The concept of winding up a company when it is insolvent is well-documented and well understood by most companies and directors in Australia, however there are other routes that companies should be aware of where a liquidation may not be appropriate. Most notably, the court has the ability to wind up when it ‘is of the opinion that it is just and equitable’ to do so, under s461(1)(k) of the Corporations Act 2001.
So what is ‘just and equitable’?
The Courts have a wide discretion to determine when it would be just and equitable to wind up a company after an application has been made to do so.
Some relevant matters that may contribute to a successful application include a breakdown in the relationship between shareholders, fraud or mismanagement of the company’s affairs, justifiable declining confidence in management conduct and associated risks to the public interest.
S461(1)(k) is subject to a wide range of case law, demonstrating the breadth of categories under which the court can determine just and equitable grounds. Some examples of recent Court decisions where what is considered to be ‘just and equitable conditions’ include:
- The engagement by directors in misleading and deceptive conduct relating to auditing requirements of the company (Australian Securities and Investments Commission, in the matter of Sino Australia Oil and Gas Limited (Prov LiqApptd)  FCA 201)
- An unsustainable business model operated by the company causing lack of confidence by shareholders (Australian Securities and Investments Commission v M101 Nominees Pty Ltd FCA 62)
- Where a company is established on the basis ofa personal relationship between shareholders or directors and irreconcilable differences arise in that relationship (In the matter of Sirrah Pty Ltd (in prov liq)  NSWSC 413
Recent caselaw – In the matter of Mudgee Dolomite & Lime Pty Ltd  NSWSC 1510
One such example of an application brought before the Court is in the Matter of Mudgee, where a company was established on the basis of a relationship of mutual confidence, and irreconcilable differences emerge between the members.
In the case, the personal relationship between the parties failed and ultimately actions such as unwillingness to sign documents or attend meetings caused the disintegration of the relationship and subsequently a reason for the court to wind up the company on just and equitable grounds.
This case exemplifies the large range of individual and company circumstances that may enliven this provision and makes it clear that directors and shareholders need to be aware of their actions and circumstances relating to winding up provisions, and especially the less common just and equitable grounds.
- There are a broad range of factors which a Court may consider to be ‘just and equitable’ for the purposes of a section 461(1)(k) application.
- Directors should ensure they are aware of and understand the Australian laws in place governing their obligations to the Company.
If a company is in breach of its legislated obligations ASIC may take an application to wind the company up on just and equitable grounds.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.