B J McAdam Pty Limited v Jax Tyres Pty Limited [2012] FCA 1438 | Case summary

REASONS FOR JUDGMENT 1 The plaintiffs apply for leave to amend their originating process and statement of claim. For the reasons which follow, leave should be denied and the application for it should be dismissed with costs. 2 An important part of the context of this application is the plaintiffs' earlier partially unsuccessful application to amend their pleadings, which was decided on 1 August 2012: B J McAdam Pty Ltd v Jax Tyres Pty Ltd (No 2) [2012] FCA 799 ('the previous judgment'). An element in that decision was my refusal to permit the plaintiffs to bring a derivative suit on behalf of Jax Tyres Investments Pty Ltd ('JTI') in which, broadly speaking, JTI would sue the trustee of the JQFS Unit Trust for its role in a restructuring of the Jax Tyres business: see [12]-[27]. JTI is a beneficiary of the JQFS Unit Trust and the proposed derivative proceeding on the beneficiary's behalf was to vindicate breaches of trust and related 'knowing involvement' remedies against third parties. 3 At the time, I declined to permit such a derivative proceeding to advance. I did so because the claim appeared to be pointless for the practical reasons I explained at [17]-[26]: 17 It is in its capacity as a beneficiary of the JQFS Unit Trust that the proposed derivative suit on its behalf is put forward. The idea is to sue: • the trustee (JQFS) for parting with trust property; • Mr Hurrell for assisting JQFS in parting with that property; • the 2008 joint venture (for receiving the trust property); and • an entity associated with Mr Hurrell for receiving trust property. 18 The problem with this suit is, as I have already foreshadowed above at [6], that the ownership structure of the 2008 joint venture is effectively the same as the ownership structure of the JQFS Unit Trust. In both cases the Jax Tyres interests hold 65% and the Quickfit interests 35%. 19 The only difference between the two situations is that: (a) the 2008 joint venture is an unincorporated one between the JF Unit Trust and Quickfit (in ratio 65:35); and (b) the original merger was/is conducted by the JQFS Unit Trust operated (in ratio 65:35) by the JFA Unit Trust and Quickfit. 20 Since the ownership of the JFA Unit Trust and the JF Unit Trust is effectively the same it is difficult to see what the problem is. More importantly, it is difficult to detect the utility in permitting such a litigious venture to go forward. 21 When I taxed Mr Street SC, with whom Mr Hogan-Doran of counsel appeared for the McAdam interests, with this observation his response was to observe: (a) the McAdam interests held 33.34% of the JF Unit Trust but 33.40% of the JFA Unit Trust so that there was a slight difference in the magnitude of the interests; (b) Mr Marcus McAdam was a director of the trustee of the JQFS Unit Trust but not of the trustee of the JF Unit Trust; (c) there were potential income tax, capital gains tax and stamp duty consequences flowing from the question of who owned and operated the business; and (d) the holder of the business was, in point of fact, different. 22 After lunch on the first day, proposition (a) was withdrawn it being accepted the unit holding was the same and that the submission had arisen from an erroneous diagramme. The McAdam interests held 33.4% of Jax's share under either arrangement. 23 I do not see the relevance of proposition (b) from the perspective of the question of utility. It may be relevant to an issue of oppression but we are here concerned with breach of trust allegations. Although (c) was advanced I was not taken to any evidence about it. I do not accept that being told I should not proceed on the basis that there were no issues about such matters discharges the onus borne by those seeking to bring derivative proceedings. Although a pleading was articulated (and, indeed, revised on the second day of the hearing) it pointedly made no mention of this topic. 24 I accept (d) but do not see what it adds. 25 On the second day financial records were tendered which it was submitted showed that the distributions flowing from the JF Unit Trust were not the same as those flowing from the JFA Unit Trust. These records did not show that the distributions were not in the ratio 61.6 : 33.4 : 5.00. Rather, they showed only that not all of the income had been distributed. As Mr Harding, for the Board interests, observed this was perhaps not entirely surprising since the records did not purport to be for the entire financial year. 26 I am left therefore with the impression, not dispelled by the manner in which the matter was pursued before me, that the proposed derivative suit to be brought on behalf of the trustee of the JFA Unit Trust is pointless and would benefit no-one. That is a sufficient reason to refuse leave. 