A Receiver in the Context of Directors and Shareholders Disputes

There will be instances that may require a receiver when a dispute has arisen between a company’s directors or shareholders. When this happens, there are a few ways in which you can try to resolve the dispute. This article will outline:

• what a receiver is and when they are appointed;
• appointing a receiver to a director/shareholder dispute;
• the powers and role of a receiver; and
• the advantages and disadvantages of seeking an order to appoint a receiver in a directors/shareholders dispute.

What Is a Receiver and When Are They Appointed?

A receiver is an independent registered liquidator, often appointed to a company by secured creditors. Their role is to collect and sell the company’s assets to repay the outstanding debts owed. Companies can take this step to avoid a winding up of the company when facing insolvency. However, a receiver can also be appointed to a company when a dispute has arisen between its directors or shareholders. Usually, when there is a deadlock between them as to how to resolve it. 

Resolution of Director and Shareholder Disputes

Unfortunately, disputes between directors and shareholders are common. However, parties are often able to resolve them either through:

• negotiation, aiming a commercial outcome to the dispute; 
• one director or shareholder resigning his or her position, and selling his or her shareholdings in the company to the existing shareholders or third party; 
• buying out the shareholding of the other disputing shareholder; or
• agreeing to resolve for the company to enter into voluntary administration.  

However, sometimes you cannot resolve directors/shareholders disputes through any of the above means.

Appointing a Receiver to a Director and Shareholder Dispute

If you cannot resolve a dispute, it may be open for a director/shareholder to the dispute to make an application to the court to appoint a receiver to the company to take control and manage its affairs. The director or shareholder can make such applications and appointments, notwithstanding that the company is solvent. Further, they can seek receivership if the disputing parties do not necessarily wish for the company to be wound up.

The court is likely to appoint a receiver to a company where its directors or shareholders in dispute seek such an order, and no other adequate remedies are available. A court may make an order to appoint a receiver if it finds oppression within the conduct or proposed conduct of the company’s affairs. This generally includes an actual or proposed act or omission by or on behalf of the company. Or additionally, a resolution or proposed resolution of members or a class of members that is either:

• contrary to the interest of the members as a whole; or 
• oppressive or unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders. 

Instances That May Result in a court-Appointed Receiver

Examples of directors/shareholders disputes and oppressive conduct that may warrant a court-appointed receiver include:

• a general disagreement between directors/shareholders as to the running of the business causing a breakdown in their working relationship;
• where one director has excluded or locked out the other director from the company and is prohibiting them from properly carrying out their director duties in managing the company and its business;
• refusing a director or shareholder access to information about the company’s affairs;
• using company funds for improper purposes, like for payment of personal expenditures; or
• where a director may be dissipating assets or setting up another business in competition with the company’s business. 

The Powers and Role of a Receiver

When a court appoints a receiver, they must act in accordance with the terms of the court orders for which he or she is appointed. Subject to such orders, a receiver will be charged, among other things, to:

• take control and carry on any business of the company;
• take possession and recover assets of the company;
• lease or dispose of the company’s assets;
• borrow money on the security of the company’s assets;
• lease or acquire any assets necessary or convenient in connection with the carrying on of the company’s business;
• execute any document, bring or defend any proceedings or do any other act or thing in the name of the company;
• engage or discharge employees of the company; and
• refer to arbitration any question affecting the company. 

A court may generally make any such order it thinks appropriate in relation to a particular company when appointing a receiver. The kind of court orders that a company can seek to define the scope of the receiver’s appointment in the context of a director/shareholder dispute may include:

• securing a company’s assets;
• investigating the status of the company’s affairs;
• negotiating with the disputing parties and their legal representatives in an effort to resolve the underlying dispute; or
• undertaking a sale of the company and its business, including engaging and liaising with sale agents and potential purchasers. 

Why Seek an Order to Appoint a Receiver in Directors/Shareholders Disputes? 

Advantages

There are numerous advantages in making a timely application to the court to appoint a receiver to a company when its directors or shareholders are in dispute. This includes minimising various risks that the context of a dispute would often expose a company to, including:

• the company’s assets being dissipated; 
• the value of the business reducing while a dispute remains unsolved; or
• poor management of the company while its directors are in dispute.

Appointing a receiver may also assist disputing parties to reach a timely settlement or resolution. Suppose a court has made orders for the receivers to affect the sale of the company and its business. In that case, a receiver should be able to efficiently, effectively and independently undertake that process in the company and its shareholder’s general interest.

Disadvantages

The obvious disadvantage of seeking an order for a court-appointed receiver is the associated legal costs and time such an application to the court will take. If the application is successful, then often, the directors/shareholders will lose control over the running of the company and the business. However, this may be of lesser concern, particularly as the directors/shareholders making the application to the court would often be already excluded from the running of the company or are otherwise denied from accessing important information of the company.

Key Takeaways

When a dispute arises between a company’s directors or shareholders, a receiver may be required. In some instances, you may also need to apply to the court for appropriate relief to resolve your dispute, including making an application to appoint a receiver to your respective companies where oppressive conduct is present. If you need assistance in navigating through your dispute to achieve a commercial and favourable outcome or assistance making any application to the court for appropriate relief to resolve your dispute, contact LegalVision’s dispute lawyers on 1300 544 755 or fill out the form on this page. 

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