(2009) 74 ACSR 282
Wayde v NSW Rugby League Limited (1985) 180 CLR 459
Judgment (21 paragraphs)
[1]
al Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63; (1991) 9 ACLC 1372
Joint v Stephens [2008] VSCA 210; (2008) 26 ACLC 1467
LPD Holdings (Aust) Pty Ltd v Phillips [2013] QSC 225; (2013) 281 FLR 227
Martis Cork & Rajan v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136
Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133
Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343
Patterson v Humfrey [2014] WASC 446; (2014) 291 FLR 246
Re A Company; Ex parte Shooter (No 2) [1991] BCLC 267
Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184
Re Enterprise Gold Mines NL (1991) 9 ACLC 168
Re Five Minute Car Wash Service Ltd [1966] 1 WLR 745
Re Quest Exploration Pty Limited (1992) 6 ACSR 659
United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWCA 910; (2003) 47 ACSR 514
Vigliaroni & Ors v CPS Investment Holdings Pty Ltd [2009] VSC 428; (2009) 74 ACSR 282
Wayde v NSW Rugby League Limited (1985) 180 CLR 459; [1985] HCA 68
Texts Cited: Hardingham and Baxt, Discretionary Trusts (2nd ed, 1984, Butterworths)
Category: Principal judgment
Parties: John Tzavaras (Appellant)
Tzavaras & Sons Pty Ltd (First Respondent)
William Tzavaras (Second Respondent)
Peter Tzavaras (Third Respondent)
Representation: Counsel:
CRC Newlinds SC / J Baird (Appellant)
JC Kelly SC / L Katsinas (Respondents)
[2]
Solicitors:
Carneys Lawyers (Appellant)
Antonenas Legal Pty Ltd (Respondents)
File Number(s): 2022/119549
Decision under appeal Court or tribunal: Supreme Court
Jurisdiction: Equity
Citation: In the matter of Tzavaras & Sons Pty Ltd [2022] NSWSC 359
Date of Decision: 5 April 2022
Before: Ward CJ in Eq
File Number(s): 2020/251170
[3]
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[4]
HEADNOTE
[This headnote is not to be read as part of the judgment]
John Tzavaras (the appellant) appeals against a decision of the Supreme Court in which he unsuccessfully sought orders for the winding up of the first respondent, his family's company Tzavaras & Sons Pty Ltd (the Company).
The Company, established in 1985, has issued share capital held in equal parts by the appellant, his two brothers, and their mother. The three brothers are the Company's directors. The Company is trustee of a family trust, which is discretionary in nature, and in that role is the registered proprietor of two properties whose rental income funds the trust. In mid-2012 the appellant informed his brothers and the Company and trust's accountant that he wished to sever ties with the Company, though he remained a director. He claims that his personal relationship with his brothers broke down at that time and is irretrievable. Since at least 2015, a company of which one of the brothers, Bill Tzavaras, is the sole director, secretary and shareholder, has occupied the lower level of one of these properties rent free.
In the primary proceedings, the appellant sought a winding up of the Company or, alternatively, an order requiring his brothers to buy his Company share at a price to be determined by the Court. He advanced a variety of particulars to establish oppressive conduct, foregrounding his exclusion, especially since 2012, from the Company's management, business and affairs (which was of far less significance in the appeal). The primary judge determined there was no oppressive conduct and, even if there was, the winding up of the Company would be inappropriate relief. In the appeal, the oppressive conduct claimed related to drawdowns on the Company's shareholders' loan account, the distribution of family trust profits for the year ending June 2020, allowing Bill Tzavaras' company to occupy the lower level of the trust property rent free, and a loan to a trust of which his company is the trustee, and he is the sole beneficiary.
On appeal, the issues were:
(i) Whether the primary judge erred in failing to find oppressive conduct;
(ii) Whether the primary judge erred in failing to consider that the cumulative effect of the pleaded particulars in (i) amounted to oppressive conduct;
(iii) Whether the primary judge erred in not allowing an amendment to the originating process which sought to require the appellant's brothers to purchase his Company share;
(iv) Whether the primary judge should have ordered, by reason of the oppressive conduct, that the Company should be wound up and a receiver appointed to realise and distribute the family trust's assets;
(v) Whether, in the alternative, the primary judge erred in failing to refer the matter to a referee to determine the value of the appellant's interest in the family trust and in failing to order the appellant's interest be brought by his brothers; and
(vi) Whether further, or in the alternative, the primary judge erred in failing to find an irremediable breakdown in the appellant's relationship with his brothers, and on the just and equitable ground the Company should be wound up and a receiver should be appointed to the family trust.
Leave is sought to amend with the additional issues:
(iii(A)) Whether the primary judge should have ordered the appellant's brothers to purchase his share in the Company at a price of one quarter of the net assets' value of the Company and family trust; and
(iii(B)) Whether, in the alternative, the primary judge should have ordered the appellant's Company share be acquired by his brothers at a price to be determined on remitter or alternatively by a referee.
The Court held, dismissing the application for leave to amend, allowing the appeal in part:
As to issues (iii) and (v):
(1) No error has been identified in the primary judge's reasoning: [51]. The appellant has failed to plead or particularise the nature of his interest in the family trust such that a meaningful determination of his interest could otherwise be made: [52]. The failure of (iii) is fatal to (v); the nexus between his interest in the trust and the Court's ability to value a buy out relied on issue (iii)'s success: [55].
As to proposed grounds (iii(A)) and (iii(B)):
(2) Leave is refused to raise these proposed grounds because of the dismissal of issues (iii) and (v): [56]-[57].
As to issues (i) and (ii):
(3) Oppressive conduct has only been established in relation to Bill Tzavaras' company's occupation of one of the Company's properties rent free: [132].
As to issue (iv):
(4) The partial finding of oppressive conduct does not warrant the winding up of the Company, and the granting of alternative relief is inapposite: [142]-[148]. It is suitable instead to direct that the Company as trustee not allow the beneficiaries to use the property for commercial purposes without paying commercial rent: [142].
As to issue (vi):
(5) The determination of this issue, the application of which (and evidence supporting it) significantly overlaps with issue (iv), the appellant's partial success in establishing oppressive conduct is insufficient to justify winding up on the just and equitable ground: [152].
[5]
JUDGMENT
THE COURT: This is an appeal from orders and a judgment dated 5 April 2022 of Ward CJ in Eq (as her Honour then was): In the matter of Tzavaras & Sons Pty Ltd [2022] NSWSC 359 (the "primary judgment" or "PJ"). The proceedings relate to a family dispute concerning the management of a family company and the distribution/management of the assets of the company and a related family trust.
John Tzavaras, William (known as Bill) Tzavaras and Peter Tzavaras are the three sons of Giannoula Tzavaras (known as Jenny) and her husband, the late Nicholas Tzavaras (known as Nick). Without intending any disrespect, we will refer to the members of the Tzavaras family by their first names.
Tzavaras & Sons Pty Ltd ("the Company") was established by Nick in March 1985. The issued share capital of the Company is comprised of four $1.00 ordinary shares. John, Bill, Peter and Jenny each hold one share. Since mid-1985 Bill and Peter have been directors of the Company. John was appointed as a director in November 1994. Since mid-1985, Bill has been the secretary of the Company. His wife, Kylie, is, and was at the relevant times, the Company's bookkeeper. During the period 1997 to 2018 Mr George Ferizis was the accountant for the Company, the Family Trust and the family's automotive mechanic business. When the proceedings were commenced in August 2020, Mr Ferizis was John's accountant and swore two affidavits in his case.
The Company is the trustee of a discretionary family trust, the Nicholas Tzavaras Family Trust ("the Family Trust"). The Company, in its role as trustee of the Family Trust, is the registered proprietor of two properties, including a commercial property which will be referred to as the Northmead Property. That property was valued as at 10 December 2020 at approximately $7,600,000 and was subject to a mortgage which had a debit balance of $2,394,809 as at 30 June 2020. The Company's other property (the "Surfers Paradise Unit") was valued at approximately $700,000.
Prior to 2013, the Company operated the business of an automotive mechanics workshop and repair business from the Northmead Property. Each of Nick's three sons worked at various times as a mechanic in the business. The Company has not traded or conducted any business since early 2013. The Family Trust's primary source of income is rental income it receives both from the Northmead Property and the Surfers Paradise unit.
[6]
The primary judgment summarised
It is desirable first to outline the primary judge's reasons for rejecting proposed amendments to the originating process (which are the subject of grounds 3 and 5 of the appeal) before summarising her Honour's reasons for rejecting John's allegations of oppressive conduct and his claim for relief on the just and equitable ground.
[7]
Amendments to originating process
Relevantly, John sought leave below to amend the originating process so as to add:
1. towards the end of prayer 3 (which sought an order that Bill and/or Peter purchase John's share in the Company), the words "including his interest in the Nicholas Tzavaras Family Trust"; and
2. a claim for winding up on the just and equitable ground under s 461(1)(k) of the Corporations Act.
