3. The oppression remedy in the Corporations Act

Introduction

  1. 3.1 This chapter discusses whether the existing statutory oppression remedy in corporations law offers effective relief to shareholders, that is, whether it achieves the purpose for which it was enacted. This is an important consideration in determining the desirability of having similar legislative remedies to protect the rights of beneficiaries. The chapter 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) and what impact, if any, this has on the need for legislative reform in Victoria.
  2. 3.2 The Commission’s view is that the existing oppression remedy in the Corporations Act has been effective in protecting the rights of shareholders. It is for this reason that the Commission considers that it forms a useful model for the recommended provisions in the Trustee Act 1958 (Vic) applying to beneficiaries of trading trusts.
  3. 3.3 However, even if the more liberal of the two lines of authority1 ultimately represents the law in Victoria, the existing Corporations Act remedy alone will never be sufficient to protect beneficiaries. This is due to the requirement for a beneficiary seeking to access the remedy to be a shareholder in the corporate trustee.2 This is one of the main reasons that the Commission recommends that a broad oppression remedy be included in the Trustee Act for beneficiaries of trading trusts.

The oppression remedy—purpose, operation and effectiveness

History and scope of the oppression remedy

  1. 3.4 The oppression remedy developed via statute over the course of the 20th century in jurisdictions including Australia, in order to overcome problems arising from the historical reliance of company law on majority rule, exacerbated by the rule in Foss v Harbottle.3
  2. 3.5 In Foss v Harbottle, two shareholders sued the five directors for fraud involving misappropriation of company funds. They claimed that the directors should compensate the company. According to Austin and Ramsay ‘the plaintiffs sued on behalf of themselves and all other shareholders except the defendants.’4 The Vice-Chancellor, Sir James Wigram, dismissed the suit on the grounds that the body corporate was the proper plaintiff, rather than individual members or groups of members.5
  3. 3.6 According to Austin and Ramsay, the ‘proper plaintiff’ rule may be justified on these grounds:
  •  the general principle that the person injured should be able to decide whether to bring proceedings to seek redress for that injury;
  • if members were allowed to bring proceedings complaining of a wrong done to the company, there would be a risk of a multiplicity of actions; and
  • the company is better able than an individual member to judge whether litigation should be commenced.6
  1. 3.7 However, rigid adherence to the rule often denied minority shareholders recourse against directors and majority shareholders.7 For this reason, the courts developed a number of ‘exceptions’.8 Austin and Ramsay have formulated these exceptions as follows:

(1) where it is alleged that somebody in the company is taking it, or has taken it, into a transaction ultra vires the company (note that the doctrine of ultra vires has been abolished in Australia);

(2) where action is taken on a matter outside the constitution and the constitution requires a resolution of a general meeting of a higher status than an ordinary resolution to authorise the action;

(3) where an individual or personal right of a member has been, or is being, infringed and the irregularity is not one that can be condoned by the company in general meeting; and

(4) where condonation by the general meeting would be a fraud on the company and the wrongdoers themselves are in control of the company.

A fifth exception is where the interests of justice require that the minority shareholder be given standing to sue on behalf of the company.9

  1. 3.8 Numerous commentators have argued that these ‘exceptions’ are in reality ‘situations where the rule simply cannot apply.’10
  2. 3.9 According to Brockett:

The ‘proper plaintiff’ rule in Foss v Harbottle did not provide an adequate mechanism for the enforcement of the duties of directors and officers duties where the company improperly refused or failed to take action.11

  1. 3.10 Since the middle of the 20th century, a realisation of these risks and difficulties has led to the introduction of statutory remedies for the relief of minority shareholders.
  2. 3.11 This process began in the 1940s in the United Kingdom, with the report and recommendations of the Cohen Committee.12 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.13
  3. 3.12 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 paragraphs14 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.15

  1. 3.13 This recommendation led to the enactment in 1947 of a new provision that became section 210 of the Companies Act 1948 (UK).16 According to Austin and Ramsay ‘section 210 empowered the court to give other relief against oppressive conduct of a company’s affairs.’17
  2. 3.14 Section 210 (and the various legislative provisions that succeeded it in the United Kingdom)18 were 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 Act 1989 (Cth). According to Austin and Ramsay:

