Vanmarc Holdings Pty Ltd v P W Jess & Associates Pty Ltd Ors [2000] VSC 153

5. The first plaintiff ("Vanmarc") is the trustee of the Klopsch Family Trust. Vanmarc is a unitholder in the PWJ Unit Trust, which by its trustee, the first defendant, carried on the accounting practice ("the Practice trust"). Vanmarc is also a unitholder in the Brighton Dale Unit Trust, which by its trustee, the second defendant, acted as the provider of staff and other services to the accounting practice ("the Service trust").

8. Eleanor Klopsch ("Klopsch") is the second plaintiff. Klopsch was a "principal of the Accounting Practice" and employed by the Practice trust since 21 July 1992. Klopsch is the beneficial owner (and entitled to be registered as owner) of shares in the first defendant ("the Practice trust trustee"). Further, Klopsch was employed by the Service trust since 27 November 1990 and is a director of the second defendant ("the Service trust trustee") since 1 November 1994. She is also the beneficial and registered owner of shares in the Service trust trustee.

11. Peter W. Jess ("Jess") is the third defendant. Michael Kelly ("Kelly") is the fourth defendant. Jess and Kelly are and at all relevant times were directors of the Practice Trust trustee and the Service Trust trustee, employees of the Practice trust and the Service trust and shareholders in the two trustees.

14. Vanmarc came to hold twenty percent of the units in each of the Practice trust and the Service trust. I do not think that it is pleaded but it may be assumed that Jess and Kelly (or their entities) hold the balance of the units in the two trusts.

17. The statement of claim alleges the following shareholdings:

The statement of claim in paragraphs 16 to 21 pleads certain duties owed by the following defendants:

(i) by the Practice trust trustee, duties as a trustee owed to beneficiaries, including Vanmarc;

(ii) by the Service trust trustee, duties as a trustee owed to beneficiaries, including Vanmarc;

(iii) by Jess and Kelly, duties as directors owed to other defendants, namely the two companies of which they are directors (the Practice trust trustee and the Service trust trustee);

(iv) by Jess and Kelly, fiduciary duties as such directors owed not only to those two companies but also to "the plaintiffs". (I note that whilst Klopsch is said to be or to be entitled to be a shareholder in those companies, Vanmarc is not);

(v) by Jess and Kelly, duties as employees of those two companies under written employment agreements.

36. Paragraph 22A of the statement of claim alleges very broad and unspecific breaches of the "trustee duties" by the Practice trust trustee and the Service trust trustee as "particularised in Schedule 2" to the statement of claim.

39. Schedule 2 of the statement of claim may be summarised as follows:

(a) Jess caused the Practice trust trustee to do a number of things in breach of trust and duty for the direct or indirect pecuniary benefit of Jess or his wife (the ninth defendant) or for others or otherwise in breach of duty - see paragraphs 1 to 21 of Schedule 2 - the acts complained of include writing off various costs and billable time to the benefit of the persons or entities specified;

(b) Jess directed Kelly to amend the financial statements of the Practice trust for the benefit of the eleventh defendant (P & B Jess Investments Pty Ltd) - see paragraph 22 of Schedule 2.

45. I note that these particulars do not contain any reference to the Service trust except in paragraph 8 of Schedule 2 but paragraph 25 of Schedule 2 says that "further particulars may be provided after discovery herein".

48. Paragraph 22B of the statement of claim alleges that by reason of the said breaches of trustee duties Vanmarc has suffered loss and damage (particularised as being a diminution in value of its units in the two trusts).

51. Paragraphs 23 and 24 allege that Jess acted respectively in breach of his fiduciary duties "owed to the plaintiffs and to the first defendant and to the second defendant" and in breach of his employment duties (owed to his employers). The breaches alleged are again very broad and unspecific but particulars are given by reference to the whole of Schedule 2.

54. Paragraph 25A alleges that, by reason of the breaches of fiduciary duties, Vanmarc has suffered (as particularised) a diminution in the value of its units in both trusts and Klopsch has suffered a loss "being an amount equal to any liability [she] incurs as a director of [the Service trust trustee]..".

57. Paragraph 25B alleges that by reason of the breaches by Jess of "the employees duties, the directors duties and the fiduciary duties", the "First and Second Defendants" have suffered loss and damage (as particularised: loss of profits or the "value of the things lost").

60. Paragraphs 26 to 28 of the statement of claim seek to set up a derivative action by pleading that Jess and Kelly control the two trustees and that the two trustees are thus unwilling to sue Jess and Kelly and that accordingly "[Klopsch] as the beneficial owner of 800 shares in the [Practice Trust trustee] and as a director and shareholder in the [Service trust trustee].... together with Vanmarc [as unit holder in the Practice Trust] together bring this proceeding on behalf of the [two trustee companies] to recover their loss and damage...".

