3. The oppression remedy in the Corporations Act

The oppression remedy—purpose, operation and effectiveness

  1. 3.1 This chapter examines the development of the statutory oppression remedy in corporations law, its purpose, operation and effectiveness. It goes on to examine the differing views as to whether trading trusts are already covered by the remedy provided
    in Part 2F.1 of the Corporations Act 2001 (Cth).

History and scope of the oppression remedy

  1. 3.2 Company law historically relies on the principle of majority rule. Board and shareholder decisions of companies are usually determined by a simple majority vote.1 While this notion of majority rule is fundamental to company law, it contains an inherent risk of abuse.2
  2. 3.3 This risk was exacerbated by the rule in Foss v Harbottle.3 According to Brockett this rule provided ‘that wrongs to the company should be redressed only by action [taken] by the company in its own name,’4 rather than the action of individual members or groups of members, and that ‘courts should not interfere with the internal management of companies acting within their powers.5 However, rigid adherence to the rule often denied minority shareholders recourse against directors and majority shareholders.6 For this reason, the courts developed a number of ‘exceptions’.7 However, numerous commentators have argued that the ‘exceptions’ to the rule in Foss v Harbottle are in reality not exceptions at all, but situations where the rule simply cannot apply.8
  3. 3.4 In addition, numerous practical and legal difficulties concerning ‘the operation of the exceptions have meant that relatively few derivative actions have proceeded.’9 The main difficulties centred on the effect of ratification of the allegedly oppressive conduct by the general meeting of shareholders.10 If effective, the purported ratification could deny the company as a whole, and hence minority shareholders, any right of action against the directors. There were also problems caused by the strict criteria that must be established before a court may grant relief.11
  4. 3.5 According to Brockett:

The ‘proper plaintiff’ rule in Foss v Harbottle did not provide an adequate mechanism for the enforcement of directors’ and other officers’ duties where the company improperly refused or failed to take action.12

  1. 3.6 Since the middle of the twentieth century, a realisation of these risks and difficulties has led a number of jurisdictions, including Australia, to introduce statutory remedies for the relief of minority shareholders in certain circumstances.
  2. 3.7 This process began in the 1940s in the United Kingdom, with the report and recommendations of the Cohen Committee.13 This Committee recognised that an order for winding up a company could sometimes be too drastic a remedy, or may not effectively relieve a shareholder subject to oppressive conduct.14
  3. 3.8 Most relevantly for this reference, the Committee discussed the problem of oppression of minority shareholders in the following terms:

60. Oppression of minorities.

We have carefully examined suggestions intended to strengthen the minority shareholders of a private company in resisting oppression by the majority. The difficulties to which we have referred in the two preceding paragraphs15 are, in fact, only illustrations of a general problem. It is impossible to frame a recommendation to cover every case. We consider that a step in the right direction would be to enlarge the power of the Court to make a winding-up order by providing that the power shall be exercisable notwithstanding the existence of an alternative remedy. In many cases, however, the winding-up of the company will not benefit the minority shareholders, since the break-up value of the assets may be small, or the only available purchaser may be that very majority whose oppression has driven the minority to seek redress. We, therefore, suggest that the Court should have, in addition, the power to impose upon the parties to a dispute whatever settlement the Court considers just and equitable. This discretion must be unfettered, for it is impossible to lay down a general guide to the solution of what are essentially individual cases. We do not think that the Court can be expected in every case to find and impose a solution; but our proposal will give the Court a jurisdiction which it at present lacks, and thereby at least empower it to impose a solution in those cases where one exists.16

  1. 3.9 This recommendation led to the enactment in 1947 of a new provision that became section 210 of the Companies Act 1948 (UK). Section 210 empowered the court to give other relief against oppressive conduct of a company’s affairs.17
  2. 3.10 Section 210 (and the various legislative provisions that succeeded it in the United Kingdom)18 was the model for section 186 of the Australian Uniform Companies Act 1961 (Cth), which subsequently became section 320 of the Companies Code19 and then section 260 of the Corporations Law. According to Austin and Ramsay: 

