Is the non-payment of a dividend a basis for shareholders to mount an action for oppression under the Corporations Act.
The remedy in oppression (S.232 of the Corporations Act) is being used more frequently in quite interesting and unique cases. One question that arises, perhaps every five or so years, is whether the non-payment of a dividend, even in a group of companies, may amount to oppressive conduct. This issue was considered by the Supreme Court of NSW in Goozee & Anor v Graphic World Group Holdings Pty Ltd & Ors ((2002) 20 ACLC 1502). Briefly Mr and Mrs Goozee were two of four shareholders in Graphic. The other two shareholders were Hoolahan, the second defendant in the case, and Thomas who was not a party in these proceedings. Graphic had several subsidiaries, two of which had directly and wholly-owned subsidiaries. The position may be more readily gathered from the following diagram in which all connecting lines (except those between the four individual shareholders and Graphic) denote both holding and beneficial ownership of all shares issued. The companies operated as a group and carried on business in the printing industry.
By interlocutory processes the Goozees sought leave pursuant to S.237 of the Corporations Act to bring proceedings on behalf of Graphic and, each other immediate holding company in the group, seeking the winding up of the holding company's wholly and directly owned subsidiary on the grounds of oppression, unfair prejudice and unfair discrimination in relation to the affairs of the subsidiary, or conduct in those affairs inconsistent with the interests of the members as a whole. The Goozees sought, as principal relief, declarations that the affairs of Graphic and Double Pay (another defendant in the case but which was not within the grouping of companies illustrated) were being conducted in an oppressive or otherwise unfair manner (as these terms are described in the language of s232 of the Corporations Act) The action was based on the proposition that the adoption and implementation of certain financial policies within the subsidiary, or each subsidiary, wholly owned by Graphic, amounted to conduct in the affairs of that subsidiary within the purview of S.232.
The Goozees said that the Graphic group of companies had generated significant profits on a consolidated basis for the last five years, yet dividends had not been paid and surplus funds had not been reinvested into the business and were sitting in bank accounts and upon deposit. They also sought orders that all the companies in the group be wound up pursuant to S.233(1)(a). The Goozees also sought leave to bring proceedings on behalf of the company seeking to have it wound up as an alternative to the remedy for oppression. The earlier action was based on the proposition that certain financial policies that were followed within each of the subsidiaries owned by Graphic amounted to conduct in the affairs of that subsidiary that was oppressive. Mr Justice Barrett felt that the Goozees could not reasonably believe that a good cause of action existed in relation to the issues that they wanted to raise under the general law. He ruled that the non-payment of dividends in these circumstances did not amount to oppression.
In doing so he said: "It can be said at once the decision not to pay dividends or to pay at a rate below that fairly allowed by the profits cannot, without more, attract the intervention of the court under the [oppression remedy]. ... In the present case, there is no evidence of the profitability of any wholly owned subsidiary, viewed separately, or of the extent of its distributor reserves ... As things stand, it is impossible to say that any of the wholly owned subsidiaries have failed to pay dividends in accordance with [the appropriate rule]. It is also impossible to see any basis on which a plausible contention to that effect could be advanced. As a threshold, the evidence does not even show that any of the wholly owned subsidiaries have ever possessed the ability to pay dividends consistently with the statutory prohibition upon payment of dividends otherwise than out of profits. Nor does it show the extent that dividend-paying capacity existed within any particular company at any particular time, assuming it existed at all."
For the applicants to be able to sue in the name and on behalf of the company Justice Barrett said the Goozees had to show that they were acting in good faith. On the evidence, the judge felt that their purpose to initiate the derivative action on behalf of each immediate holding company was "a collateral purpose beyond that required by the legislation." In the circumstances it was not in the best interests of Graphic and therefore should not be allowed.
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