4 In the proposed second further amended statement of claim, there is now contained a Section E entitled 'Claims in respect of Merim'. It runs from paragraphs 138 to 150. Merim Holdings Pty Ltd ('Merim'), the third plaintiff, is alleged to be a shareholder in JTI (paragraph 3(b)) and also a beneficiary of the trust of which JTI is the trustee (paragraph 48(f) and (g)). This trust is known as the 'JFA Unit Trust'. 5 What is the JFA Unit Trust? It was a trust brought into existence, so the plaintiffs (as part-owners of the Jax Tyres business) allege, to hold the interests of all Jax Tyres owners in the new business resulting from the merger of the Jax Tyres business with the Quickfit business. That merged business was to be conducted by a unit trust in which the proprietors of the Jax Tyres and Quickfit businesses would share. The pleading alleges that Quickfit received 35% of the units. The remaining 65% were given to JTI as the trustee of the JFA Unit Trust and it, in turn, issued units to the three entities nominated by the proprietors of the Jax Tyres business. The McAdam interests, who are the plaintiffs, received 33.34% of the units in the JFA Unit Trust and they did this through Merim. It is also alleged that JTI, as trustee, became the owner of 65% of the shares in JQFS which brought about that to which I have already referred, namely JTI's role (in a trustee capacity) both as a shareholder in JQFS and a beneficiary of the trust of which JQFS was the trustee. 6 The basic contentions that the pleading now seeks to make are: that this structure was the result of two antecedent merger agreements (one between the Jax and Quickfit interests, the other amongst the Jax interests); that in 2008 the merged business was moved from JQFS into an unincorporated joint venture between JFS and Quickfit; and that that transfer was a breach of the antecedent agreements and a breach of trust. 7 In the previous judgment, I refused to grant leave to the plaintiffs to bring a derivative proceeding along those lines on behalf of the trustee of the JFA Unit Trust against JQFS: at [12]-[27]. I did this because the ownership structure of the unincorporated joint venture is exactly the same as the ownership structure of JTI. That is, the Jax Tyres interests hold 65% of that business with Quickfit holding the remaining 35% and, in turn, the 65% Jax Tyres share is held by the McAdam, Board and Hurrell parties in exactly the same proportions as they hold in the JFA Unit Trust. This is done through a different unit trust called the JF Unit Trust. To put the matter plainly: before the events of 2008, the McAdam interests held 33.34% of the units in a unit trust which held 65% of the units in a unit trust conducting the merged business. After the events of 2008, the McAdam interests now hold 33.34% of the units in a unit trust which holds a 65% interest in an unincorporated joint venture conducting the same business. 8 Those facts do not bespeak, without more, the presence of a difficulty. It does not, however, require very much legal imagination to construct scenarios in which such facts might generate problems. As I said at [21] and [23] of the previous judgment, there may, for example, have been not insignificant tax consequences flowing from the rearrangement. 9 No such difficulty, however, is hinted at in the proposed pleading. At [20] of the previous judgment, I explained this problem and I set out at [21]-[24] counsel's response to it. That is set out above at [3]. The point to be emphasised is the absence of any substantial explanation of what the problem is of which the plaintiffs complain. 10 It was for that reason that I refused leave to bring a derivative proceeding on JTI's behalf: at [26]. The proposed proceeding simply had no point or, perhaps to put it in another way, no point which was ever explained to me. 11 The pleading now proposed works first by alleging that JQFS committed a breach of trust by allowing the merged business to pass out of its hands and into the hands of the unincorporated joint venture. Pausing there, such a claim would ordinarily be brought by a beneficiary of the JQFS Trust, i.e. JTI or derivatively. It was, of course, precisely such a claim in respect of which I earlier refused leave. It is now alleged, in the same manner, that various defendants were knowingly involved in those breaches of trust: paragraphs 144 to 146. 