As a result of amendments to the Corporations Law made by the Company Law Review Act 1998 (Cth) section 260 became section 246AA of the Corporations Law on 1 July 1998.20

By virtue of the Corporate Law Economic Reform Program Act 1999 (Cth), this formed the basis of the current sections 232 and 233 in Part 2F.1 of the Corporations Act 2001 (Cth).21

  1. 3.11 The ambit of these sections is broader than that previously available to shareholders
    under the common law, particularly as it applies to both current and former members
    of a company.22
  2. 3.12 Section 232 of Part 2F.1 provides:

The Court may make an order under section 233 if:

(a) the conduct of a company’s affairs; or

(b) an actual or proposed act or omission by or on behalf of a company; or

(c) a resolution, or a proposed resolution, of members or a class of members of a company;

is either:

(d) contrary to the interests of the members as a whole; or

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

For the purposes of this Part, a person to whom a share in the company has been transmitted by will or by operation of law is taken to be a member of the company.

  1. 3.13 The reference in paragraph (e) to the impact on a member or members ‘whether in that capacity or in any other capacity’ is of particular significance to this reference. Traditionally, that phrase has been applied where the member is also a director, creditor or employee of the company. However, for the purposes of this reference, it is necessary to consider the extent to which the phrase also comprehends other capacities of a member (such as a member who is a beneficiary of a trust of which the corporation is a trustee).
  2. 3.14 Prior to 1983, the provision referred only to ‘oppressive’ conduct, with no reference to prejudicial or unfairly discriminatory conduct, acts, omissions or resolutions. This original formulation proved problematic, as courts in England and, to a lesser extent, Australia tended to apply a fairly restrictive definition, despite the expansive approach taken by the Cohen Committee in its initial recommendation.23
  3. 3.15 Arguably a wider interpretation was given in Elder v Elder & Watson Ltd, in which the Scottish Court of Session broadly equated oppression with lack of fair dealing.24 However,
    a more narrow interpretation given by Viscount Simonds in the House of Lords in
    Scottish
    Co-operative Wholesale Society v Meyer,
    25 ‘equating “oppression” with “burdensome, harsh and wrongful” conduct26 was the approach generally initially adopted by the English courts.27
  4. 3.16 In Australia, a wider approach was adopted from the start28 and greater emphasis placed on the wide discretion given to the court.29 This broader approach has now been emphasised by Chief Justice French in the decision of the High Court of Australia in Campbell v Backoffice Investments Pty Ltd:30

…Their language and history indicate that sections 232 and 233 are to be read broadly. The imposition of judge-made limitations on their scope is to be approached with caution.

  1. 3.17 Even as originally formulated, the section significantly enlarged the scope of
    remedies available to members.31 According to Ford and Ramsay:

It did not require the conduct complained of to be unlawful, and allowed proceedings to be instituted by an individual member, notwithstanding the rule in Foss v Harbottle.32

The remedy applied to the conduct of both shareholders and directors.33 However, the original wording suggested that the remedy was available only against oppressive conduct that was positive and continuing.34 The remedies were also not as broad and flexible as under the present wording.35

  1. 3.18 The present breadth of the oppression provision and the range of flexible remedies a court is able to order once oppression is established has made it one of the most widely used corporate law remedies.36
  2. 3.19 One further matter that is of crucial importance for the consideration of whether and how oppression remedies apply to beneficiaries of trading trusts is the definition given in section 53 of the Corporations Act of the expression ‘a company’s affairs’, as used in section 232(a).
  3. 3.20 Section 53 defines ‘a company’s affairs’ to include (relevantly):

(a) …business, trading, transactions and dealings (…including transactions and dealings as… trustee)…

(b) in the case of a body corporate (not being a licensed trustee company within the meaning of Chapter 5D or the Public Trustee of State or Territory) that is a trustee (but without limiting the generality of paragraph (a)) - matters concerned with the ascertainment of the identity of the persons who are beneficiaries under the trust, their rights under the trust and any payments that they have received, or are entitled to receive, under the terms of the trust.37

