Corporate ventures are usually founded with the very best intentions, but as matters unfold disputes between investors are all too common.
The legal steps to resolve such disputes and assert control over a company can be complex and arduous.
However, there are good reasons for this due process, and it cannot be circumvented.
The recent Federal Court decision of Day in the matter of A Bliss Clinic Pty Limited v Goodwin (No 2) [2020] FCA 869 (Day v Goodwin) reminds us that parties who believe they are entitled to control a company cannot take matters into their own hands.
The ASIC register
ASIC is an independent government body that acts as Australia’s corporate regulator.
Pursuant to s 1274(1) of the Corporations Act 2001 (Cth) (Act), part of ASIC’s role is to maintain a publicly accessible register of information about companies.
These records can be accessed online by anybody to confirm details about a company, such as its office holders, members, addresses, solvency and other relevant information.
Of course, for such a register to be beneficial, the information lodged must be accurate.
It is an offence, pursuant to s 1308(2) of the Act, for a person to knowingly make a false statement or omission in a document lodged or required to be lodged with ASIC.
ASIC may, at the time of lodgement, refuse to register a document for various reasons (s 1274(8)) or require a person who submits a document to produce other documentation or information, which it thinks is necessary to decide whether to refuse or register a document (s 1274(9)).
But when a document has already been lodged, and another interested party subsequently objects, it falls to the courts to resolve the dispute.
How to rectify the register and prevent further alteration
Section 1322(4)(b) of the Act provides that an interested person may apply to the Court for an order directing the rectification of any register kept by ASIC under the Act.
Pursuant to s 1324, the Court may, on the application of ASIC or a person whose interests have been affected, grant an injunction restraining a person from engaging in conduct which would contravene the Act.
Case example
In Day v Goodwin, the plaintiff alleged the defendant had lodged false documents with ASIC and sought orders pursuant to ss 1322(4)(b) and 1324 to correct the register and restrain the defendant from making any further alterations.
HopgoodGanim acted for the plaintiff, who was wholly successful in obtaining the relief sought.
In 2019, the plaintiff acquired shares in a company and was appointed as the sole director and ultimate beneficiary of the trustee shareholder.
The plaintiff and her husband had contributed a significant sum towards the acquisition.
The defendant gave evidence that the parties had entered into an arrangement when the company was founded, which meant the defendant would acquire equity in the company through “sweat equity”. Colvin J held that parts of the defendant’s evidence lacked consistency and that she failed to identify how any agreement between the parties was reached and when. However, most of the descriptions of the agreement asserted a 50/50 ownership position or a relationship as business partners. [79]
The relationship between the parties deteriorated and the defendant formed the view that she was entitled to take control of the company. She lodged documents removing the plaintiff as sole director and secretary, removing the corporate trustee as sole shareholder and altering the company’s registered addresses.
The defendant alleged the plaintiff had verbally resigned as director at a meeting that was alleged to have taken place on 21 February 2020 and that she was appointed in lieu.
Taking matters into your own hands
Colvin J did not accept the defendant’s evidence as to what occurred at the alleged meeting on 21 February 2020. [99]
With respect to the existence of any agreement made between the parties, his Honour decided that it was not necessary to make any finding. [100(1)]
“… even if there was a proper evidential foundation before the Court for the existence of an agreement of the kind alleged by Dr Goodwin (a matter upon which it is not necessary to reach a conclusion), it would not be a basis upon which Dr Goodwin could unilaterally alter the shareholding, officers and registered office details for Bliss and the terms of the Mermaid Trust without compliance with the legal steps by which those changes may be effected.
Rather, Dr Goodwin would have to take steps to secure performance of the agreement by calling on Dr Day to convene necessary meetings of Bliss, to formally resign as a director of Bliss, to execute share transfers, to convene a meeting of Reinvent as the trustee of Mermaid Trust to resolve to exercise any power of amendment of the trust deed in accordance with the procedures set out in the deed and to formally relinquish her interest as the beneficiary and principal of the Mermaid Trust. If there was a refusal to undertake those steps then Dr Goodwin would need to bring proceedings in which she established the nature of the agreement and sought specific performance of its terms.” [84]-[85]
No substantial injustice
The defendant contended that the relief sought should not be granted because substantial injustice would likely be caused.
Section 1322(6)(c) provides that a Court may not make an order unless it is satisfied no substantial injustice has been, or is likely to be, caused.
Colvin J said there was no injustice in having the false state of the ASIC register corrected:
“Indeed, there would be injustice if Dr Goodwin’s actions were to remain unremedied and the false state of the record were to remain in place. It would mean that the register of Bliss would not accurately record the position as to important details of the company…Further it would mean that by unlawful action rather than due process, Dr Goodwin would have secured control of Bliss…” [112]
The result
The Court ordered, among other things, that the relevant documents be withdrawn, that the corporate key for the company be cancelled and reissued to the Plaintiff, and that the Defendant be restrained from causing the lodgement of specific notifications in relation to the company.
The defendant was ordered to pay the costs of the plaintiff.
Where false information has been lodged with ASIC, applications pursuant to ss 1322(4)(b) and 1324 provide parties with an effective means of rectifying the register. Whatever the justification, correct due process must be followed to take control of a company.
For more information or discussion, please contact our Dispute Resolution and Litigation team.