12 These otherwise academic allegations are then made relevant by paragraphs 147 to 148, where Merim complains that JTI has committed a breach of the terms of the JFA Unit Trust by allowing the events of 2008 to occur and by not bringing proceedings against JQFS and others relating to JQFS's breaches of trust. Finally it is said (at paragraphs 148 and 149) that the actions of the Board and Hurrell interests in the affairs of JTI has been oppressive to Merim, both as a unitholder in the JFS Unit Trust and as a shareholder in JTI itself. 13 The claim then is one for, or at least relating to, breaches of trust, oppression in the conduct of the affairs of a trust and oppression in the conduct of the affairs of a company. The relief claimed by Merim is equitable compensation for breaches of trust by JTI, the appointment of a receiver and manager to JTI as trustee and an order winding it up. 14 So far as the pleading articulates a case that the JTI should be liable for not suing JQFS, it is transparently an attempt to evade my prior refusal to grant leave to bring such a proceeding in the name of JTI. Even now I would, at least, contemplate such a course if the plaintiffs could indicate what possible point it could have. 15 My anxiety to grasp what the complaint was or why it mattered that the business had been conducted as an unincorporated joint venture (rather than as a corporation or unit trust) continued unabated during the hearing of the present application. For example, the following exchange occurred between Mr Street and myself: HIS HONOUR: Can you - is it possible for you to encapsulate for me just in a nutshell, at the highest level of generality, what your case is? MR STREET: Yes, your Honour. There was, in essence, a position where it was intended that there would be set up this entity JTI that would act as the unit holder for the respective interests that included my client's interests that would be recipient of the proceeds of the merged business, and then instead of that, what has happened is the Hurrell and Board interests have carefully hired it off to an entity in respect of which my clients can't participate, and taken the profits and HIS HONOUR: But what's the answer to the proposition for the ownership - the capital ownership structures of both are the same. MR STREET: No, they're not, your Honour. There's a difference between a corporate entity and an individual, and that difference is really - what your Honour has said in relation to the derivative judgment certainly was perfectly proper, referable to a derivative action. But it has no substance in relation to the right to bring a separate suit. HIS HONOUR: But I don't quite understand what the - I struggle to understand what the loss is. I struggle to understand what the problem is. MR STREET: Well, your Honour, because the beneficiary under the - we're talking about section E now, your Honour. I understand what your Honour is now referring to. Section E. You have a beneficiary in respect of an agreement. The trustee hasn't distributed to that beneficiary. And there's a proffer of - I think it's in paragraph 146 - by Bruce McAdam to make good what distributions may have been made to him, which is why there's then - there's an express reference to him. So, your Honour, in our respectful submission, it cannot be the case - and we're dealing with section E if we're moving to this - that a beneficiary is deprived of being able to bring suit against a trustee in respect of a trustee's failures. And the allegations that are advanced are allegations referable to what are, in essence, the oppressive conduct and the steps that might then be taken and as your Honour well knows in relation to, you know, the affairs of a company, as defined in the, you know, Corporations Act, the trust activities are part of the affairs in respect of which oppression can operate. And I think that's - is it section 53. I think it's section 53, your Honour. If your Honour can give me one moment just to pick up the reference in the Corporations Act. Nature of affairs. Yes. Section 53 in relation to work done by section 232 and 233 makes crystal clear that matters of trust are picked up within the scope of oppression. And so, your Honour, there is no scope to say that section E is somehow outside the scope of capacity to bring to it the case for oppression and nor is there any substance in saying that this has in fact been ruled on and is in the ..... of what your Honour determined. What your Honour dealt with - it was the derivative