the heads in s 232 of the Corporations Act are satisfied. That is, there must be evidence that the conduct of the company’s affairs or an act or proposed act or omission by or on behalf of the company is:
  • either contrary to the interests of the members as a whole; or
  • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
• Historically, deadlock alone was insufficient to support a finding of oppression. However, the plaintiff submitted that where deadlock leads to an inability to maintain proper corporate governance, that may suffice as such a state of affairs would be contrary to the interests of the members as a whole [43].
• The plaintiff also submitted deadlock can arise that amounts to oppression, even where no finding of fault is made against any party. However, the breakdown must be such that the company cannot function properly [43].
• Irving As J concluded that the Court’s jurisdiction had been enlivened because the current state of affairs was contrary to the interests of the members as a whole.
• Further, the relief proposed by the plaintiff – giving the plaintiff sole control and ordering a sale – would bring an end to the oppression and would be a less drastic measure than winding up the Company or the appointment of a receiver, especially given that the plaintiff had acknowledged her statutory and fiduciary obligations and had undertaken not to sell the property for less than the sworn valuation [61]. This approach is consistent with the attitude generally taken by the Courts to oppression cases which is to do the minimum required where that is possible.
• It is also to be noted that had the four shareholders simply held the property as tenants in common, the plaintiff would have been able to apply for an order for sale under Division 2 of Part IV of the Property Law Act 1958 (Vic). Irving As J said: “In circumstances where the Company is not engaged in any other business activity, the refusal of Helen and John to cooperate in the sale of the property represented oppressive conduct”. That is, the judge looked at the substance of the arrangements between the parties, not just the legal device used to affect their arrangements.
• However, Irving As J did not make any orders regarding adjustments to the net proceeds arising out of various late fees and penalties because there was insufficient information before the Court. Further the precise amounts claimed were not stated in in the originating process served upon the defendants who did not appear in the proceeding so did not have notice of them [64]. However, this did not shut out the plaintiff as such payments could be taken into account as part of finalizing the financial affairs of the Company.

Oppression: Assessing Conduct & Crafting a Remedy

• The facts of Re J. & B. Oscari Properties Pty Ltd were straightforward, the defendants did not appear, and the remedy flowed naturally from the substance and nature of the arrangements between the parties. However, often the allegations in an oppression case are messy with allegation and counter allegation requiring a careful consideration of the conduct in “the context of the particular relationship in issue, which will not infrequently involve a balancing exercise between competing considerations, including examination of the conduct of the applicant” (see Solanki v Cufari [2014] VSC 345 (22 July 2014) per Elliott J at [58]). This balancing act may go both to whether the oppression jurisdiction is enlivened and then if so, what remedy is appropriate.
• An example of the balancing required in considering a remedy – where the critical question was whether the majority or minority should be given the first chance to acquire the other’s shares at fair value –  can be seen in the Victorian Supreme Court of Appeal decision in Millsave Holdings Pty Ltd v Connective Group Pty Ltd [2023] VSCA 326 (18 December 2023) where considerations such as:
  • the duration and nature of the oppressive conduct;
  • the manner in which the defendants had conducted themselves during the course of the dispute, including the issue of subsequent proceedings to put financial pressure on the plaintiff  in the hope of extracting a settlement favourable to themselves, the defendants’ dishonesty as witnesses, failures to make proper discovery and destruction of documents and whether such conduct made them unfit to act as directors (which they would continue to be if they acquired the minority’s shares) which in turn required consideration of  whether they posed a threat to the public;
  • whether notions such as “rewarding wrongdoing” were apt in cases like this where the wrongdoing had been directed at acquiring the shares for less than their true value and a remedy focused on fair value was being considered;
  • the importance of relieving the oppression as a whole, rather than giving effect to alleged interests; that is, crafting a remedy to alleviate oppression is a different task to assessing damages for breach of contract; and
  • the circumstance that the defendant majority had been overwhelmingly responsible for the very prosperous state of the company and had put themselves at risk by giving personal guarantees long after the plaintiff’s guarantee had been discharged.

