Plaintiffs v Defendants

Plaintiffs v Defendants - [2012] VSC 156 - VSC 2012 case summary — Zoe

[130]

106 An executive team meeting was held on 31 August 2009 when Mr Drapac's proposal was discussed. According to Mr Wain and Mr Murchie, they told Mr Drapac that the proposal he had put forward was not a workable business plan. There was discussion about the entitlements of the employees - Mr Drapac referred to them as conditional or provisional until a new agreement was worked out. Mr Wain said that the entitlements had never been provisional. Mr Drapac wanted to meet separately with each of the key employees, but they wanted to discuss things as a group. Mr Drapac's view was that he had started the Drapac Group ten years before any of them had been employed in the business; they had no experience and skill in property development or funds management when they started but he trained them and gave them opportunities to develop themselves professionally; they did not make any financial contribution to the Drapac Group, but were employees who received salaries and bonuses for each profitable project; he was prepared to give them an interest in the Drapac Group on the basis that they commit to work for and grow it over a period of ten years, after which they would get the percentage interest in the Drapac Group as agreed in the final discussion paper of 2008; he had trusted them and allocated the units and shares to them provisionally and had subsequently negotiated with them to resolve the differences between them as to what the equity participation scheme should provide in case of them leaving the Drapac Group before the expiry of the ten year period. He felt that they were only intent on realising the assets and moving on for their own benefit which was not the vision that he had. According to Mr Murchie, Mr Drapac told them that the problem with their model for going forward was that he would not have control. According to Mr Mercuri, there was discussion at this meeting about conditions or restrictions (concerning a restraint on Mr Wain and Mr Mercuri from dealing with existing clients of the Drapac Group for a period of time and their providing "deal flow" to Mr Drapac giving him an opportunity to inject equity at cost for a certain percentage of equity for any project going forward) that would be imposed if entitlements were paid out. The meeting ended in a stalemate.

[166]

138 The Drapac parties submitted that there was no evidence of any loan agreement underlying the book entries and that, in the absence of that evidence, the Court could not conclude that valuable consideration had been given for the shares and units. They relied on HCK China Investments Ltd v Solar Honest Ltd & Ors.[25] In that case, HCK entered into sale agreements for the purchase of shares from the Wah Nam Group of companies ("WNG") and parties friendly to WNG. HCK's nominee company (Eutopia) also entered into a sale agreement for the purchase of separate parcels of shares from Charmlink International Ltd and Wise Spencer Ltd (who were also friendly to WNG). HCK was to pay the net tangible asset value of the shares plus a 3% premium. The main sale agreements completed but the Eutopia sale agreement did not complete. There was then discussion about the preparation of a document to cover the amount owing to Charmlink and Wise and Spencer and the balance of an amount owed to WNG. WNG instructed a solicitor to draft an agreement to record the amount payable by HCK and to make it enforceable. The solicitor was told that 10 million shares were to be deposited by HCK as security for the payment and that Solar Honest was to act as a collection agent for the parties to whom the amount was owed. A document was prepared which recited that HCK was indebted to Solar Honest and that HCK had deposited with the solicitor (as escrow agent) a transfer form for 10 million shares in blank as to the transferee ("the Solar Honest document"). The document recorded that if the amount of the debt and interest was not paid within 45 days then the blank transfer form was to be delivered to Solar Honest "who shall be entitled to register such blank transfer form in its name" and to exercise its power of sale in respect of the shares to satisfy the debt. The moneys were not paid and the transfer form was provided to Solar Honest. The transfer form was completed by inserting the name of Solar Honest as transferee and inserting a consideration of $1.5 million. That figure was based on the last closing price for the shares. Solar Honest became the registered holder of the shares. HCK claimed that the shares were held on resulting trust for it because Solar Honest did not provide any monetary consideration for the transfer of shares to it. Hely J held that the Solar Honest document was not effective to create any debt or other obligation in HCK to Solar Honest and therefore, the transaction could not take effect by way of mortgage.[26] His Honour then turned to consider whether there was a resulting trust and looked at the share transfer for evidence of HCK's intentions. His Honour stated:

[345]

[A] limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to "quasi-partnerships" or "in substance partnerships" may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words "just and equitable" sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.[43]

[361]

These cases, properly considered, do not, in my view, place limitations on the kind of orders that I "consider[] appropriate in relation to the [CPS] company[ies]", having regard to the particular circumstances before me. The point that I have to consider was not dealt with in Kizquari or any of the other cases mentioned above. 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 which Young JA cited with approval in McEwen 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 (sic) 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.[54]

[citations omitted]

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Cases Cited (8)