Founding directors claim unfair dismissal after majority shareholder failed to invest capital

Two founding directors of a meal kit delivery service challenged their dismissal, arguing they were summarily dismissed for contrived reasons after the majority shareholder failed to invest the promised $1.5 million and unilaterally extended the loan repayment date by six years. 

The workers contended that allegations of unauthorised director loans, personal expenses, and deletion of company records were not substantiated with evidence, and they were not given the opportunity to respond. 

The employer maintained the workers engaged in serious misconduct, including unauthorised transactions breaching the shareholders' deed, intentional disobedience, refusing to provide admin rights, and deletion of company records, warranting summary dismissal.

Acquisition and loan arrangements

The workers founded the business in December 2014. In October 2023, the majority shareholder acquired a 54% shareholding with the shareholder's directors being appointed to the board alongside the workers as founding directors, but with the shareholder's chair appointed with a casting vote. 

The announced terms of the acquisition were that the shareholder invests $1.5 million into the business for a controlling interest, the business loans to the shareholder $1.5 million, and the shareholder loans $110,000 to each of the founding directors. 

Both sets of loans had the same commercial terms and were to be repayable no later than 30 October 2024. Both workers were close to the end of their working careers and an in-principle arrangement was agreed that the founding directors would earn out their shareholding over a period of 12 months to coincide with the due date of the loans.

In addition to being directors, the workers were also employed by the business from 2016. Following the majority shareholding, the two workers entered into new employment contracts. 

Both workers were contracted to receive $168,000 per annum, reduced from the earlier contracted salary of $200,000. Despite these new contracts of employment, both workers did not receive their full wage entitlements as the business began to experience cash flow difficulties. 

The workers gave evidence that they received $89,450 for the 2023/2024 financial year and $18,900 for July 2024 to December 2024.

The workers missed out on their wages when business cash flow was insufficient. 

There is no evidence nor was it contested that no other employee missed out on their wages, the cashflow affected the wages for the working directors. 

The workers submit that at no time did they agree to waive their rights to their wages and other entitlements.

Shareholder directors seize control

In the period November to December 2024 the shareholder directors began directing changes in the business without support from the founding directors. 

These changes included replacing the company accountant, who had been the accountant since 2014, with the shareholder's accountant, and the shareholder's solicitors sent a letter of demand to each worker seeking repayment of their respective loans with interest. 

On 4 December 2024, the shareholder chair sent to the workers a board circular resolution varying the loan agreement, varying the repayment due date for the $1.5 million loan from 30 October 2024 to 30 October 2030.

Despite the objections from the workers, the two shareholder directors approved the resolution to extend the repayment loan due date on the basis that the shareholder chair had the casting vote. 

Further, the chair directed one worker to relinquish top-level administrative access to the Google and Xero accounts. 

As the chair had the casting vote among the four directors, neither worker could avert or influence any board decisions that effectively removed any level of their control over the business and into the control of the shareholder directors.

Unpaid wages and medical condition

As no capital investment was made by the shareholder and the loan repayment was not paid by the due date of 30 October 2024, noting that the loan agreement term was changed on 18 December 2024 to be payable in October 2030, one worker who was drawing from his own personal savings to cover business expenses to keep the business solvent, raised concerns about wages owed to him and its effect on his morale and commitment to the business. 

Board minutes show that one shareholder director expressed concern over the cash flow and level of reduction on the worker's salary, that some level of salary ought to be established, but further discussion is required. No further action was taken by the directors to address the failure to pay either worker their wage entitlements.

In early December 2024, one worker was hospitalised for a serious medical condition. Materials submitted show that the shareholder chair denied payment of sick leave or any other paid entitlements to the worker during his absence from work.

In December, the shareholder directors also demanded repayment of the director loans that were in place prior to the shareholder's acquisition of shares.

Suspension and dismissal allegations

The employer submitted that the workers were dismissed for failure to comply with the direction to hand over top-level admin rights to Xero and Google, for alleged unauthorised director loans, unauthorised expenses for personal benefit and destruction of company records. 

The workers submitted that their dismissal was unfair because they were summarily dismissed for invalid reasons, and the procedure was unfair. The workers submitted that the reason given for the summary dismissal was contrived.

On 19 December 2024, the workers submitted that they each received an email from the shareholder chair which stated: 

"As passed by board resolution with shareholder majority approval yesterday, please consider this email a formal notice of your suspension as [position] of [business] due to potentially serious misconduct." 

On 20 December 2024, the workers replied, both advising that they did not accept the "formal notice of suspension" as the notice of suspension provided no explanation or particulars of the alleged "potentially serious misconduct," and they denied any wrongdoing or misconduct.

One worker submitted that he was advised at the board meeting of 6 January 2025 that his employment and that of the other worker were terminated. 

