Common remedies for parties to corporate disputes
A common problem encountered in our practice is when disputes arise between the owners of a small business. Where such a business is operated through a small proprietary company, typically with only a few directors, an owner with a substantial shareholding may nonetheless find himself marginalised and excluded by other directors in decision-making, denied company information and even restricted in trying to exit the business and sell his shares to a third party.
Remedies that may be available to a shareholder in this situation include:
A shareholder (and in some circumstances an ex-shareholder) can apply to the Court where the company's affairs are being conducted in a manner contrary to the interests of the shareholders as a whole, or oppressive to or unfairly prejudicial towards a certain shareholder or shareholders. An order may also be sought in respect of an oppressive resolution or other act or omission (whether proposed or actual).
The Court can make a wide range of orders to remedy the oppressive conduct, including winding up the company, modifying or repealing the company constitution, requiring the company to institute or discontinue legal proceedings, or requiring a person to do, or not to do, a certain act.
Breach of directors' duties
Directors are subject to a number of obligations, both under the common law and the Corporations Act 2001 (Cth) ("the Act"). These include the common law duty to act with due care, skill and diligence, and the statutory duties to act in good faith in the company's best interests and for a proper purpose, to avoid conflicts of interest and to not use one's position to obtain a personal advantage.
These duties are owed to the company, so it is incumbent on the company itself bring proceedings against the infringing director. ASIC will not normally intervene in respect of a breach of duties by a director of a small proprietary company.
Where the infringing director(s) have effective control of the company, a former or current shareholder (or officer of the company) may apply to the Court for leave to bring proceedings on behalf of the company under Part 2F.1 of the Act. The Court must grant the application if it is satisfied that the applicant is acting in good faith, there is a serious question to be tried, it is in the best interests of the company for leave to be granted, and it is probable that the company will not otherwise bring the proceedings or conduct them properly. Once leave is granted, the applicant can then seek compensation from the infringing director(s) for the damage suffered by the company as a result of their conduct.
There are also a number of obligations and prohibitions in the Corporations Act 2001 (Cth) that deal with specific issues, such as access to information. If a shareholder (who is also a director) is denied access to information by other directors, they may be guilty of an offence and he or she may also be able to apply for compensation for any damage suffered. Moreover, even if the shareholder is not a director, he or she may still apply to the Court to inspect the books of the company.
Finally, apparent misconduct by other directors may also be in breach of either the company constitution or any shareholders' agreements. The constitution governs the operation of a company and prescribes a variety of matters ranging from the conduct of directors' and members' meetings, appointment and removal of directors, and transfer of shares, whereas shareholders' agreements supplement the constitution by providing for additional matters such as dispute resolution. Both of these documents operate (among other things) as a contract between each shareholder and the company and between a shareholder and each other shareholder, so any non-compliance may entitle an injured party or parties to sue for breach of contract.