Available forms of relief

  1. 3.21 Once oppressive, unfairly prejudicial or unfairly discriminatory conduct is established, the power of the court to make orders granting relief is set out in section 233 of the Corporations Act which provides:

1) The Court can make any order under this section that it considers appropriate in relation to the company, including an order:

(a) that the company be wound up;

(b) that the company’s existing constitution be modified or repealed;

(c) regulating the conduct of the company’s affairs in the future;

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

(e) for the purchase of shares with an appropriate reduction of the company’s share capital;

(f) for the company to institute, prosecute, defend or discontinue specified proceedings;

(g) authorising a member, or a person to whom a share in the company has been transmitted by will or by operation of law, to institute, prosecute, defend or discontinue specified proceedings in the name and on behalf of the company;

(h) appointing a receiver or a receiver and manager of any or all of the company’s property;

(i) restraining a person from engaging in specified conduct or from doing a specified act;

(j) requiring a person to do a specified act.38

  1. 3.22 Because the specific orders listed are only examples, it is open to the court to make any other orders it thinks appropriate. However, it falls to the applicant ‘to indicate the nature of the relief sought.’39
  2. 3.23 According to Austin and Ramsay, ‘the remedy that is the least intrusive that will eliminate the oppression should be considered first by the court.’40
  3. 3.24 The wide range of exemplary remedies outlined in section 233, underlined by the virtually unlimited discretion to make any other order, empowers the court to address the full variety of circumstances in which oppression may occur. In contrast to the remedies available to beneficiaries under existing trust law, which are generally limited to addressing breaches of trust by trustees by seeking a relatively limited range of equitable remedies, section 233 provides the courts with the ability to take action in any case where oppressive, prejudicial or discriminatory conduct is found to have occurred.41 Moreover, such action can proceed not only against the company, but also against the directors and other shareholders.42
  4. 3.25 One of the main objectives of broad statutory powers to deal with oppression by corporations was to provide aggrieved shareholders with remedies beyond the winding up of the company.43 Given the drastic consequences of winding up a company, courts will generally try to avoid granting that remedy, particularly where the company continues to trade successfully.44 In that context, the court will seek to apply other available remedies, such as requiring the purchase of shares held by the oppressed shareholder, at a fair value.45
  5. 3.26 The extensive powers under section 233 provide a broad range of remedies to relieve the oppression in the most effective way in the particular circumstances. For example, in Re Spargos Mining NL,46 Justice Murray of the Supreme Court of Western Australia ordered the appointment of a new board, the amendment of the company’s articles and for the new board to report to the court every three months.47

Who may apply for relief?

  1. 3.27 Standing to bring an action is covered by section 234.48 This section provides that 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;

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

(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;

(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.49

  1. 3.28 While this provision is broad in scope, several common law principles limiting it have developed, including:

unregistered purchasers lack standing

applicants with collateral purposes may be denied standing, as may those who come to the court with unclean hands

when the company is in liquidation, the liquidator is the appropriate plaintiff.50

What constitutes oppression?

  1. 3.29 Numerous reported cases have defined oppressive, unfairly prejudicial or unfairly discriminatory conduct under Part 2F.1.51
  2. 3.30 Relief is not available merely because a member disagrees or is dissatisfied with the management of the company or dissatisfied with their own position ‘or the fact that they cannot control the management of the company. Something more than this is required.’52
  3. 3.31 Chief Justice Spigelman in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd stated that while ‘irreconcilable differences may establish a basis for winding up, they do not of themselves constitute oppression or unfair prejudice’.53 According to Brockett:

the courts have held that oppression connotes a lack of probity and fair dealing54 (although this not a necessary condition),55 is something that is burdensome, harsh or wrongful,56 or is inequitable or unjust,57 or exhibits commercial unfairness.58