63. Paragraph 29 alleges that Kelly knew of and condoned and/or participated in "some or all" of the matters alleged in Schedule 2, alternatively ought to have known of "some or all" of them, and assisted and permitted Jess to do the things alleged by implementing them, including making the relevant book entries.

66. Paragraphs 30 to 36 go on to plead as against Kelly the same matters as are alleged against Jess in paragraphs 23 to 28.

69. Paragraphs 38 to 71 of the statement of claim contain a number of separate allegations against some of the other defendants. I will refer to these allegations later.

72. Paragraph 72 alleges that each of the third, fourth, ninth to fourteenth and eighteen and nineteenth defendants knowingly participated or assisted in the said breaches of trust by the two trustees or knowingly received in breach of trust the benefits and things referred to in Schedule 2. The particulars refer to Schedule 2 and to other preceding paragraphs. Paragraph 73A claims that Vanmarc as a unit holder in the trusts is therefore entitled against those defendants to relief. Paragraph 73B makes similar allegations in relation to knowing participation in the breaches of fiduciary duty by Jess and Kelly by these other defendants and paragraph 73C claims that the plaintiffs are entitled to relief against these defendants.

75. No criticism is made of paragraphs 74 to 107 of the statement of claim which deal with other matters including questions relating to the redemption of Vanmarc's units in the two unit trusts.

78. Paragraphs 108 to 110 contain a claim of oppression by Klopsch within the meaning of section 246AA of the Corporations Law based upon the factual matters alleged in paragraphs 1 to 37 and 74 to 107. Paragraph 109 states (after allowing for some obvious typographical errors):

"The matters referred to in paragraphs 1 - 37 and 74 - 107 hereof:

(a) constituted conduct of the affairs of the First Defendant and of the Second Defendant in the manner that was and is oppressive and/or unfairly prejudicial to and/or unfairly discriminatory against [Klopsch] as a member of the First Defendant and the Second Defendant and/or conduct in a manner that is contrary to the interests of the members of the First Defendant and the Second Defendant as a whole;

(b) constituted acts by [Jess and Kelly] which were and are oppressive and/or unfairly prejudicial to and/or unfairly discriminatory against [Klopsch] as a member of the First Defendant and the Second Defendant and/or was and are contrary to the interests of the members of the First Defendant and the Second Defendant as a whole".

84. The balance of the pleading deals with specific matters to which, where necessary, I will return later.

87. The defendants' first main submission was in substance that it was incorrect for the plaintiffs to allege that the first two defendants, who were trustees carrying on the businesses of the Practice trust and the Service trust, had suffered loss as a result of the alleged breaches by Jess and Kelly as directors, fiduciaries and employees. The loss, if any, was to the trust property in which the trustees had no beneficial interest. The correct cause of action was one for breaches of trust and further, it was submitted that there were no proper particulars of such breaches of trust, in that schedule 2 referred only to acts of Jess rather than breaches of trust by the trustees. In addition, none of the particulars in schedule 2, other than paragraph 8, related to the Service trust.

90. The defendants' second main submission challenged the attempt by the plaintiffs to assert a right to sue Jess and Kelly and (others of the defendants as participants) on behalf of the two trustee companies (the first and second defendants). It was submitted that the duties allegedly broken by Jess and Kelly were owed to the companies but that the companies, being trustees, would not have sustained any loss. Further, as to derivative actions, Vanmarc was not a shareholder in the two companies and Klopsch was a shareholder only in the Service trust trustee, whilst, as to breaches of trust, Klopsch (not being a unitholder) had no standing to sue in respect thereof.

93. The defendants submitted that the plaintiffs' primary objective was to secure the redemption of the units in the two trusts for an appropriate price, including any loss of value caused by breaches of trust. Accordingly, it was sufficient in that regard if conventional claims for damages for breach of trust were made. It was therefore submitted that it was an abuse of process for the plaintiffs to bring unnecessary proceedings on behalf of the trustees against Jess and Kelly and others of the defendants.

96. The defendants' third main submission was that the plaintiffs, in particular Klopsch, were not entitled to bring an oppression proceeding when the two companies (the first and second defendants) were merely trustees with no assets of their own and the alleged oppressive acts in relation to the affairs of the trusts did not affect the values of the shares in the companies.