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

  1. 3.15 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.21
  2. 3.16 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. 3.17 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, its significance lies in its potential inclusion of a member who is a beneficiary of a trust of which the corporation is a trustee.
  2. 3.18 It is also significant in considering how the Commission’s recommended amendment to the Trustee Act might operate. This is further discussed in Chapter 5.
  3. 3.19 While a narrow interpretation of the oppression remedy has at times caused difficulties in the United Kingdom,22 despite the expansive language used by the originating Cohen Committee, the Australian approach has always been broader.23
  4. 3.20 This broad 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:

…Their language and history indicate that ss 232 and 233 are to be read broadly. The imposition of judge-made limitations on their scope is to be approached with caution.24

  1. 3.21 According to Austin and Ramsay ‘the present breadth of the oppression provision and the range of flexible remedies a court is able to order has made it “one of the most widely used corporate law remedies”’.25
  2. 3.22 This wide use also tends to support the Commission’s conclusion that Part 2F.1 of the Corporations Act has effectively protected the rights of shareholders. Two of the submissions also support this view.26 The remaining submissions, while not directly addressing this issue, do not put an opposing view. Moreover, in that they support legislative reform to offer an oppression remedy to beneficiaries, they could also be seen by implication to endorse the effectiveness of Part 2F.1.
  3. 3.23 Some other jurisdictions, notably Canada, have taken an even broader view. The Canadian oppression remedy is known as ‘the broadest, most comprehensive and most open-ended shareholder remedy in the common law world.’27 The oppression remedy in the Canada Business Corporations Act28‘seeks to enforce fairness and equity, and is not limited to the enforcement of lawful conduct. The potential protection it offers corporate stakeholders is awesome’.29
  4. 3.24 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).
  5. 3.25 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.30

Available forms of relief

  1. 3.26 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. 31

  1. 3.27 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.’32
  2. 3.28 According to Austin and Ramsay, ‘the remedy that is the least intrusive that will eliminate the oppression should be considered first by the court.’33
  3. 3.29 The extensive powers provided under section 233 provide a broad range of remedies to relieve the oppression in the most effective way in the particular circumstances.34 For example, in Re Spargos Mining NL,35 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 every three months.36
  4. 3.30 The broad, flexible nature of the discretion and orders available to courts under Part 2F.1 of the Corporations Act have clear implications for this reference. This will be further discussed in Chapter 5.

Who may apply for relief?

  1. 3.31 Standing to bring an action is covered by section 234.37 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; 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.38

  1. 3.32 In the Australian Law Reform Commission and Companies and Securities Advisory Committee report Collective Investments: Other People’s Money, the recommended oppression remedy could be sought by ‘an investor in a collective investment scheme or by the Commission.’39 It should be remembered that the subject of that report included, but was broader than, trading trusts. Thus an ‘investor’ could be a beneficiary or unitholder of a trading trust, but may not necessarily be so.
  2. 3.33 In the Singapore Business Trusts Act (2008), the remedy may be sought by ‘any unitholder or any holder of a debenture of a registered business trust’.40
  3. 3.34 In the Canada Business Corporations Act, ‘a “complainant” may apply to a court for an order’. Section 238 of that Act provides:

“complainant” means:

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,

(b) a director or an officer or a former director or officer of a corporation or any of its affiliates

(c) the Director41 or

(d) any other person who, in the discretion of a court, is a proper person to make an application under this Part.42

  1. 3.35 The requirements for standing in respect of trading trusts and who should be able to seek any oppression remedy are further discussed in Chapter 5.

What constitutes oppression?

  1. 3.36 Numerous reported cases have defined oppressive, unfairly prejudicial or unfairly discriminatory conduct under Part 2F.1.43
  2. 3.37 Relief is not available merely because a member disagrees or is dissatisfied with the management of the company or dissatisfied with his or her own position ‘or the fact that they cannot control management. Something more than this is required.’44
  3. 3.38 Chief Justice Spigelman of the New South Wales Supreme Court in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd stated that: ‘Irreconcilable differences may establish a basis for winding up, they do not of themselves constitute oppression or unfair prejudice.’45 According to Brockett ‘the courts have held that oppression connotes a lack of probity and fair dealing46 (although this is not a necessary condition),47 is something which is burdensome, harsh or wrongful,48 or is inequitable or unjust,49 or exhibits commercial unfairness.’50
  4. 3.39 According to Brockett ‘the conduct [complained of] must relate to the “affairs of the company”,51 which has been determined to be of considerable breadth.’52 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.53 Where the conduct complained of involves company directors, the court must also examine whether they are acting honestly in the interests of the company.54 Moreover, ‘[t]he test requires the weighing of the particular member’s interest against that of the company as a whole.’55
  5. 3.40 Examples of oppressive behaviour given by Brockett include where a majority shareholder:
  • runs the company in their own interests and ignores the interests of minority shareholders56
  • improperly issues shares to themselves to outvote other shareholders57
  • excludes a minority shareholder from being involved in the management decisions of the company58
  • redirects business opportunities from the company to themselves59
  • pays themselves excessive salaries at the expense of paying dividends to shareholders.60
  1. 3.41 The fact that there has been such significant consideration of these issues by the courts, and that the existing provisions have been interpreted broadly, also has clear implications for the Commission’s consideration of the desirability and the form of amendments to the Trustee Act. This is further discussed in Chapter 5.

