Trading Trusts—Oppression Remedies: Consultation Paper (html)
5. Possible reform mechanisms
The need for legislation
5.1 As outlined in Chapters 3 and 4, considerable uncertainty exists about the availability of adequate remedies under the current law for minority unitholders confronted by oppressive behaviour. This contrasts with the broad and flexible way the courts have interpreted the oppression remedies in the Corporations Act 2001 (Cth) applying to minority shareholders.
5.2 Bergman argues that where the courts have determined that beneficiaries—especially unitholders—have suffered oppression, this has led them to interpret section 53 of the Corporations Act to provide relief, as to do otherwise would be unfair.
24 Has the lack of a clear oppression remedy for minority beneficiaries of a trading trust caused substantive injustice or hardship? If possible, please
5.3 In this chapter, two approaches to legislative reform are discussed:
• Option 1 is to leave the current legislation unamended, preserve the status quo, and await development of the law by the courts.
• Option 2 is to amend the Trustee Act 1958 (Vic) to provide equivalent remedies to some or all of those available to shareholders under Part 2F.1 of the Corporations Act.
5.4 The Commission invites submissions on which option or other alternative is best suited to the law concerning trading trusts and oppression remedies in Victoria.
Option 1: Status quo
5.5 While there is an argument that the lack of oppression remedies for beneficiaries is unfair and should be remedied, there is a countervailing view that no overwhelming policy argument for such reform has been demonstrated. As Bergman points out, the use of trading trusts (especially unit trusts) in almost identical circumstances to a private trading company is virtually unique to Australia. Given the characteristics inherent to their private nature, private trading trusts have kept a very low profile. By contrast, public unit trusts, which are used in a similar fashion within Australia and elsewhere, have received a high profile both domestically and internationally, prompting the adoption of the Managed Investment Scheme provisions in Chapter 5C of the Corporations Act. Cases of oppressive conduct occur overwhelmingly in private, as opposed to public, entities.
5.6 This has resulted in a situation where private trusts in Australia have received insufficient ‘public or legal attention to prompt legislators’ to extend relief against oppression to beneficiaries. As Bergman notes, it would thus seem reasonable to question whether legislative reform is justifiable ‘from an economic policy viewpoint given the issue has not caused the type of serious financial consequences that may otherwise be expected to justify legislative reform.’
5.7 Although cases of oppression in private trusts have not prompted legislative intervention analogous to Chapter 5C of the Corporations Act, this does not necessarily mean that legislation is required or that the current law is inadequate.
5.8 The argument for the introduction of an oppression remedy for unitholders in private unit trusts, however, needs to be balanced against the view that the fundamental nature of such private trusts is determined by the trust deed. It can be argued that where participants enter willingly and are or should be aware of the provisions of the trust deed or unitholders’ agreement, the legislature and courts should not interfere with the operation of these instruments.
25 Is legislative reform to provide oppression remedies to minority beneficiaries in Victoria justified?
Option 2: Amendment of the Trustee Act 1958(Vic)
5.9 A second option is to amend the Trustee Act to provide for oppression remedies for minority beneficiaries. However, doing so would raise issues concerning the interaction between state and Commonwealth laws.
5.10 The constitutional basis for the Corporations Act is found both in the legislative powers of the Commonwealth in section 51 of the Constitution (especially section 51(xx), the power to make laws with respect to trading or financial corporations) and in the referral of powers by the states (see the Corporations Act, section 3). In particular, the states, through Acts such as the Corporations (Commonwealth Powers) Act 2001 (Vic), referred to the Commonwealth the power to make laws with respect to the matters relating to the original text of the Corporations Act.
5.11 The current referral reflects the position that the Commonwealth’s legislative power does not cover the whole scope of corporate entities (section 51(xx) being relevantly directed to ‘trading or financial corporations’), that the power in section 51(xx) was extended only to the regulation of trading and financial corporations once ‘formed’ and that the High Court had found that jurisdiction under state corporations laws (under the previous regime) could not be vested in the Federal Court.
