Trading Trusts—Oppression Remedies: Consultation Paper (html)

1. Background

Referral to the Commission

1.1 On 29 October 2013, the Attorney-General, the Hon. Robert Clark, MP, asked the Commission, under section 5(1)(a) of the Victorian Law Reform Commission Act 2000 (Vic), to review and report on the desirability of having similar remedies to those provided to shareholders of companies under sections 232 to 234 of the Corporations Act 2001 (Cth) to protect the rights of beneficiaries of trading trusts who may be subject to oppressive conduct by a trustee. The terms of reference appear at page vii. The Commission is to report by 3 February 2015.

1.2 Section 232 of the Corporations Act provides that the court may make an order where the conduct of a company’s affairs or the actual act, omission or resolution of a company is:

• contrary to the members’ interests; or

• oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members, whether in that capacity or any other capacity.

Where these grounds are satisfied, section 233 provides that the court can make ‘any order… that it considers appropriate in relation to the company’, including an order ‘regulating the conduct of the company’s affairs in the future’, or that the company be wound up, or its constitution be modified or repealed.

1.3 Section 234 sets out who has standing to bring an action.^[1] The following types of individuals can apply for relief in relation to a company:

(a) a member of the company, even if the application relates to an act or omission that is against:

(i) the member in a capacity other than as a member; or

(ii) another member in their capacity as a member; or

(b) a person who has been removed from the register of members because of a selective reduction of capital; or

(c) a person who has ceased to be a member of the company if the application relates to the circumstances in which they ceased to be a member; or

(d) a person to whom a share in the company has been transmitted by will or by operation of law; or

(e) a person whom ASIC thinks appropriate having regard to investigations it has conducted or is conducting into:

(i) the company’s affairs; or

(ii) matters connected with the company’s affairs.

1.4 This reference deals with ‘trading trusts’, which are a form of commercial trust. The particular features of this type of trust and the approach the Commission has taken are discussed in Chapter 2, below.

1.5 One question is whether the Corporations Act already gives the court power to grant an oppression remedy in the context of trading trusts. The current legal position is unclear.

A line of cases has held that beneficiaries are limited to the conventional forms of equitable relief under trust law.^[2] However, an alternate line of cases has held that the court’s power under section 232 is not limited to an action against the company, and extends more broadly to the affairs of a company, including trading trusts.^[3]

1.6 The problem is particularly relevant in two scenarios. First, where a trading trust utilises a corporate trustee, and creates a structure that affords the advantages of a trust but operates in a similar fashion to a company. In this instance, a member may have a nominal shareholding in a corporate trustee. However, the value of the investment will be located in the units held by the beneficiary. If the trustee engages in oppressive conduct that devalues the units rather than the shares, then under the Kizquari v Prestoo (‘Kizquari’) approach^[4] the member will be limited to enforcing the terms of the trust deed and equitable, rather than oppression, remedies. If a private trust is used, it may be difficult for the member to extricate themselves from the trust structure, due to the absence of a ready market for units. The second related scenario is when the unitholder, who is also a member of the corporate trust, is seeking a specific oppression remedy not usually available to a beneficiary. For instance in Vigliaroni v CPS Investment Holdings (‘Vigliaroni‘)^[5] and likewise in Wain v Drapac (‘Drapac’)^[6] the plaintiffs sought a compulsory buyout of their units, which is not available through conventional equitable doctrine.

1.7 Under trust law, there are limited avenues for minority unitholders to extricate themselves from a trust.^[7] The trust deed will usually contain a clause providing for the purchase of units and the method of valuing them. However, these clauses often provide the other unitholders with the first choice to purchase the units.^[8] This makes the use of these clauses problematic where there is a disagreement with the trustee or majority unitholders. The absence of a ready market for units from private trading trusts exacerbates the problem.

1.8 The other option for a beneficiary is to seek to vest the trust pursuant to the rule in Saunders v Vautier,^[9] which requires the trustee to distribute the trust property to the beneficiaries.^[10] In practice, however, the rule is of limited value since it requires the agreement of all those having a beneficial interest in the trust property, which will usually include the trustee and majority beneficiaries.

