26 May 2020

International Cases





Court may withhold a winding up order, where Plaintiff lacks clean hands or has himself or herself been primary contributor to breakdown of relationship.

In facts of instant case, winding up application is made pursuant to Section 461(1)(k) of Corporations Act, 2001. This is section which is generally referred to as winding up on just and equitable ground. It is position of Plaintiff that, first Defendant Company is a quasi-partnership and relationship between directors has broken down. They can no longer work together and on that basis, first Defendant ought be wound up. Plaintiff says the only reasonable course is to wind up first Defendant. Second defendant does not agree. He takes view Mr Shepherd (Second Defendant) should continue to run business and presumably continue to pay him at rate, he has been paid in the past.

In matter of Amazon Pest Control Pty Ltd [2012] NSWSC 1568 Black J said: Court may withhold a winding up order where Plaintiff lacks clean hands or has himself or herself been primary contributor to breakdown of relationship. However, even if a lack of clean hands were established, it is not an absolute bar to a winding up order because, as Santow J pointed out in Ruut v Head … otherwise neither party could obtain a winding up order where both were at fault.

In Duc v PTS Australia Distributor Pty Ltd Barrett J referred to Ruut v Head and noted that, respective contributions to breakdown should be assessed in determining what is just and equitable; and observed that a degree of fault on part of Applicant in that case, viewed in context of fault of other shareholder, should not deter Court from making an order for winding up so as to address deadlock in the company's affairs.

In present case, even assuming some fault on part of Mr Shepherd, it can hardly be said that, second Defendant is blameless. He has not attended at premises of first Defendant for over 12 months. Despite repeated requests, he has not provided adequate medical evidence as to reason for his present incapacity. That is hardly consistent with an ongoing working relationship. In any event, this so-called lack of clean hands does nothing more than enliven a discretion to refuse to make the order. Whether that discretion is exercises must depend upon the facts in each case.

In reality, when a relationship that is a quasi-partnership breaks down, there are only three options available. First, business can be sold by parties as a trade sale. That may well be best way to realise underlying value of the company's core assets. Second alternative is for one party to buy other out. Orders can be made for valuations and sale process can be controlled by Court.

Third option is winding up. It is option of last resort. Appointment of a liquidator to a healthy business will necessarily destroy some of underlying value. If nothing else, it must have an adverse effect on goodwill. But at least, someone takes control of business, is able to maintain it, if necessary and to organise an orderly sale. Furthermore, a liquidator who has funds available from a profitable business can examine affairs of Company to determine, whether there has been anything done by any party which is wrong. If such conduct is established then liquidator is well placed to take steps to protect company's interests.

Mr Shepherd has continued to run company and has taken decisions which, by rights, should be decisions of both directors. It might be said second defendant has tacitly approved Mr Shepherd operating as he has. But that is hardly a satisfactory situation. Mr Shepherd may have made decisions which, if they had been discussed with second defendant, would have been at least modified or perhaps abandoned all together. To expect that arrangement to continue is unrealistic.

There is no utility in refusing to wind up first Defendant. To put parties to inconvenience and expense of a contested hearing with cross-examination and extensive legal argument is pointless. A contested hearing is not going to improve relationship between Mr Shepherd and second defendant. They are destined always to be at loggerheads. Accordingly, there will be an order first defendant be wound up on the just and equitable ground.

Tags : Application Winding up Grant

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