Section 232 of the Corporations Act 2011 (Cth) defines oppressive conduct as conduct that is contrary to the interests of the shareholders as a whole. Contained within ss 232 and 233 of the Act, the prohibitions closely align with with central tenets of corporate governance,
- that directors should act reasonably and
- in good faith,
- in the best interests of the company and its members.
Statutory provisions
Section 232 of the the Corporations Act 2001 (Cth) (“the Act”) allows the Court make an order for a remedy under section 233 if:
1. The conduct of the company’s affairs; or
2. An actual or proposed act or omission by or on behalf of the company; or
3. A resolution, or proposed resolution, of members or a class of members of the company
is either:
- a. Contrary to the interests of the members as a whole; or
- b. Oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member or members whether in that capacity or another capacity.
Oppressive Conduct
The Act contains no uniform definition of what constitutes oppressive conduct. Although the common law has established that oppressive conduct typically involves;
- a lack of fair dealing;
- something burdensome, harsh or wrongful, inequitable or unjust; or
- exhibited commercial unfairness.
It may be accepted that the existence of irreconcilable differences amongst persons involved in what is, in effect, a partnership, will destroy the personal relationship involving mutual confidence, that lies at the heart of that partnership. This “partnership analogy” has been applied both to applications for winding up on the just and equitable ground and also to oppression suits. Although the differences in form are not immaterial. Irreconcilable differences may establish a basis for winding up, but do not of themselves constitute oppression or unfair prejudice.
Nevertheless, the destruction of the personal relationship establishes a basis for granting relief in the usual case, not for concluding that the partnership analogy has ceased to be pertinent.
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) ACSR 672 [89]
The most commonly applied test is whether the decision made by the director is one that no board of directors, acting reasonably, would have made
The full context of the relevant conduct should be examined, rather than viewing the conduct in isolation. However, objectively the court looks at the result of the conduct by the majority members or directors, not their intentions.
Wayde v New South Wales Rugby League Ltd 180 CLR 459
Examples of oppressive conduct have included where majority members/directors:
- Engaged in unfair conduct, which reasonable directors would not have thought fair;
- Run the company in their own interests, ignoring the interests of minority shareholders;
- Improperly issue shares to themselves to out-vote other shareholder
- Vote to approve the sale of company assets to themselves at below-market;
- Exclude a minority shareholder from involvement in the management decisions of the company;
- Issued shares to themselves, with the objective of becoming majority members and diluting other members;
- Excluded members from the business or management;
- Failed to act in the best interests of the company.
Section 233 provides the Court wide-ranging power to make “any order that it considers appropriate”, which may include (but are not limited to):
- Winding-up of the company;
- Modifying or repealing the company’s constitution;
- Regulating the future conduct of company affairs;
- Appointing a receiver and manager of any or all of the company’s property;
- Restraining a person from engaging in specified conduct;
- Requiring a person to do a specified act.
Section 233 of the Act provides the Court with significant discretion to analyse the relevant conduct, determine whether minority oppression has occurred and enforce various potential remedies. Indeed, the High Court has openly recognised that the power given to the court is to be read broadly.
In practice, however, the Court rarely makes extreme or novel orders and will only order a company to be wound up as a matter of last resort, typically looking to restore the minority shareholder to the position they would have been in, but for the conduct occurring. This frequently sees orders that a defendant company “buy out” the minority shares for fair value, as determined by an independent valuer.
The Matter
In Re Estate Soulos [2022] NSWSC 1507 the Supreme Court of NSW considered a claim by members of ‘Esperia Court Pty Ltd’(Esperia Court) a family company, alleging that the conduct of the directors were oppressive to, unfairly prejudicial or discriminatory against the minority shareholders. The deceased, a wealthy woman with four children: James, Maria, Dennis and Nick. was referred to in the judgement as ‘the Iron Lady of Strathfield’ who ‘left her affairs in a mess.’
The deceased’s estate had a value of around $36 million, of which a substantial part was attributable to the deceased’s shareholdings in Esperia Court. Under the deceased’s last will, all 500 management shares were gifted to Nick, giving him control of Esperia Court.
Each of his siblings alleged that the deceased had created an expectation that the four children would share equally in the material benefits of the family assets through their shareholdings in Esperia Court. James, Dennis and Maria each made a family provision application under the Succession Act 2006 (NSW).
Esperia Court
Esperia Court was the registered proprietor of 3 parcels of land. The deceased’s children disputed their entitlements to shares in the company. Maria (the plaintiff) – supported by James and Dennis claimed that Esperia Court should be wound up in oppression proceedings, alleging that the directors of Esperia Court, comprised of the deceased Nick and his son John (the directors), breached their duties and fiduciary obligations
The directors wanted to retain control of Esperia Court for its strategic property holdings, but Maria, James and Dennis wanted to realise any interest they had in it as shareholders, either via
- winding up – where a solvent company’s outstanding matters are finalised, its assets liquidated, and it ceases to exist as a company; or
- orders for management shares in Esperia Court to be distributed equally between all four children to enable them to participate in its management and obtain material returns on their shareholdings.
This was because the four classes of ordinary shares (initially distributed amongst James, Maria, Dennis and Nick), held no voting rights, and 500 “management” shares, which were the only voting shares in the company were held by the deceased. A, B, C and D class shares of the company that the plaintiffs held, had no commercial value in the absence of winding up because no voting right attached to them. However, upon winding up, the Plaintiff’s shares would be worth $3 million.