The defendants below opposed the proposed amendment to prayer 3 on the basis that there was no proper identification of the nature of John's "interest" in the Family Trust and opposed the alternative basis for winding up on the basis that it was brought at a late stage and there was no evidence nor pleadings. As the Family Trust is a discretionary trust, the defendants pointed out that John merely had a contingent future interest and no proprietary interest, and that further there was no evidence valuing that contingent future interest. The primary judge deferred ruling on the amendment application pending provision of an amended draft pleading with proper particulars. Although her Honour granted leave to add the just and equitable ground claim, she said that leave to amend prayer 3 would not be granted unless John made clear the basis upon which he sought that amendment by appropriate amendments to the statement of claim.
A proposed amended statement of claim was circulated as directed by the primary judge, but significantly it did not plead or particularise John's claimed interest in the Family Trust.
John's failure to particularise this interest and the lack of evidence of the value of a contingent beneficiary under the discretionary Family Trust were both discussed at the beginning of second day of the hearing. Counsel for the defendants emphasised that the existing valuation evidence did not purport to value John's interest in the Family Trust. The primary judge noted the distinction between a valuation of the Company as trustee of the Family Trust, as opposed to a valuation of John's contingent interest in the Family Trust. In refusing the proposed amendment to prayer 3, her Honour said:
… There is a limit to the amount that you are able to patch up on the second day of hearing. If you have not pleaded in the amended statement of claim what this interest is and I can't see in the valuation that the particular interest of the first defendant as a contingent beneficiary under a discretionary family trust has been valued, as opposed to the value of the company as trustee for the family trust, then I'm not going to allow the matter to go off the rails at this stage.
[8]
Findings as to oppression and just and equitable grounds
It is important to re-emphasise that, in support of his claim of oppressive conduct in the proceeding below, John relied on many matters, some of which are now not pursued on appeal. As the primary judge noted at PJ[104], the principal basis for John's allegation of oppression was his claim that, since his father Nick died in 2001, but particularly since 2012, he had been excluded by Bill and Peter from the management, business and affairs of the Company which he says were exclusively managed by Bill and Kylie. This complaint assumed far less significance in the appeal and was effectively only raised in support of other complaints of oppression.
At trial, John's oppression case also raised allegations of Company finances being misused when $825,400.00 was lost through an alleged embezzlement in a failed attempt to buy a trucking business for cash. That complaint, which was rejected by the primary judge, is not pursued on appeal.
John also complained that Bill and Peter had occupied the Surfers Paradise Unit without paying any rent to the Company. This complaint was rejected by the primary judge and it too is not pursued on appeal.
The focus of John's complaints of oppressive conduct on appeal were significantly refined compared with the conduct of his case below.
The primary judge found that John's conduct in mid-2012 in severing his ties with the Company business made it clear that he had no wish to be involved in the management of the Company. Accordingly, her Honour reasoned that it was not oppressive for the directors of the Company not to involve him in the day-to-day business or annual meetings of the Company. John was apprised of matters on which his consent was required but was otherwise "left alone". At PJ[229] the primary judge found that it was unreasonable in those circumstances for John to seek a winding up of the Company because of the failure of the remaining directors to involve him in management. This particular finding is not challenged on appeal.
In the event that that conclusion was wrong, the primary judge added at PJ[230] that, if that conduct was oppressive, the appropriate relief would not be to wind up the Company. Instead, there should be a direction that John be provided with notice of future meetings of the Company and be provided with Company material which he claimed he had not received in the past years.
[9]
The appeal
As originally filed, the notice of appeal contained six grounds of appeal. In brief, ground 1 claimed that the primary judge erred in failing to find that there was oppressive conduct. Adopting what appeared to be a scattergun approach, no less than 15 particulars were provided in support of that ground, some of which overlapped.
Ground 2 claimed that the primary judge erred in failing to consider that the cumulative effect of the pleaded particulars of oppressive conduct in ground 1 amounted to oppressive conduct.
Ground 3 challenged the primary judge's decision not to allow the proposed amendment to the originating process which sought to require Bill and Peter to purchase John's share in the Company, "including his interest in the Nicholas Tzavaras Family Trust" at a price to be determined by the Court.
Ground 4 claimed that the primary judge ought to have ordered that by reason of the pleaded oppressive conduct, the Company should be wound up and a receiver appointed to the Family Trust to realise its assets and distribute them in accordance with the Court's directions.
Ground 5, which was in the alternative, claimed that the primary judge erred in failing to refer the matter to a referee for determination of the amount which John's interest in the Family Trust should be valued at, and further, in not ordering that John's interest be bought by Bill and Peter.
Ground 6, which was stated to be further or in the alternative, claimed that the primary judge erred in failing to find that:
1. there was an irremediable breakdown in the relationship between John and Bill and Peter; and
2. accordingly, the Company ought to be wound up on the just and equitable ground and a receiver appointed to the Family Trust.
Notably, the notice of appeal as filed did not include a compulsory buy out order under s 233(1)(d) of the Corporations Act. Ultimately, that claim had not been pressed in the Court below (see PJ[3]).
John subsequently sought leave to amend the proposed relief in the notice of appeal by adding two new grounds of appeal. The first (ground 3A) claims that, under s 233(1)(d) of the Corporations Act, the primary judge should have ordered Bill and/or Peter to purchase John's share in the Company at the price of one quarter of the value of the net assets of the Company and the Family Trust, as determined by the valuation adopted below or such other price as determined by the Court, on condition that John relinquish his interest in the Family Trust.
[10]
Consideration and determination
It is convenient to determine the appeal by reference to the grounds and proposed grounds of appeal and the parties' submissions in relation to those matters. Some of the grounds will be grouped together. It is practical and efficient first to address grounds 3 and 5, which challenge the primary judge's ruling on the amendment application (see at [18] to [23] above).
[11]
Grounds 3 and 5 - Primary judge's refusal of amendment application
John accepted in his written submissions on the appeal that the joint valuation by Ms Bateman below had valued the Company by reference to its net assets (including the assets of the Family Trust) at $5,766,000. Ms Bateman had not sought separately to value John's interest in the Family Trust as a discretionary beneficiary. John said that the primary judge's refusal of the proposed amendment led him to abandon his claim for a buy out order and had limited his case to "an all or nothing winding up application".
John complained that the only reason given by the primary judge for refusing this amendment is that given at PJ[61], where her Honour accepted the respondents' contention that, since John was merely a discretionary beneficiary of the Family Trust with no proprietary interest, different expert evidence would be required if he was permitted belatedly to raise the issue of the value of his interest in the Family Trust. John criticised this reasoning on the following grounds.
First, John submitted that for the purpose of s 232 of the Corporations Act, the affairs of a company also include rights under any trust of which the company is trustee.
Secondly, John claimed that once the Court finds that the affairs of a company (including as trustee) have been conducted oppressively within the meaning of s 232 of the Corporations Act, that opens a gateway to the making of orders under s 233, which includes fixing a price for a compulsory buy out order. Fixing such a price is not a valuation exercise but is directed to redressing the relevant oppressive conduct. The price under a compulsory buy out order will not always reflect the price that might be obtained in the open market (citing inter alia Smith Martis Cork & Rajan v Benjamin Corporation Pty Ltd [2004] FCAFC 153; (2004) 207 ALR 136 ("Smith Martis Cork")).
Thirdly, John claimed that the primary judge erred in finding at PJ[257] that, if the matter had been referred to a referee to value John's interest as a prelude to a buy out order, "that seems unlikely to produce a substantial result for John (and he has eschewed a compulsory purchase order)". John noted that the "only prejudice" to the respondents would be the need to obtain another expert valuation report and that there was no need to obtain a separate valuation of the Family Trust because the valuation by Ms Bateman in the Court below included the value of the assets of the Family Trust. Thus John contended that it was "illusory" for Bill and Peter to have claimed that there was a need to obtain another expert valuation report. In any event, even if that were not the case, John argued that the matter could have been referred to another expert after judgment was delivered.
[12]
Whether John should have leave to add proposed grounds 3A and 3B of the notice of appeal
The nature of these proposed amendments are set out at [41] and [42] above. They are predicated on the proposition that the value of John's interest in the Family Trust either does not require any additional expert valuation evidence or, alternatively, the task of valuation could be achieved by a referral. Accordingly, the proposed amendments are closely linked with grounds 3 and 5 of the notice of appeal.
In our view, there is no utility in permitting John to rely upon either of these proposed grounds of appeal unless he succeeded on either or both grounds 3 and 5. For reasons given above, both those grounds have been rejected. Necessarily, therefore, John should not be given leave to rely on proposed grounds 3A and 3B.
[13]
Grounds 1 and 2 - Oppressive conduct
Both these grounds relate to John's claims of oppressive conduct under s 232(e) of the Corporations Act, the effect of which is to empower the Court to make an order under s 233 if the conduct of, inter alia, a company's affairs is "oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity".
