Assignment Corporations Law

a. Case introduction

The case of Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 (NSW Court of Appeal) relates to the duties of director and the breaches of directors duties.

The case is of Mr. Nikola Kokotovich and Mrs Elaine Wallington who have a business relations as well as personal relationship of more than twenty years. The issue between the respondent (Mrs. Wallington) and second appellant (Mr. Kokotovich) initiated with the events related to incorporation of a company by Mr. Kokotovich which was Kokotovich Constructions Pty Limited (first appellant).

Mr Kokotovich held one governing director’s share and one each of the A and B ordinary shares in the company however, the incorporation legal requirement require second shareholder as told by accountant, Mr Bullivant, which was fulfilled by Mrs Wallington who held one A and one C ordinary share to fulfil this requirement.

The case point to the issue of improper purpose under director duties and a breach of fiduciary duty by director in the issue of shares for an improper purpose and also towards diluting shareholding of a member (depiction of the shares as valueless) thus, breaks down the confidence and mutual trust (Langford, 2011).

The issue towards the allotment of shares allegedly made by Mr. Kokotovich on 30 October 1972 and the allotment of shares made was invalid for 9,795 one dollar shares on 10 December 1992, in the first appellant company by Mr.  Kokotovich, these disputes among Mr. Kokotovich and Mrs. Wallington have resulted to litigation.

There is also issue related to the validity of shares issue alleged to Kokotovich Constructions Pty Limited. Mrs Wallington thus, seeks an order for the winding up of the first appellant, Kokotovich Constructions Pty Limited. Here, the case identifies the legal concern towards the section 194 of the Corporations Law.

The court judge was faces with the issue of beneficial ownership of the share, validity towards the allotment of shares in 1992 and whether or not the company can be wound up (Valsan, 2016).

The case highlight Mrs. Wallington towards beneficial interest in Kokotovich Constructions Pty Limited considering the past personal relationship with the governing director and for the time invested in the business affairs and establishment of a constructive trust among the parties.

This case situation has raised question over the appliance of Corporations Law and about the winding up of the appellant company.

b. Breaches of directors’ duties under the Corporations Act 2001(Cth)

A number of duties i.e., general, fiduciary and specific are imposed on directors under the Corporations Act. Under the Corporations Act, a director’s duty is required to act in good faith and to act for a proper purpose in the best interest of the corporation.

This is a civil obligation of the duties of a director. It can be discussed that there are different facts that led to the charges of breaches of directors’ duties against Mr. Kokotovich, the director of Kokotovich Constructions Pty Limited.

Here, section 181 of the Corporations Act can be referred impose on director to exercise their power as well as perform their duties in good faith and for a purpose that is proper (Lee, 2014).

Thus, for the purpose of self- interest or third party interest this is considered as a breach of director duty. Thus, it can be discussed that Mr. Kokotovich had an improper purpose that was not in the best interests of Kokotovich Constructions Pty Limited but to benefit self interest thus, has breached this duty of director.

It can be discussed that this duty was breached by Mr. Kokotovich as the purpose was to make the proprietary right of Mrs. Wallington worthless in the shares and to manipulate the voting power.

Under the Corporations Act, Section 184(1) is concerned with the breach of duty that takes place in situation where the director was irresponsible or intentionally dishonest then the breach of this duty is considered to be a criminal offence (Henley, 2005).

Also, referring to the specific duties of directors, under section 588G, the director has a duty to avert insolvent trading by the corporation (Sharar, 2010) however, it can be said that this duty has been breached by the governing director under the Corporations Act 2001 (Cth) and is exposed to the provisions of the civil penalty.

It can be conferred that this additional directors duty was breached as Mr. Kokotovich did not make sure that  Kokotovich Constructions Pty Limited does not trade at the same time where it is supposed that it might be insolvent under section 588G under the Corporations Act 2001.

It can be discussed that the court held that the director breach their duties in their finding as there was little evidence of the proper purpose to raise money whereas profusely the purpose was inadequate to ensure that plaintiff (Mrs. Wallington) proprietary rights that were personally held were to be made insignificant/ valueless.

There was devaluation of the shared held by Mrs. Wallington which was not in the best interest of the company thus, a fiduciary director duty owned towards Mrs. Wallington was breached.

c. Analysis of the Court’s decision

The Court’s decision by the primary judge Young J was that winding up of the company, Kokotovich Constructions Pty Limited was established and appointment of an official liquidator for carrying out the winding up of the first appellant company.

Under the view of the Corporations Act, it can be discussed that the section 260 presents that company can be wound up under this section as it sanction the winding up of a company based on grounds of oppression. It can be discussed that the section 461 of the Corporations Law presents the general grounds on which a company can be wound up by the court in Part 5.4A of the Act (Austlii, 2018).

Thus, under the section 461 it is analyzed that winding up order from court can be given if the director of the company have acted in the own interest in the company’s affair more willingly than interests of the company members and in manner that come into sight to be unjust or unfair to the other members of the company.

It also covers that an act by or on behalf of the company of a class of company members would be oppressive or unfairly prejudicial to a member and opposing to the members interests as a whole.

In this case, it is also analyzed that the supposedly oppressed member (Mrs. Wallington) has brought the battle thus, the condition of a winding up order towards unfairly injustice the oppressed member or other company members makes this condition irrelevant for court on not to give a wound up company order towards statutory bases in making this order.

Also, under the section 461, it can be discussed the court decision was based on this section that the winding up order by court may be given if the opinion of the court considered on the grounds of just and equitable towards the wound up of a company (Austlii, 2018).

