When can a court wind up a company on just and equitable grounds?

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Under section 461(1)(k) of the Corporations Act 2001 (Cth) a court may order the winding up of a company if “the court is of the opinion that it is just and equitable” to do so. In a recent case decided in the Federal Court, Solinska v Fortuna Corporation Pty Ltd [2010] FCA 1085, the Court considered the circumstances in which it could use this power to wind up a company.

The plaintiff was one of the two directors of a company. Both directors were equal shareholders. After 4 years of operation, the company began failing and the two directors were in dispute about money that was invested in the company. However, it was clear that the company required an injection of further capital to continue operating. The Court described the dispute as a “complete breakdown” in the relationship. A liquidator was approached by the plaintiff with a view to winding up the company. The other director was initially opposed on the basis that he wished to protect funds he had advanced to the company, although he did not formally appear before the court.

In considering whether it was within the Court’s power to wind up the company on just and equitable grounds, McKerracher J referred to several earlier cases and identified several factors that a court should take into account when deciding whether a shareholder’s legal rights may be subject to equitable considerations. The factors were that the company in question:

• was formed or continued on the basis of a personal relationship, involving mutual confidence;
• was formed on the basis of an agreement or understanding that all or most of the shareholders would participate in the conduct of the business; and
• imposed restrictions on the transfer of the members’ interests in the company, meaning that if confidence was lost or a member was removed from management, that member could not take out his or her stake and go elsewhere.

The Court highlighted the nature of the personal relationship between the two shareholders and directors and the fact that they were effectively operating as a partnership. The Court noted that there was an expectation that each would participate in the conduct of the business and that the shares of each director would pass to the other upon the death of either. The complete breakdown in the relationship between the directors, along with the fact that nether was willing or able to provide further funding for the company, meant that the company was unable to continue.

McKerracher J found that this was an entirely appropriate case for exercising the Court’s discretion to wind up the company on just and equitable grounds.

A full text of the judgement is available at by clicking here.

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