  1. 3.32 According to Brockett, ‘the conduct [complained of] must relate to the “affairs of the company”59, which has been interpreted broadly.’60 In determining whether allegations of oppression are made out, the court must examine conduct in the context in which it takes place, rather than in isolation.61 Where the conduct complained of involves company directors, the court must also examine whether they are acting honestly in the interests of the company.62 Moreover, ‘the test requires the weighing of the particular member’s interest against that of the company as a whole.’63
  2. 3.33 Examples of oppressive behaviour, Brockett states, include where a majority shareholder:64

runs the company in their own interests and ignores the interests of minority shareholders65

improperly issues shares to themselves to out vote other shareholders66

excludes a minority shareholder from being involved in the management decisions of
the company67

redirects business opportunities from the company to themselves68

pays themselves excessive salaries at the expense of paying dividends to shareholders.69

  1. 3.34 According to Brockett, ‘these actions may impact on the value of a minority shareholder’s investment and frequently lead to disputes between the parties.’70

Types of company covered

  1. 3.35 Oppression remedies contained in the Part apply to:
  • companies limited by shares
  • companies limited by guarantee71
  • unlimited companies
  • public no liability companies
  • co-operative societies that are incorporated.72

 

  1. 3.36 While Part 2F.1 can apply to different types of companies, a study of oppression cases published in the late 1990s found that the oppression remedy has been used mostly in relation to small or closely held companies, where shareholders are often involved in the management of the company. According to Ford and Ramsay:

the study found that in over 50% of the cases studied, the number of shareholders in the relevant company was 10 or fewer (with most cases having five or fewer shareholders) and that in over 43% of the cases, all or most of the shareholders were involved in the management of the company.73

  1. 3.37 The editors of Ford’s Principles of Corporations Law suggest several reasons for this.74 Shareholders in such companies may frequently be involved in the management of the company, or be employed as officers and directors.75 A dispute with majority shareholders may see such engagements, and the remuneration associated with them, terminated.76 Moreover, shareholders in small companies are more vulnerable than those in larger, public companies.77 The lack of a liquid market for shares may make it difficult for an aggrieved minority shareholder to sell his or her shares.78 Such companies may also have express limitations or restrictions on the right of shareholders to sell their shares, frequently requiring that any sale of shares must be approved by the directors or a majority of shareholders.79 Significantly, these difficulties are very similar to those commonly experienced by beneficiaries of trading trusts.

Question

6 How well has the oppression remedy worked to protect shareholders?

 

Does the existing oppression remedy apply to trading trusts?

  1. 3.38 Given the terms of reference for this review, one crucial issue to be considered is whether or not the existing oppression remedy in Part 2F.1 of the Corporations Act 2001 (Cth) already applies to beneficiaries of trading trusts, at least where they are also shareholders in the corporate trustee.
  2. 3.39 There is a clear division in the view of Australian courts as to this question.80Kizquari Pty Ltd v Prestoo Pty Ltd81 (‘Kizquari’) held that beneficiaries of a unit trust could not obtain oppression remedies. Justice Davies, however, in Vigliaroni v CPS Investment Holdings Pty Ltd82 (‘Vigliaroni’) declined to follow Kizquari, emphasising the importance of section
    53 of the Corporations Act.83

 

Question

7 In your view, does the existing oppression remedy apply to trading trusts?
If not, should it?

 

Kizquari and related cases

  1. 3.40 Kizquari, a decision of Justice Young in the Supreme Court of New South Wales, concerned a company that was trustee of a unit trust. According to Heape:

each of the Lane, Cuciti and Gabbey families participated in the business and had interests in a third of the units in the unit trust and in the shares of the defendant trustee company. Lane retired from active employment in the business and the remaining employees then paid themselves excessive salaries. The plaintiff, (the trustee of the Lane family trust) sought orders that it have its shares and units bought out by the other investors.84

  1. 3.41 If this conduct had occurred on the part of a company trading in its own right, it would have been a clear case of oppression, meriting relief under Part 2F.1, as the funds of the company available to be distributed to members of the company would be reduced by ‘the excessive salary being paid to another member.’85 According to May:

in Kizquari, the payment was not made out of funds held by the company owned in its own right, and so the payment did not diminish the amount available to be paid out as dividends- rather it decreased the amount that the company could distribute as trustee
of the trust.86

  1. 3.42 Heape argues further that:

