Trading Trusts—Oppression Remedies: Report (html)
Executive summary
On 24 October 2013, the Attorney-General asked the Victorian Law Reform Commission to review the desirability of introducing 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.
The law requires reform for three reasons: clarity, simplicity and fairness.
In Victoria, trusts are regulated by a combination of the Trustee Act 1958 (Vic) and judge-made law. For this reason, reform of the law will require amendment of the Trustee Act.
Two important findings of the report, based on the Commission’s research and consultation, are:
• Existing remedies under equitable doctrines, corporations or trusts legislation are inadequate for beneficiaries of trading trusts facing oppression.
• Trading trusts and corporations should be treated in a similar fashion as regards oppression remedies.
Where minority shareholders of a company wish to extricate themselves from it, due to the fact that the company’s affairs or conduct are contrary to their interests, oppressive or unfair, they can usually sell their shares or seek to obtain an oppression remedy under the Corporations Act. Under existing trust law, there are limited avenues for minority beneficiaries or unitholders in similar circumstances.
For beneficiaries, simply disposing of their interests or units by selling them is problematic. 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 beneficiaries with the first choice to purchase the units. This makes the use of these clauses difficult 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. Moreover, other trust remedies, whether based on equitable doctrines or statute, also appear unsuitable to provide relief against oppressive conduct.
Trading trusts
Trading trusts are a form of commercial trust. For the purpose of the proposed reforms, the Commission has adopted a functional definition of ‘trading trust’ that includes all trusts where ‘some property held by the trustee is employed under the terms of the trust in the conduct of a business’.[7]
Applying a functional approach, the Commission determined that, notwithstanding this broad definition of trading trust, managed investment schemes,[8] charitable trusts and regulated and statutory superannuation trusts did not require additional remedies. These types of trusts are already subject to significant regulation under Commonwealth and Victorian law,[9] which would prevent, minimise or provide protection against oppressive conduct. Moreover, applying an oppression remedy via the Trustee Act to these types of trusts could create significant
jurisdictional issues.
Corporations Act
Section 232 of the Corporations Act provides that the court may make an order where the conduct of a company is oppressive. Where the court is satisfied that conduct of this type has occurred, section 233 gives it a broad discretion to make appropriate orders. Section 234 sets out who has standing to bring an action, including current or former members of the company (namely shareholders) or any person the Australian Securities and Investment Commission (ASIC) thinks appropriate, in light of its investigations.
It is unclear whether the existing oppression remedy in the Corporations Act already gives the court power to grant relief in the context of trading trusts. One line of authority has held that beneficiaries are limited to the conventional, and largely ineffective, forms of equitable relief under trust law.[10] An alternate line of decisions has held that the court’s power under section 232 of the Corporations Act is not limited to an action against the company and extends more broadly to the affairs of a company, including trading trusts of which the company is the trustee.[11]
Even if the latter line of decisions represents the law in Victoria,[12] the existing Corporations Act remedy alone will never be sufficient to protect all beneficiaries of trading trusts, because a beneficiary seeking to access the remedy must also be a shareholder in the corporate trustee.[13]
In a number of cases, the beneficiary will not be a shareholder, which effectively leaves such an individual without any effective remedy at all, unless an alternative statutory remedy is provided.
Even where the beneficiary is a shareholder, the current state of the law is so complicated and unclear, that extensive costs must be expended and delays endured in investigating possible ways of framing a claim in the absence of a clear remedy. This can also lead to oppressed beneficiaries refraining from taking legal action at all, instead settling on less than favourable terms rather than face lengthy and costly litigation with an extremely uncertain outcome.[14]
In some situations, this can lead to manifest unfairness, given the fact that in contemporary Australia, trading trusts are often used as an alternative and in a very similar way to companies as a way to structure businesses. If a company structure is utilised, remedies will be available to oppressed shareholders. If a trading trust structure is adopted, this will probably not be the case.
In the Commission’s view, this differential treatment of shareholders and beneficiaries cannot
be justified.
As a result, the central recommendation of the Commission is that the Trustee Act should provide for beneficiaries of trading trusts[15] subject to oppressive conduct to be able to apply to the court[16] for a remedy. In the Commission’s view, this should be the case notwithstanding anything contained in the trust deed.
