Recently, in the decision of Mudgee Dolomite & Lime Pty Limited (No. 4)  NSWSC 393, the Supreme Court of NSW considered a dispute between two directors and equal shareholders of a mining company that eventually led to it being wound up.
Liquidators were appointed.
Before the windup, the first shareholder had brought a derivative action on behalf of the company pursuant to s237 of the Corporations Act 2001 (Cth) against the second shareholder and their related entities. The claim succeeded concerning the revenue from one mine, which the second shareholder diverted away from the company to their own interest. Still, the claim failed in relation to revenue from another mine that the second shareholder had directed away from the company.
The second shareholder appealed.
The first shareholder applied to lodge a cross-appeal on behalf of the company.
The liquidators came before the Court to seek advice pursuant to s 90-15 of the Insolvency Practice Rules, including asking the Court if they would be justified in:
(i) causing the company to defend the second shareholder’s appeal;
(ii) not opposing the first shareholder’s cross-appeal; and
(iii) instructing the same lawyers the first shareholder used for the derivative action Advice was given.
Regarding (i) the Court advised that the liquidators were justified in defending the appeal.
Regarding (ii) the Court advised the liquidators were justified in not opposing as the proposed cross-appeal because the first shareholder bore many of the risks (including an adverse costs order). There was a potentially significant upside for the company if the first shareholder won.
Regarding (iii) the Court advised the liquidators were justified in instructing the same lawyers as it would be in the company’s best interests to make use of the earlier lawyers’ case-specific knowledge.
Having provided the advice, the Court then ordered that the liquidators’ legal costs of the proceedings were to be paid as costs of the winding up.
This case serves as a powerful illustration of the value for liquidators in approaching the Court to seek advice about a proposed course of conduct. Perhaps more than that, it shows the damaging impacts that a dispute between shareholders can have on a company’s financial position.
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