99. In general, the plaintiffs submitted that, for various reasons and subject to the sundry amendments sought to be raised in running, each of the causes of action pleaded by them was tenable or arguable upon the face of the pleading. I will deal with the plaintiffs' specific submission where necessary in the course of considering the statement of claim in light of the submissions as to the law and of the authorities cited.

102. In Young v Murphy [1996] 1 V.R. 279, new trustees who had replaced a previous trustee of an investment trust sued the former trustee for breach of trust and also the directors of the former trustee on various bases. The Full Court held, inter alia, that the new trustees had standing to sue the directors of the former trustee for alleged participation in and procurement of breaches of trust but had no standing to sue the directors for breaches of the duty of care and the fiduciary duty allegedly owed by them qua directors to the former trustee. Phillips J (as he then was) said (at 302-303) that it was the former trustee company in which any of the lastmentioned rights of action was vested, however, his Honour said that the beneficiaries of the trust might well be interested in the former trustee pursuing its directors for breaches of their duties and he noted that it had not been pleaded that the directors owed any duties to the beneficiaries (thus, it would seem to me, leaving open the possibility that such a pleading might be sustainable).

105. The plaintiffs here therefore contended as I understood it that the following causes of action remained arguable as against Jess and Kelly as directors:

(a) a derivative action by Klopsch as shareholder on behalf of the trustees as companies against the said directors for breaches of duty owed to the companies;

(b) a claim for breach of fiduciary duty by Vanmarc as beneficiary against the said directors;

(c) a claim pursuant to s.1324 of the Corporations Law against the said directors.

Further, there was open to be pleaded, so it was submitted, a claim by one quasi-partner (Klopsch) against the other quasi-partners (Jess and Kelly). In those respects, the plaintiffs also relied upon what was said by Young J in Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 as supporting three independent propositions:

(i) a derivative action against directors could not only be brought by a minority shareholder under the third exception to the rule in Foss v Harbottle but also "where justice so requires" under the so-called fifth exception to the rule in Foss v Harbottle;

(ii) s.1324 of the Corporations Law gave standing to any person whose interests were affected by conduct of directors in contravention of the Corporations Law not only to seek an injunction (s.1324(1)) but also damages (s.1324(10)) - (see too: Allen v Atalay (1993)11 ACSR 753);

(iii) where a company in the nature of or controlled by a quasi-partnership is in its death throes, the directors owed fiduciary duties not only to the company but to the quasi-partners or shareholders (see what was said by Young J (at 138-9) in relation to Glavanics v Brunninghauser (S.lt. N.S.W., Bryson J, 15/2/96, unreported)).

115. Each of these propositions are in my opinion arguable but it is necessary to consider to what extent the facts pleaded can be related to them.

118. The plaintiffs further submitted that the defendants' submissions involved unwarranted assumptions that the businesses carried on by the first two defendant companies were solely trust businesses but that the pleading contained particulars which indicated that other activities had been carried on outside the purposes of the two trusts (such as the funding of a sports promotion business).

121. Turning again to the latest version of the statement of claim, paragraphs 1 to 15 thereof are, I think, unexceptionable save that the significance of paragraph 13(b) which pleads that Klopsch was "a principal of the Accounting Practice" is not made clear elsewhere in the pleading. Paragraphs 16, 17, 22A and 22B plead breaches of trust by the two trustees. In the end, the criticism here related substantially if not entirely to the particulars in Schedule 2. However, in my opinion Schedule 2 generally provides adequate particulars of the alleged breaches of trust at this stage of the proceeding. After all, the matters referred to would all be likely to be within the knowledge of Jess and Kelly. Further particulars can be sought if need be.

124. Paragraphs 18 to 21 cannot of themselves be criticised insofar as they set out normal duties owed to their companies by Jess and Kelly as directors and employees. However, paragraph 21 as amended pleads that as directors Jess and Kelly also owed fiduciary duties to the plaintiffs. Although I think that it may be arguable that Jess and Kelly as directors owe fiduciary duties to Vanmarc as a beneficiary and to Klopsch as a shareholder, the pleading as it stands does not set out with any specificity the facts relied upon in respect of each plaintiff which are said to give rise to these duties. For example, the quasi-partnership basis is not set out nor are the contraventions of the Law said to give rise to a claim or claims under s.1324. Therefore, when it comes to paragraphs 23, 25A, 31, 32 and 33A, I consider that there is presently no basis pleaded to justify the allegations of breaches of duties owed by Jess and Kelly to the plaintiffs.

127. Insofar as paragraphs 23 to 37 plead derivative actions by Klopsch as a shareholder on behalf of the two companies against their directors, there was in my opinion ultimately no argument of weight raised against the proposition that such actions were arguably open. No point was taken concerning Klopsch's shareholdings. I do not think an arguable basis is pleaded for derivative actions by Vanmarc.