As noted above, multiple particulars were provided in support of ground 1. It is unnecessary, however, to summarise all those particulars because, at the outset of the hearing of the appeal, Mr Newlinds SC (who appeared for John together with Mr Baird) sensibly reduced John's challenge to the primary judge's rejection of his oppressive conduct claims relating to the following four broad topics:
1. the drawdowns on the SLA;
2. the distribution of Family Trust profits in the financial year ending June 2020;
3. the loans to NACT; and
4. allowing Northmead Auto Centre to occupy the lower level of the Northmead Property rent free.
Although these four topics were also relied upon below, it is well to recall that the primary focus of the case that was run below was directed to John's claim that he had been excluded from the management of the Company's affairs and business, a claim which was rejected by the primary judge. On appeal, the burden of John's case shifted away from complaints of his exclusion from the Company to the four topics identified by Mr Newlinds SC.
At PJ[221], the primary judge referred to various authorities relating to s 232 of the Corporations Act and oppressive conduct, which her Honour summarised at PJ[222]:
Whether oppression is established is to be determined by reference to the nature of the business carried on by the company and the nature of the relations between participants, and "whether objectively in the eyes of the commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair" (see Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 per Young J, as his Honour then was, at 704). As Black J noted in In the matter of Computer Room Solutions [2021] NSWSC 845 (at [89]), each case must be considered on its own facts and circumstances, and by reference to the conduct as a whole.
The primary judge also acknowledged at PJ[223] the importance of the fact that the Company was a family company and performed a limited role as trustee of the Family Trust. Her Honour noted there that "a closely-held company or quasi-partnership has features that may form a species of oppression claims".
[14]
(1) Drawdowns on the SLA
John's pleaded claims regarding the SLA may be summarised as follows. First, by drawing down on the SLA during the financial years 2013 to 2020, Bill and/or Peter preferred their own interests to those of the Company and its members, including John, to the detriment of the Company and John, and conducted the affairs of the Company in a manner prejudicial to John.
Secondly, John did not receive any amount from the profits of the Family Trust during the financial years 2015 to 2020.
Thirdly, since about 2001 no dividend had been declared by the Company from its profits to any shareholders, including John.
Fourthly, by reason of this conduct, Bill and Peter preferred their own interests to those of the Company and its members, including John, and conducted the Company's affairs in a manner prejudicial to John and to his detriment.
Fifthly, John claimed that Bill and Peter were liable to account and pay to him his 25% share of the total amount drawn from the SLA during the relevant period ($1,125,527.00).
Finally, John pleaded that Bill and Peter's conduct was oppressive to, unfairly prejudicial to, and/or unfairly discriminatory against, John and that the conduct also meant that it was just and equitable that the Company be wound up.
The SLA is recorded in the books and financial records of the Family Trust. The financial records for the period 1 July 2012 to 30 June 2020 detail the debt which was owed by the Family Trust to the four co-owners of the SLA, namely John, Bill, Peter and Jenny (Jenny was diagnosed with dementia in 2010 and, at the time of the trial, she resided in a nursing home and was aged in her late eighties). The records reveal that the amount standing to the credit of the co-owners was reduced by an amount of $1,125,527 over that period. As at 30 June 2020, the SLA's balance was $209,370.02.
The evidence indicated that each of the four co-owners of the SLA was entitled to make drawings on it. As the primary judge found at PJ[19] the evidence was to the effect that the three sons (including John) were able to draw on funds from time to time by using the Company cheque book and that John himself had done this in the past prior to 2012 in order to pay for tools or other items for his own benefit.
John contended that Bill and Peter preferred their own interests to John's exclusion and that it was irrelevant that John had not objected to their conduct in drawing down on the SLA. He noted that as a result of their drawdowns he was "worse off financially by [$281,382] as a result of the joint debt being paid to the other co-owners of the debt without any notice being given to him at all" (that amount represents a quarter of the total of $1,125,527). John submitted that he had not waived or abandoned his joint entitlement to share in the SLA.
[15]
(2) Distribution of Family Trust profits
John argued that the primary judge erred in failing to find that the distribution of the Family Trust profits between 1 July 2015 and 30 June 2020 to the exclusion of John amounted to oppressive conduct.
At trial, John complained that no part of the net profits of the Family Trust for that period which totalled $1,316,683 was distributed to him or received by him. He acknowledged that for most of that period there were no net profits to distribute because the available tax losses were offset against the Family Trust's taxable income, nor was any dividend to shareholders declared by the Company. John also complained that, although there was an amount of $36,458.38 available for distribution to beneficiaries in the financial year ending 2020, the entire amount was distributed to NACT, which then lent that amount back to the Family Trust where it was recorded as a "beneficiary loan". NACT apparently received a tax benefit from this.
On appeal, it appeared that John no longer complained about the available tax losses arising from the financial years ending 30 June 2013 ($825,387) and 30 June 2014 ($325,308) being offset against the taxable income of the Family Trust in the financial years ending 30 June 2015 to 2020. Rather, his complaint focussed on the distribution of net profits from the Family Trust which accrued in the financial year ending 30 June 2020. As noted above, this involved the amount of $36,458.38, which was distributed to NACT (see the immediately preceding paragraph).
John contended that the primary judge failed to deal with his submission that the distribution of this amount to NACT amounted to oppressive conduct and a preferment of Bill's interests.
In oral submissions on the appeal, John claimed that this was a benefit conferred by Bill (as director of the Company) on himself (as the sole shareholder and director of NACT). John noted that even if it were permissible under the Trust Deed to do this, it remained the case of "Bill making a decision that obviously suits Bill and therefore is unfairly discriminatory against the others".
John also contended that the primary judge erred in not finding that Bill and Peter, as directors of the Company, failed to consider him as a discretionary beneficiary of the Family Trust when distributing the profits for the financial year ending 30 June 2020. John argued that the primary judge's approach at PJ[232] was in error as it misconceived the argument put below. John contended that his complaint was not that profits had been used to offset tax losses, but rather that John was treated unfairly.
[16]
(3) Loans to NACT
John contended that the primary judge failed to consider or give any reasons for not accepting his submission concerning the increase in the NACT loan account with the Family Trust from nil dollars (30 June 2013) to $593,760.64 (30 June 2020), when there was no evidence as to the capacity of NACT to repay the debt to the Family Trust or as to the authority of the directors of the Company to lend such an amount to a related entity without security. John submitted that this constituted oppressive conduct and amounted to preferment of Bill's interests.
The respondents say that this criticism of the primary judge is unjustified because it was not part of the pleaded case that there was no authority to lend without security or that NACT did not have the capacity to repay, and it was not put to the respondents below.
As to the pleading, the respondents' submission is correct. The "no authority, no security, no evidence of ability to repay" case was not pleaded in respect of the loans to NACT. The relevant pleading is at [19B] and [19C] of the amended statement of claim:
19B Further during the period 1 July 2014 to 30 June 20230 the loan account in the name of NACT in the books of the Trust increased from an amount of $nil to a debit amount of $593,760.64
…
19C By the conduct referred to in paragraphs 19A and 19B above aforesaid the second and/or third defendants have preferred their own interests to those of the Company and its members including the plaintiff, to the detriment of the Company and the plaintiff, and have conducted the affairs of the Company in a manner prejudicial to the plaintiff.
The reference in [19C] to [19A] of the amended statement of claim is a reference to a pleading relating to the SLA, rather than to the loan account in the name of NACT.
As to the way the case was run below, John opened on the (unpleaded) case that the "$500,000" loan to NACT was part of the distribution of the profits of the Trust. As part of the application to amend the originating process (see above at [18]-[23]), John also obtained leave to amend the statement of claim to include, among others, [19B] and [19C]. These were said to be "further particulars of oppression". The complaint was that in causing the Family Trust to make a loan to NACT, Bill and Peter had preferred the interests of NACT.
John did not contend on appeal that he put the "no authority, no security, no evidence of ability to repay" case to the respondents below.
[17]
(4) Allowing Bill to occupy part of the Northmead Property rent free
It was pleaded in [26] of the amended statement of claim that because Northmead Auto Centre (Bill's company) had not paid any amount to the Company since about 2015 in respect of its exclusive occupation of the lower level of the Northmead Property, Bill and/or Peter had preferred the interests of Bill over the Company and its members, including to John's detriment.
John contended that the primary judge erred in viewing the value of any caretaker role performed by Bill (see PJ[234]) as having the same value as commercial rent. John contended that even if the rent-free arrangement was permissible under the terms of the Trust Deed, it nevertheless still amounted to a preferment of Bill's interest. The conduct meant, in essence, that the Company was losing approximately $50,000 per annum in rent and in a way that was not for the benefit of members as a whole. (It should be noted that the primary judge found at PJ[118] that the figure of $50,000 per annum was based upon an annexure to Ms Bateman's report that was not itself the subject of expert evidence in accordance with the Expert Witness Code of Conduct and her Honour treated it as no more than "an indication of rental value").
John emphasised that his counsel made clear below that John's complaint regarding Northmead Auto Centre's non-payment of rent was not put as a breach of fiduciary duty (which had not been pleaded) but rather was put as part of the pleaded case of oppressive conduct because Bill preferred his own interests.
