TGIF 31 May 2019: Champions’ Quarrel: Provisional liquidators appointed to protect company assets from majority shareholder

This week’s TGIF considers the case of Champions Quarry Pty Ltd v GSQ Holdings Pty Ltd, in the matter of Champions Quarry 2 Pty Ltd [2019] FCA 459 in which provisional liquidators were appointed following allegations a company’s business had been conducted in a manner oppressive to its minority shareholder and the company as a whole. 

What happened?

The proceedings concerned an interlocutory application for the appointment of provisional liquidators to Champions Quarry 2 Pty Ltd (the Company).

The action was brought by a minority shareholder as part of broader proceedings to have the Company wound up on the basis that:

• a director had conducted the affairs of the company in his own interest; and
• in a manner oppressive to its members.

The application requested the appointment of provisional liquidators for the period prior to the making of a winding up order, if one was to be made, in order to protect the Company’s assets.

Background

From 1985 to 2018 the Company operated a sandstone quarry in northern NSW under the trading name “Champions Quarry”.

In 2017, the Company sold 51% of its shares to the defendant, GSQH, and provided to one of GSQH’s directors, Mr Richards, a consent to act as director of the Company. The consent was signed and returned but no formal step was taken to appoint Mr Richards. It was alleged that shortly thereafter, Mr Richards began conducting the affairs of the Company to the exclusion of its minority shareholder and for the sole benefit of GSQH.

Circumstances requiring a provisional liquidator

The power to appoint a provisional liquidator has been referred to as a ‘drastic intrusion’ into the affairs of a company; one which should only be considered where there is an arguable case for winding up and where the need to appoint a liquidator is urgent.[1]

Considerations often include whether assets of the Company need to be protected, whether the facts demonstrate independent supervision of the company’s affairs is necessary and/or if a breakdown in relationship has occurred.

In this case, the Court found that Mr Richards’ conduct as a director of the Company met the required threshold and that there existed a sufficiently urgent need to protect the Company’s assets to justify the appointment of a provisional liquidator.

The conduct of Mr Richards which the Court considered included:

1. appointing his sister as company secretary without authorisation from other directors or the Company’s members;
2. causing the Company’s contact details, including its telephone number, email address, postal address and website to be changed so that they were only accessible to GSQH personnel;
3. entering into negotiations to divert a lease to the Company to himself or GSQH;
4. arranging a transfer of the Company’s EPA Licence into the name of GSQH; and
5. attempting to assign the Company’s major quarry supply contracts to GSQH.

In addition, since Mr Richards appointment as a director, the Company’s accounts showed no operating revenue and that substantial administration fees were being incurred without explanation and appeared to be meeting the costs of fuel, insurance, maintenance and repairs for plant operated by GSQH as opposed to quarrying operations of its own.

Taking those facts into account, the Court was satisfied that a provisional liquidator was necessary. The Court emphasised the immediate risk being posed to the Company and the need for independent supervision to protect its assets and examine the company’s revenue and expenses.

Key takeaways

In circumstances where a majority shareholder operates a company “as if it were a wholly owned subsidiary” of the shareholder, there is an obvious risk to the interests of the company’s minority members. Where that conduct is accompanied by an immediate risk to a company’s assets, courts will be more likely to exercise their discretion in favour of appointing a provisional liquidator under s 472 of the Act.

The discretion conferred on the court to appoint a liquidator is particularly wide and can be exercised at any time after the filing of a winding up application and before any such order is made.

If the application seeks the appointment of liquidators on a provisional basis, this case serves as a reminder of both the urgency which often accompanies such an application and the importance of clear and compelling evidence that the appointment is warranted.

^{[1]See Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 and Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd  (2003) 47 ACSR 197.}