Young J found that excessive remuneration had been paid to the remaining employees and that the amounts should be paid back to the trust fund by the Cuciti and Gabbey families as a matter of trust law. However, his Honour rejected the submission that the court should order a compulsory purchase of shares in the trust company based on valuations of the trust property.87

  1. 3.43 In relation to the argument that an oppression remedy should be granted Justice Young held:

I do not consider that I should accede to this submission. The company in question is Prestoo Pty Ltd. This company is a trustee company. It has no assets of its own. It operates a business as a trustee on the basis of loan capital. The only oppression is in relation to the operation of the trust. That oppression has not affected the value of the shares one whit. The shares in Prestoo either have no value or alternatively a value of $1 being the amount paid for each share and they continue to have that value. It would be a very bold step indeed to order the Gabbeys and the Cucitis to buy the plaintiffs’ $1 share for a sum anything like say $189,000 on the basis that the plaintiffs thereby relinquished any interest in the trust.88

 

  1. 3.44 Moreover, Justice Young expressly declined to follow Re Bodaibo Pty Ltd,89 where in the context of granting an oppression remedy Justice Vincent valued the shares in the corporate trustee in relation to the units. Justice Young said that:

No other cases have been cited by counsel as situations where one can make an order in respect of a trustee company under s 260. My view is that one cannot do so.90

  1. 3.45 Kizquari was followed in Re Polyresins:91

where Justice Chesterman considered an application by a majority shareholder for a winding-up order, or alternatively an order compelling the minority shareholder to purchase the majority shareholder’s shares.92

It was unclear on the facts whether the company held property on trust,93 but Justice Chesterman made the following comment:

If the trust has been validly constituted, then the shares in the company are worth no more than face value and it is inappropriate for the court to order a compulsory purchase. I accept the submissions that in an application under s 260 the court cannot deal with equitable interests conferred by a trust of which a company is trustee. Nor can it value the shares in the company by reference to the assets held on trust.94

  1. 3.46 In McEwen v Combined Coast Cranes Pty Ltd95 Chief Judge in Equity Young said (at [46]):

It is well established that where oppression has occurred in a company which holds all its assets on trust, there is no diminution in value of the plaintiff’s share in the company despite the oppressions.

  1. 3.47 In Surf Road Nominees Pty Ltd v James96 Justice Einstein held that these cases were ‘authority for the proposition that sections 232 and 233 of the Corporations Act are inapplicable in the circumstances.’97
  2. 3.48 The Kizquari approach was strongly endorsed in Ciccarello: re Adelaide Property Development Pty Ltd v Cubelic,98 where Justice Mansfield held:

The preponderance of authority is to the effect that, where oppression has occurred in a company which is a bare trustee so that all its assets are held in trust, relief under sections 232 and 233 of the Corporations Act is inappropriate. Oppressive conduct does not result in diminution of the value of the shares in the trustee company.99

  1. 3.49 Indeed Acting Justice Windeyer in Trust Co Ltd v Noosa Venture I (‘Noosa Venture’)100 recently said:

with respect to the decision of Davies J [in Vigliaroni] and accepting the requirement for coherence in corporations law I find it difficult to accept than an order ‘in relation to the company’ includes an order in relation to the affairs of the company because if that were the legislative intention it would have been easy enough to insert the words ‘or the affairs of the company’ after the words ‘the company’ in the commencement part of s 233(1) of the Act. It is a question of power not scope.101

 

  1. 3.50 Acting Justice Windeyer reached this conclusion despite the fact that section 53 says that ‘the affairs of a company include transactions and dealings as trustee and property held as trustee.’102 In the judge’s view, an order requiring one trust beneficiary to buy out the interest of another trust beneficiary would be an order in relation to the trust, not in relation to the company.103
  2. 3.51 In these observations, Acting Justice Windeyer was responding directly to an alternate line of decisions, beginning in 2009 and emanating from the Supreme Court of Victoria. They will be considered below.

Questions

8 Do you agree with the reasoning in Kizquari?

9 Justice Young in Kizquari treats the values of shares and the value of units as entirely separate matters. Do you agree with this approach?