5.12 In this context, the Corporations Act, while Commonwealth law, contains provisions in Part 1.1A which provide, in short, that:
• that Act is intended to have concurrent operation with state laws, including ones which impose additional liabilities on companies or directors
• the states can declare a matter to be an ‘excluded matter’ so that, simply put and subject to the Commonwealth making a regulation to the contrary, part or all of the Corporations Act does not apply with respect to that matter; and
• the states can declare a provision of a state law to be a ‘corporations legislation displacement provision’ so that, in short, the corporations legislation does not operate to the extent that there were would otherwise be an inconsistency between the corporations legislation and the provision of the state law.
5.13 Part 1.1A of the Corporations Act is designed against the operation of section 109 of the Constitution, which provides that, where a state law is inconsistent with a Commonwealth law, the latter shall prevail and the former shall be invalid to the extent of the inconsistency.
Is a corporation legislation displacement provision necessary?
5.14 In the Commission’s view, consideration needs to be given to the operation of Part 1.1A of the Corporations Act in relation to minority beneficiaries who are shareholders in the relevant corporate trustee.
5.15 As discussed in chapter 3, there is a clear division in the view of Australian courts regarding the question of whether the remedy in Part 2F.1 of the Corporations Act already applies to such beneficiaries. If it does and the Trustee Act was amended to provide similar remedies to part 2F.1 of the Corporations Act, a question may arise as to whether there would be inconsistency between Part 2F.1 of the Corporations Act and the new provisions which would render them invalid by virtue of s 109 of the Constitution:
• While s 5E(1) of the Corporations Act provides that the Corporations legislation is not intended to exclude or limit the concurrent operation of any law of a State, is relevant to determining a question of inconsistency, it is not necessarily determinative; in particular, it will not avoid invalidity arising out of a “direct” inconsistency (or textual collision) between Commonwealth and State laws;
• In some cases, a Commonwealth law conferring jurisdiction on a court will be construed as intending to provide an exclusive remedy with respect to a particular matter, rendering a State law conferring jurisdiction with respect to that matter invalid;
• In other cases, a Commonwealth law conferring jurisdiction on a court will be construed as intending to exist against the background of State laws, including State laws conferring like jurisdiction on the courts. In such cases, inconsistency will not arise unless a court actually exercises jurisdiction under the Commonwealth law, in which case, the determination in the exercise of the jurisdiction under the Commonwealth law will prevail (and any exercise of State jurisdiction with respect to the same matter will be invalid).
5.16 If the second scenario considered above arose, the State could declare the relevant provisions of the Trustee Act to be corporations legislation displacement provisions under s 5G of the Corporations Act. As discussed in paragraph 5.12 above, this would avoid any issue of inconsistency arising (as, to the extent that there might otherwise be inconsistency, the Corporations Act would not apply).
26 Could new remedies under the Trustee Act coexist with those under the Corporations Act?
27 If the Trustee Act is amended to provide oppression remedies, should this be supplemented by a Corporations legislation displacement provision?
5.17 A number of further issues would arise if this option were adopted. These include: the scope of the remedies to be available to oppressed beneficiaries; whether they should reflect those available under Part 2F.1 of the Corporations Act; the range of orders available to the courts where oppression was established; whether the provisions should apply to all trusts and, if not, which ones; and the potential for such remedies to be excluded by an express provision of the trust deed. These all need to be considered.
28 Should the Trustee Act 1958 (Vic) be amended to provide oppression remedies for minority beneficiaries?
29 If so, to what extent should the provisions reflect those in Part 2.1F of the Corporations Act?
30 Should the orders available to the court be specified, or left to what the court ‘considers appropriate’ as in section 233 of the Corporations Act?
31 Section 233 of the Corporations Act provides a non-exhaustive list of examples of the types of order available. Should a similar list be included in any amendment to the Trustee Act?
32 What effect should the trust deed have on the availability of any oppression remedies included in the Trustee Act? Should it be possible to exclude their operation by express provisions in the trust deed?
33 Should such a provision apply to all trusts? If not, which types of trusts should be covered?
34 Are there any alternative legislative reforms that, in your view, should be considered to protect the rights of oppressed beneficiaries?