The respondents pointed to cl 10 of the Schedule to the Trust Deed which expressly authorised the trustee to "[a]llow any one or more of the Beneficiaries to occupy, have custody of or use any property forming part of the Trust Fund on such terms and conditions in all respects as the Trustee deems fit". The respondents contended that this provision permitted the Company, as trustee, to allow Bill to use and occupy the Northmead Property, including without any need to pay rent. The respondents also pointed to the fact that John himself has occupied the premises rent free from 2002/2003 "right through until 2012" to store his drag racing equipment.
For the following reasons, we would uphold this part of John's appeal.
First, the arrangement whereby Bill occupied the lower level of the Northmead Premises rent-free was authorised by the Trust Deed, but it constituted a clear preferment of his own interests over those of the other beneficiaries.
[18]
Ground 4 - Company should have been wound up and assets realised
As the respondents pointed out, the primary judge indicated several times in her Honour's reasons for judgment that, even if John had succeeded in establishing oppression, she would not have wound up the Company. For example, her Honour said at PJ[241] and [245]:
I consider that it is unreasonable for John (having stood back and permitted Tzavaras & Sons to operate as it has over a significant number of years) now to seek to wind up the company (and trust) when I consider that there are other avenues of relief available which should put an end to any alleged oppression (such as the inclusion of John in the management as a director of the company).
…
… where John's share in Tzavaras & Sons does not entitle him automatically to a one quarter share of the net assets of the trust, and where liquidation of the trustee will have consequences for the ongoing administration of an otherwise solvent trust, I do not consider that winding up would be an appropriate remedy.
On appeal, John has succeeded in his claims relating to Northmead Auto Centre's/NACT's commercial use without payment of the lower level of the Northmead Property. We consider that this matter alone does not warrant the Company being wound up. Consideration needs to be given to less draconian relief. There should be an order under s 233(1)(c) of the Corporations Act regulating the conduct of the Company's affairs in the future, specifically an order that the Company as trustee of the Family Trust not allow or permit the beneficiaries of the Family Trust to use or occupy trust property for commercial purposes without paying commercial rent. It will be a matter for the directors of the Company to determine what is a fair market rent if Northmead Auto Centre/NACT seeks to continue to occupy and use the lower level of the Northmead Property.
Although the possibility of a compensation order was mentioned in passing in John's oral submissions on appeal, in the circumstances of this case, it is not appropriate to make a compensation order against Bill, let alone his company, Northmead Auto Centre, in respect of its rent-free occupation of the lower level of the Northmead Property for the five years from 2015 to 2020. That is for the following reasons.
First, as already noted, John's complaint regarding Northmead Auto Centre's/NACT's non-payment of rent was not pleaded or run at trial as a breach of Bill's director's or fiduciary duties, no finding to this effect was sought by John at trial or made by the primary judge, and no claim for compensation was pleaded or made against Bill at trial.
[19]
Ground 6 - Winding up on the just and equitable ground
John relied on s 461(1)(e) of the Corporations Act which is expressed in similar terms to s 232(e) of that Act. He contended that the primary judge ought to have found that there was an irretrievable breakdown in the relationship between John and his brothers so as to justify a winding up order.
This ground repeated the evidence and submissions relating to his oppressive conduct complaints which presumably included the fact that in oral address those complaints were reduced to the four matters described at [57] above.
As noted by Rees J in In the matter of Crow Inn Pty Limited (No 2) [2020] NSWSC 1749 at [276], there is a significant overlap between the Court's powers under ss 233 and 461 of the Corporations Act, citing Asia Pacific Joint Mining Pty Limited v Allways Resources Holdings Pty Limited (2018) 3 Qd R 520; [2018] QCA 48 at [62]-[63] per McMurdo JA.
John's success on appeal relating to his claim of oppressive conduct is confined to the matter of Northmead Auto Centre's use and occupation without payment of the lower level of the Northmead Property. This conduct is insufficient to warrant winding up on the just and equitable ground.
[20]
Orders
For the reasons given above, we make the following orders:
1. Refuse leave to include proposed grounds 3A and 3B.
2. Appeal allowed in part, only in respect of part of ground 1.
3. That pursuant to s 233(1)(c) of the Corporations Act 2001 (Cth), the first defendant shall not allow or permit the beneficiaries of the Tzavaras Family Trust to use or occupy the trust property for commercial purposes without paying to the Company the commercial value of the use or occupation of such property.
4. The appeal is otherwise dismissed.
5. In the absence of agreement as to final orders as to costs of the appeal and in the Court below, direct each party, within five weeks hereof to file and serve submissions not exceeding three pages in length in support of the final orders proposed by that party, with the intention that final orders will be made on the papers and without a further oral hearing.
[21]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 25 July 2023
John worked as a mechanic at the Northmead Property from 2000 until mid-2012, when he ceased working there. John's solicitor wrote a letter dated 30 July 2012 to Bill, Peter and Mr Ferizis stating inter alia that John wished to sever his ties with the Company. Since 2012, although remaining as a director, John has not attended any meetings of directors but he has received and signed through intermediaries various documents and returns of the Company when asked to do so. The only minutes of any meeting of the Company's directors in evidence are those held on 30 June 1991, 1992 and 1995. No reason was given for the failure of any party to provide copies of any other minutes.
John maintains that since 2012 there has been an irretrievable breakdown in the personal relationship between him and his brothers. Both Peter and Bill said that they had not spoken with John since 2012 after he left the Company business. Bill gave evidence, however, that since then he had had contact with John via one or more intermediaries, namely Jim Manolis and Bill Coundrelis (who is an uncle to the three brothers). Bill gave evidence in cross-examination that, through these intermediaries, John was invited to attend annual general meetings of the Company. Further, Bill gave evidence that he had tried numerous times to ring or text John but that John did not answer those calls or texts.
The assets of the Family Trust include a joint shareholders' loan account ("SLA") (which could also be described as a beneficiary loan account) under which all shareholders can make drawings (see PJ[12]). John, Bill, Peter and Jenny are jointly entitled to the SLA. At the end of the 2012 financial year, the account stood at $1,334,897. Following a series of drawings made over the years (about which more will be said later), as at 30 June 2020, the SLA stood at $209,370.02. None of those drawings from the SLA (which totalled approximately $1.125 million) benefitted John. It is uncontroversial that they benefitted Bill and Peter and, to a lesser extent, Jenny and Kylie.
When John commenced the proceedings on 28 August 2020 (which is the relevant date to which his claims relate) the upper level of the Northmead Property was leased to 7Eleven Stores Pty Ltd. Since at least 2015 the lower level of the Northmead Property has been occupied by a company called Northmead Auto Centre Pty Ltd ("Northmead Auto Centre"). Bill is the sole director, secretary and shareholder of Northmead Auto Centre. That company is trustee of the Northmead Auto Centre Trust ("NACT"), of which Bill is the sole beneficiary.
Northmead Auto Centre has not paid any rent or occupation fee to the Company for its use and occupation of the lower level of the Northmead Property. This is the basis of one of John's complaints of oppressive conduct.
The financial statements for the Family Trust for the financial year ending 30 June 2020 record that the total income available for appropriation (after application of carried forward tax losses) was an amount of $36,458.38, which was distributed to NACT and is recorded as a "beneficiary loan". This forms the basis of another of John's complaints of oppression in that he says it represents preferment of Bill's interest over his.
As the primary judge noted at PJ[11], John's two principal complaints regarding alleged financial mismanagement related to the reduction in the SLA and the failure of the Company to distribute profits of the Family Trust (even though no breach of trust was alleged). John also complained about the increase in the loan amounts to Bill's Northmead Auto Centre, which John claimed was part of the distribution of the profits of the Family Trust.
In the Court below, John sought declaratory relief and orders for the winding up of the Company pursuant to s 233(1)(a) of the Corporations Act 2001 (Cth) or, alternatively, under s 461(1)(e) and/or s 461(1)(k) of the Corporations Act (ie the just and equitable ground). In the alternative, John sought an order under s 233(1)(d) of the Corporations Act requiring Bill and Peter to buy his share in the Company at a price to be determined by the Court. In his closing submissions, John's counsel said that the buy out order was not pressed. This has assumed some significance in the appeal, as will be explained. For completeness, it may also be noted that at trial John sought an order under s 66G of the Conveyancing Act 1919 (NSW) in respect of a property at Maroubra of which he and Peter were the registered proprietors. The primary judge made such an order and no issue is taken with respect to that matter on the appeal.
John's unsuccessful claims of oppressive conduct at trial were presented under five headings: exclusion from the management of the Company's affairs; shareholder loans and dividends; Northmead Auto Centre occupation claim; misuse of Company funds (not relevant on the appeal); and the Surfers Paradise Unit claim (not relevant on the appeal). The same complaints formed the basis of John's claim under the just and equitable ground of relief. As noted, two of those matters are not relevant on the appeal and the first matter concerning exclusion from management received far less attention on the appeal than was the case at trial.