Types of company covered

  1. 3.42 Oppression remedies contained in Part 2F.1 apply to:
  • companies limited by shares
  • companies limited by guarantee61
  • unlimited companies
  • public and proprietary no liability companies
  • co-operative societies which are incorporated.62
  1. 3.43 While Part 2F.1 can apply to any type of company, 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’.63 According to Austin 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.’64
  2. 3.44 Austin and Ramsay suggest several reasons for this:
  • Shareholders in such companies may frequently be involved in the management of the company, or be employed as officers and directors. A dispute with majority shareholders may see such engagements, and the remuneration associated with them, terminated.
  • Moreover, shareholders in small companies are more vulnerable than those in larger, public companies.
  • The lack of a liquid market for shares may make it difficult for an aggrieved minority shareholder to sell his or her shares.
  • 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.65
  1. 3.45 Significantly, these difficulties are very similar to those commonly experienced by beneficiaries of trading trusts.
  2. 3.46 Again, the types of trusts potentially subject to the availability of an oppression remedy is of crucial importance to this reference. This is discussed at length in Chapter 2.

Does the existing oppression remedy apply to trading trusts?

  1. 3.47 Given the terms of reference for this review, one issue to be considered is whether or not the existing oppression remedy in Part 2F.1 of the Corporations Act already applies to beneficiaries of trading trusts where there is a corporate trustee and if so, whether this existing remedy provides adequate relief.
  2. 3.48 There is a divergence in the judgments of Australian courts on this question.66Kizquari Pty Ltd v Prestoo Pty Ltd 67 (Kizquari) held that beneficiaries of a unit trust could not obtain oppression remedies. Justice Davies, however, in Vigliaroni v CPS Investment Holdings Pty Ltd (Vigliaroni), declined to follow Kizquari, emphasising the importance of section 53 of the Corporations Act.68

Kizquari and related cases

  1. 3.49 Kizquari, a decision of Justice Young (as then he was) in the Supreme Court of New South Wales, ‘concerned a company that was trustee of a unit trust.’69
  2. 3.50 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.70

  1. 3.51 Moreover, Justice Young expressly declined to follow Re Bodaibo Pty Ltd,71 where in the context of granting an oppression remedy, Justice Vincent of the Supreme Court of Victoria 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.72

  1. 3.52 Kizquari was followed in Re Polyresins Pty Ltd.73In that case, it was unclear on the facts whether the company held property on trust,74 but Justice Chesterman of the Supreme Court of Queensland 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.75

  1. 3.53 In McEwen v Combined Coast Cranes Pty Ltd 76 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.77

  1. 3.54 In Surf Road Nominees Pty Ltd v James78 Justice Einstein held that these cases were ‘authority for the proposition that ss 232 and 233 of the Corporations Actare inapplicable in the circumstances.’79
  2. 3.55 The Kizquari approach was strongly endorsed in Ciccarello, Re Adelaide Property Development Pty Ltd v Cubelic,80 where Justice Mansfield said:

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 s 232 and s 233 of the Corporations Act is inappropriate. Oppressive conduct does not result in diminution of the value of the shares in the trustee company.81

  1. 3.56 In Trust Co Ltd v Noosa Venture I Pty Ltd (Noosa Venture),82 Acting Justice Windeyer 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 that 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.83

  1. 3.57 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.’84 In his Honour’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.85
  2. 3.58 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 are considered below.

