McEwen v Combined Coast Cranes Pty Ltd

(5) As the Court is exercising Federal jurisdiction it thus cannot entertain anything that is not Federal jurisdiction. 40 The argument is quite misdirected. It gains no support from Justice Allsop's paper. 41 All that exercising Federal jurisdiction means is that any appeal from any part of the case is to be dealt with as if it were wholly a Federal matter so that as the two cases I have just cited state, there can be no appeal to the Privy Council even before such appeals were generally abolished. Furthermore, the provisions of ss 79 and 80 of the Judiciary Act 1903 need to be taken into account. However, no-one on either side has raised any significance that those sections would have for the current litigation. 42 It should be observed that in cases such as the Philip Morris case the Supreme Court did in fact deal with matters of contract and tort and purely State questions and the High Court threw no doubt at all as to its ability to have dealt with those questions. 43 Accordingly I reject this preliminary submission. 44 It is now necessary to deal with the principal matter raised for decision, namely, the applicability of ss 232 to 233 of the Corporations Act on the facts of this case. 45 At first blush, this would seem to be a plain case for the application of the section. The five entered into the deal on the basis that there would be a service company functioning in all their interests and in which they would all have an equal share, yet today the benefits of the venture are wholly devoted to the interests of Trevor and Terry. 46 The matter is not so simply solved. The sections are directed to the conduct of a company's affairs. 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: Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606; Re Polyresins Pty Ltd (1998) 145 FLR 141. In that latter case, Chesterman J said that the Court could not in an application under these sections deal with equitable interests conferred by a trust of which the company is trustee, see page 156. 47 However, in the instant case, the statement of claim primarily seeks equitable damages in contract, breach of trust or ss 232 to 233 of the Corporations Act. 48 Mr Cohen says that it is to be noted that the proceedings were commenced by originating process under the Corporations Act rules and that the primary relief sought was under ss 232 to 233 of the Corporations Act. 49 It seems to me, however, that the peculiar pleadings in this case and the way it was presented make it open to the Court to deal with the questions involving contract and trust. 50 So far as contract is concerned, Dave relies on the statements that were made before the trust was set up. I think the answer to this claim is fairly simple. Either the words spoken were not spoken with any intention to create a contract, or alternatively, they were consummated in the trust deed which was eventually drawn up. This latter is more probably the case and this view is reinforced by the fact that there has never been any complaint as to the form of the trust deed. Rather, the claim has been that the legitimate expectations of Dave have not been fulfilled in either the Company or the trust. 51 Accordingly, it seems to me that there is no need to consider the case in contract further. 52 This leads me to the case of the trust. 53 Various breaches of trust are alleged including taking the use of all of the Company's property for personal use, breach of the pre-emption articles, failure to involve Dave in management and the distribution of work. 54 Of course there is the problem as to how far the directors of the trustee or how far Trevor and Terry could be personally liable if there was a liability in this connection. The stronger view appears to be that it is only in very rare circumstances that the directors of a trustee company being agents of the company are personally liable for the defaults; see eg Bath v Standard Land Co Ltd [1911] 1 Ch 618; Hurley v BGH Nominees Pty Ltd (1982) 1 ACLC 387; Re James [1949] SASR 143, my decision in Glandon Pty Ltd v Strata Consolidated Pty Ltd (No 3) - 4 June 1990, unreported, p 58 and the paper by Ford and Hardingham "Trading Trusts: Rights and Liabilities of Beneficiaries" in Finn's Equity and Commercial Relationships (Law Book Company, Sydney, 1987) 48 at 60 and following. 55 As to the matter of the transfer of Alan's and Ron's units to Trevor and Terry contrary to the pre-emption provisions of the trust deed and the articles of association, one does not have to focus on the value of the units at that time because both Alan and Ron seem satisfied with the $10,000 they received for their one share and 20 units. However, Dave was entitled to be offered the units and he was entitled to be allotted his fair share of the units. He thus should have acquired five of Alan's units and six of Ron's for which he would have had to pay $2,500 and $3,333 respectively. These monies would have been paid out in September 1999 and July 2000 respectively so that there would need to be three or two years' interest notionally added to the $5,833 which, if one took the average court rate for two and a half years would be $1,458. 56 Accordingly, the only time Dave would suffer damage is if the units as at the date of breach were worth more than $10,000 for 20. As I have said, the factors favouring this are that today they would appear to be more than this. However, in 1999 and 2000 even though Ron and Alan were close relations of Terry's, there is very little to suggest that the transactions were not an arm's length transaction. 57 Accordingly, it seems to me that the most that, on the evidence that I have, Dave would be entitled to receive by way of damages if he was entitled to anything, would be a nominal $100. 58 There is then the matter of legitimate expectation within the trust. Where a company is concerned, questions of legitimate expectation (though this may be an unfortunate phrase), are entitled to be considered; see eg Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 and on appeal, (2001) 37 ACSR 672. Those legitimate expectations may be found either in an understanding reached when the enterprise was set up, or by a process of inference. 59 However, in the case of a trust, the position is not at all clear. There is nothing in the trust deed itself dealing with the management of the trust or of the rights, if any, of the unit holders to be given any work by the trust or to be involved in the trust's day to day activities. 