Trading Trusts—Oppression Remedies: Report (html)

6. Interests of other parties

Introduction

6.1 The previous chapter explored the various reform mechanisms that enable beneficiaries of trading trusts to obtain oppression remedies. The terms of reference require the Commission to consider the interests of other parties which may be involved in, or interact with, trading trusts including creditors, trustees, directors and employees. Any such considerations will depend upon the nature of the recommendations, and in particular, the type of remedies that are made available to the beneficiaries of trading trusts.

6.2 Chapter 3 outlined in detail the different remedies that a court can order in response to oppression under section 233 of the Corporations Act 2001 (Cth). It is clear that, at a general level, most of these remedies will impact upon the interests of other parties. For instance, a winding-up order will impact upon the employment of the company’s officers or other employees. These considerations are relevant for a court in determining whether it is appropriate to grant an oppression remedy.^[1] In the Commission’s view, the same logic can be readily applied to trading trusts.

6.3 In the Commission’s view, it is not clear that the introduction of oppression remedies for trading trusts would either alter or affect existing frameworks under the Corporations Act. For instance, the conduct of directors or trustees amounting to a breach of duty may itself constitute oppressive conduct. However, it is not clear that providing oppression remedies for beneficiaries of trading trusts would affect the duties owed by trustees or directors of corporate trustees.

6.4 An important issue that affects other interested parties was discussed in Chapter 3. Under the Vigliaroni and Drapac approach, third parties such as directors, creditors and employees might be able to avail themselves of oppression remedies when they are also shareholders of the corporate trustee. The limitations implicit in this approach are discussed in Chapters 3 and 5.

Directors of the corporate trustee

6.5 Chapter 3 outlined the basic proposition that directors owe duties directly to the company.^[2] However, the facts of many of the cases considered in this report show that typically the trustee of a trading trust will be a corporate trustee.

6.6 At law, the doctrine of separate legal personality means that where a company acts as a trustee, the directors will owe duties to the company rather than the beneficiaries of the trading trust.^[3] Although, as was shown in Chapter 2, a trustee owes duties directly to the beneficiaries, the interposition of a corporate trustee would ordinarily prevent beneficiaries from claiming directly against the directors.^[4]

6.7 There are exceptions to this principle. The first is if a director knowingly assists the company in a breach of trust, then the director may be liable under the principles from Barnes v Addey.^[5] As Ford and Hardingham explain, the beneficiaries could argue:

to the extent that any breach of fiduciary duty has been committed by the trustee company, the directors, as the brains and hands of the company, must have knowingly assisted in that breach and thus, once again, should share full responsibility.^[6]

6.8 The second possible exception is that there might be circumstances where the directors of a corporate trustee owe fiduciary duties directly to the beneficiaries of a trading trust.^[7]

6.9 If oppression remedies, however, were granted to the beneficiaries of a trading trust, this may alleviate the need to find a fiduciary duty owed by the directors of corporate trustees.

6.10 In the consultation paper, the Commission asked what impact the legislative reforms would have upon directors and trustees. According to Cornwall Stodart and Ari Bergman:

[t]he introduction of statutory oppression remedies for beneficiaries of trading trusts would potentially expose the trustee and directors of the corporate trustee to greater liabilities than those to which they are currently subjected.^[8]

6.11 Some participants at the roundtable, however, suggested that the introduction of a statutory oppression remedy would have little impact upon the liability owed by directors. This was based on the view that courts already have the power to join a director to an oppression proceeding under the Corporations Act.

6.12 The Commission agrees with the submission stated above, that the introduction of a statutory oppression remedy would increase the liability of directors and trustees, insofar as their conduct falls within the ambit of the amendment. The Commission does not view this as an undesirable outcome of the amendment.

