6. Interests of other parties

Introduction

  1. 6.1 The previous chapter explored the various reform mechanisms to enable beneficiaries of trading trusts to obtain oppression remedies. The terms of reference require the Commission to consider the interests of other parties which may be involved in or interact with trading trusts, including creditors, trustees, directors and employees. Clearly, this will depend upon the nature of the recommendations, and in particular, the type of remedies that are made available to the beneficiaries of trading trusts.
  2. 6.2 Chapter 3 outlined in detail the different remedies that a court can order in response to oppression under section 233 of the Corporations Act 2001 (Cth). It is quite clear that, at a general level, most of these remedies will impact upon the interests of other parties. For instance, a winding up order will impact upon the employment of the company’s officers. These considerations are relevant for a court in determining whether it is appropriate to grant an oppression remedy.1 In the Commission’s view, the same logic can be readily applied to trading trusts.
  3. 6.3 The Corporations Act and the general law create a complex legal framework of the legal duties owed by third parties, in particular directors and creditors. Chapter 2 outlined some of the differences between general law duties owed under trust law and company law with an emphasis upon the significance of the company’s separate legal personality.
  4. 6.4 In the Commission’s view, it is not clear that the introduction of oppression remedies for trading trusts would either alter or affect these frameworks. For instance, the conduct of directors or trustees amounting to a breach of duty may itself constitute oppressive conduct. However, it is not clear that providing oppression remedies for beneficiaries of trading trusts would affect the duties owed by trustees to beneficiaries.
  5. 6.5 An important issue that affects other interested parties was discussed in Chapter 3. Under the Vigliaroni and Drapac approach, third parties such as directors, creditors and employees might be able to avail themselves of oppression remedies when they are also shareholders of the corporate trustee. The limitations implicit in this approach have been discussed in Chapters 3 and 5.  

Directors of the corporate trustee

  1. 6.6 Chapter 2 outlined the basic proposition that directors owe duties directly to the company.2 The chapter also outlined the key differences between directors and trustees. However, the facts of many of the cases considered in this consultation paper show that typically the trustee of a trading trust will be a corporate trustee.
  2. 6.7 At law, the doctrine of separate legal personality means that where a company acts as a trustee, the directors will owe duties to the company rather than the beneficiaries of the trading trust.3 Although, as shown in Chapter 2, a trustee owes duties directly to the beneficiaries, the interposition of a corporate trustee would ordinarily prevent beneficiaries from claiming directly against the directors.4
  3. 6.8 There are a number of exceptions to this principle. The first is if a director knowingly assists the company in a breach of trust, then the director may be liable under the principles from Barnes v Addey.5 As Ford and Hardingham explain, the beneficiaries
    could argue:

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

  1. 6.9 The second possible exception is that there might be circumstances where the directors of a corporate trustee owe fiduciary duties directly to the beneficiaries of a trading trust.7
  2. 6.10 If oppression remedies, however, were granted to the beneficiaries of a trading trust, this may alleviate the need to find a fiduciary duty owed by the directors of corporate trustees.

Question

35 Would the introduction of statutory oppression remedies for beneficiaries of trading trusts affect the interests of directors or trustees? If so, how?

 

Creditors

  1. 6.11 According to Jacobs’ Law of Trusts in Australia:

on a judgment at law against a trustee, the creditor ordinarily could not levy execution against the trust property; this is so even though the debt is founded upon a debt incurred in the course of trading by the trustee, because the execution does not extend to equitable assets where the whole beneficial interest is not in the judgment debtor.8 

  1. 6.12 Since the corporate trustee of a trading trust will be nominally capitalised, a creditor may also seek access to the assets of the trust. A creditor may potentially access the assets of the trust through subrogation to the trustee’s right of personal indemnity to the trust property,9 and potentially to the personal claim against the beneficiaries.10
  2. 6.13 A creditor may also seek access to the assets of the directors. Without a personal guarantee, however, the doctrine of the corporate separate personality ordinarily prevented this.
  3. 6.14 The introduction of section 197 of the Corporations Act, however, enables a creditor in certain circumstances to enforce a debt against the director of the corporate trustee.
    That section states:

Directors liable for debts and other obligations incurred by corporation as trustee

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not discharged, and cannot discharge, the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets solely because of one or more of the following:

(i) a breach of trust by the corporation;

(ii) the corporation’s acting outside the scope of its powers as trustee;

(iii) a term of the trust denying, or limiting, the corporation’s right to be indemnified against the liability.

The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

Note: The person will not be liable under this subsection merely because there are insufficient trust assets out of which the corporation can be indemnified.

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by one of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.

(3) This section does not apply to a liability incurred outside Australia by a foreign company.

(4) This section does not apply to a liability incurred by a registrable Australian body outside its place of origin.

(5) This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.

  1. 6.15 Ford’s Principles of Corporations Law has described the context surrounding the need for section 197 as follows:

When, in the 1970s many private businesses were organised as trading trusts to gain advantages under income tax law, it became usual for a trading trust to be established with a limited company as trustee. When such a company became insolvent, a creditor for a debt not related to the trust could have no access to trust assets. Creditors for trust-related debts could have no direct access to the trust assets but could stand in the shoes of the trustee when it went into liquidation to exercise whatever right of indemnity the trustee had to resort to the trust assets to pay the debts. 

Usually the trustee company would have few assets in its own right and creditors were dependant on the trustee’s right of indemnity. That right of indemnity could be reduced if the trustee had acted outside the scope of the trust.11

  1. 6.16 As shown in Chapter 2, the trust deed is capable of excluding many of the trustee’s duties including the right of indemnity. Section 197 was introduced in the event that the trust deed excluded the right of indemnity, or a right of set-off of the beneficiaries reduced the amount otherwise owed to the trustee.12
  2. 6.17 As outlined in Chapter 3, the principles from Vigliaroni and Drapac mean that a creditor of a trading trust will not be able to obtain an oppression remedy unless they are unitholders and shareholders in the corporate trustee.
  3. 6.18 Clearly, if an oppression remedy involved compensation or the reduction of debt, a grant of the remedy could reduce the assets otherwise available to creditors. However, this is presently the position of the law under section 233 of the Corporations Act. The flexibility of the oppression remedy allows the court to take the position of creditors into account before deciding on the appropriate order.13 In the view of the Commission, the availability of oppression remedies by the beneficiaries of trading trusts is not likely to disturb the current position of creditors.

Question

36 Would the introduction of statutory oppression remedies for beneficiaries of trading trusts affect the interests of creditors? If so, how?

 

Employees

  1. 6.19 It has been suggested in a number of cases that a court will take into account the position of employees if a winding up order is sought in response to an oppression remedy.14 However, in Chapter 3 it was shown that courts will rarely order a winding up order in any case. It follows that in the view of the Commission, the availability of oppression remedies to trading trusts is not likely to increase the possibility of an adverse impact upon employees.

Question

37 Would the introduction of statutory oppression remedies for beneficiaries of trading trusts affect the interests of employees? If so, how?

 

 

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