The other worker advised that he was informed by the first worker of the decision, as he was absent from the meeting. However, formal correspondence terminating employment was dated and received by email on 30 January 2025, together with a circulatory board resolution confirming their dismissal. 

In addition, both directors were notified of their immediate removal as directors by way of a circulatory resolution by the shareholder directors.

Workers' responses to allegations

Both workers submitted that the 30 January 2025 correspondence was the first occasion on which the reasons for dismissal became known. 

They submitted that the allegations and evidence was not at any time put to them to respond to, nor was there any advance notice of the misconduct that both workers allegedly conducted. 

In response to the allegation that the workers were party to a number of "unauthorised director loan transactions" since the shareholder became shareholder, one worker explained that the accountant used the director loan accounts as a temporary measure while accounts were in draft form as a book entry to assist with tax planning and did not constitute a loan to the director. 

On finalising the accounts from draft form, the amounts were properly adjusted to the correct accounting classification such as wages or director fees. 

The worker submitted that the allegation that these draft accounts referencing director loans was baseless and deliberately misconstrues any allegation that the practice was not known until the shareholder accountants took over the accounts because all financials were previously fully disclosed to the shareholder directors.

In response to the allegation of using company resources for personal purposes, one worker denied the allegation and said his uber account was offered for inspection to show that the use of uber was used to deliver customer goods and not for personal purposes. 

He further submitted that the employer did not particularise any of the allegations to properly respond to them. The other worker also responded to the claims that he made grocery purchases and used uber and petrol for personal benefit. 

The worker denied the allegations and said the expenses were in the course of business. He described his purchases to meet customer changes to orders or because of food intolerances or where an item was cheaper from the supermarket than the supplier. 

The worker also used Uber to deliver products, and petrol was used for delivery purposes or for refueling the business van.

The workers responded in broad terms due to the lack of specificity in the allegations against them.

In response to the allegation that he deleted company records, one worker denied this and said private emails and files were deleted, unrelated to the company affairs, including correspondence between the worker and his legal adviser concerning the unfair dismissal application. 

The workers further contended that even though no procedural fairness was afforded by the employer and even if there were legitimate concerns, the dismissal was disproportionate, and a warning or performance improvement plan was more appropriate.

Legal proceedings and duplicate transactions

Separate proceedings are on foot in the County Court concerning the dispute between the majority shareholders and the founding directors. 

However, the allegations that the founding directors engaged in unlawful business expenditure for their own benefit is strongly contested by the workers' lawyers in correspondence dated 14 May 2025. 

The correspondence identified that an analysis of the transactions alleged to be personal expenditure contains transactions more than six years old and predates the shareholding by the shareholder, further there are over 400 duplicate transactions, the transactions are not personal expenses but legitimate expenses for staff amenities and business related operational expenditure.

The employer submitted that on 18 December 2024, the workers were immediately suspended from employment by board resolution. 

The employer submitted that neither director's employment nor directorship was terminated at the meeting, but the threat of dismissal and termination as directors was probable, given the notice that the shareholder directors were investigating the conduct of the workers. 

The employer asserted that the board discussed director loan transactions and "unauthorised expenses/personal benefits" as alleged in the letter of dismissal. 

The employer submitted that the alleged transactions, which it said amounted to serious misconduct, could not be established until the chair had access to the bank accounts.

No valid reason found

The Commissioner found the reasons for the dismissal identified in the letter of termination cited breach of duties as provided in the shareholders deed, as well as levels of professionalism and diligence as an executive with reference to: unauthorised and undocumented director loan transactions since shareholder became shareholder, unauthorised expenses/personal benefits, deletion of company records, and for one worker the additional allegation of intentional disobedience which related to a failure to provide access and administration rights to the employer's key accounts for approximately two months.

The employer failed to present evidence to demonstrate that the decision was sound, defensible or well-founded in respect to each of the reasons. 

The workers gave evidence that they were informed to keep running the business as they always had, prior to the majority shareholding by the shareholder. The workers contended that this instruction was given, even though both workers executed the deed variation. 

The employer did not dispute this evidence. Further, the contested evidence over the financial records was explained by the former accountant that the accounts were in draft form, and the practice in draft form was for the purpose of tax planning. 

The employer evidently rejected this evidence but failed to present evidence that the records showed unauthorised loan transactions that presented any risk to either the employer or the majority shareholder.

The Commissioner observed that the employer made serious allegations of breaches of Corporations law and tax avoidance which required more than mere allegations. 

Reliable evidence supporting the decision to summarily dismiss the workers ought to have been presented to them and the Commission to better understand the scope and detail of the allegation. 

The details of the allegation were imprecise and remained disputable between the parties. The Commissioner observed that as the details of the allegations were never presented to the workers, the details of the allegations were therefore most likely to be equally unclear to them.

