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Using safe harbours and collaborative law to resolve shareholder disputes and save the company!

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6 Jun 2018

In September 2017, ‘safe harbour’ reforms to insolvency law were introduced to encourage directors to engage in a course of action early that is reasonably likely to achieve better outcomes for companies than immediate administration or liquidation. However, the existence of a safe harbour may not be enough if shareholders are locked into an intractable dispute. In this article, insolvency and dispute resolution lawyer Penelope Pengilley explores how collaborative law practices, applied to operate within a ‘safe harbour’, may facilitate shareholder dispute resolution and save the company!


Shareholder disputes are renowned for their rancour and intractability. Festering issues become open wounds and if left untreated or aggravated, can be come fatal. Often the causes of the conflict are lost in the mists of time with the relationship between shareholders becoming a toxic mix of hatred, suspicion, allegations and counter allegations, with a desire to win at all costs driving not only dealings between shareholders but also company decision making. Forgotten is the fact that insofar as they are directors, parties owe duties to the company and as Justice Almond reminds us in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2013] VSC 2013 at [44],[1] the interests of shareholders of even sole director family companies are not necessarily the same as the interests of the company.

Unpicking this morass is often very costly and unproductive and in recognition of this, the Supreme Court of Victoria has introduced a pilot program for shareholder disputes.[2] For appropriate cases, the pilot program offers an abbreviated court process that requires the parties to forego lengthy court documents with voluminous allegations, and instead provide a preliminary estimate of the values of the shares in the company and to attend early mediation either before a court official or private mediator. It is only if the dispute remains on foot after mediation that it returns to the Court for directions and becomes more conventional in character.

However, by this stage, the parties are in the trenches with shareholder value severely compromised through decision paralysis, lack of new capital, staff unrest and attrition, loss of custom, competitors circling and then pressures on cashflow; in short what remains is a distressed company with the parties fighting over the right to preside over the demise of their business with all involved exposed to the risks of insolvent trading and other claims for breaches of directors’ duties!

Can this race to mutual destruction be avoided? Utilisation of the new ‘safe harbour’ provisions set out in section 588GA of the Corporations Act while engaging in collaborative law or collaborative practice to resolve disputes may be key.

Safe harbour provisions – what are they and how do they operate?

The ‘safe harbour’ provisions were introduced to give directors a safe harbour within which to develop a course of action aimed at saving the company. They operate to protect directors from insolvent trading claims where directors have engaged in a course of action that is found to be reasonably likely to have led to a better outcome for the company than immediate administration or liquidation. For this test to be satisfied, the Court will look to whether the director:

  • Is properly informing himself or herself of the company’s financial position;
  • Is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts;
  • Is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company;
  • Is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice;
  • Is developing or implementing a plan for restructuring the company to improve its financial position;
  • Is ensuring that employee entitlements are paid by the time they fall due; and
  • Is ensuring that the company is giving returns, notices, statements, applications or other documents as required by tax law.

To a significant extent, these requirements simply mirror good corporate governance: keeping proper financial records, directors informing themselves of the company’s financial position, paying employee entitlements and keeping up-to-date with tax compliance. However, in addition there is the requirement to obtain advice from an appropriately qualified entity.

This concept has not been defined in the legislation however it should cover registered liquidators and may cover accountants, lawyers or even bankers with restructuring and turnaround expertise. However, the requirement of being “qualified” may mean that experience without an appropriate certificate, diploma or degree in turnaround type skills will not suffice. Further a significant disproportion between the size and complexity of the company and an individual liquidator’s background and experience may also fall foul of the “appropriately” requirement. At the end of the day, the Court will need to be satisfied that the exercise is real and not a sham to give time to engage in last minute asset protection or to set up a phoenix company (where a business and its assets are transferred to a new entity often with a similar name and creditors left stranded).

