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Remedy Oppression In The Corporations Act

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Question:

Discuss About The Remedy Oppression In The Corporations Act?

 

Answer:

Introducation

The Corporations Act, 2001 (Cth) provides the different provisions which govern the actions of the ones who run the affairs of the company. In this regard, the directors have been given a key responsibility to safeguard the interest of every stakeholder and not be indulged in a conduct which can be deemed as oppressive, unfair or prejudicial based on section 232 of this act (Cassidy, 2006). Where it is held by the court that such a conduct has been undertaken which can be deemed as discriminatory or prejudicial in an unfair manner or which is oppressive, the court can make an order pursuant to section 233 and this power is present based on section 232 of this act (Australasian Legal Information Institute, 2017). As per section 233, the court has the power of directing the management to do something or to refrain from indulging in certain conduct, which could include buying the shares of the shareholders, and the order for winding up of the company can also be passed based on this section (Victorian Law Reform Commission, 2016).

In order to show that an oppressive conduct has taken place, with regards to the dividends the three conditions given under Thomas v H W Thomas Ltd (1984) 1 NZLR 686 need to be applied. As per this case, it has to be shown that if remedies are awarded, they would be fair and equitable; that the purpose of indulging in a particular conduct was to oppress, discriminate or prejudice; and that there has been a failure in meeting the rational expectations of the parties. In the quoted case, the court held that by adopting a traditionalist financial strategy and by not paying high amounts as dividends, the conduct of the company would not become oppressive especially when the same has been agreed by the majority shareholders and there is absence of failure which could show the unfairness (New Zealand Official Law Reports, 2017).

Application

Applying the rules discussed here on the facts of the case study, the shareholders in question here belonged to such class where the directors had the discretion of awarding dividends. So, if these are not provided, it cannot be claimed upon by the shareholders as being oppressive. Also, applying the case discussed in the rules segment, here the awarding of remedies would be unfair as the conduct is not oppressive particularly because the same was optional. The purpose of this conduct was not to harm these shareholders but just to expand the business of the company. And lastly, the expectation of the shareholders is not just as the money is being used for a different purpose, which would benefit the company only.

 


The buyback of shares can be best defined as the company purchasing its already issued shares from the shareholders (Latimer, 2012). The rationale for undertaking buyback of shares is not only to increase the ownership in the company but also to reduce the dilution, to increase the financial ratios of the company, whereby the position of the company is portrayed in a batter manner and by also benefiting from the undervalued company shares (Kandarpa, 2016).

Under Division 2 of Part 2J.1 of the Corporations Act, the requisites for share buyback and the procedure which has to be adopted for the same is provided (Australian Government, 2013). This act, along with the Australian Securities and Investments Commission provides the requirements which have to be undertaken for buying back the share. Also, there is a need to fulfil the disclosure requirement covered under section 257A of this act. Further, there is a need for the valuation of shares of the independent expert based on Regulatory Guide 75 of the ASIC (ASIC, 2007).

Applying the rules to the facts of the case, the company can here opt for buyback of shares and this would help the company in obtaining advantages of buyback. Plus, the company may have to anyways buy back the shares if oppressive conduct is established against the company. To seek the report of an independent expert for valuation purpose would right meet the rules stated above.

Reduction of capital is such a procedure in which the share capital of the company is reduced and this is done by following the procedure which has been given under the law. Capital reduction, like buyback of shares, has its own benefits and included in this is the increased value of the shareholders and also helps in improving the capital structure of the company (Nanda, 2015). However, under section 256C of the Corporations Act, certain requirements have been stated which have to be fulfilled in order to reduce the share capital of the company. In this regard, there is a need to obtain the approval of the shareholders and also to prove that the reduction of the share capital would not be prejudicial for the creditors of the company, particularly with regards to their debt repayment. At times, the buyback of shares is also deemed as capital reduction; and apart from this, the capital can be reduced by redeeming the redeemable preference shares, amongst the other methods (ASIC, 2014).

Capital reduction would be beneficial for the company in this case, as with this the disputes associated with this class’s shareholders can be avoided. But in order to undertake this capital reduction, there is a need to fulfil the criteria laid down under section 256C.

Conclusion

Hence, the company could opt for either of the two options, but it would be preferable to reduce the capital of the company.

 

References

ASIC. (2007) Share buy-backs. [Online] ASIC. Available from: https://download.asic.gov.au/media/1240127/rg110.pdf [Accessed on: 01/10/17]

ASIC. (2014) Reduction in share capital. [Online] ASIC. Available from: https://asic.gov.au/for-business/running-a-company/shares/reduction-in-share-capital/ [Accessed on: 01/10/17]

Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www6.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions [Accessed on: 01/10/17]

Australian Government. (2013) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 01/10/17]

Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.

Kandarpa, K. (2016) What is the Purpose of a Share Buyback and How can Shareholders Benefit from it?. [Online] Wise Owl. Available from: https://www.wise-owl.com/investment-education/what-is-the-purpose-of-a-share-buyback-and-how-can-shareholders-benefit-from-it [Accessed on: 01/10/17]

Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.

Nanda, D.S. (2015) Reduction in share capital: Analysis. [Online] Corporate Law Reporter. Available from: https://corporatelawreporter.com/2015/02/23/reduction-share-capital-analysis/ [Accessed on: 01/10/17]

New Zealand Official Law Reports. (2017) Thomas v H W Thomas Ltd - [1984] 1 NZLR 686. [Online] New Zealand Official Law Reports. Available from: https://www.lawreports.nz/thomas-v-h-w-thomas-ltd-1984-1-nzlr-686/ [Accessed on: 01/10/17]

Victorian Law Reform Commission. (2016) The oppression remedy in the Corporations Act. [Online] Victorian Law Reform Commission. Available from: https://www.lawreform.vic.gov.au/content/3-oppression-remedy-corporations-act#footnote-135972-53-backlink [Accessed on: 01/10/17]

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