A broader scope: The Vanmarc approach

  1. 3.59 In Vanmarc Holdings Pty Ltd v PW Jess and Assoc Pty Ltd (Vanmarc),86 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. 3.60 In Vanmarc, the plaintiffs sought relief on several grounds, including an oppression remedy under section 246AA of the then current 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. 3.61 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 buy-out 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 s246AA in the case of a trustee company) (see too: Re Bountiful Pty Ltd (1994) 12 ACLC 902, 905).87

  1. 3.62 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.88

  1. 3.63 A number of commentators89 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. 3.64 In Vigliaroni,90 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. 3.65 Vigliaroni involved a successful business comprising unit trusts and companies, primarily involved in the concreting industry, which was controlled by the Vigliaroni family.91
  3. 3.66 The Vigliaronis launched proceedings against Mr Gargaro, their manager and financial advisor, and the related entities on several grounds, including that Gargaro’s actions were oppressive under Part 2F.1 of the Corporations Act. They sought a forced buyout under section 233, winding up under section 233 and relief pursuant to section 467(1). The Vigliaronis were largely successful in the actions, including the application of sections 232 and 233 to force a buyout of Gargaro’s interests in both the shares and units.92
  4. 3.67 In reaching 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 the 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 Young J 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.93

Tomanovic

  1. 3.68 The case of Tomanovic v Global Mortgage Equity Corporation Pty Ltd94 arguably casts some doubt on the application of the Kizquari approach, without fully endorsing the alternative posited in Vigliaroni.
  2. 3.69 The case concerned a breakdown of a business relationship between Mr Tomanovic and Mr Sayer that comprised a complex corporate structure also containing a unit trust. The parties agreed, through an unexecuted heads of agreement, to separation on the basis that Tomanovic would receive a lump sum payment, and that each would operate half of the business. Negotiations fell through and Tomanovic sought an oppression remedy on the basis that Sayer had not signed the heads of agreement, diverted assets for his own benefit and excluded Tomanovic from the management of the business.95 The New South Wales Court of Appeal overturned the decision of Justice Austin at first instance, holding that the conduct of Sayer amounted to oppression.96 Importantly, the Court of Appeal made draft orders that Sayer buy out Tomanovic’s shares in the company to be valued at a later date.97
  3. 3.70 The importance of the case for this reference is that the draft orders appear to envisage that the value of Tomanovic’s units in the trust could be taken into account as part of the process of valuing the shares.98 Justice of Appeal Campbell referred to both the Kizquari and the Vigliaroni lines of authority, and said that:

No attention was paid, at either the trial or on the argument of the appeal, to the way in which the available remedy for Oppression operated in relation to the units in the 9 Argyle Street Unit Trust. Even if the court were to make a buyout order concerning Argyle HQ, that would not have any effect on the beneficial ownership of the assets it held on trust - the beneficial ownership of those assets could be altered only if a buyout order were to be made concerning the units in the 9 Argyle Street Unit Trust. When the Trust has at all times been an important part of the overall commercial group, failure to deal with ownership of units in the Trust would result in any relief granted by the Court not totally resolving the commercial relations between the parties.99

 

  1. 3.71 Justice of Appeal Campbell went on to say:

After judgment had been reserved, further submissions were invited from the parties on that topic. The Respondents’ submissions in response to that invitation objected to the matter being raised at this stage, when it was not part of the case of the Appellants at either the trial or on appeal.

Once this objection is taken, it must be acceded to, as the Court is in no position to be satisfied that the availability of relief concerning the units in the Trust could not be affected by facts additional to those investigated at the trial.100

  1. 3.72 Bergman notes that despite these remarks, it is not clear in the later proceeding whether the units were actually taken into account as part of the process of valuing the shares, since at that stage the parties agreed to a buyout process as part of winding up the business.101
  2. 3.73 In the Commission’s view, the case is difficult to reconcile fully with the Kizquari approach. Under Justice of Appeal Campbell’s reasoning, merely treating the value of the units as transposed into the value of the shares does not answer the question of what happens to the beneficial ownership in the unit trust, and thus will not ‘totally [resolve] the commercial relations between the parties’.102 However, this difficulty appears to have arisen since the Court of Appeal considered it necessary to make orders consistently with the way the case was argued on appeal. While, as noted above at [3.70], the judgments refer to the Kizquari and Vigliaroni line of cases, they did not clearly indicate a preference for either. In the Commission’s view, this means that Tomanovic does not support either approach.
  3. 3.74 The Commission notes, however, that the approach of valuing the shares with respect to the units adopted by Justice of Appeal Campbell had been utilised in the reasoning of Justice Davies in Vigliaroni and Justice Ferguson in Drapac.103
  4. 3.75 Moreover, according to Bergman, the highly unusual facts104 of the case ‘reflected aspects of estoppel and specific performance’,105 which takes the reasoning beyond the analysis considered in this chapter.

