Written by Brittany Brancatella | Solicitor

On 17 January 2024, His Honour Justice Black of the Supreme Court of New South Wales handed down his judgement in the matter of Munja Bakehouse Pty Ltd [2024] NSWSC 6.

This case is typical of what can be described a “commercial divorce” between directors and shareholders, where there has been an irreparable breakdown of their relationship.

The parties in this proceeding were shareholders and directors of two companies, Munja Bakehouse Pty Ltd, which operated a gluten free bakery business, and Smith Street Marrickville Pty Ltd, which owned the freehold premises.

Our firm was fortunate enough to represent the plaintiffs in this proceeding. The plaintiffs were Stephen Dionatos (“Dionatos”), his son Peter and their family trust. The defendants in the proceedings were a husband and wife, Harry and Sophia Alexander, and their family trust, all of whom also worked in the business.

Background

The relationship between the plaintiffs and defendants began in 2005 when Dionatos was supplying bakery goods to a café operated by the defendants. As their commercial relationship developed, the parties agreed to open their own wholesale bakery business known as “Munja Bakehouse”.

Munja Bakehouse traded from a number of leased premises until the parties purchased and renovated a purpose-built factory to manufacture and distribute Munja’s bakery goods. They then purchased the freehold via a unit trust, from which they ran the business. The plaintiffs and defendants were also unit holders in this unit trust.

About 9 years after Munja’s establishment, the relationship between the plaintiffs and defendants deteriorated, largely due to disputes involving salaries and issues around the company’s accounts. The breakdown ultimately resulted in an oppression proceeding being issued on behalf of the plaintiffs in late 2022.

The Initial Claims

The plaintiffs issued proceedings seeking a buy-out order or, alternatively, that the companies be wound up, on the grounds of oppressive conduct by the defendants.

On 31 July 2023, the defendants brought an interlocutory application seeking an order that the companies be wound up on just and equitable grounds or, alternatively, that a buy-out order (in substantially the same terms as sought by the plaintiffs) be made.

Variations to the Claims at Trial

At the trial, Justice Black noted an unusual feature of the proceedings was that the parties were essentially seeking the same orders, just in a different order of priority.

The plaintiffs ultimately withdrew their oppression claim and consented to the defendant’s interlocutory application that the company be wound up on just and equitable grounds.

The defendants, however, then sought leave to amend their interlocutory process seeking orders to buy out the plaintiffs on two alternative bases:

1. The first being on the basis of a narrow oppression claim where they sought to rely on the fact that Dionatos failed and/or refused to sign off on a lease agreement between Munja Bakehouse and the Smith Street Property trust (“Oppression Claim”).

2. The second being that, where the Court was prepared to make a winding up order under section 461(1)(k) of the Corporations Act 2001 (Cth) (“Act”), it also had power under section 467(1) of the Act to make a buy-out order.

The Outcome of the Plaintiff’s Claim

The Court found that it was just and equitable to wind up the companies under section 461(1)(k) of the Act, given the failure of the relationship between the shareholders (which was not disputed by any party).

The Outcome of the Defendant’s Claims

In relation to the defendant’s Oppression Claim brought against the plaintiff, the Court found that Dionatos’ failure to sign a lease did not constitute oppressive conduct. Importantly, Justice Black noted that:

1. The interest of a tenant and the interests of a landlord are generally not aligned.

2. In circumstances where the directors of a tenant company are also the directors of a landlord company, signing a lease between the two companies would arguably give rise to a conflict of interest.

3. In light of the conflicted position of Dionatos, his failure to sign the lease was not oppressive conduct.

The second of the defendant’s two claims required the Court to consider whether the scope of the Court’s power to “make an interim or other order that it thinks fit” under section 467(1)(c) of the Act was wide enough to force a buyout.

Justice Black was guided by, inter alia, the statutory history of section 467(1) of the Act and the purpose of the oppression provisions, which provided the Court the power to make a buyout order.

His Honour noted that the oppression remedy appears to have been introduced largely to provide an alternative remedy to a winding up order. If the preexisting just and equitable wind up provisions already provided the Court the power to force a buyout, the “alternative” remedy afforded by the oppression provisions would not have been necessary.

As such, Justice Black held that the power under section 467(1) of the Act was not wide enough to permit the Court to make an order for a buyout.

The Outcome

Justice Black ultimately found in favor of the plaintiff’s application for a wind up on just and equitable grounds.

His Honour found that the defendants’ oppression claim could not be made out and was not persuaded by their argument that, where the Court was prepared to make a winding up order under section 461(1)(k) of the Act, it also had power under section 467(1) of the Act to make a buy-out order.

Consequently, His Honour ordered the winding up of both of the companies and that the liquidator nominated by the plaintiffs be appointed as liquidator of the companies and receiver of the trust assets.

Key Takeaways

This case serves as a reminder to practitioners and shareholders alike that, in circumstances where there is a profitable company, shareholders in dispute should always try to negotiate a commercial outcome between themselves.

Once in the hands of the Court, there may be no other choice but to order a wind up.

Do you have a legal matter you need assistance with? Sanicki Lawyers can help. To seek professional advice, please contact us on (03) 9510 9888.