Therefore, a critical aspect of seeking a ‘safe harbour’ within which to resolve shareholder disputes and hopefully save the company is appointing an appropriately qualified entity - but how are they to deal with the challenges of entrenched shareholder conflict?

What is collaborative law and how does it work in practice?

Collaborative law or collaborative practice is a method of dispute resolution first developed in the United States and now gaining more and more support in Australia. It is a process through which parties “identify interests and issues, develop options, consider alternatives and make decisions about future actions and outcomes”[3] as part of resolving a dispute between them. A unique feature of collaborative law is that the parties and their lawyers agree in writing that the lawyers will not act (or their files handed over) should the parties later resort to litigation. This means that there is less capacity to use the process to position oneself in any subsequent proceeding so parties are more likely to be forthcoming, make concessions and offer constructive suggestions enhancing the prospects of a good outcome.

The process involves stakeholders agreeing to work through issues in a structured manner that identifies issues and objectives and then designs a process for addressing each issue. Unlike the traditional adversarial approach, collaborative law focuses on interests rather than rights. The process first developed in the area of family law, driven by concern to protect the interests of the children. I argue that the process lends itself to resolving shareholder disputes, with preserving value in the business for the benefit of all being the driver in a commercial context.

A collaborative process usually involves a facilitator who is experienced in working collaboratively, and the parties often with their own advisors/supporters. To take the benefit of a ‘safe harbour’ defence, either the facilitator could be the appropriately qualified person who would also give advice to the directors in their role as directors, or an independent appropriately qualified person could be engaged as part of the process. Many registered liquidators have years of experience in dealing with competing stakeholders whether it be suppliers, creditors or shareholders so would be well placed to act as a facilitator. However, if relationships have become so bad that parties won’t deal with each other at all then a facilitator with training in dispute resolution or with a background in industrial psychology may be needed with the restructuring professional working alongside and focussed on s 588GA issues. However, as a practical matter, for the safe harbour to work, the interests of the company, which may or may not always align with shareholders, must be represented and protected as part of the process.

So, a collaborative process would typically commence with the facilitator being given access to information about the dispute, followed by a meeting with each stakeholder to discuss their concerns and objectives. In the case of shareholder disputes, access to company records would probably be necessary also. There may be threshold issues about the adequacy of record keeping and whether employee entitlements and tax compliance are up-to-date. These would have to be addressed first to be able to take the benefit of the ‘safe harbour’ provisions.[4]

Once the parameters of issues start to emerge, other external input may be required (for example, advice about specific business, commercial or legal matters) and then a critical path developed that may reflect external obligations such as re-occurring tax obligations, the timing of staff pay-runs, forward ordering and lease renewals.

If the company’s value is to be preserved, the parties may have to reach at least limited agreement about what is required to maintain the status quo while the process is undertaken with the facilitator available to assist them here. For example, an interim chief operating officer could be appointed with an agreed remit regarding day-to-day decision making or it be agreed that no material decisions be made for an agreed period to enable the status quo to be maintained while shareholders try to resolve issues.

There may be a hierarchy of issues or one or more fundamental matters that need resolution before other items can be addressed. It is the job of the facilitator to keep the process moving forward and to navigate difficulties as they arise.

If the race to mutual destruction can be disrupted, then the parties will have some space within which to work out a solution both for themselves and their business and if they ensure that their process complies with section 588GA, then they can also give themselves a safe harbour within which to clean and refit their ship.

Pairing a collaborative approach with utilising a safe harbour

So by taking a collaborative approach and using an appropriately qualified person, the process could be used to bring to the table, as appropriate:

  • A voice to protect the interests of the company and that of its creditors;
  •  A chance to put holding mechanisms in place to preserve the status quo pending final resolution;
  • A review of financial records for regulatory and ‘safe harbour’ compliance and if necessary taking steps to ensure compliance;
  • An assessment of current and future liabilities, available cash flow and whether any liabilities can be renegotiated, deferred or avoided;
  • Commercial, business and legal advice about prospects and threats to the business;
  • Opportunities for business mentoring/executive coaching or to pursue a new recruitment strategy if personality/business styles are an issue or there are skills gaps in the business;
  • Development of restructuring options including dealing with financing and tax considerations to enable parts of the business to be separated and transferred to each shareholder, shut down or sold with a view to ensuring a better outcome to the creditors than insolvency administration; and
  • At least limited time for stakeholders to consider their options, formulate objectives and get advice.