suit. Your Honour did not deal with the trust action. HIS HONOUR: I am still mystified, though. I am still mystified as to how exchanging equal proportions and admittedly different legal structures brings about any problem. I just don't get it. MR STREET: Well, your Honour, I guess if one were to tear away the principles in relation to identity of beneficiaries and separation between corporate vehicles and the like, your Honour, there may be circumstances where one can say there are small differences. There may be a significant difference. HIS HONOUR: I can understand why the change in the legal structure may give rise to nominal claims. I can understand that. MR STREET: But, your Honour HIS HONOUR: But what I'm trying to understand is why MR STREET: Merim has received nothing. HIS HONOUR: it ..... when it looks at - when looking at the money. MR STREET: Well, your Honour, it would be nice if companies were always treated in this way in terms of being the same as the individuals behind them, but they're not. HIS HONOUR: At the last hearing, you hinted that there may be tax issues related to the share structure, and that's a proposition which I can very readily understand, that there may well be capital gains tax and stamp duty implications involved in transferring the structures across. That's a kind of loss which I can readily understand. But stripped of something like that - as you stand there today, all you're saying to me is that there was a switch in the structure. MR STREET: But, your Honour, switching HIS HONOUR: And beyond giving you peppercorn rent and perhaps a declaration that there was a breach of trust - peppercorn damages and perhaps a breach of trust, I just don't quite understand why we're all here. MR STREET: But, your Honour, unless the trust is, in essence, a sham, and the legal entities are to be disregarded, and the rights of the beneficiaries, a corporate entity, are to be treated in some way as HIS HONOUR: No. Let's assume that there's a breach established. Then one gets to the end of the game which is: what's the quantification of the loss? And there it seems to me that the fact that the ownership structure is exactly the same on both sides of the wall points you as heading rather rapidly in the direction of a loss which either is zero or within $10 of zero. MR STREET: Not at all, your Honour. HIS HONOUR: Why not? MR STREET: Well, your Honour, the shoes of the company are different from Bruce McAdam. HIS HONOUR: Quite. 16 I have set out this lengthy exchange to indicate why it is that I still do not understand what the point of the proposed suit is. 17 In that circumstance, I do not think there would be any utility in permitting a case to be brought by Merim against JTI in the form of Section E. 18 The second difficulty confronted by the pleading is contained in Section C and concerns the claim by Merim for breach of the antecedent merger agreement. The problem has both a front end, a midsection and a rear end. The front end is that Merim did not exist at the time that the merger agreement was reached; the midsection is that Merim's trustee for the purpose of the merged business, JTI, had not yet been incorporated; the rear end is that one of the parties it seeks to sue, JQFS, did not exist either. These entities did not exist for the same reason, namely, because they were vehicles contemplated to come into existence as the means by which the merged business was to be held. 19 The problem then is one of chronology. The pleader has invoked in all three cases the same solution, which is the doctrine of ratification. 20 The ratification by JTI and Merim is alleged at paragraphs 47 to 48 and by JQFS at paragraph 52. They are as follows: 47. In the period November to December 2004, the McAdam interests, the Hurrell interests and the Board interests agreed that their (or their nominee's) respective share of their combined share in the Merged Business would be in the proportions 61.66% (to the Hurrell interests), 33.34% (to the McAdam interests) and 5% (to the Board interests). Particulars (i) The agreement was partly oral and partly by conduct. (ii) Insofar as it was oral, tThe agreement was made in discussions in November and December 2004 between Marcus McAdam, Mr. Board and Mr. Hurrell. (iii) Insofar as it was by conduct, the conduct was the formation of JTI, and the nomination by the McAdam interests of Merim, by the Hurrell interests of Vakofa and by the Board interests of Grayen, to hold an interest in JTI and the JFA Unit Trust in proportion to their respective interests. 