 

A broader scope: The Vanmarc approach

  1. 3.52 In Vanmarc Holdings Pty Ltd v PW Jess and Assoc Pty Ltd (Vanmarc),104 a decision that
    pre-dates both McEwen and Surf Road Nominees, Justice Mandie in the Supreme Court of Victoria, while not being directly inconsistent with the Kizquari reasoning, took a broader approach.
  2. 3.53 In Vanmarc the plaintiffs sought relief on a number of different grounds, including an oppression remedy under section 246AA of the Corporations Law. The defendants sought to have the matter wholly or partly struck out, on the basis of the reasoning in Kizquari and the related cases discussed above.
  3. 3.54 In relation to the striking out application, Justice Mandie cited Kizquari extensively, concluding:

In the present proceeding, it is probably also the case that a combination of trust remedies and recourse to the buyout provisions of the trust deed will ultimately provide adequate relief for the plaintiffs (if any is required). It is probably also the case that the shares in the trustee companies will be found as is usual to have no value, so that an order of the kind made in Re Bodaibo Pty Ltd should not be made (even assuming that such an order is ever appropriate under s 246AA in the case of a trustee company) (see too: re Bountiful Pty Ltd (1994) 12 ACLC 902, 905).105

  1. 3.55 However, Justice Mandie did not categorically reject any possibility for the oppression remedies to be applied to cases involving unit trusts and corporate trustees:

Nevertheless , I do not think that the prospect of relief under s 246AA can be ruled out in the case of a trustee company, however unlikely that prospect may be. In that regard, it must be remembered that the powers of the court under that section are not confined to orders for winding up or for the compulsory sale and purchase of shares but include orders restraining a person from engaging in specified conduct or from doing a specified act and requiring a person to do a specified act.106

  1. 3.56 A number of commentators107 have seen Justice Mandie’s decision as a step towards the even more expansive position later taken by the Victorian courts in Vigliaroni and Drapac, discussed below.

Vigliaroni—’the affairs of the company’

  1. 3.57 In Vigliaroni,108 Justice Davies in the Supreme Court of Victoria declined to follow the Kizquari line of authority described above. In doing so, she created a distinct, competing line of authority, which produces a significant degree of legal uncertainty.
  2. 3.58 Vigliaroni involved a successful business comprised of unit trusts and companies, predominantly involved in the concreting industry (CPS Investment Holdings), that was primarily owned by the Vigliaroni family. Two sons of the original family, Dominic and Ivan Vigliaroni, were involved in the business, which had been managed for many years by
    Mr Gargaro, a trusted financial advisor and manager. Disputes arose when the relationship between Mr Gargaro and the Vigliaronis broke down due to alleged actions by Mr Gargaro to appropriate group business and assets for himself and to exclude the Vigliaronis.
  3. 3.59 Among Gargaro’s alleged actions was the creation of a number of businesses in the mid-1990s, operated by unit trusts, in which he was given a large equity stake, for no consideration. The other equity holders were Dominic and Ivan Vigliaroni. Over time, Ivan and Gargaro excluded Dominic’s equity interest in the business. Dominic later alleged he was not made aware of this decision. Gargaro engaged in transactions and business activities for his own personal benefit, which was in breach of fiduciary and statutory duties. Gargaro’s breach of duty was made worse by the fact that he was the Vigliaronis’ financial advisor.109
  4. 3.60 The Vigliaronis launched proceedings against Gargaro and the various relevant entities on a number of grounds, including that Gargaro’s actions were oppressive under Part 2F.1 of the Corporations Act. They sought a forced buyout of Gargaro’s interests in the group under section 233, or alternatively a winding up under section 233 or section 467(1), on just and equitable grounds. The Vigliaronis were largely successful in all actions, including the action to apply sections 232 and 233 to force a buyout of Gargaro’s interests in both shares and units.
  5. 3.61 In making her decision, Justice Davies expressly declined to follow the Kizquari line of authority:

