Resolving Disputes Between Directors and Shareholders

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Table of Contents

• 1. Settlement and Resignation / Share Buyout 
• 2. Voluntary Administration
• 3. Receivership and Security 
• 4. Winding up / Liquidation 
• 5. Voluntary Deregistration 
• Key Takeaways 
• Frequently Asked Questions 

Disputes between directors (who may also be shareholders) of a company can often occur for various reasons. While such disputes can vary in complexity, they can significantly divert resources from the business operations. Therefore, directors need to understand the methods available to resolve these disputes to assist them in dealing with them as efficiently as possible. This article will discuss the options available in resolving disputes between directors and shareholders. 

1. Settlement and Resignation / Share Buyout 

If you are involved in a director dispute, and you reach an agreement with the other side to resolve it, the next step is usually to enter into a deed of settlement or a deed of settlement and release. This document formalises the terms of that agreement and sets out what each party has to do to settle the matters between them. 

Additionally, a well-drafted deed of settlement will make sure that you and the other party carry out the agreement. This may include:

• making a payment; 
• resigning as a director; and
• if you are also a shareholder, transferring shares. 

If one party does not carry out their obligations under the deed, the other party can rely on the deed to enforce them, such as taking the other party to court to demand payment. A deed of settlement will also ensure the same dispute does not emerge again at a later date. Typically, the deed will include a release, where parties agree to release eachother from all future claims, demands and actions.

You may also need to complete other documents in addition to the deed of settlement and any share sale/buy-back agreement. For example, these documents may include: 

• a letter of resignation as director;
• a share transfer form; 
• if the director/shareholder is an employee of the company, a letter of resignation as an employee; and
• copies of documents relating to the company and business in its possession.

2. Voluntary Administration

Voluntary administration is a process allowing a company experiencing cash flow or solvency issues to appoint an external administrator who will manage the company’s assets while it restructures to avoid liquidation. The process of voluntary administration maximises a company’s chances to continue to exist. This is different to winding up procedures, after which a company ceases to exist.

Usually, the voluntary administration process takes 25-30 business days. An appointed administrator then takes control of the company and conducts a meeting with creditors to determine the distribution of the company’s assets. The administrator holds two meetings with creditors, including the: 

• first meeting within eight business days; and 
• second meeting four to six weeks after the appointment. 

What Happens at the Second Meeting?

At the second meeting, creditors must decide either to:

• return the company to the directors’ control;
• have the company enter into a deed of company arrangement (DOCA), which is a binding agreement between the company and its creditors that determines how to deal with its affairs. A DOCA aims to increase the company’s chances of continuing to trade or to provide a better return to creditors. Suppose the creditors vote for the company to enter a DOCA. Then the company has 15 business days to do so or else the company will go into liquidation automatically; or
• place the company into liquidation. A liquidator is then appointed who ‘liquidates’ the company’s assets and proceeds to wind up the company. The company will be deregistered at the conclusion of the liquidation process.

3. Receivership and Security 

Directors or shareholders who cannot resolve a dispute can make an application to the court to appoint a receiver to a company. Usually, this occurs where: 

• there is a deadlock as to how to resolve the dispute; or 
• the disputing parties do not wish for the company to be wound up.

The court may appoint a receiver to a company where the directors or shareholders in dispute seek such an order, and no other adequate remedies are available. Additionally, a court may make an order to appoint a receiver where it finds oppression within the conduct or proposed conduct of the company’s affairs. This commonly includes:

• a proposed or actual act or omission by or on behalf of the company; or
• a proposed resolution or resolution of members or a class of members that is: 
  • contrary to the members interests as a whole; or 
  • oppressive or unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders.

When a court appoints a receiver, they must act per the terms of the court orders for which they are appointed. For example, types of court orders that a company can seek to define the scope of the receiver’s appointment may include:

• investigating the status of the company’s affairs;
• securing a company’s assets;
• selling the company and its business; or
• negotiating with the disputing parties and their legal representatives to resolve the underlying dispute.

4. Winding up / Liquidation 

A company can only be voluntarily wound up if it is solvent, meaning that it can pay its debts when they fall due. In order to wind up a company, there are some requirements: 

1. the majority of the company’s directors need to make a written declaration outlining that they have made an inquiry into the company’s affairs. It must also state that, at company directors meeting, they have decided that the company will be able to pay its debts completely within a period of 12 months after commencing the winding up;
2. the company’s shareholders must pass a special resolution to wind up the company. This means that at least 75% of the shareholders must agree to wind up the company voluntarily. In agreeing to the voluntary winding up of the company, the shareholders must also appoint a liquidator who will administer and carry out the winding up of the company;
3. after the company passes a resolution for a voluntary winding up, it must also lodge with ASIC a prescribed notice setting out the text of the resolution within seven days after passing the resolution; and
4. after a liquidator is appointed to administer the company’s winding up, it must then publish a notice on ASIC’s Published Notices by the end of the next business day. 

Liquidator’s Role

Once a liquidator has been appointed, directors cannot use their powers and are obligated to assist the liquidator in its functions.

The appointed liquidator will then administer the winding up, which generally involves:

• assessing the company’s books and records;
• lodging a detailed list of receipts and payments for the administration with ASIC; and 
• distributing any of the company’s property.

If during the winding up, the liquidator decides that the company will not be able to pay their debts within 12 months (in full), the liquidator must:

• convene a meeting of creditors;
• appoint a voluntary administrator, in which case the company will be placed under external administration; or 
• apply to the court for the company to be wound up in insolvency.

Moreover, from passing the resolution to voluntary wind up the company, the company must cease to carry on its business. This is insofar that the liquidator believes that it will be beneficial for the business’ disposal or winding up. 

5. Voluntary Deregistration 

Voluntary deregistration will close down the company so that it no longer exists. Additionally, it will remove your obligations as a company officeholder. To be eligible to take this route, you will need to ensure that the company:

• has all members agree to the deregistration;
• is not conducting business;
• has assets worth less than $1,000;
• does not have any outstanding liabilities (e.g. tax liabilities and unpaid employee entitlements);
• is not involved in any legal proceedings; and
• has paid all fees and penalties payable to ASIC.  

Key Takeaways 

There are various options available to resolve disputes between directors and shareholders outside of dealing with the dispute in protracted court proceedings. They can include: 

• entering into a deed of settlement;
• applying for receivership of the company; or 
• voluntary deregistration, administration or liquidation of the company.

Directors and shareholders should carefully consider their options when attempting to resolve a dispute. If you need help resolving a director and shareholder dispute, our experienced dispute resolution lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions