In the matter of 1A Eden Pty Limited  NSWSC 82 the Court considered whether a disagreement between directors was solemn enough to wind up the company.
P, a director, applied to wind up a company that was the trustee of a unit trust.
P’s fellow directors were S and D. P said there was a deadlock and relations between them had broken down.
P and S were builders. D was a property developer. The 3 agreed to found the Co to develop a site together with P and S to share 50% of the profits and D to take the remaining half as unit holders.
There was no written agreement.
In 2013 the company was established and the unit trust was settled.
Even though it was intended an entity of P and S would do the building work, a new cheaper contractor was found.
In 2016 the building was completed.
In 2016 P, S and D agreed to take unsold apartments as their profit share with S also taking $500,000.00 in cash.
In 2017 the company declared profit of around $8m.
The parties agreed on notional values of units for the purpose of profit distribution.
The Owners Corporation of the building the company constructed commenced building defect proceedings against the company and the contractor.
In 2018 P and S received their apartments, though D did not.
In 2019 the company, as part of the defect proceedings, was obliged to pay $15,000.00 for expert fees. D did not agree to contribute and the was then out of money. P paid on the company’s behalf.
P suggested a deadlock had arisen about paying the expert.
P lodged caveats over the company’s properties which were to be transferred to D.
P took the approach that while P and S should retain their profits (via apartment ownership), the apartments to be transferred to D ought to be retained for any liability the company might have pursuant to the defect proceedings.
D sued seeking (among other things) to remove the caveats and restore the 50:25:25 distribution.
P suggested the profit calculations had a $156,000.00 shortfall for which P blamed D.
D denied any deadlock and proposed an audit.
The Court found the suggestion of a breakdown of the relationship artificial. From 2013 to 2019 P was happy to leave admin and accounting in D’s hands, the venture made $8m in profit, and all parties had agreed on its distribution.
The Court considered this windup application, which might thwart the caveat proceedings and defect proceedings, was “infused with self interest”.
While a liquidator could investigate defending claims and seeking an account, the cost may be disproportionate noting P was chasing an estimated $156,000.00. Nor did P undertake to fund the liquidator.
Winding up would affect the Owners Corporation adversely. Winding up is a last resort and alternative, less drastic remedies are available.
The application was dismissed. Costs followed the event.
This matter is a lesson about the importance of maintaining healthy relationships with fellow board members, and for getting legal advice on what happens when things go badly.