Creditors

The right of indemnity

6.13 According to Heydon and Leeming:

[o]n a judgment at law against a trustee, the creditor ordinarily could not levy execution against the trust property; this is so even though the debt is founded upon a debt incurred in the course of trading by the trustee, because the execution does not extend to equitable assets where the whole beneficial interest is not in the judgment debtor.^[9]

6.14 Since the corporate trustee of a trading trust will be nominally capitalised, a creditor may also seek access to the assets of the trust. A creditor may potentially access the assets of the trust through subrogation to the trustee’s right of personal indemnity to the trust property,^[10] or potentially to the trustees’ personal claim against the beneficiaries.^[11]

6.15 It is possible, however, for the trustees’ right of indemnity to be modified by the terms of the trust deed. Matthew Conaglen submitted that:

There is complicated case law as to whether the trustee’s proprietary right of indemnity against trust assets (as distinct from the personal right of indemnity against the trust beneficiaries) is capable of being removed by the trust deed: see, e.g., Kemtron Industries Pty Ltd v Commissioner of Stamp Duties [1984] 1 Qd R 576, 585; Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26 at [39], (2012) 16 BPR 30,397; Franknelly Nominees Pty Ltd v Abrugiato [2013] WASCA 285 at [205]-[235]. On the basis of this case law, there is a sound basis for arguing that the indemnity provided for by s 36(2) of the Trustee Act 1958 (Vic) is capable of being removed by the trust deed, on the basis of s 2(3) of the same Act (and by analogy with the reasoning adopted in the Franknelly decision), but that is not beyond doubt. That, obviously, does not mean that the indemnity cannot be removed by legislation (or by a court order where legislation so empowered the court), but the point is that this would be a consequence for third party creditors, who would lose their ability to subrogate to that indemnity. The extent of that consequence depends on the extent to which trusts in Victoria exclude the trustees’s proprietary right of indemnity.^[12]

6.16 Some participants at the roundtable suggested that as part of the proposed reforms to the Trustee Act 1958 (Vic), a court should have the express power to modify the trustee’s right of indemnity. This view was based on the argument that a court should be given maximum flexibility under the proposed amendment, once the criterion of standing is established. As noted by Matthew Conaglen, such an inclusion would affect the interests of creditors.

6.17 A contrary view however, was expressed by Cornwall Stodart and Ari Bergman who submitted:

[t]he introduction of statutory oppression remedies for beneficiaries of trading trusts should not affect the interests of creditors…In determining appropriate remedies, the Court often has regard to the interests of creditors.^[13]

6.18 The Commission has considered whether it is appropriate for the Court to be given an express power to modify the trustee’s right of indemnity. It is not clear, however, in what circumstances it would be necessary for the court to modify the right of indemnity in order to relieve beneficiaries from oppressive conduct.

6.19 The Commission notes that Recommendation 2 provides that the court can make ‘any order it considers appropriate’ which includes an order modifying the trustee’s right of indemnity. It is therefore unnecessary for an express power to be provided.

6.20 While the Commission accepts that ordinarily it would be undesirable for a court to interfere with the interests of creditors, the preferable approach, consistent with the broad and flexible nature of the oppression remedy, is for this to be at the discretion of the court.

6.21 Participants at the roundtable suggested that if the court is given the power to modify the trustee’s right of indemnity, then the amendment should expressly state that a court must consider the interests of creditors. The Commission accepts this recommendation. Moreover, the Commission recommends that a provision be included in the amendment providing that a court should consider the interests of third parties including, but not limited to, directors, trustees, shareholders, employees and creditors.

Recommendation

6 In determining whether to grant an oppression remedy, the Supreme Court of Victoria should be required to consider the interests of third parties including, but not limited to, directors, trustees, shareholders, employees and creditors.

Standing

6.22 As outlined in Chapter 3, the principles from the Vigliaroni and Drapac line of authority mean that creditors of a trading trust will not be able to obtain an oppression remedy unless they are both unitholders and shareholders in the corporate trustee.

6.23 However, as explained in Chapter 5, although the Commission is not recommending that standing be expressly extended to creditors, the Commission proposes that other parties may obtain the leave of the court to seek an oppression remedy.

6.24 In contrast to Canada and Singapore, Australian courts have been reluctant to extend the availability of oppression remedies ‘in order to avoid an unwarranted assumption of the responsibility of the company.’^[14] It has been suggested that creditors who are also members of a company can seek leave under section 234 of the Corporations Act. Austin and Ramsay explain that:

There is English authority that the oppression remedy is broad enough to include a member who is affected in the capacity of a creditor, even where the loan to the company is not made directly by the member but is made through another company which the member controls: R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2

BCLC 280.^[15]

6.25 In the Commission’s view, a creditor may arguably qualify as a party to whom the court may grant leave in the event that their interest is affected by oppressive conduct. The Commission, however, considers that a court should have regard to matters considered above at [5.51] and the current law relating to creditors, which would suggest that a creditor would receive standing only in limited circumstances.^[16]

6.26 Clearly, if an oppression remedy involved compensation or the reduction of debt, a grant of the remedy could reduce the assets otherwise available to creditors. However, this is presently the position under section 233 of the Corporations Act. The flexibility of the oppression remedy already allows the court to take the position of creditors into account before deciding on the appropriate order.^[17] The Commission considers that this flexibility, coupled with Recommendation 6, will protect creditors’ interests while preserving the effectiveness of the oppression remedy.