Drapac and Arhanghelschi

  1. 3.76 Justice Davies’ approach in Vigliaroni was approved and developed by Justice Ferguson of the Supreme Court of Victoria, in Wain v Drapac (Drapac).106In that case, ‘with a view to securing their participation in management,’107 the defendant, Mr Drapac, issued the plaintiffs, Mr Wain and Mr Murchie, with units in property trusts, and with shares in the trustee companies.108 At trial, Wain and Murchie argued oppression including ‘the termination of their directorships and the planned dilution of their interests.’109 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.110
  2. 3.77 Justice Ferguson made the requested orders. 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 legislation111 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.112

  1. 3.78 Justice Ferguson was satisfied that making the orders was ‘an appropriate exercise of discretion.’113 Her Honour proceeded to order Drapac and his company Briaroaks to purchase Wain and Murchie’s interests, both shares and units, at fair value.114 Justice Ferguson went on, in a separate decision, to value the interests cumulatively.115
  2. 3.79 While Justice Ferguson largely followed the reasoning of Justice Davies in Vigliaroni, she relied upon the ‘quasi-partnership’ concept, expounded by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd (Ebrahimi).116 Justice Ferguson relied upon 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 in 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.’117 Justice Ferguson followed a broad, liberal approach to applying statutory oppression remedies, irrespective of the structure of the relevant entity.
  3. 3.80 While an appeal against the decision in Drapac was lodged with the Victorian Court of Appeal, the substantive issues did not proceed to hearing. This meant that a potential opportunity for an intermediate appellate court to clarify the conflicting authorities did not arise.
  4. 3.81 Justice Ferguson also relied upon the Vigliaroni approach in the subsequent decision of Arhanghelschi v Ussher (Arhanghelschi).118The case involved a dispute between ‘partners’ in a radiology practice conducted through a unit trust. Justice Ferguson found against the plaintiff, on the ground that the majority acted in accordance with the terms of the unitholders’ agreement; moreover, she used this agreement to distinguish ‘the case from the equitable rights of parties in other (quasi) partnerships where no such agreements apply.’119
  5. 3.82 As a result, Justice Ferguson rejected the plaintiff’s claim, finding that the conduct was not oppressive under section 232:

Here, in my opinion, 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.120

  1. 3.83 Despite the result, the reasoning of Justice Ferguson clearly allows for the grant of an oppression remedy to unitholders or beneficiaries under Part 2F.1 of the Corporations Act.121

Conclusion

  1. 3.84 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 Ventures underlines the uncertain state of the law in this area. This is an argument for statutory intervention, to clarify the parameters and operation of the law.
  2. 3.85 In its consultation paper, the Commission asked a series of questions about the opposing lines of authority.122 Several submissions address this issue. Three submissions indicated support for the Vigliaroni/Drapac approach.123 The Commercial Bar Association of Victoria expressly agrees with the approach taken in these cases, that once the discretion in section 232 of the Corporations Act is ‘enlivened’, section 233 empowers the court to make orders ‘in relation to the company’, including trusts of which the company is trustee.124
  3. 3.86 One submission favoured the Kizquari line of authority,125 referencing Justice Young in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd,126 where he noted that courts are reluctant to use oppression remedies to assist franchisees in enforcing franchise contracts with a corporate franchisor.127 It reiterates that Justice Young’s approach in Kizquari and Starr is that non-shareholder rights are to be enforced outside the oppression remedies and that there do not appear to be any previous authorities to support Justice Davies’ approach in Vigliaroni.128
  4. 3.87 However, regardless of which line of authority is ultimately found to reflect the law in Australia, the Corporations Act cannot provide a comprehensive or complete remedy for all beneficiaries. This is due to the requirement for such beneficiaries to be shareholders in the corporate trustee. This is one of the reasons that the Commission recommends that the Trustee Act be amended to provide for an oppression remedy for beneficiaries
    of trading trusts.

 

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