None of those cases considered the scope of the oppression power and jurisdiction of the court to grant relief, having regard to s 53, although s 53 appeared in the legislation at the time those cases were decided in terms similar to the provision as it now appears. It would appear that s 53 was not brought to the attention of those courts in those cases. Section 53 has been brought to my attention and I must decide in light of s 53 whether my powers are circumscribed so that I cannot make an order under s 233 in respect of a trustee company. In my view, s 53 puts beyond any doubt that the court’s jurisdiction and powers under the statutory oppression provisions are not circumscribed in respect of a trustee company and accordingly I conclude that I should depart from the view expressed by Justice Young in Kizquari and the cases which have supported that view, in view of s 53. I would also respectfully disagree with the view that Chesterman J expressed in Re Polyresins Pty Ltd, which Young JA cited with approval in McEwan that the equitable interests in the trust cannot be dealt with by the court under s 233.

The only limitation imposed on the court on the kind of order that it can make under s 233 is the requirement for the order to be one that that the court considers appropriate ‘in relation to the company’. The phrase ‘in relation to’ requires a rational and discernible link between the remedy and the company in which the oppression has occurred. In other words, any remedy granted under s 233 must not be extraneous to achieving the object of relieving the oppression and must be appropriate to putting an end to the causes of oppression, including where the company acts as trustee and the oppression relates to the affairs of the trust. In appropriate cases the remedy may include orders dealing with the equitable interests in the trust, in my view.110

Questions

10 Which approach to section 232 do you consider preferable, Acting Justice Windeyer’s or Justice Davies’?

11 Do you agree with Justice Davies’ interpretation of the purposive approach?

12 Do you agree with Justice Davies’ interpretation of section 53?

 

Drapac and Arhanghelschi

  1. 3.62 Justice Davies’ approach in Vigliaroni was approved and further developed by Justice Ferguson, also of the Supreme Court of Victoria, in Wain v Drapac (‘Drapac’).111In that case, with a view to securing their participation in management, Mr Drapac issued Mr Wain and Mr Murchie, with units in property trusts, and with shares in the trustee companies.112 Moreover, Mr Drapac controlled the business group as a whole. It was argued that Drapac caused the termination of employment of Wain and the forced resignation of Murchie. At trial Wain and Murchie argued oppression based on the manner of their termination including ‘the termination of their directorships and the planned dilution of their interests.’113 The plaintiffs sought orders that Drapac or other entities in the corporate group purchase their shares in the trustee companies and their units in the trusts.
  2. 3.63 Besides the oppression proceeding, Drapac also involved arguments covering employment law, directors’ duties and contract. Moreover, Bergman notes that similarly to Vigliaroni the request for relief related to shares and units in various entities in a group, which differed from a number of other cases, where the requested relief from oppression concerned a limited number of single entities, generally involving a ‘valueless corporate trustee acting for a valuable trust.114 
  3. 3.64 The defence in Drapac raised a series of arguments against the grant of the oppression remedy. These included an issue of standing, as the allegedly oppressed parties (Murchie and Wain) were not personally beneficiaries of the units held in the Drapac Group, so that the nexus required by the phrase ‘a member in any other capacity’ in section 232(e) had not been shown.115 It was further argued that the corporate trustees had not committed any acts of oppression, but that if there had been any such acts, they were conducted by Drapac personally, ‘with the inference that section 232 cannot apply because there was no oppression in the affairs of the company.’116 Finally, Drapac argued, even if he was personally liable, the appropriate remedy was to apply relevant provisions of the Trustee Act 1958 (Vic), rather than the oppression remedies in Part 2F.1 of the Corporations Act.117
  4. 3.65 Justice Ferguson rejected all of these submissions. She approved the decision in Vigliaroni, especially in relation to the importance of section 53:

