It’s a fact of life that sometimes relationships break down. But what happens when the breakdown is between two commercial parties with a successfully operating business? Jirsch Sutherland Principal Tina Battye gives the lowdown.
In early 2024, Jirsch Sutherland was appointed as liquidator to a company following a winding-up order made by a Supreme Court of NSW judge on “just and equitable grounds” rather than due to the company being insolvent.
Background
The company was a successful Sydney-based food wholesaler. Initially the business partners operated amicably but over time the relationship fractured due to a variety of reasons, largely accounting based. Initially mediation was sought but this failed and legal action was taken. As part of the litigation, the partners agreed the options available to them were to either have one partner buy the other out, or to wind up the company.
While there was initial enthusiasm for the buy-out proposition, no resolution was made and ultimately, the judge made the order for the business to be wound up on just and equitable grounds.
What are just and equitable grounds?
Sadly, disputes between shareholders and directors do arise and can have a detrimental effect on the business. In extreme cases, these disputes can become irreconcilable and exit strategies are sought. While mediation exists, if this breaks down, another more formal option is to go to court, where a judge may decide that the company is to be wound up. Winding up a company is generally the last resort after all other alternatives are considered and rejected. If a judge orders a company to be wound up on just and equitable grounds, it is usually because no solution between disputing parties of a solvent business can be reached.
The Federal Court or the Supreme Court of a state or territory has the power to order a company be wound up under Section 461 of the Corporations Act 2001. In the context of disputes between directors and shareholders, the court may order a company be wound up:
- When oppression is presented in the conduct of the company’s affairs
- If the court is of the opinion that it is just and equitable that the company be wound up.
In this case, the court accepted that the relationship between the two parties was irretrievable and found a winding-up order should be made. Jirsch Sutherland was appointed soon after.
A successful sale
Jirsch Sutherland immediately took control of the business operations, and retained all staff, including the business owners, who played an integral part in the operations. Given the business owners remained employed, there were some tricky issues to navigate around managing the owners’ expectations and demands considering the relationship breakdown that had occurred.
The business was advertised for sale and an extensive marketing campaign was undertaken. The campaign generated a large amount of interest, and the business was ultimately sold, and still successfully operates today. All staff remained employed and as a result, there was no need to crystalise any entitlement claims as part of the liquidation.
Summary
The nature of this appointment, while not common, does happen from time to time when a relationship breaks down and causes detriment, or anticipated detriment to the business. An order to wind up a company on just and equitable grounds can be a sensible option in circumstances where no common ground can be found to allow the business owners to move forward, and ensures no determinant is caused to the business operations.
Tina Battye
Principal
Jirsch Sutherland