Counsel acting for John then confirmed that his client would be able to meet rescheduled hearing dates (approximately a week later) if leave was given to file the amended statement of claim and amended originating process (without the words "including his interest in the Nicholas Tzavaras Family Trust"). The defendants were given an opportunity to put on further evidence in response to the issues raised by the new just and equitable ground pleading.
As will emerge, the respondents on the appeal claim that John's challenge to the primary judge's ruling on the proposed amendments does not identify any error of the kind in House v The King (1936) 55 CLR 499; [1936] HCA 40.
In relation to John's claims regarding the SLA (which are pursued on appeal), the primary judge found that there was no entitlement to a quarter share of the loan account balance, because John and the other account holders were entitled jointly to the whole balance. Her Honour said at PJ[231]:
Second, as to the complaint in relation to the Shareholders' Loan Account, I consider that, again, there has been no oppressive conduct. John does not have an entitlement to a one-quarter share of this loan account balance - he and the other account holders were entitled jointly to the whole of the balance. True it is, that John has not drawn down on the account over the years - this is because he absented himself from the company and its affairs; and made no request for any such drawings. John has abandoned his claim for a shareholders' accounting in respect of the Shareholders' Loan Account. Moreover, John surely cannot (at least from a moral perspective as her son) complain as to the disbursement of expenses referable to Jenny's maintenance and support out of the account (particularly when it appears that the history of the family company was that expenses of this kind were met out of company profits by way of drawings).
As to the non-payment of dividends from profits of the Family Trust and Company (which is also pursued on appeal), the primary judge noted that in some circumstances this could amount to oppression. But given that there had been no payment of dividends to any shareholders and given that the profits had been used to offset tax losses, her Honour found that, on the balance of probabilities, a commercial bystander would not be satisfied that this was unfair in the sense of oppression. Her Honour stated at PJ[232]:
I accept that a failure to pay dividends may be oppressive (Roberts v Walter Developments Pty Limited (1997) 15 ACLC 882); and this may particularly be the case where the payment is to some but [not] all of the shareholders. However, here there has been no payment of dividends to any of the shareholders (and the use of profits to offset tax losses has a rational explanation which to my mind tells against oppression, in the sense that, on the balance of probabilities, a commercial bystander would not be satisfied that this offsetting of profits against losses was or is unfair in the sense of oppression (see Cassegrain v CTK Engineering Pty Ltd [2005] NSWSC 495 at [84] per White J as his Honour then was).
As to the claims relating to the Family Trust's dealings with NACT, including the fact that Northmead Auto Centre had not paid any rent during the period from 2015 to 2020 (which are also pursued on appeal), the primary judge accepted that NACT had benefitted, at the expense of the Family Trust, and that conduct by directors taking a benefit at the expense of the Company may constitute oppression. Nevertheless, the primary judge found that there was some benefit obtained by Bill's security and caretaking role at the Northmead Property and, given the context of a family business, it would be unlikely that Nick would have expected the occupation of the Northmead Property by a family business to be on the same basis as if leased to a third-party commercial entity. The primary judge also noted that the appropriate remedy, if there were oppression, would have been a direction to the trustee to not allow beneficiaries to use trust property without paying commercial rent, rather than ordering the winding up of the Company.
The primary judge concluded, in relation to winding up generally, that it was unreasonable for John, in circumstances where he had permitted the Company to operate as it had over a number of years, to seek to wind up both the Company and the Family Trust where there were other avenues of relief available which would put an end to any alleged oppression (such as the inclusion of John in the management of the Company).
Proposed ground 3B (which was said to be in the alternative) claims that the primary judge should have ordered that John's share of the Company be acquired by Bill and/or Peter at a price to be determined on remitter to a Judge of the Equity Division or, alternatively, by an appropriately qualified referee who would report back to the Court.
The respondents opposed the grant of leave to amend in respect of those proposed grounds. The Court indicated that the issue of leave would be dealt with in the Court's final reasons (see later at [56]).
The primary judge went on to note at PJ[257] that she did not "consider the expense of such a process is warranted (especially where the parties have already incurred expense in a valuation exercise of that kind)". John argued that this approach "unfairly holds against John that he did not pursue a buy out order when the Primary Judge had disallowed the proposed amendment to permit the assets of the [Family] Trust to be taken into account for the purposes of such an order".
For the following reasons, grounds 3 and 5 should be rejected. As to John's complaint that he was not permitted to further amend his originating process so as to include a reference to his interest in the Family Trust, we accept the respondents' submission that no error of the kind in House v King has been identified. The primary judge's stated reason for refusing leave was not merely because John was a discretionary beneficiary under the Family Trust with no proprietary interest, but primarily related to her Honour's conclusion (which was undoubtedly correct) that John had not pleaded or particularised the nature of that interest despite having been given an opportunity to do so (see at [19] and [20] above).
Absent an adequate and particularised description of John's interest in the Family Trust, it is difficult to see how any meaningful determination could be made as to whether, for example, that interest was capable of being valued by reference to Ms Bateman's existing valuation or, alternatively, whether an additional valuation exercise needed to be conducted and, if so, in relation to what particular interests or matters. Neither of these things were capable of sensible determination unless John identified with sufficient precision what was the nature and character of his interest as a beneficiary in the discretionary Family Trust.
We accept the respondents' submission that the valuation of the expectation of an object of a discretionary trust would be a difficult and complex exercise because the valuer would have to address, inter alia, the number and position of different beneficiaries for a favourable exercise of discretion. Contrary to John's apparent position, the valuation of the interest would not be a simple case of dividing the corpus of the assets of the Family Trust into quarters merely because the Company had four shareholders. Amongst other things, this is because there are potentially many more beneficiaries of the Family Trust than merely John, Bill, Peter and Jenny.
The difficulty of assessing the value of the interest possessed by an object of a discretionary trust is well illustrated by the following passage from Hardingham and Baxt, Discretionary Trusts (2nd edition, 1984, Butterworths) at 140:
The factors which the court would need to consider in assessing the value of the property possessed by each object of a discretionary trust would include: the size of the distributable fund, the size of the range of objects, the nature of any criteria provided by the settlor by way of guidance to the trustees in the exercise of their discretion, the number and nature of any takers in default of appointment and the nature of the power - is it necessary that the trustees distribute the fund to the objects? The relationship of any particular object to the settlor should be considered. If a valuation is being made at a time subsequent to the creation of the trust, the practice of the trustees between the time of creation of the trust and the time of valuation will be relevant in assessing the interest's value. Factors similar to those taken into account in valuing defeasible interests in trust property would be relevant in this inquiry.
As to ground 5, the fundamental difficulty for John is that, as noted at [15] above, the Court below was informed that his claim for a buy out order was not pressed. John does not dispute that this occurred. But he now says that in not pressing the claim his counsel was merely responding to the primary judge's refusal to grant leave so as to add a reference to his interest in the Family Trust in prayer 3. Assuming in John's favour that there was such a nexus between those two matters, the rejection of ground 3 of the notice of appeal is necessarily fatal to ground 5 because of that very nexus. In any event, it is difficult to see why John should be permitted to advance a different case on appeal to that which was advanced below after his counsel presumably made a considered forensic decision not to press for a buy out order.
We did not understand John to question the correctness of the primary judge's identification of the relevant principles. Rather, his complaints under grounds 1 and 2 challenge the primary judge's application of those principles to the particular circumstances.
Nor was there any dispute that the "conduct of a company's affairs" under s 232 of the Corporations Act includes the affairs of trustee companies. This reflects the fact that the expression "affairs of a body corporate" has a defined meaning in s 53 of the Corporations Act. Section 53(b) provides that the "affairs of a body corporate" for the purposes of ss 232, 233 and 234 of the Corporations Act include "in the case of a body corporate… that is a trustee… matters concerned with the ascertainment of the identity of the persons who are beneficiaries under the trust, their rights under the trust and any payments that they have received, or are entitled to receive under the terms of the trust". As Davies J stated in Vigliaroni & Ors v CPS Investment Holdings Pty Ltd [2009] VSC 428; (2009) 74 ACSR 282 at [63] (citations omitted):
Section 53 is clear in its terms. The affairs of trustee companies are within the statutory meaning of "affairs of a body corporate" for the purposes of s 232 and the scope of the statutory oppression remedy includes relief for conduct of the prescribed kind that affects a member of the trustee company in that member's capacity as a beneficiary of the trust of which the company is trustee. In other words, the statute specifically provides for remedy under oppression provisions where the oppression relates to the operation of a trust which has a corporate trustee.
In response to the emphasis placed by the respondents on the fact that the SLA was a joint loan account and that any of the four shareholders was entitled to make drawdowns on it regardless of their contributions, John claimed that this misstated the relevant issue - which he said was that the making of the unequal drawings against the SLA amounted itself to oppressive conduct because Bill and Peter had preferred their own interests and ignored John's interests.