These tasks should satisfy the requirements of the draft safe harbour defence because they include:

  • Keeping appropriate financial records;
  • Obtaining appropriate advice from an appropriately qualified entity who has been given sufficient information;
  • Keeping directors properly informed; and
  • Developing or implementing a plan for restructuring the company to improve its financial position.

Collaborative practice is not some group hug, rather it is a structured means of working through issues in the interests of the parties and the company. The prospects of preserving shareholder value are maximised while the risks of insolvent trading are minimised at much less cost than hard fought, brutal, scorched‑earth litigation.

The idea of exploring collaborative practice may come from the company’s accountant, banker, lawyer, or from one of the warring parties. A trusted advisor who knows the parties and has not taken a partisan position may also be well placed to act as facilitator working alongside a restructuring professional. With the introduction of a ‘safe harbour’ defence, using collaborative law could be an attractive option for company director and business organisations to offer members.

Recourse to collaborative law can also be introduced into shareholder and joint venture agreements with triggers clearly identified. For example, if there is a pattern of disagreements or matters remain unresolved for a defined period, a dispute or disagreement can be deemed to have arisen with a collaborative law process automatically coming into play. The agreement could nominate a facilitator or failing that, call upon the head of an organisation like the Australian Restructuring, Insolvency & Turnaround Association to do so, drawing from a pool of persons with appropriate credentials reflecting the nature and scale of the company or joint venture.

If the process does not resolve the dispute, the warring shareholders can still resort to litigation and oppression proceedings although the process may have enabled holding mechanisms to be put in place to preserve the status quo in the meantime. In that event, the parties will need to engage new lawyers and a fresh team to conduct their case and there will be a cost involved (“ceasing to act rule”). Can this cost be mitigated to some extent?

Collaborative law and the Supreme Court pilot program

The Victorian Supreme Court Practice Note SC CC 8 contemplates obtaining of valuations and early mediation. Under the pilot, it is only where the dispute remains on foot after mediation that the matter returns to the court for directions and becomes more conventional in character. Like collaborative practice, the pilot takes a practical and outcome focussed approach to the first stage of a proceeding but importantly also recognises that this approach will not suit all cases.

Therefore, it may be that where collaborative law has not succeeded, given the energy, cost and expense already expended, in appropriate cases, the Court would be open to the idea of skipping early mediation and valuation with the matter moving straight to directions and conventional litigation with mediation at a later stage. It may also be that at the collaborative stage, any valuations obtained through the process can be carved out from the ceasing to act rule so that they can be used in any later litigation – or at least at any subsequent mediation. By this means, those using collaborative law would not be prejudiced and their dispute could move promptly to judicial resolution.

The benefits of collaborative law practice coupled with compliance with ‘safe harbour’ requirements offer shareholders the best chance of preserving their companies, avoiding liability for breaches of duty and restoring shareholder value.


[1] Upheld on appeal in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9 by Warren CJ at [60], Neave JA at [134] and Garde AJA at [220].

[2] Practice Note SC CC 8 Oppressive conduct of the affairs of the company.

[3] Law Council of Australia, Australian Collaborative Practice Guidelines for Lawyers.

[4] If these matters can’t be addressed promptly then a safe harbour can’t arise although there may still be benefit in trying to resolve matters between the parties, perhaps with an administrator appointed to avoid insolvent trading with the prospect of a deed of company arrangement being put up if shareholder issues can be dealt with in a timely manner.