60 There is probably no reason in principle why the "legitimate expectation" learning in connection with oppression in companies should not apply in the case of trusts because equity is flexible enough to deal with unconscionable conduct in any appropriate way. If conduct is unconscionable by the standards of a statute in the Corporations Act, there is a lot to be said for the proposition that it would be unconscionable as a matter of general equity; see eg the remarks of Spigelman CJ in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, 679. 61 However, it must be remembered that when dealing with so-called legitimate expectation, "One cannot infer the right to have a status quo continue merely from the fact that it is a status quo. Something more is needed in order to establish a right or expectation that it would continue. That will usually take the form of an agreement or understanding between parties or an expectation induced by the conduct of the business." (Fexuto op cit at 683). 62 In the present case there was insufficient evidence of any contract and any understanding was of a fairly nebulous kind. What is more, it must be remembered that any such understanding that one is to be involved in the management of a trading trust or company or other enterprise is that that is only to continue so long as that right is compatible with the general operation of the enterprise. 63 There is an amount of evidence in the instant case, some of which at least must be accepted that Dave was a disruptive influence at meetings. There is also some evidence that his activities with Energy Australia were leading to the view amongst the other members of the five, or those that remained, that he was getting the best of both worlds. He was a competitor with respect to the work of Energy Australia; he was letting his crane out on preferred jobs which could have been done by a smaller crane; and that it was not appropriate that he should also participate in the trust. 64 In any event, the failure, if it be a failure, is one which is hard to remedy with equitable damages or compensation. If a person sees that he or she is being starved out of an enterprise then the prime remedy is injunction. The alternate remedy is at that stage to elect to get out of the enterprise, and as I have already said this is possible in the instant case by giving a notice of being desirous of transferring the units. It is rather difficult both to remain in the enterprise, receive equitable compensation and then allow the conduct to continue whilst still a member. 65 It seems to me that the real position is that the fruits of any oppressive conduct will be reflected in the capital value of the units so that again the remedy is that at any time to put into play the notice of transfer procedure. I realise this is only effective when there are willing buyers, but that would appear to be so in the instant case. 66 As I remarked in Kizquari, where a person has the right to offer his or her units in a trust to the other members, prima facie, if the value of the trust property is not alleged to have been affected by the activities of the defendants, putting in train the pre-emption procedure will normally give the plaintiff sufficient relief, at least if there are buyers for his units. In the instant case, Trevor and Terry have made it quite clear that they are prepared to purchase Dave's units. They put the purchase price at $10,000 which Dave considers is far too little. Trevor's answer that he would not take $10,000 for his interest in Central Coast Cranes tends to confirm this as being a correct view. 67 There is no clear evidence as to the value of the assets held in the Company's name. However it would appear that its business has been successful. It purchased the goodwill of the business for $40,000 six years ago and with inflation and accretions to the goodwill one would expect the value of all the units to be at least $50,000 or $10,000 for 20. However, how much more is impossible for me to say. 68 Thus it would seem that the offer to purchase is pitched at too low a figure. 69 Clause 5.11 of the trust deed provides that a unit holder proposing to realise his units shall give a transfer notice and specify what he considers to be the fair value. However, under clause 5.11(9), the proposed purchaser can require the trustees to have the fair value fixed by an independent valuer nominated by the chairman for the time being of the NSW branch of the Australian Institute of Chartered Accountants, or in certain cases, the President of the NSW Law Society. The valuer is to value the assets of the trust fund and make a valuation of the units on such basis as he considers appropriate. 70 Accordingly, as any increased capital value because of the activities of the defendant will be reflected in the value of the units, Dave has not suffered any damage to the value of his units in the trust. 71 Accordingly, the only damage for which Dave could get equitable compensation, assuming he can get equitable compensation at all, is for any distribution of income that may have been made unfairly to Trevor and/or Terry. However, there is absolutely no evidence of any such distributions. 72 It is useful to compare the current situation with an application to wind up under the "just and equitable" ground. Ordinarily, if there is a fair machinery for the plaintiff to exit the company by being bought out, and winding up is opposed, no winding up order will be made; see eg In re Wondoflex Textiles Pty Ltd [1951] VLR 458, 465. 73 Having taken this view, it is unnecessary to consider whether the pleadings in this case support the claim in any event. 74 The appropriate course for Dave to take is to elect whether he will stay with or exit the Company. If the latter election is made, he will need to put in place the buy-out provisions to recover the current value of his investment. 75 Accordingly, the plaintiffs' claim virtually fails. The plaintiffs are, at least theoretically, entitled to a small amount of nominal damages. Furthermore the defendants' conduct is clearly in breach of trust to some extent and we have the situation where, without compensation, the controllers of the first defendant company, Trevor and Terry, have effectively excluded the first plaintiff from participation in everything except dividends and retaining the capital value of his units. 76 I believe the appropriate order to make is simply to dismiss the suit but make no order as to costs. However, because this aspect of the matter has not been argued, I will merely publish my reasons and give liberty to the parties to approach my Associate in the new term if they wish to have the matter listed for short argument as to what are the appropriate orders. Failing any such approach by 4 pm on 11 February 2003, the orders may be taken out as I have just noted them.

At a glance

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Judgment (10 paragraphs)

Parties

Cases Cited (4)