But our relationship hasn’t broken down!

Dawning Investments Pty Ltd [2022]

In the recent decision of Dawning Investments Pty Ltd [2022] the Supreme Court of Victoria considered a scenario where two companies and unit trust established to conduct property investment and development business. The Court was asked to determine whether conduct of companies’ affairs was contrary to the interest of members as a whole and if this conduct was unfairly prejudicial to or unfairly discriminatory against the member.

Company One and Company Two did development work together.

Two natural persons, plaintiff and defendant, were inter alia (i) equal shareholders in Company One and Company Two, and (ii) directors of Company Two. The defendant was the sole director of Company One.

The plaintiff brought an application pursuant to s233 and s461 to wind up Company One and Company Two.

Originally, defendant had borrowed money from plaintiff’s parent for the venture. The plaintiff’s parent only agreed so plaintiff could learn the property development business in a quasi-partnership venture, built on trust.

Various loans between the entities, and the plaintiff’s parent, were made for Company Two to purchase properties for development.

Over time, the plaintiff’s spouse became involved. The plaintiff took a passive role in the venture.

The plaintiff alleged that the defendant caused over $3,000,000.00 in improper transfers from Company One’s accounts.

The defendant returned a significant amount of that sum.

Evidence suggested the defendant “parked” some of Company One’s money in the defendant’s own offset accounts to reduce the defendant’s interest payments, and bought a car without permission.

The defendant diverted funds of Company One, that could have been used to pay its debts and made other payments with a lack of transparency; apparently a breach for directors duties, as well as sufficient to enliven both s461 and s232.

The breakdown in relations was shown by increasingly toxic WeChat exchanges.

The lack of trust stymied further development opportunities, but the defendant said suggestions of a breakdown in relations were exaggerated.

Company One and Company Two had not prepared financial statements from 2018 with no explanation. The defendant blamed plaintiff’s spouse for not providing the supporting documents needed.

Breaches of director duties and inadequate accounts can be sufficient to wind up a Company on the just and equitable basis.

Company One and Company Two also failed to comply with their tax obligations or pay their debts; likely a breach of directors’ duties and sufficient to ground an s461 order.

The failure by Company Two to resist a VCAT claim against it is further evidence of deadlock between the parties.

The lack of records made it difficult for the Court to understand the Company’s position. It appeared at least one insolvency test might be met.

To the extent that defendant raised transactions plaintiff engaged in that might have been improper, the Court considered a liquidator would be well placed to pursue these.

The erosion of trust and confidence meant it would be just and equitable to wind the Companies up (s461) and that the conduct was relevantly unfair (s232).

The status quo was “wholly unsatisfactory” and the existing problems – tax debt, poor record keeping and governance – were likely to worsen. Independent liquidation was therefore attractive.

There was no alternative remedy and so the Court ordered that Company One and Company Two be liquidated.

This case illustrated the principle of just and equitable winding up and the importance of adhering to directors duties. If you would like advice in relation to corporate disputes please do not hesitate to reach out to our team.

*This article was prepared with the assistance of Christie Preston*

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