RSM Australia

Oppressive behaviour as a director will bite you in the wallet

The exercise of directors’ powers came under close scrutiny in the recent decision In the matter of Optimisation Australia Pty Ltd [2018] NSWSC 31, and the directors lost out against a minority shareholder who Oppressive behaviour as a director will bite you in the walletwas also an employee.

The court considered the behaviour of the directors in a closely held company which operated as a “quasi partnership”, as it related to corporations law and employment law, finding that the directors breached their duties and acted in an oppressive manner when they:

  • made excessive payments to themselves for salaries
  • made excessive payments to a related company for services
  • terminated the employment of a key employee and minority shareholder

Directors duties

Sections 180 to 182 of the Corporations Act 2001 impose duties on directors to act with care and diligence, in good faith for a proper purpose and to not improperly use their position to gain an advantage to themselves or someone else, or cause detriment to the corporation. Breaches of these duties give rise to civil penalties and a court may order a director to compensate a company for damages.

Oppression

Under section 232 of the Corporations Act 2001, a court may make an order under section 233 if (inter alia) the conduct of a company’s affairs is contrary to the interests of the members as a whole or, as the court put it, is…….”objectively in the eyeOppressive behaviour as a director will bite you in the wallets of a commercial bystander …… so unfair that reasonable directors who consider the matter would not have thought the decision fair”.

In this case, the court found the affairs of Optimisation had been conducted in a manner oppressive to or unduly prejudicial to an employee who was also a minority shareholder in circumstances where he was deprived of his employment without a fair offer to acquire his shares.

The court ordered that:

  • The majority shareholders (which included the directors) purchase the shareholding of the minority shareholder for $725,000. Interestingly, it was the court that engaged an accountant to determine the purchase price
  • The directors pay Optimisation $151,860 as compensation for overpayment of salaries, and
  • The related company pay Optimisation $208,618 as compensation for overpayment for agreed services.

The case illustrates the high standards that directors must meet when discharging their duties to a company while at the same time ensuring their conduct of the affairs of a company does not harm the corporation. Failure to do so can have serious financial consequences.


FOR MORE INFORMATION ON DIRECTOR'S OBLIGATIONS AND OPPRESSIVE BEHAVIOUR
If you have any questions or concerns related to the obligations of directors and oppressive behaviour, please contact one of our Restructuring & Recovery specialists.


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