48. In the period from December 2004 to early 2005, and for the purposes of giving effect to the Merger Agreement and the agreement alleged in paragraph 47 above: (a) the McAdam interests caused the formation of Merim, which was nominated by the McAdam interests for the purposes of the agreement in paragraph 47 47 above; (b) (in December 2004) Grayen, Vakofa and Merim (as shareholders) caused the incorporation of JTI (then known as Jax Franchising Australia Pty Limited) and subscribed for shares in JTI; (c) (on 4 January 2005) JTI became the owner of 65% of the units in the JQFS Unit Trust; (d) (on about 19 April 2005) JFS nominated JTI as the shareholder (as defined in the Merger Agreement) which nomination JTI accepted, and JFS transferred its shares in JQFS to JTI which JTI received as assignee; and (e) (on about 19 April 2005) JTI became the owner of 65% of the shares in JQFS. Accordingly , at all material times from about 19 April 2005, JQFS is and was a subsidiary of and a related body corporate of JTI; (f) JTI became the trustee of the Jax Franchising Australia Unit Trust ("JFA Unit Trust"); and (g) JTI issued units the JFA Unit Trust to Merim, Grayen and Vakofa who subscribed for those units; and, in taking the steps in: (h) subparagraphs (c) to (g) above, JTI ratified the Merger Agreement and the agreement alleged in paragraph 47 above; (i) subparagraphs (b) and (g) above, Merim ratified the Merger Agreement and the agreement alleged in paragraph 47 above, or alternatively the agreement alleged in paragraph 47 only. Particulars (i) Jax Franchising Australia Unit Trust deed dated 4 January 2005, between Vakofa (as trustee for the Hurrell Investment Trust), Merim (as trustee for the Merim Trust), Grayen (as trustee for the Board Family Trust), as subscribers, and JTI, as trustee. (ii) The plaintiffs rely on the terms of the JFA Unit Trust deed as if pleaded fully herein. (iii) JTI received shares in JQFS and the units in the JQFS Unit Trust as trustee of the JFA Unit Trust. See Schedule 1 to the trust deed. (iv) Corporations Act, s. 131. … 52 In the period from early 2005 and in any event from 1 April 2005, and at all material times thereafter, JQFS as trustee for the JQFS Unit Trust owned and operated the Merged Business and, to that end: (a) at some time in about 2005: (i) JQFS further agreed with JQL to pay to it 2.5% of the annual gross turnover of JQFS as a licence fee for use of the Jax and Quickfit trademarks; and (ii) further agreed with JFS and Quickfit to pay to them $300,000 per annum in royalty fees for use of their franchising systems, divided between them in the proportion 65% and 35% respectively. (b) paid or accrued the obligation to pay to JQL 2.5% of the annual gross turnover of JQFS as a licence fee for use of the Jax and Quickfit trademarks; (c) paid or accrued the obligation to pay to JFS and Quickfit $300,000 per annum in royalty fees for use of their franchising systems, in the proportion 65% and 35% respectively; (d) issued new franchise agreements to former franchisees of JFS and Quickfit in its own name and under the 'Jax Quickfit' brand; (e) developed new franchise business pursuant to franchise agreements entered into in its own name and under the 'Jax Quickfit' brand' (f) developed the Jax Quickfit brand name including all goodwill associated with the name; (g) took over the employment of all necessary former JFS and Quickfit staff and employed new staff to operate the Merged Business; (h) entered into all supply agreements with tyre manufacturers and other product suppliers necessary to operate the Merged Business; (i) entered into all rebate agreements with tyre manufacturers necessary to operate the merged business; (j) subsidised losses incurred by JQR and JQP by advancing funds to them as necessary to operate the Merged Business; and (k) operated any and all those residual franchise agreements remaining between franchisees sand JFS and those franchise agreements between franchisees and Quickfit on behalf of JFS and Quickfit. and, in: (l) agreeing to become the trustee of the JQFS Unit Trust; (m) issuing units in the JQFS Unit Trust to JTI and Quickfit; (n) entering into the agreements alleged in subparagraph (a) above; and (o) engaging in the conduct alleged in subparagraphs (a) to (k) above, JQFS ratified the Merger Agreement. Particulars (i) As to (a), the agreement was made in discussions between the representatives of Quickfit and Marcus McAdam (for the McAdam interests), Mr. Hurrell (for the Hurrell interests) and Mr Board (for the Board interests)) [sic] and the board of JQFS in 2005, and implemented by appropriate entries in the accounts of those companies in the period to at least October 2009 as approved by the relevant boards. (ii) Corporations Act 2001, section 131. 