In considering this matter, it is well to bear in mind the following important observations in Brennan J's judgment in Wayde v NSW Rugby League Limited (1985) 180 CLR 459; [1985] HCA 68 at 472-473 ("Wayde") (citation omitted):
It is not necessarily unfair for directors in good faith to advance one of the objects of the company to the prejudice of a member where the advancement of the object necessarily entails prejudice to that member or discrimination against him. Prima facie, it is for the directors and not for the court to decide whether the furthering of a corporate object which is inimical to a member's interests should prevail over those interests or whether some balance should be struck between them. The directors' view is not conclusive, but an element in assessing unfairness to a member is the agreement of all members to repose the power to affect their interests in the directors. Nevertheless, if the directors exercise a power - albeit in good faith and for a purpose within the power - so as to impose a disadvantage, disability or burden on a member that, according to ordinary standards of reasonableness and fair dealing is unfair, the court may intervene under s 320. The question of unfairness is one of fact and degree which s 320 requires the court to determine, but not without regard to the view which the directors themselves have formed and not without allowing for any special skill, knowledge and acumen possessed by the directors. The operation of s 320 may be attracted to a decision made by directors which is made in good faith for a purpose within the directors' power but which reasonable directors would think to be unfair. The test of unfairness is objective and it is necessary, though difficult, to postulate a standard of reasonable directors possessed of any special skill, knowledge or acumen possessed by the directors. The test assumes (whether it be the fact or not) that reasonable directors weigh the furthering of the corporate object against the disadvantage, disability or burden which their decision will impose, and address their minds to the question whether a proposed decision is unfair. The court must determine whether reasonable directors, possessing any special skill, knowledge or acumen possessed by the directors and having in mind the importance of furthering the corporate object on the one hand and the disadvantage, disability or burden which their decision will impose on a member on the other, would have decided that it was unfair to make that decision.
The relevant principles were helpfully summarised by Stevenson J in Munstermann v Rayward; Rayward v Munstermann [2017] NSWSC 133 at [22]:
1. The test of oppression is an objective one of unfairness (Wayde at 472-473 (Brennan J); Re Quest Exploration Pty Limited (1992) 6 ACSR 659 at 669 (Mackenzie J)).
2. The court must look to determine whether on the balance of probabilities the objective commercial bystander would be satisfied that the affairs of the company were being conducted unfairly (Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359 at [362] (Young CJ in Eq); Cassegrain v CTK Engineering Pty Ltd [2005] NSWSC 495; (2005) 54 ACSR 249 at [84] (White J)).
3. A director may act oppressively in the sense relevant to the operation of s 232 and yet not breach any fiduciary or other duty owed as a director (Gerard Cassegrain & Co Pty Ltd v Cassegrain [2011] NSWSC 1156 at [49] (Barrett J)).
4. Conduct of a company's affairs may be oppressive even though the conduct is otherwise lawful (Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 at [176] (Gummow, Hayne, Heydon and Kiefel JJ) ("Campbell v Backoffice")).
5. Conduct that has the effect of paralysing a company in the operation of its business is properly characterised as conduct contrary to the interests of the members as a whole (Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95; (2008) 66 ACSR 359 at [185] (Basten JA)).
6. A shareholder of 50 per cent of the shares in a company can seek relief for oppressive conduct because they do not have control in the form of power to prevent the oppression, particularly where individual strong arm tactics are used (Patterson v Humfrey [2014] WASC 446; (2014) 291 FLR 246 at [52]-[53] (Le Miere J)).
7. The court must formulate an opinion about oppression or unfair prejudice as at the date of the institution of proceedings and the issue of relief under s 233 must be determined as at the date of the hearing (Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 at [159] (Spigelman CJ)).
8. The discretion under s 233 is wide as to the appropriate remedy (Smith Martis Cork at [70] (Wilcox, Marshall and Jacobson JJ) citing United Rural Enterprises Pty Ltd v Lopmand Pty Ltd [2003] NSWCA 910; (2003) 47 ACSR 514 at [34]-[38] (Campbell J)).
9. The nature of the remedy chosen by the court under s 233 will be dependent upon the conclusions drawn by the court as to the type of oppression with which the court is dealing and the court will choose the remedy which is least intrusive (Re Enterprise Gold Mines NL (1991) 9 ACLC 168 at 174 (Murray J); United Rural Enterprises Pty Ltd v Lopmand Pty Ltd at [26] citing Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [1998] NSWSC 413; (1998) 28 ACSR 688 at 742 (Young J) ("Fexuto")).
10. The aim of any order under s 233 must be to put an end to the oppression (Nassar v Innovative Precasters Group Pty Ltd [2009] NSWSC 342; (2009) 71 ACSR 343 at [125] (Barrett J)).
11. The court should only look to wind up an otherwise solvent company as a "last resort" (Fexuto at 742 (Young J)).
12. As a remedy for oppression, an oppressor can be ordered to sell their shares to the oppressed party (Re A Company; Ex parte Shooter (No 2) [1991] BCLC 267 (Harman J); Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184 (Rattee J)).
13. If an order is to be made for the purchase of shares under s 233 the task of the court is to fix a price that represents a fair value in all the circumstances (Smith Martis Cork at [71] (Wilcox, Marshall and Jacobson JJ)).
It is well settled that the expression "oppressive to, unfairly prejudicial to, or unfairly discriminatory against", is a compound expression and is concerned with "commercial unfairness" (see Joint v Stephens [2008] VSCA 210; (2008) 26 ACLC 1467 at [134] and BAM Property Group Pty Ltd as trustee for BAM Property Trust v Imoda Group Holdings Pty Ltd [2019] FCA 1192 at [49] per Derrington J).
As the primary judge acknowledged at PJ[102], it is also relevant in a case such as the present, when dealing with a family situation, that "fairness must be considered against the background of the fair treatment of the whole body of shareholders, in the light of the history of the company and the family and the purpose for which the company was formed", citing In the matter of Ledir Enterprises Pty Ltd [2013] NSWSC 1332; (2013) 96 ACSR 1 at [178] per Black J.
John did not question the correctness of these principles. At trial, his counsel said the following:
[T]he test that we propose is that the test of oppression is an objective one of unfairness whether objectively in the eyes of a commercial bystander there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair.
For the following reasons, we consider that John's complaints regarding the primary judge's rejection of his claim, that conduct relating to the SLA was oppressive, should not be accepted.
First, it is relevant to have regard to the background to the establishment of the SLA and the relevant evidence regarding the Family Trust's financial accounts. As the primary judge noted at PJ[51], the SLA was established in 1998 by Mr Ferizis on instructions from Nick. In his evidence below, Mr Ferizis recalled that Nick said to him words to the following effect:
The capital that we're introducing into the business is from the family and I want all my three sons to benefit equally and their families to benefit equally and it doesn't matter how much moneys (sic) came out of each individual account. All that money is for the benefit of all three sons and their families.
In his affidavit evidence, Mr Ferizis also said that Nick told him that the SLA was to operate for the benefit of the three sons equally "regardless of who contributed to the purchase of the Northmead Property".
Mr Ferizis' affidavit evidence included a statement that from 2001 onwards he primarily received instructions on the accounting matters from Bill and Kylie. He said that they would give him information relating to the financial affairs of the Company. He said that he expressed his concerns to Bill and Kylie about the management of the Company and that he believed this led to him being replaced in 2018 with new accountants. Her Honour also stated at PJ[99] that there was "no doubt" that Mr Ferizis (whom the primary judge concluded was partisan to John's position) disapproved of the way in which the accounts were prepared. Her Honour added at PJ[99] that it "may be telling" that there was nothing in the evidence which tended to show that the accountants who replaced Mr Ferizis in 2018 took issue with the manner in which the accounts were prepared.
Mr Ferizis confirmed in his cross-examination that although the SLA was described as a "shareholder loan account", that meant the same thing as a "beneficiary loan account". Mr Ferizis confirmed that in the Family Trust accounts since 1998, distributions of income which were made from the Trust to the SLA were entered as credits to that account.
The primary judge noted at PJ[84], that Kylie (the bookkeeper) worked with the Company's accountants in preparing, finalising and approving financial statements and tax returns. Kylie confirmed that all payments recorded as shareholder drawings represented personal payments to the shareholders.
Reference should also be made to the primary judge's finding at PJ[81], where her Honour noted that Bill agreed in cross-examination that he had relied on Kylie to maintain the books of the Company and the Family Trust and that he left the bookkeeping for the Family Trust to Kylie and the accountant. Bill confirmed that he and Kylie discussed financial statements and tax returns with the accountant and that he relied upon the accountant to prepare those documents based upon information provided by Kylie. Kylie confirmed in her cross-examination that both Bill and she discussed the draft accounts with Mr Ferizis in 2017 and it may reasonably be inferred that that was the case up until that time (after which new accountants were appointed).
Kylie confirmed that she and Bill reviewed the financial statements for 2019 and 2020 and that Bill signed the electronic lodgement declarations (when the new accountants were employed).
It is evident from the transcript of Bill's cross-examination that he was uncertain about the details of the accounting for the Family Trust. When he was asked whether he was aware that the Family Trust had not paid any monies to or for or on behalf of John since 2012 (whether by way of shareholder's drawings or drawings on the SLA), he responded: "I don't know".