The words ‘in respect of’ have a very wide meaning. Bearing this in mind, and with respect, in my opinion Windeyer AJ’s construction of this legislation118 is too narrow. Were that interpretation to be accepted, then in cases such as the present, where there is a complex corporate structure that is a mixture of companies and trusts but in a real sense only one business is conducted by the corporate group, the legislation would be rendered virtually useless to remedy the real harm that has been caused by the oppressive conduct. It would strike me as odd if the court could take into account oppressive or unfair conduct in the company’s affairs in determining whether relief may be granted but then could not give effective relief to redress the harm caused by that conduct. That this is not intended is, I think, clear from the terms of s 233 in respect of at least one form of order for which specific provision is made. In this regard, the section provides that the court may make any order that it considers appropriate in relation to the company including an order regulating the company’s affairs in the future. As noted above, the company’s affairs includes its business, transactions and dealings with others. In my view, it is clear that the legislative intent was to include the power to grant relief provided that (in the words of Davies J) there is a ‘rational and discernible link between the remedy and the company in which the oppression has occurred.’ In a complex corporate structure (such as the Drapac Group) there is such a link between the companies and the relevant trusts which together operate the business. In my opinion, there is power to grant the relief sought and consideration now needs to be given to whether, as a matter of discretion, it should be given.119

Question

13 Do you agree with Justice Ferguson’s approach of treating the whole group as one entity?

 

  1. 3.66 Justice Ferguson was satisfied that making the orders was an appropriate exercise of discretion. She proceeded to order Drapac and his company Briaroaks to purchase Wain and Murchie’s interests, both shares and units, at fair value.120 Justice Ferguson went on, in a separate decision, to value the various interests cumulatively.121

Question

14 Even under the more liberal approach adopted in Vigliaroni and Drapac, in order to claim an oppression remedy, the plaintiff needs to be both a member/shareholder and a beneficiary. Is this appropriate and desirable?

 

  1. 3.67 While Justice Ferguson largely followed the reasoning of Justice Davies in Vigliaroni, she buttressed this approach with the ‘quasi-partnership’ concept, expounded by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd (‘Ebrahimi’).122 Justice Ferguson used Ebrahimi to explain that remedies for oppressive conduct are not entirely the construct of corporations law statutes. Rather, they draw on established ‘equitable principles based on the doctrine of “legitimate expectations” that arise between quasi-partners in the creation of a [business] venture, whatever the form of the entity in which the venture takes place.’123 Justice Ferguson follows a broad, liberal approach to applying statutory oppression remedies, irrespective of the structure of the relevant entity, ‘so that a just and equitable result can be provided to the oppressed party.’124

Question

15 Do you agree with Justice Ferguson’s use of the ‘quasi-partnership’ doctrine as set out in Ebrahimi?

 

  1. 3.68 At the time of writing, the decision in Drapac is before the Victorian Court of Appeal. Presuming the appeal proceeds to hearing, this could provide the first opportunity for an intermediate appellate court to clarify the existing conflicting authorities outlined above.
  2. 3.69 Justice Ferguson also demonstrated her support for the Vigliaroni approach in the subsequent decision of Arhanghelschi v Ussher (‘Arhangelschi’).125The case involved a dispute between ‘partners’ in a radiology practice conducted through a unit trust. In this case a minority unitholder radiologist was ousted from the business by the other unitholders, ‘pursuant to the express terms permitted by a unitholders’ agreement.’126 Justice Ferguson found against the plaintiff, on the ground that the majority acted in accordance with the terms of the unitholders agreement and moreover used this agreement to distinguish ‘the case from the equitable rights of parties in other (quasi) partnerships where no such agreements apply.’127
  3. 3.70 As a result, Justice Ferguson rejected the plaintiff’s claim, finding that the conduct was not oppressive under section 232:

Here it is submitted, there is nothing commercially unfair to Dr Arhanghelschi. This is not a case where equitable considerations have a role to play. Whilst the doctors referred to themselves as partners, they chose to regulate their relationship primarily through the terms of the Unitholders Deed. That is a distinguishing feature of this case.128

  1. 3.71 Despite the result, the reasoning of Justice Ferguson clearly allows for the grant of an oppression remedy to unitholders under Part 2F.1 of the Corporations Act.129

Question

16 Do you agree that Arhanghelschi demonstrates the fundamental importance of the trust deed and/or unitholder agreement?

 

  1. 3.72 The cases reviewed above indicate the current tension in Australian law between two competing lines of authority. The fact that Vigliaroni was criticised in Noosa Venture underlines the uncertain state of the law in this area. This is potentially an argument for statutory intervention of some sort, to clarify the parameters and operation of the law.

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