1.9 Beneficiaries could seek to rely upon section 63 and section 63A of the Trustee Act 1958 (Vic)

which arguably grants the court powers to vary the beneficial interest of unitholders. However, the statutory requirements for the exercise of these powers are not easily compatible with trading trusts. Moreover, it is unlikely that a court has any inherent jurisdiction to alter the beneficial interests of unitholders.^[11]

1.10 The reference also raises a number of subsidiary questions. For instance: are oppression remedies currently an effective option for shareholders? If so, would inserting similar remedies into the Trustee Act 1958 (Vic) be appropriate? Does the current law surrounding equitable remedies allow for equivalent relief, and if it does not, is there potential for development in the law?

Previous reviews of the rule by law reform bodies

1.11 This reference is the first public review of trading trusts and oppression remedies in Victoria, and, as far as the Commission is able to ascertain, the first in any common law jurisdiction. In 1993, the Australian Law Reform Commission (ALRC), in conjunction with the Companies and Securities Advisory Committee, examined Collective Investment Schemes.^[12] The ALRC recommended that an oppression remedy be available for investors in such schemes, which could include trading trusts.^[13]

1.12 A number of earlier reviews of aspects of trusts law by other law reform bodies also raise related issues that the Commission has been able to consider. These bodies include:

• the Scottish Law Commission^[14]

• the British Columbia Law Institute^[15]

• the Law Reform Commission of Saskatchewan.^[16]

Conduct of this reference

Division

1.13 The Chair of the Commission has exercised his powers under section 13(1)(b) of the Victorian Law Reform Commission Act to constitute a Division to guide and oversee the conduct of the reference.

Consultation paper and submissions

1.14 This paper draws from the preliminary research conducted by Commission staff. It describes the law, identifies and asks questions about the issues arising from the terms of reference and explores options for reform. The questions are listed on pages 68–69.

1.15 The Commission is seeking submissions in response to the questions in the consultation paper by 21 July 2014. Information about how to make a submission is set out on page v.

1. R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 15th ed, 2013) 714 [10.440].

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2. Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606; Re Polyresins Pty Ltd [1999] 1 Qd R 599; McEwen v Combined Coast Cranes Pty Ltd [2002] 44 ACSR 244; Trust Company Ltd v Noosa Venture 1 Pty Ltd (2010) 80 ACSR 485; This is discussed in Chapter 3.

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3. Vigliaroni & Ors v CPS Investment Holdings Pty Ltd (2009) 74 ACSR 282; Wain v Drapac [2012] VSC 156 (26 April 2012); Arhanghelschi v Richard Milne Ussher & Ors [2013] VSC 253 (16 May 2013). See Chapter 3, page 25, for a discussion of the two differing lines of authority.

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4. (1993) 10 ACSR 606. This will be explained in greater detail from [3.40]–[3.51].

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5. (2009) 74 ACSR 282.

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6. [2012] VSC 156 (26 April 2012).

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7. The remedies currently available to beneficiaries in equity are further discussed in Chapter 4.

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8. For example, see the facts of Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2007] VSC 40 (23 August 2007).

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9. (1841) 4 Beav 115. This rule is further discussed in Chapter 4.

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10. Law Reform Commission of Saskatchewan, The Rule in Saunders v Vautier and the Variation of Trusts, Consultation Paper (1994) 3.

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11. Arakella v Paton (2004) 60 NSWLR 334; Westfield Qld No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd [2008] NSWSC 516 (29 May 2008), [36] (Einstein J) considering the effect of s 81 under Trustee Act 1925 (NSW).

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12. Australian Law Reform Commission and Companies and Securities Advisory Committee, Collective Investments: Other People’s Money, ALRC Report No 65 (1993).

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13. Ibid 127.

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14. Scottish Law Commission, Report on Variation and Termination of Trusts, Report No 206 (2007).

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15. British Columbia Law Institute, Report on the Variation and Termination of Trusts, Report No 25 (2003).

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16. Law Reform Commission of Saskatchewan, The Rule in Saunders v Vautier and the Variation of Trusts, Consultation Paper (1994); Law Reform Commission of Saskatchewan, Trustees Act: Proposals for Reform, Report (2002).

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