21 The pleading invokes two concepts: ratification at common law and ratification under s 131 of the Corporations Act 2001 (Cth). At common law, it was not possible for a party to ratify acts of an alleged agent which occurred prior to the party's existence: Kelner v Baxter (1866) LR 2 CP 174; North Sydney Investment and Tramway Company Limited v Higgins [1899] AC 263 at 271-272 per Lord Davey; Natal Land and Colonization Co Ltd v Pauline Colliery and Development Syndicate Ltd [1904] AC 120 at 126 per Lord Davey; Dudley Buildings Pty Ltd v Rose (1933) 49 CLR 84 at 94 per Starke J; Vickery v Woods (1952) 85 CLR 336 at 348 per Williams J. 22 Upon the introduction of the uniform companies laws in 1981 (including the Companies Act 1981 (Cth) and the Companies (New South Wales) Code 1981 (NSW)), the common law position was changed in relation to pre-incorporation contracts by s 81 of the Companies Code. This followed the Victoria Law Reform Commissioner's eighth report, Pre-Incorporation Contracts, Report No 8 [1979] VicLRCmr 8. The present version of that provision is now found in s 131 of the Corporations Act, which is as follows: 131 Contracts before registration (1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time - within a reasonable time after the contract is entered into. (2) The person is liable to pay damages to each other party to the pre‑registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time - within a reasonable time after the contract is entered into. The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all. (3) If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre‑registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following: (a) pay all or part of the damages that the person is liable to pay; (b) transfer property that the company received because of the contract to a party to the contract; (c) pay an amount to a party to the contract. (4) If the company ratifies the pre - registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay. 23 What s 131 requires is a person entering into, or purporting to enter into, a contract on behalf of or for the benefit of the yet-to-be corporation. This, in turn, requires that the person said to have initially entered into the contract should have indicated that it was entering into the contract not for itself but for the unincorporated company. Speaking, it is true, of common law ratification, Lord Macnaghten thought in Keighley, Maxsted & Co v Durant [1901] AC 240 at 247 that ratification was 'not to be created by, or founded upon, undisclosed intentions': cf. Commissioner of State Revenue v Viewbank Properties (2004) 55 ATR 501; [2004] VSC 127 at [50]. In the latter case, Nettle J thought that s 131 (of the Corporations Law) required the party initially entering into the contract to act 'openly and avowedly on behalf of another', citing Keighley. I do not need to decide whether s 131 goes so far, although I would note that it seems ratification may be express or implied: Aztech v Atlanta Aerospace (Woy Woy) (2005) 55 ACSR 1; [2005] NSWCA 319 at [81]-[82] per Basten JA, Handley JA agreeing. I am not sure that Nettle J's reference to acting 'openly and avowedly' for another necessarily involves a correct reading of Keighley at 247, although I do not need to decide this. 24 I do not need to decide those matters because the pleading manifestly fails to identify the party who entered into the merger agreement on behalf of the putative ratifiers. An essential prerequisite to the enlivenment of s 131 is the existence of a person entering into a contract on behalf of the company. There are a total of eleven entities alleged to be parties to the merger agreement, but since the pleading does not allege that any of them entered the agreement on behalf of Merim, JTI or JQFS, s 131 cannot be engaged. In that circumstance, the ratification argument based on s 131 cannot succeed. The claim based on the common law has been untenable since the year after the cessation of hostilities in the American Civil War. In short, as pleaded, the ratification point is hopeless. 25 It will follow that leave ought not to be granted to pursue the claims in Section C based on ratification.

B J McAdam Pty Limited v Jax Tyres Pty Limited

At a glance

Court

Decision date

Before

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Judgment (7 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (8)

Cited By (7)