The Court found that the directors had breached their directors’ duties under ss 180-182 of the Corporations Act 2001 (Cth), as the acquisition of one property and the leasing of another were transactions that was not ‘at arms length.’ Additionally, the directors had acted in total disregard of the plaintiff’s interest as a shareholder.
The Court held that an attempt to pay out the plaintiff would be insufficient relief because the directors were incapable of paying the plaintiff the full amount of the value of her shares based upon a winding up of Esperia Court.
However, as the company was still solvent an order to wind it up would be a ‘disproportionate remedy’. Therefore the Court ordered that all shares in the company be reclassified as ordinary shares of a single class, with equal rights to notice of meetings, voting, dividends, and any surplus on a winding up of the company, together with a range of other remedies to ‘facilitate an orderly transition of the management of Esperia Court to a regime untainted by oppression.
Separate Oppression proceedings
In separate Oppression Proceedings commenced after the respective Succession Act proceedings, Maria alleged that there had been oppressive conduct in the directors breach of s 232 of the Corporations Act 2001 (Cth). In 2017, a property (the Symond Arcade) in the Strathfield town centre was acquired with 80% by Esperia Court holding an 80% share and Nick and John holding a 20% share personally.
Nick and John submitted that the deceased would only allow the transaction to go ahead if they took a personal interest in the property. The transaction was financed by a $29.05 million loan obtained from National Australia Bank. The business of leasing retail space in Symond Arcade conducted as a partnership between Esperia Court as to 80%,and Nick and John as to 20%. The partnership has run at a loss for a number of years.
Additionally Esperia Court, owned the Strathfield Private Hotel (the Hotel). In 2014 (before Nick was appointed as a director of Esperia Court), Nick’s corporate vehicle (SPH) entered into a lease with Esperia Court to manage the Hotel. The lease did not contain a “demolition clause” and was alleged by Maria to be at below market rent.
Maria alleged that the acquisition of the Symond Arcade (along with the ongoing partnership agreement) and the grant of the lease to SPH were self-dealing transactions that amounted to oppressive conduct under s 232(d) and (e) of the Act.
Proprietary estoppel
In September 1998, following Dennis’ divorce from his then wife, the deceased and her husband purchased a property in Chapman Street through a company (A&R) on the understanding that Dennis would live in it and pay rent to provide funds for A&R to service the mortgage. Dennis’ submitted that he was promised that he would own the Chapman Street Property.
Dennis has lived at the Chapman Street Property since 1998 and has also used the property as his place of business. Dennis paid rent to A&R until December 2003 and gave evidence that he expended significant time and money renovating the property. However in the deceased’s last will, the shares in A&R were bequeathed to the deceased’s grandsons in equal shares.
The decision
The primary judge concluded that the conduct involving the acquisition of the Symond Arcade, the partnership between Esperia Court, Nick and John, and the grant of a lease to SPH constituted oppressive conduct. The primary judge found that Dennis’ proprietary estoppel claim was made good.
As to the family provision claims, the primary judge concluded that each of James, Maria and Dennis had been left without adequate provision for their maintenance, education or advancement in life, finding that they were encouraged by the deceased in an expectation that their shares in Esperia Court would enable them to enjoy substantial wealth.
Orders were also made varying the lease to SPH (to include a termination clause), unwinding Nick and John’s interest in the Symond Arcade, and declaring that the partnership between Esperia Court, Nick and John was terminable on six months’ notice.
The transfer of management shares was ordered in both the Oppression Proceeding and the Succession Act proceedings.
The primary judge also declared that A&R holds the Chapman Street property on trust for Dennis.
The appeal
Appeals were lodged by
- Nick and John from the orders made regarding the oppressive conduct;
- Nick (in his capacity as an affected beneficiary) concerning the orders made in each of the three Succession Act proceedings; and
- the Executors in relation to the orders made in each of the three Succession Act proceedings.
In Soulos v Pagones [2023] NSWCA 243 the Court of Appeal set aside the orders amending the Constitution of Esperia Court and restructuring its shareholding, as well as the orders varying the lease to SPH. Finding that the primary judge
- erred in finding that the grant of the lease to SPH without a demolition clause was an instance of oppressive conduct and that
- restructuring orders went beyond what was necessary to bring an end to the oppression.
The Court of Appeal dismissed
- the appeal from the Oppression Proceeding, and
- the appeals by Nick and the executors of the deceased estate against orders made in Succession Act proceeding
The Court of Appeal held that the primary judge did not err in finding that the acquisition by Nick and John of a 20% personal interest in the Symond Arcade involved oppressive conduct by the directors of the company, however, the primary judge’s orders dealing with the acquisition of the Symond Arcade and the related partnership were upheld.
The Court also upheld the finding as to Dennis’ proprietary estoppel claim.
Finally, the Court held that the primary judge did not err in determining that further provision for each of Nick’s siblings was necessary for their proper maintenance and advancement. The Court of appeal concluded that this finding was not manifestly unreasonable, particularly given the expectations created by the deceased that her children would benefit materially from Esperia Court, nor did his Honour err in making provision for James to have an additional 1,000 “B” class shares from Nick’s bequest under the Will.
One Reply to “”