Details of the recommended reform
Scope
The recommended oppression remedy should have similar breadth and flexibility to that provided by the Corporations Act to shareholders, bearing in mind the multiplicity of ways in which oppressive conduct can arise.[17] As a result, the Commission also recommends that the court be given a broad discretion in similar terms to those used in section 233 of the Corporations Act, and a non-exhaustive, exemplary list of possible orders be included in the Trustee Act, where oppression is established.
The precise wording of the Corporations Act remedies would have to be adapted to accommodate the law of trusts. In the Commission’s view, the key features of the non-exhaustive list are:
• to terminate the trust
• to modify the terms of the trust deed
• to regulate the conduct of the trading trust
• to order the purchase of, or payment for the renunciation of, a right under the trading trust.
The first and last of these powers are akin to the winding up and buyout orders available under the Corporations Act, respectively.
Standing
A similarly inclusive view should be adopted with regard to standing to seek an oppression remedy. This means that there should be no requirement for an applicant seeking an oppression remedy to be a shareholder or member of the corporate trustee. Rather, any beneficiary or individual having a beneficial interest in a trading trust should be able to apply to the court. In addition, a person to whom the court grants leave should also be able to apply, in line with ASIC’s power to grant standing under section 234 of the Corporations Act.
Existing powers
While the Commission takes the view that the court’s existing powers, under the doctrines of equity, the Trustee Act and its inherent jurisdiction do not provide equivalent relief to the recommended oppression remedy, it is important that the recommended legislative amendment not have the effect of limiting any of the court’s current powers. The reforms are intended to supplement, rather than replace, existing avenues. The Commission therefore recommends that an express provision be included in the amended Trustee Act, making it clear that the court’s new powers regarding oppression do not limit any existing powers of the court.
Third parties
The terms of reference require the Commission to consider the interests of other parties that may be involved in, or interact with, trading trusts including creditors, trustees, directors and employees. The Corporations Act and the general law create a complex legal framework of the legal duties owed to third parties, in particular directors and creditors.
In the Commission’s view, it is not clear that the introduction of oppression remedies for trading trusts would alter or affect this framework. However, clearly the grant of at least some types of remedies in the context of oppression will affect the specific interests of third parties.
For this reason, the Commission recommends that, in determining whether to grant an oppression remedy, the court should be required to consider the interests of third parties including, but not limited to, directors, trustees, shareholders, employees and creditors.
The Commission has made six recommendations, which appear on page xiv of the report.
Conclusion
The need for legislative reform is clear. The traditional doctrines of trust law have kept pace with neither the commercial realities of the 21st century, nor the use of trading trusts in contemporary Australia. The current oppression remedies in the Corporations Act do not provide a clear and comprehensive solution.
The recommended reforms if enacted should provide beneficiaries with a fairer, more certain way to seek redress when faced with oppressive conduct. However, given their limits and flexibility, the recommended reforms should not place an unjustified or onerous burden on trustees, directors or third parties associated with the relevant businesses.
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H A J Ford and I J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in P D Finn (ed), Equity and Commercial Relationships (Lawbook Co, 1987) 48.
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As defined in s 9, Corporations Act 2001 (Cth).
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For managed investment schemes, Chapter 5C of the Corporations Act 2001 (Cth); for charitable trusts, Charities Act 1978 (Vic); and for superannuation trusts, the Superannuation Industry (Supervision) Act 1993 (Cth).
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Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606; Re Polyresins Pty Ltd (1998) 28 ACSR 671; McEwen v Combined Coast Cranes Pty Ltd (2002) 44 ACSR 244; Trust Company Ltd v Noosa Venture 1 Pty Ltd (2010) 80 ACSR 485.
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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) 94 ACSR 86.
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Ibid.
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Ibid.
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Submission 5 (Commercial Bar Association of Victoria) 5.
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As defined above.
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Throughout this report, where the Commission refers to the power of the court under the proposed amendment, the Commission means the Supreme Court of Victoria. The Commission considers that difficulties may arise where a claimant seeks an oppression remedy in a court which is not vested with jurisdiction under the Corporations Act. The Supreme Court of Victoria has jurisdiction to make orders under both the Trustee Act (including the proposed amendments) and the Corporations Act.
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Submission 4 (Federal Court of Australia) 2.
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