At PJ[83], the primary judge concluded that Bill "was simply a laconic and not particularly sophisticated witness who was not prepared to speculate; and that it was not implausible that he simply had a poor memory of events". That conclusion was well made out by the transcript - Bill answered many questions regarding the financial records of the Company and Family Trust by saying either "I don't know" or "I'm not sure". He was, however, able to answer some questions more directly. For example, it was put to him that it was the practice at each financial year end for him and Kylie and the accountant to discuss what distribution should be made to beneficiaries. He answered: "I think so, yeah". When pressed, however, on the accounting details relating to the distribution of approximately $36,000 to NACT in 2020, Bill was unable to assist in any meaningful way. He simply said that "I don't get involved in this side of it". When he was further pressed on this by reference to the relevant accounting records, Bill acknowledged what was written there, but then added: "I don't understand why they've put these things there".
As to Peter's role as Company director, there is no challenge to the primary judge's finding at PJ[95] that Peter "made no pretence of any involvement in the financial or accounting matters involving [the Company] and I have no difficulty accepting that he relied on Bill and others for that side of things". Her Honour added that Peter's evidence was consistent with the operation of the business being "on a relatively informal basis with drawings as and when needed and with little emphasis on technical corporate requirements, no doubt as it would not uncommonly be the case with many small family businesses".
As noted at [30] above, John's claims of oppression in relation to the SLA were rejected by the primary judge principally because each of the four accountholders was entitled jointly to the whole of the balance of the SLA and John was wrong to believe that he had an entitlement to a one-quarter share of the balance. It was open to John to draw down on the account. Although he had done so for several years (see PJ[19]), this had not been the case since 2012 when he left the Company business. The primary judge found at PJ[231] that John had made no request for any drawings on the SLA during this period. Her Honour also noted that, during the course of the trial, John abandoned his claim for a shareholders' accounting. Finally, the primary judge concluded that, at least from a moral perspective, John could scarcely complain that drawings had been made on the SLA for the purpose of his ailing, aged mother's maintenance and support.
We respectfully agree with those findings. The drawings on the SLA by the other accountholders, particularly Bill and Peter, are not properly characterised as preferments of their own interests or unfairly discriminatory against John's interests in circumstances where all the accountholders were equally entitled to draw down on the whole of the SLA according to their particular wishes and needs.
Secondly, and importantly, it is relevant to take into account other aspects of John's own conduct. Plainly this was a matter which weighed heavily with the primary judge, with particular emphasis on the fact that John decided himself to quit the Company business in mid-2012 and that he played only a limited role thereafter as a director of the Company. Notwithstanding that on appeal John did not directly challenge the primary judge's rejection of his complaint that he had been excluded from Company management, we consider it relevant to draw upon the primary judge's findings on that topic in considering the four topics which form the basis of John's appeal concerning oppression, including in respect of the SLA.
As Dalton J said in Hunter v Organic and Natural Enterprise Group Pty Ltd & Ors [2012] QSC 383; (2012) 92 ACSR 183 at [105] (upheld in Hunter v Organic and Natural Enterprise Group Pty Ltd [2013] QCA 331), in assessing whether or not the statutory criterion of unfairness in s 232 of the Corporations Act has been met, "it is appropriate to take into account the behaviour of the person making the allegation of oppression".
To similar effect, in John J Starr (Real Estate) Pty Ltd v Robert R Andrew (Australasia) Pty Ltd (1991) 6 ACSR 63; (1991) 9 ACLC 1372 at 1375-1376 Young J, said "…oppression is something done against a person's will and in his [or her] despite. It is not something done with the acquiescence or consent, and still less is something done with his [or her] cooperation".
John accepted in cross-examination that, despite having left the Company business in 2012, he continued to trust Bill until 2018. Moreover, he continued to act as a director (in the limited manner described above). He accepted that he had never had occasion to tender his resignation as director. When asked whether he took any steps during his time as a director to inform himself of the nature and extent of the business and affairs of the Company, he simply said "I trusted my brothers". The evidence demonstrates that, while John worked in the family business, he was content to place his trust in Bill, who had primary responsibility for managing the business and its related affairs. Even after John walked away from the family business in mid-2012, he continued to trust Bill. He relied upon Bill's knowledge and management of the Company business and affairs of the Family Trust in signing documents as and when requested. It was not until 2018 that John lost confidence in Bill. In that context, it is relevant to note the following observation from Re Five Minute Car Wash Service Ltd [1966] 1 WLR 745 at 751 per Buckley J:
The mere fact that a member of a company has lost confidence in the manner in which a company's affairs are conducted does not lead to the conclusion that he is oppressed; nor can resentment at being outvoted; nor mere dissatisfaction with or disapproval of the conduct of the company's affairs, whether on grounds relating to policy or to efficiency, however well founded. Those who are alleged to have acted oppressively must be shown to have acted at least unfairly towards those who claim to have been oppressed.
Moreover, as the primary judge noted at PJ[125], in concluding that John had not established that there had been an irretrievable breakdown in the brothers' relationship, the brothers were apparently able to cooperate in respect of their joint ownership of a shopping centre at Georges Hall, which they had inherited from Nick.
It is notable that John accepted in cross-examination that, after he left the Company business in 2012, he never sought any drawing from the SLA. The evidence does not suggest that there was some insurmountable obstacle to him doing so. As the primary judge correctly found at PJ[229], John literally walked away from the family business in mid-2012 and thereafter performed only a very limited role as Company director. We respectfully agree with her Honour's finding at PJ[29] that John was "apprised from time to time on matters on which his consent or approval was required but otherwise (in accordance with his stated wishes) he seems to have been left alone".
For these reasons, we reject John's claims that drawings made by the other co-owners of the SLA (particularly those of Bill and Peter) during the period relevantly constituted oppressive conduct.
The respondents claimed that John had not pleaded these matters relating to profit distribution and that he should not be able to raise them on the appeal. They referred to [19C] of the amended statement of claim, which raised a complaint of preferment on the part of Bill and/or Peter but only by reference to the conduct pleaded in [19A] and [19B] (relating to the SLA and the loan to NACT, respectively).
However, the pleadings relating to shareholder loans and dividends also included [19F]. It specifically referred to the distribution of the $36,458.38 in the 2020 financial year and how it was lent back by NACT to the Family Trust. John then pleaded in [22] that the conduct referred to in [19A] to [19F] was conduct by which Bill and Peter preferred their own interests to those of the Company and its members including John. The particulars to [22] simply complained that John had not received his 25% of the amount which was drawn down by the other beneficiaries from the SLA, which again placed primary attention on that topic rather than the particular distribution in the 2020 financial year.
In these circumstances, it may be accepted that the pleadings in [19A]-[19F] were somewhat confusing. But account also needs to be taken of the way in which the case was conducted below. We consider that John's claims relating specifically to the distribution of the $36,458.38 to NACT and what subsequently occurred were sufficiently raised. Both Bill and Kylie were cross-examined at some length on the topic. In his closing written submissions below, John did point to the unequal treatment of the SLA as part of his complaint of financial oppression but he then also made several separate submissions regarding oppression, including specifically referring to the $36,458.38 to NACT. This submission was made immediately after his submission that financial oppression was also demonstrated by the fact that there had been no distribution of the substantial financial profits of the Family Trust since at least 2015. Moreover, the primary judge noted at PJ[11] that John's case included claims by him regarding the distribution of the amount of $36,458.38 to NACT.
On the appeal, John correctly pointed out that the primary judge then failed to determine whether the conduct relating to this matter was oppressive. This may reflect the structure of John's pleadings below, where he pleaded the distribution of profits as part of the claims relating to the SLA, rather than as an issue relating to NACT.
At PJ[86] the primary judge noted Kylie's agreement that, as a result of a discussion between Mr Ferizis, Bill and herself, a decision was made to distribute the Family Trust's total available profit for the financial year ending 30 June 2020 to Northmead Auto Centre. The primary judge also noted at PJ[86] Kylie's explanation in cross-examination that it was in "the best interests of everything as a whole" to distribute that amount to Northmead Auto Centre. Kylie's cross-examination on this topic included the following exchange:
Q. So, I ask you again, when you said it was for the benefit of the trust, how is it that the distribution of the entire profit to one beneficiary is for the benefit of the trust?
A. Because it reduced the overall tax altogether, because it was always looked at, that there was, I'm assuming there was a loss in Northmead Auto Centre, and it was written off against the loss, so that there was no tax paid. So, that was thought to be in the best interest of everything as a whole.
Q. So, that was the best interest of both the Nicholas Tzavaras Family Trust and the Northmead Auto Centre, is that what you're saying?
A. Well it didn't have a benefit, it didn't make any difference to Northmead Auto Centre Trust. It was a benefit for the Tzavaras, Nicholas Tzavaras Family Trust and Tzavaras & Sons company.
Q. What difference does it make tax wise, to Nicholas Tzavaras Family Trust whether taxable profit is distributed to one beneficiary, two beneficiaries or a number of beneficiaries?
