Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133

In this case, the Supreme Court of NSW exercised its broad powers to make any orders it considers appropriate where a shareholder suffers oppressive and unfairly prejudicial conduct. The Court ordered that Mr Rayward, a director that caused a deadlock, should sell his shares to the other shareholder at their fair market value. The director’s conduct included bullying, attempting to increase his own salary and reducing the salary of the other director, refusing to authorise financial statements and budgets and then resigning his directorship.

Facts

• Mr Munstermann and Mr Rayward were equal shareholders of QIA Group Pty Limited; they were the only directors of the company and did not have a shareholder agreement.

• An irreconcilable deadlock arose upon Mr Rayward’s decision to retire and sell his shares:  the shareholders could not agree on the sale price. Mr Munstermann claimed Mr Rayward conducted himself  contrary to the interests of the members of the company as a whole, and was oppressive or unfairly prejudicial to Mr Munstermann as a shareholder.

• Mr Munstermann contended that pursuant to s 232 of the Corporations Act 2001 (Cth), the court should order Mr Rayward to sell his shares to him.

• Examples of Mr Rayward’s conduct included billing for work which he did not perform, workplace bullying, attempting to appoint himself as QIA’s financial controller at a salary that was five times higher than the current financial controller, refusing to authorise financial statements and budgets, and proposing an “immediate recovery plan” which involved reducing Mr Munstermann’s salary by 53%.

Legal principles

Justice Stevenson provided a succinct list of principles to be considered when determining if the conduct contravenes the Corporations Act. These principles include:

• The test of oppression is of fairness and is objective; the test is whether, on the balance of probabilities, the objective commercial bystander would believe the conduct was oppressive.

• Even where the conduct is lawful it can still be oppressive; where the conduct has the capacity to paralyse a company the conduct may be seen as contrary to the interests of the members as a whole.

• A shareholder who holds 50% of the shares can seek relief for oppressive conduct as they do not have control or power to prevent the conduct.

• The remedy chosen by the court relies on the conclusions drawn by the court as to the nature of oppression. The court must choose the least intrusive remedy with the objective of any order being to end the oppression.

• The winding up of solvent companies is seen as a “last resort” by the courts.

• An oppressor may be ordered to sell their shares to the oppressed party, but where this occurs the court must fix a price that represents a fair value in all circumstances.

Decision

The court held that Mr Rayward had caused the deadlock. Mr Rayward had agreed during cross-examination that his conduct was part of a plan to cause a buyout. It was decided that Mr Rayward was to be removed from the management and ownership of QIA in favour of Mr Munsterman.

Orders

The court ordered that Mr Rayward:

1. Sell his shares in QIA to Mr Munstermann at their fair market value.

2. Resign as director of QIA in writing with immediate effect.

3. Remove himself as a signatory and authorised person on all bank accounts.

4. Repay QIA his director's loan from QIA.

5. Return all property of QIA to QIA.

6. Pay the costs of the proceedings.

For the full judgment and orders of Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133 click here.

Contact Peter McNamara if you want to avoid a shareholder deadlock. If you are in deadlock, get legal advice and act quickly to protect the company and yourself from unnecessary loss and damage.