“Put not your trust in money, but put your money in trust”

Oliver Wendell Holmes Jr, Acting Chief Justice of the United States

“A friendship founded on business is better than a business founded on friendship”

John D Rockefeller

Company shareholder and director disputes

When disputes arise between company directors and shareholders, you need experienced business and corporate lawyers to resolve the conflict and to give you tax planning advice as part of the resolution in order to minimise any dysfunctional tax outcome arising from any business separation.

Many private companies with diverse ownership interests (i.e. non associated shareholders) often fail to understand the benefits of all shareholders and the company entering into sensible and balanced shareholders’ agreement concerning the management, direction and funding of the company and the management of shareholder disagreements.

Furthermore, the constitution of many Australian companies fail to address the rights of shareholders to exit a company and to include workable “pre-emptive”, “tag along” and “drag along” exit clauses when there is (for example):

  • an irreconcilable shareholder disagreement,
  • a third party or majority shareholder private take-over offer or
  • a minority shareholder agitating to realise their investment.

In order to commence business as a company, many Australian business owners ask their accountant to buy a pre-incorporated shelf company – cheaply of course.   These shelf companies have a very basic pro forma constitution which generally is absolutely useless when there a dispute arises between directors/ shareholders about money, management, control, funding and exiting a company.

The absence of a sensible and relevant shareholders agreement and a properly drafted constitution entered into at or around the time that a business is commenced means that shareholders then need to rely on the “oppression provisions” in the Corporations Act.

Under these provisions, shareholders, normally but not always minority shareholders, seek the assistance of the court because they are the subject of action which is contrary to the interests of shareholders as a whole, oppressive, unfairly prejudicial or unfairly discriminatory. The court is given a wide discretion by the Corporations Act to determine which conduct is oppressive, prejudicial or discriminatory and this is done according to an objective standard. Some examples where courts have intervened include the improper issue of shares, misuse of company funds, oppressive conduct at meetings and the improper payment of excessive remuneration.  Court orders can include that the company be wound up, that a receiver and manager be appointed, that shares be bought, shareholding be changed or injunctions be put in place restraining conduct or requiring different conduct.

Disputes involving trusts, trustees and beneficiaries

Trusts are a cornerstone of commercial life in Australia.  A trust is where one party holds (owns) property for the benefit of other parties called beneficiaries. The following are all types of trust:

  • fixed trust – where there is no discretion as to how to distribute property
  • discretionary (or family) trust – where the trustee has some discretion as to which beneficiaries will benefit
  • unit trusts – the beneficiaries own units in the trust and distributions are made according to the units held
  • hybrid trusts – a cross between discretionary and unit trust
  • testamentary trust – established according to a will
  • a managed investment fund
  • a superannuation fund

Trustees of a trust owe a wide range of duties to the beneficiaries of a trust, depending on how the trust arose and some of these duties may be set out in a document called the trust deed. Disputes often arise between beneficiaries and trustees as to whether the trustees are complying with their obligations or not.

Remedies available to the court when dealing with a trust dispute include the removal and replacement of the trustee, appointing a receiver and manager, vesting orders which are where legal title to property is transferred by court order, declaratory relief as to what words in a trust deed mean or injunctions preventing or requiring certain conduct and there are others.

Remedial trusts

When people try to rip you off the court will often impose a special type of trust called a remedial or constructive trust which is where a person or company (P1) holds money or assets on trust for the person or company who originally possessed the money or assets (P2), regardless of the intention of the parties when the money or assets was transferred. A constructive trust can arise in situations where there was also an agreement concerning how the money or assets was going to be dealt with and P1 hasn’t complied with their obligations under the agreement. And if P1 then gives the money or asset to another person (P3) then a constructive trust can also be imposed on P3.

Disputes between partners

It has been said that it is easier to get out of an unsatisfactory marriage than an unsatisfactory business partnership. This may be especially so depending on the terms of any written partnership agreement – provided there is a written partnership agreement which deals with separation and exit – and most often there is not.

In the well-known English partnership case of Phoenix v Pope and others [1974] 1 All ER 512 Mr Phoenix rushed off to court seeking an order that a partnership be dissolved, however the court found that a partnership agreement meant that he wasn’t justified in doing so and stayed the proceedings commenced by Mr Phoenix.

While the Partnership Act 1892 does give the court powers to regulate the affairs of partnerships in NSW, it is essential that you get legal advice about your rights so that you can avoid expensive mistakes, like that made by Mr Phoenix.

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