6.27 In the view of the Commission, the availability of oppression remedies to the beneficiaries of trading trusts is not likely to disturb the current law relating to creditors.

Employees

6.28 It has been suggested in a number of cases that a court will take into account the position of employees if a winding-up order is sought in response to an oppression remedy.^[18] However, in Chapter 3 it is shown that courts rarely order a winding-up. It follows that in the view of the Commission, the availability of oppression remedies in the context of trading trusts is not likely to increase the possibility of an adverse impact upon employees.

6.29 Participants at the roundtable stressed the advantages to employees where the court has a discretion to make orders relieving oppression other than a winding-up order. Participants thought the potential impact on employees, where a winding-up order is the only order a court can make, affords a strong argument in favour of a broad and flexible oppression remedy.

1. Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 466.

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2. Percival v Wright [1902] 2 Ch 421.

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3. R P Austin and I M Ramsay, LexisNexis Butterworths, Ford’s Principles of Corporations Law (at 109) [4.225].

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4. H A J Ford and I J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in P D Finn, Equity and Commercial Relationships (Lawbook Co) 58.

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5. (1874) LR 9.

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6. H A J Ford and I J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in P D Finn, Equity and Commercial Relationships (Lawbook Co, 1987) 63. However in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 the High Court held that the breach of trust which was assisted must be dishonest or fraudulent.

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7. Hurley v BGH Nominees Pty Ltd (1984) 10 ACLR 197; ASC v AS Nominees (1995) 133 ALR 1, 18–19; Although in AS Nominees Finn J appears to leave the possibility open, his Honour suggests that the imposition of a direct fiduciary duty is unlikely, given the availability of other remedies.

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8. Submission 6 (Cornwall Stodart and Ari Bergman) 8.

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9. J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th edition, 2006) 574, citing Daly v Union Trustee Co of Aust Ltd (1898) 24 VLR 460, 468; Re Staff Benefits Pty Ltd [1979] 1 NSWLR 207; also see Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367.

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10. J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th edition, 2006) 574.

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11. H A J Ford and I J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in P D Finn, Equity and Commercial Relationships (Lawbook Co, 1987) 75–6; Daniel Whitehead, ‘Pride or prejudice: A better understanding of the English law risks of corporate trustees can benefit a large number of investors’ (2011) 30 International Financial Law Review 32; also see Hardoon v Belilios [1901] AC 118.

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12. Submission 1 (Professor Matthew Conaglen, University of Sydney Law School) 3.

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13. Submission 6 (Cornwall Stodart and Ari Bergman) 8.

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14. R N Chesterman, ‘Oppression by the majority—or of it?’ (2004) 25 Australian Bar Review 103, 108, citing Thomas v HW Thomas Ltd [1984] 1 NZLR 686, 697; Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 467.

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15. R P Austin and I M Ramsay, LexisNexis Butterworths, Ford’s Principles of Corporations Law (at 109) [10.470].

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16. The possibility of extending standing under an amendment to the Corporations Act to certain types of creditors that hold debentures has been recently considered by Ari Bergman, Should statutory oppression remedies apply to unit trusts? A comparison of unitholder and shareholder rights (SJD Thesis, Monash University, forthcoming) 189-90. It is also worth noting that debenture holders currently have standing to seek an oppression remedy under Singapore legislation: Business Trusts Act (Singapore, cap 30, 2008 rev ed) s 41(1).

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17. Wayde v New South Wales Rugby League Ltd (1985) 180 CLR 459, 466; suggests that the interests of various groups can be considered by court in determining whether an oppression remedy should be granted; see R Baxt, E Finnae and J Harris, Corporations Legislation 2011

    (Lawbook, 10th ed, 2011) 260.

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18. Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd (2008) ACSR 325, 341 [119]–[120]; Wain v Drapac [2012] VSC 156

    (26 April 2012).

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