A. You're talking about tax law now, and that's way out of my knowledge base. So, I can only go, be advised by what my accountant suggested we do at the time.
Q. I'll in fairness put it this way. I put it to you that it makes no difference to the Nicholas Tzavaras Family Trust whether its available profit for appropriation is distributed to one beneficiary or many? Are you able to agree or disagree with that?
A. I'm totally confused. That confused me completely now. I, I'm going on the advice of what my accountant said, and I honestly cannot tell you individually what, whether its in any else's benefit or whatever, I, I can only be advised by what our accountant has suggested, and that's when he did that, and that's what he suggested. I don't have anything else to offer about that.
The primary judge expressly noted at PJ[113] that John sought a finding of fact that the entire amount available for distribution by the Family Trust for the financial year ending 30 June 2020 was the $36,458.38 which was distributed to NACT and then loaned back. Her Honour said that she was prepared to make that finding, having regard to the financial statements and the fact that the matter did not appear to be disputed.
At PJ[159] and [160], the primary judge noted John's submission that the accounting treatment of the $36,458.38 in the 2020 financial year constituted conduct by which Bill and Peter preferred their own interests to other relevant interests including John.
The primary judge dealt with the general distribution of profits and losses at PJ[232]:
However, here there has been no payment of dividends to any of the shareholders (and the use of profits to offset tax losses has a rational explanation which to my mind tells against oppression, in the sense that, on the balance of probabilities, a commercial bystander would not be satisfied that this offsetting of profits against losses was or is unfair in the sense of oppression (see Cassegrain v CTK Engineering Pty Ltd [2005] NSWSC 495 at [84] per White J as his Honour then was).
There is no specific finding in the primary judgment as to the distribution of profits in the 2020 financial year. This is perhaps unsurprising given that the distribution of profits for the 2020 financial year was a relatively minor part of John's oppression case. It received only a passing reference in his written and oral contentions. In his closing oral submissions, John's counsel said that the conclusion was "inescapable" that the entire profit available for appropriation in the 2020 financial year was distributed to NACT. No specific submission was made that this conduct was oppressive, but, implicitly, this matter was put forward as one of several particulars of alleged financial oppression. Understandably, the primary judge's attention was primarily focused on the numerous other matters raised by John which were given more prominence in both the pleadings and submissions, and which involved more significant sums of money.
Given the relatively modest sum of money involved, even if the conduct relating to the distribution of the amount of $36,458.38 in the financial year ending 2020 was viewed as oppressive, this conduct alone would not provide a sufficient basis for winding up the Company.
In any event, we doubt that a commercial bystander would view the conduct as oppressive. The evidence as to why the Family Trust operating profit for the relevant financial year was dealt with that way was far from comprehensive. Bill was unable to offer any explanation. As is evident from the extract from Kylie's cross-examination (see [110] above), she said that she relied upon the accountant's advice and was unable to say one way or the other whether it made any difference to the Family Trust whether the available profit was distributed to one beneficiary or many. She simply understood that the accounting treatment for that amount was for the benefit of the Family Trust and reduced overall tax. The primary judge concluded at PJ[87] that she found Kylie in general to be a "co-operative witness when giving evidence as to her role in the bookkeeping and administrative matters in relation to the company". Apart from Kylie's evidence regarding one telephone conversation she had with Mr Ferizis, the primary judge said at PJ[87] that she had "little doubt that Kylie relied on accounting advice in relation to the preparation of the relevant company documents". Unsurprisingly, Mr Ferizis did not give any evidence on the topic, presumably because he was not responsible for preparing the financial accounts for the 2020 financial year.
Having regard to all these matters, we are not satisfied that John has discharged his onus of establishing oppression in relation to this particular conduct.
When Bill was asked whether NACT could repay the debt, Bill answered that he did not know. Although there was no objection to this question as being outside the pleaded case, importantly no application was made by John to further amend the pleading consistently with the submission put in closing of "no authority, no security, no evidence of ability to repay". If notice of such a case had been given in an amended pleading, the respondents may have sought to address that case by way of evidence.
In John's closing written submissions at trial, he sought to support the pleading in [19C] of the amended statement of claim on the basis that there was no evidence as to the ability of NACT to repay to the Family Trust the loan account debt which stood at $593,760.64 as at 30 June 2020. Nor was there any evidence of the authority of the directors to lend such amounts to a related entity without security.
In oral closing submissions below, John went no further than to ask for a finding as to the amount of the increase in the debit balances of the NACT loan recorded in the financial statements of the Family Trust from 1 July 2014 to 30 June 2020.
At [138] of his closing written submissions, John claimed for the first time that there was no evidence of NACT's ability to repay its debt to the Family Trust, nor was there any evidence as to the directors' authority to lend such amounts to a related entity without security. The respondents' submission that these matters were not part of John's pleaded case below and that they were raised too late in his closing address should be accepted. John should not be permitted to raise those matters on appeal.
It is well settled that in determining whether particular conduct is oppressive for the purposes of s 232 of the Corporations Act the conduct is to be judged objectively and it is not to the point that conduct which is said to be oppressive was carried out without any intention to unfairly prejudice, oppress or discriminate against a member (see Campbell v Backoffice at [176]). Having regard to NACT's use of the premises for commercial purposes and without paying any rent, we consider that a commercial bystander would view that arrangement as commercially unfair.
Secondly, and related to the first point, it is significant that the entire lower level of the Northmead Property was used by Bill for commercial purposes. Having regard to the familial context in which the Family Trust operated it may be one thing for the family members to stay rent free for brief periods at the Family Trust's Surfers Paradise Unit, but quite another for one of the beneficiaries to occupy Family Trust property for long term commercial purposes.
Thirdly, it is no answer to this preferment of Bill's commercial interests which extended over a period of at least five years, to say that many years previously John himself had used a small part of the premises for storing racing cars and related equipment without paying any rent.
Fourthly, Bill's preferment is not excused because his occupation performed a security and caretaker role, which may have benefitted the Family Trust. As John pointed out on the appeal, a commercial tenant would have been expected to perform those functions as a normal part of a commercial lease. Moreover, the value of those particular functions would presumably fall well short of the indicative annual rent of $50,000.
Fifthly, it is beside the point whether Bill's conduct may have also amounted to a breach of his director's and fiduciary duties to the Company (a claim which was not pleaded or run at trial). It suffices that his conduct was oppressive and commercially unfair when viewed through the eyes of a commercial bystander.
Ground 2 of the appeal claims that the primary judge erred in failing to consider that the cumulative effect of the particulars of oppression raised by John amounted to oppressive conduct. In written submissions, John contended that when the conduct is viewed as a whole it amounts to a "powerful picture" of John being entirely denuded of the substantial profits received by the Family Trust since at least 2015 while those profits were enjoyed by his brothers.
For reasons given above, we have rejected John's complaints in relation to the SLA, and the distribution to NACT in the 2020 financial year and the loans to NACT. The only complaint which has been upheld is that in relation to Bill's occupation of the Northmead Property without paying rent or an occupation fee for at least five years. Accordingly, this matter alone constitutes oppressive conduct and ground 2 adds nothing.
Secondly, no order for compensation can be made against Northmead Auto Centre on appeal as it is not a party to the oppression proceedings.
Thirdly, John acknowledged on appeal that he could have but did not seek relief at trial under s 233(1)(g) of the Corporations Act to institute proceedings in the name of the Company against Bill and/or Northmead Auto Centre to recover compensation in respect of the rent-free occupation of the lower level of the Northmead Property from 2015 to 2020. Nor did John seek such relief on appeal by an application for leave to amend his amended statement of claim or to join Northmead Auto Centre as a party to the appeal and the proceedings below.
Fourthly, there being no pleaded claim against Bill that his conduct in allowing Northmead Auto Centre to occupy the lower level of the Northmead Property rent-free was a breach of his director's or fiduciary duties owed to the Company, it is not open to this Court to make such a finding against Bill, such that the Court might exercise its powers to make a direct order for compensation against Bill in the Company's favour: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97; (2001) 37 ACSR 672 at [138], [144] (Spigelman CJ), [527]-[528] (Priestley JA); LPD Holdings (Aust) Pty Ltd v Phillips [2013] QSC 225; (2013) 281 FLR 227 at [43], [51]-[53] (McMurdo J); CIP Group Pty Ltd v So [2022] FCA 1490; (2022) 164 ACSR 566 at [85]-[91] (Derrington J).
Fifthly, and in any event, there is no challenge to the primary judge's finding at PJ[118], that the evidence of the commercial value of the use of the lower level of the Northmead Property is problematic, because the only evidence was an opinion of value attached to Ms Bateman's report which was not itself the subject of expert evidence in accordance with the Expert Witness Code of Conduct. Her Honour treated this opinion as no more than an indication of rental value. Thus, even if it was open to this Court to make a finding against Bill that he is liable to pay compensation to the Company, it would be necessary to remit the matter to the Court below for an assessment of compensation.