Allegations not substantiated

With respect to the alleged unauthorised expenses for personal benefit, this evidence was contested and supported by correspondence from the workers' lawyers dated 14 May 2025. A document containing numerous one-line transactions was presented to the workers. 

The workers' response to the allegation and accompanying document containing the transactions of 14 May 2025 appeared not to have been responded to by the employer. 

Therefore, the transactions relied upon by the employer to assert the unauthorised expenses and use of business resources for personal benefit were unknown. 

Further, the employer did not respond to the witness evidence and the letter, which identified more than 400 duplicate transactions, presented to the workers for their response.

No discernible evidence was presented to the Commission that the alleged transactions were either unauthorised or for the personal benefit of the workers, nor was the value of the alleged transgressions. 

The employer's reliance on email correspondence from the quality manager did not corroborate that the workers misused company resources, all it established was that the workers were seen by the employee to "frequent" the café. 

The quality manager did not present evidence in support of the email relied upon by the employer. In the absence of evidence establishing that the expenses were unauthorised or for personal benefit as opposed to legitimate business expenses, this allegation that the pattern of expenses was either fraud, theft, an oversight or a mistake was not substantiated by the employer.

While the employer asserted that deletion of company records had occurred with deliberate knowledge of both workers, this and what company records were alleged to have been deleted was neither revealed nor substantiated with evidence. 

The employer relied on an unreadable "sample" of extracts or screen grabs, the purpose which was not established. Further, the employer asserted that it concluded that the deletion of company records was a deliberate effort to conceal information. 

What information was concealed was uncertain, the workers admitted to deleting personal correspondence with their legal representative in respect to their unfair dismissal application considered legal privilege. In regard to this allegation, the reason was not sound, defensible or well-founded.

Intentional disobedience allegation

The final allegation related only to one worker, and it was alleged that his conduct amounted to intentional disobedience when he did not immediately abide by a request to hand over high-level administrator rights until two days after a board direction to do so. 

The employer asserted that this was serious to justify summary termination. The worker had reason to be concerned, as both workers had no capacity to influence board decisions, and their investment as founding directors was slipping out of their control into the control of the shareholder directors. 

The workers, in their view, had reasonable concern that the conduct of the shareholder directors was to take control of the business without the promised financial investment of $1.5 million. 

The worker held the view that the Google and Xero accounts were the last level of control before the founding directors would be pushed out of the business. 

The employer acknowledged that the worker handed over the rights two days after the board decision and well before the dismissal but did not justify why this alleged disobedience justified summary dismissal.

On review of the evidence, the Commissioner could not be satisfied that the alleged conduct occurred. The employer failed to demonstrate credible, sound, defensible or well-founded reasons for a summary dismissal. 

The workers were given a letter of dismissal on 30 January 2025, but were suspended on 18 December 2024. The employer submitted that the workers were given the notice that the shareholder directors were investigating the conduct of the workers in relation to director loan transactions and unauthorised expenses/personal benefits at the 6 January 2025 board meeting. 

This absence of detail in respect to either allegation was bereft of notification of reason. The workers were entitled to the details concerning each serious allegation, and this was not done.

No opportunity to respond and maximum compensation

At no point were the workers given an opportunity to respond to the allegations or any evidence against them.

No evidence was presented to them for response or in support of the decision to dismiss them. 

The only detail provided was the numerous one-line transactions, which the workers contested and further advised that the document contained more than 400 duplicate transactions. 

The employer did not respond or provide any reasonable evidence to support the reason that led to the dismissal.

The Commissioner found not only that the dismissal was lacking in valid reasons, but the process was devoid of any procedural fairness. 

In addition, decisions at the board level appeared to have been unilateral by the shareholder directors, somewhat dictatorial and without regard for the effect of the decisions on the workers.

Most concerning was the decision not to repay the $1.5 million loan by the due date and without any penalty or consideration for the workers' loans, noting that the shareholder directors amended the due date more than a month after it was due. 

The effect of this was to place the founding directors in serious debt with unpaid wages and their loans, together with accumulated interest, all while one worker was seriously ill and the other worker was distressed and pressured to reach into his personal savings to keep the business solvent.

The Commissioner found the workers' length of service was eight years and a further two years as founding directors investing in a start-up business. This was not an insignificant period. 

Both workers were close to the end of their working careers and planned to see the new majority shareholders buy them out after 12 months.

It was reasonable to conclude from the evidence that the workers would have exited their careers after 12 months with their entitlements paid out. 

For the reason of length of employment and expectations of a mutually agreed exit from the business, compensation at the highest level was appropriate. The maximum compensation under the Act was 26 weeks, and the Commissioner considered the maximum was appropriate in the circumstances. 

An order of 26 weeks' pay was awarded and this figure was $84,000 gross to be taxed according to law for each worker. The employer was ordered to make the payment of compensation to the workers within 14 days.