Towards this, it was pointed that Mr. Kokotovich defended that it was not a quasi-partnership however, it was not strong evidence. It can be analyzed that there has been recognition of the pre-existing personal relationship apart form business relationship with Mr. Kokotovich

however, the hostility among them and the risk of oppression issues and the partial activities of the company made the decision of winding up appropriate by the court. The case of Ample Source International Ltd v Bonython Metals Group Pty Ltd; Re Bonython Metals Group Pty Ltd (No 6) [2011] FCA 1484 can be referred where the judge held oppression instances towards the Ample Source

which was the minority shareholder due to the conduct of Bonython Metals Group that was unfair and breach shareholder’s agreement thus, a wound up was granted under the 233(a) of the Act (Kumar, 2013).  The case of Hillam v Ample Source International (No 2) [2012] FCAFC 73 can be also referred where the order of winding up of a solvent company was considered to be an appropriate exercise in the case of oppression towards a minority interests (Schultz, 2016).

d. Relevance and impact of the decision

Here, the relevance of the court’s decision towards the development of the corporations’ law in Australia and the impact of court decision on the companies operation in Australia are discussed.

Hence, it can be said that in winding up decision for a company the directors’ duties general, fiduciary and specific and the Corporations Act are considered and there is need for strong evidence in case in making an wound up order for a company.

It can be discussed that the court decision will be relevant in taking an indication on the grounds towards the winding up of a company and also towards the indication of an oppressive or unfair or unjust conduct such as in the existing case where the issue of share was performed by the director, Mr. Kokotovich for the inadequate purpose of lowering the stake of another stakeholder in Kokotovich Constructions Pty Limited.

It can be discussed that the decision has relevance with regards to a company minority stakeholders. It can be discussed that the decision will impact on company operations with regards to the duties of director and towards the purpose for the issue of share considering the member’s interest.

The impact can be on the issue of additional shares by the director where the case provide an understanding towards the conduct of director which can be oppressive against the company members such as diluting the interest of member interest in the company (Galbreath, 2011).

It can be discussed that it will have impact on the company director to  exercise a fiduciary power in the allotment of shares in a fair and just manner and in the proper purpose that is in the best interest of the company and not in director self interest or in favor of other shareholders.

Thus, the company operations towards mixed purpose of director will be impacted and towards their exercise of power for the desired purpose and voting rights.

In this context, a related case can be referred for mixed or improper purpose towards the issues of share as invalid in the case of Whitehouse v Carlton Hotel Pty Ltd (1987) 70 ALR 251 where it was held by the High Court that Mr. Whitehouse purpose was to dilute the company control from Mrs. Whitehouse and daughters thus, the issue of share was seized to be invalid (Edelman, 2013).

It was also held in Whitehouse case that power of director to use share cannot be used towards the manipulating the company control in relation to the voting rights (Valsan, 2016).  Also, this will impact a company operations in situation where the one of the oppression is the complaint considering the section 461 of the law where the member can seek winding up order.

Thus, the court decision holds relevance in the Australian corporation law to remind that in disputes among shareholders and breach of directors’ duties which also involves oppression of minority shareholders, the court is willing to take order of the winding up a successful as well as a solvent company in Australia as the extreme step.

Conclusion

It can be conceded from the case of Kokotovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 (NSW Court of Appeal) that the court has taken consideration of relevant sections under the corporations Act and the different duties of directors to grant the decision towards the winding up of the company.

It can be concluded that the purpose for the issuing of shares by Mr. Kokotovich was not to raise capital but to dilute the shareholding and lower the significance of interest of Mrs. Wallington in the company.

It can be concluded that the winding up of the company is seen as an extreme step but it was analyzed that the court decision was sound based on the breach of director duty, improper purpose, dilution of shareholder stake by issue of additional shares, oppression risk and the nature of company activities.

 References

Austlii. 2018.  CORPORATIONS LAW- SECT 461. [Online] Available at: http://classic.austlii.edu.au/au/legis/cth/repealed_act/cl184/s461.html (accessed 23 May 2019).

Sharar, Z., 2010. Minority Shareholders’ Remedies In Public Shareholding Companies: Comparing The State of Qatar and Australia. Corporate Governance eJournal.

Henley, P., 2005. Were Corporate Tsunami Donations Made Legally? Directors and Corporate Social Responsibilities. Alternative Law Journal, 30(4), pp.154-158.

Galbreath, J., 2011. Are there gender-related influences on corporate sustainability? A study of women on boards of directors. Journal of Management & Organization, 17(1), pp.17-38.

Langford, R.T., 2011. The Duty of Directors to Act Bona Fide in the Interests of the Company: A Positive Fiduciary Duty? Australia and the UK Compared. Journal of Corporate Law Studies, 11(1), pp.215-242.

Edelman, J., 2013. The importance of the fiduciary undertaking. Journal of Equity, 7, p.128.

Lee, S.L.J., 2014. Making a case for the duty to act for proper purposes. Singapore Journal of Legal Studies, pp.79-97.

Valsan, R., 2016. Directors’ Powers and the Proper Purposes Rule. King’s Law Journal, 27(2), pp.157-164.

Schultz, A., 2016. Finding the Right Remedy in Minority Shareholder Oppression Law: A Transnational Analysis of Solutions in Closely Held Corporations. Transnat’l L. & Contemp. Probs., 26, p.499.

Kumar, M., 2013. Judicial opinions on the basis rule: Strict rule or matter of weight?. Precedent (Sydney, NSW), (119), p.21.