After weighing up these matters, despite their misconduct, the Court of Appeal gave the majority the first opportunity to acquire the minority shares at a fair value without a minority discount (see at [1033] – [1040] and [1287] – [1294]), overturning the decision of the trial judge. However, the Court of Appeal did not interfere with the trial judge’s decision on costs which was that the defendant directors pay the costs of the proceeding on an indemnity basis – which could be said to mitigate any perceived reward for misconduct in any event!

• Where the allegations span many years, it is critical to making findings about conduct, “to do so in the contemporaneous context in which each of the events and actions of which complaint is made took place” (see BBHF Pty Ltd v Sleep Duck Pty Ltd & Ors [2024] VSC 320 (14 June 2024) per Delany J at [891]).
• It is also not necessary that the oppressive conduct be on foot at the time of trial. The oppression jurisdiction may be engaged if the conduct occurs at any time. Further, a plaintiff can rely upon conduct that occurs after the proceeding has commenced (see Re Dawning Investments Pty Ltd; Grace Yang v Xu Dong Zheng [2022] VSC 641 (28 October 2020) per Hetyey AsJ at [162]).

Risks of Doing Nothing

• Where one director is misusing company assets or running the company in their own interests rather than those of the company, seeking an oppression remedy may be unavoidable if equity in the company is to be preserved and/or restored.
• Likewise, where governance failures lead to nonpayment of statutory charges, taxes or employee entitlements, if the shutout directors do nothing, they may expose themselves to insolvent trading risks and/or personal liability to pay the company’s unpaid PAYG withholding, GST and super guarantee charges. Therefore, they may have little choice but to issue oppression proceedings.
• But sometimes disagreements are more about the future direction of the business or differences in business philosophy which have arisen due to internal changes due to death, illness or family disputation or external changes to the business landscape or its market rather than corporate impropriety; although poor governance practices can creep in as bitterness and anger take hold and reason goes out the door.

How to Avoid the Oppression Jurisdiction and Save the Company – Finding a ‘Safe Harbour’!

• My June 2018 article argued that using the safe harbour provisions that had just been introduced into the Corporations Act at that time and collaborative practice techniques could provide a way to preserve companies riven by shareholder disputes. This is still an option and may offer an environment within which various orderly withdrawal or disaggregation scenarios can be workshopped and developed. It is a means of preserving shareholder value – and perhaps individual dignity!
• The safe harbours regime operates as a defence to insolvent trading claims where the conditions set out at s 588GA are met. These conditions are designed to impose disciplines upon the directors for the benefit of all stakeholders including the creditors so as to maximise the opportunity for turn around.
• A critical aspect of the safe harbour regime is that the directors must obtain advice from an appropriately qualified entity, which may be a registered liquidator or other turn around expert, and then implement a plan for restructuring the company or improve its financial position. The introduction of such an entity into the mix may cut through the adversarial dynamic, provide an experienced, objective perspective, offer creative solutions and facilitate an orderly divestment or sale process if that becomes the agreed course. Further, as there is no requirement to involve creditors, discretion can be maintained.
• And to those who may say that safe harbours were designed for companies that are distressed or likely to become insolvent, my answer is that once a company is subject to director and shareholder disputes and is at or is approaching deadlock, profitability and governance are likely to deteriorate, essential staff may leave and the lack of future direction is likely to lead to loss of market share  and declining income with  insolvency becoming more and more likely through the passage of time.
• In 2020, I expanded the argument by suggesting that safe harbours could also be used to preserve shareholder value when companies are in crisis and of course that crisis could be caused by, or lead to, shareholder disputation.
• Since these articles were written, other restructuring mechanisms have been introduced into the Corporation Act, such as enabling the appointment of a small business restructuring practitioner under s 453B if certain criteria are met – and see my colleague Mark Addison’s article Small business insolvency reforms – will they really help? for a summary of the new regime. However, this is a more visible restructuring regime than safe harbours as creditors must be involved, so small business restructuring is probably more suited to companies where insolvency is imminent and the threshold criteria are met.
• However, the point still remains that utilizing restructuring mechanisms set out in the Corporations Act offers both protections to directors and the opportunity to introduce an experienced business turnaround professional into the equation, thereby enhancing prospects of preserving shareholder value and protecting the interests of creditors.