There are a number of reasons that may see directors and/or shareholders of a company with opposing views regarding a business decision or situation. When these types of issues arise, it is important to know the appropriate course of action to take in order to resolve a dispute between directors and shareholders.
Depending on the situation, possible actions or resolutions for the company and its directors may include entering into:
- a deed of settlement
- voluntary administration
When it comes to acting in the best interests of a business, it is reasonable to expect that for the most part, directors and shareholders tasked with steering a company, would be well aligned in their intentions. However, the reality is that it is not always that straightforward. From time to time disputes will arise regarding important aspects of running the business.
These disputes can often divert significant resources away from regular operations. As such, it is imperative to take the necessary action to resolve any dispute as promptly and efficiently as possible.
Confirm the Agreement with a Deed of Settlement
It’s possible that an agreement may be reached between the involved parties to resolve the director dispute. In this instance, it is important that a document known as a deed of settlement or deed of settlement and release is entered into. These documents formalise the agreement. They set out the terms and obligations that each party is required to undertake in order to settle the dispute.
An example of agreed actions contained in the deed of settlement, to resolve the director dispute, may include:
- making a payment
- resigning as director
- transferring shares (if also a shareholder)
In addition to the deed of settlement, other documentation may also be prepared in regards to finalising and executing the details of the agreement.
- In the case of a company buy-back or share transfer, details may be included in the deed of settlement or in a separate agreement/share transfer form.
- Letter of resignation as a director of the company
- Letter of resignation if the director or shareholder is an employee
- Documents relating to the company and business in its possession
Upon executing the deed of settlement and carrying out any related actions, the company should be sure to advise ASIC (Australian Security and Investment Commission) of any changes to its directors and shareholders.
A deed of settlement also acts to ensure that the same dispute does not arise again.
It’s important to understand that the agreement is a legal document. If one party does not carry out their obligations as set out in the deed of settlement, the other party has recourse to enforce them. This may include initiating court proceedings in order to have the necessary actions take place.
Voluntary Administration: Get Things Back on Track
In the case of a director dispute that cannot be resolved between the parties themselves, voluntary administration usually provides the best chance for the company to get back on track and continue to exist. Voluntary administration is entered into with the view to remedying the existing issues and hopefully avoiding liquidation of the company.
The process of voluntary administration usually takes between 25-30 days and involves engaging an external administrator to take control of the company and manage it’s assets so that the company has some time to focus on restructuring while not having to deal with the creditors, landlords and suppliers. Importantly, during this time, directors are not able to handle any company assets or perform management duties without the consent of the appointed administrator.
The role of the administrator involves meeting with creditors to determine the distribution of the company’s assets. The first meeting is held within 8 business days or their appointment, with a second meeting held after four to six weeks.
At the second meeting, the creditors must decide whether:
- the company be returned to the control of the directors’
- to enter into a DOCA (deed of company arrangement) – an agreement between the company and its creditors
- to place the company into liquidation
Court Appointed Receivership
When directors or shareholders are unable to resolve a dispute, or do not wish for the company to be wound up, they can apply to the court to have a receiver appointed to the company. The receiver’s role is to collect and sell the company’s assets in order to repay outstanding debts.
The receiver is required to act as per the terms of the court order, the scope of which can be determined by the company seeking the appointment.
Such actions 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.
The court may also order the appointment of a receiver where it believes there has been, or is likely to be, action taken by the company, or members of the company, that is oppressive, contrary to members interests as a whole, or unfairly prejudiced or discriminatory.
Wind up the Company via Voluntary Liquidation
If a company is solvent, meaning that it is able to pay its debts as and when they fall due, voluntary liquidation may be an appropriate action to resolve a director dispute. It is important to note that a company cannot voluntarily liquidate if it is not solvent.
There are a number of requirements to be met, and process to be followed, in order to place a company into voluntary liquidation. This includes the requirement for a majority of directors and shareholders to support or agree to the winding up and lodging the necessary notices with ASIC.
Once the resolution is made to voluntarily liquidate the company, the company must stop carrying on its usual business.
As with voluntary administration, once the company is under an appointed liquidator, the directors are not able to carry out their usual role and responsibilities and must assist the liquidator in their functions.
The winding up of the company usually 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.
Following the successful voluntary liquidation of a company, it will still continue to exist as a legal entity until it is deregistered.
If, during the process of investigation, the liquidator determines that the company will not be able to pay their debts within 12 months (that is, it is insolvent), then the liquidator must convene a meeting of creditors and then either commence the process of voluntary administration, or make an application to the court for the company to be wound up in insolvency.
Voluntary Deregistration – Close Down the Business
Another potential remedy available to resolve a director dispute is voluntary deregistration. Voluntary deregistration is the process of closing down the company so that it no longer exists. It also removes any obligations as a company officeholder.
In order to be eligible to be voluntarily deregistered, the company must:
- have all members agree to the deregistration;
- not be conducting business;
- have assets worth less than $1,000;
- not have any outstanding liabilities (e.g. tax liabilities and unpaid employee entitlements);
- not be involved in any legal proceedings; and
- have paid all fees and penalties payable to ASIC.
If the company does not meet the above criteria for deregistration, voluntarily liquidating or winding up the company (as outlined above) may be an alternative option to resolve the director dispute.
Expert Advice to Resolve Director Disputes
As with any business problem, in the case of a director dispute, it is always best to take prompt action and seek professional advice. Often, the longer that a problem is left unresolved, the worse it’s implications can get and the harder it can be to resolve, or the more favourable options are now unavailable.
Seeking advice as soon as you become aware of an issue, or even suspect a potential issue is arising, can provide the best chance for resolving the dispute between directors and shareholders, and ultimately lead to saving the company.
The team of business and corporate law experts at The Quinn Group can provide individually tailored advice and guide you through the best course of action to resolve your director or shareholder disputes. Contact us by completing an online enquiry form or call 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 and arrange a meeting or teleconference to discuss your needs.