130. I will next deal with the arguments in relation to s.246AA of the law.

133. In Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606 (Supreme Court of New South Wales) the first defendant company was the trustee of a unit trust in which the families of the second plaintiff and of the other defendants held units. The first defendant company, as trustee, operated a profitable business but the second plaintiff (who had retired from the business) claimed that excessive salaries being paid to the other defendants as employees of the first defendant had greatly decreased the trust distributions. Young J decided that the salaries paid were substantially more than was reasonable and that, as a matter of trust remedies, the first defendant as trustee should recover back the overpayments or otherwise adjust the trust distributions to account for them. The application was also brought under the then oppression section of the Corporations Law (s.260) seeking that the defendants be compelled to buy out the plaintiffs. As to that, Young J said (at 612-3):

"The parties can, of course, agree to buy one another out, but a sale and purchase can only be forced by the court if there is some legal warrant for the court making such an order. It is not really a function of s.260 of the Corporations Law to enable people to release their capital from ventures where their co-venturers have displeased them. In most situations where people have agreed to contribute funds for a venture there is no right to have the funds released before the venture is fulfilled. The law has allowed exceptions in extreme cases such as where the substratum of the venture has gone or where there has been oppression by those controlling the venture. It must be realised however that these are exceptional cases. Even in cases of oppression it does not follow that the court will consider it appropriate to release the plaintiff's funds from the venture. Where the venture is protected by a unit trust device superimposed on a company structure the plaintiff's task will be harder again. Again, if the articles or trust deed make provision for release of the plaintiff's investment by a certain procedure, normally the plaintiff should be left to put that procedure in motion. The court may make orders ensuring that there is no unfairness in the valuation process or require improperly depleted funds to be reimbursed, but after that, there is no valid reason why the plaintiff should have any special consideration when he or she wishes to withdraw his or her investment. So far as this particular trust deed is concerned, provision is made for the situation where a person has a desire to dispose of his or her units. That process in fact has been put into place. ... Accordingly it seems to me that so far as trust remedies are concerned, I should proceed no further than I have gone. Miss Needham, for the plaintiffs, submits that her clients are entitled to remedies under s.260 of the Corporations Law on the facts as I have found them. She says that there has been oppression proved, winding up is not a suitable remedy and accordingly there should be a compulsory purchase of shares. I do not consider that I should accede to this submission. The company in question is Prestoo Pty Ltd. This company is a trustee company. It has no assets of its own. It operates a business as a trustee on the basis of loan capital. The only oppression is in relation to the operation of the trust. That oppression has not affected the value of the shares one whit. The shares in Prestoo either have no value or alternatively a value of $1 being the amount paid for each share and they continue to have that value. It would be a very bold step indeed to order the [defendants] to buy the plaintiffs' $1 share for a sum anything like say $189,000 on the basis that the plaintiffs thereby relinquished any interest in the trust. This sort of problem, as far as I am aware, has not come before the court in an acute form though there have been passing references to it in some of the authorities. Miss Needham submits that s.260 is nowadays construed "in the widest form imaginable" per Murray J in Re Enterprise Goldmines NL (1991) 3 ACSR 531 at 536; 9 ACLC 168 at 173. She submits that it is possible to apply the section where there is oppression in the capacity of a director or as an employee or as a franchisee or in the capacity of a member of a trust. She relies on dicta in Re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588 at 620; 2 ACSR 553 and John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A'asia) Pty Ltd (1991) 6 ACSR 63 at 66; 9 ACLC 1372 at 1375. Miss Needham points out that in Re Bodaibo Pty Ltd (1992) 6 ACSR 509; 10 ACLC 351, Vincent J in the Supreme Court of Victoria made an order valuing the shares in a trustee company at some $68,000. It would not seem that his Honour's intention was drawn to the difficulty caused where the only business that the company carried on and the only assets it possesses are held pursuant to a trust in which it is not a beneficiary. Accordingly, I do not feel constrained to follow Re Bodaibo Pty Ltd on this point. No other cases have been cited by counsel as situations where one can make an order in respect of a trustee company under s.260. My view is that one cannot do so. However, if that be wrong, in this particular case the oppression is stoped by the making of the order for reimbursement and there is no reason why the plaintiffs should be able to escape from their contractual obligations to go through a certain procedure if it is desirous of disposing of their units in the trust merely because of what has occurred. It follows that there is no need at this stage to make any valuation of the plaintiffs' interests."

137. In the present proceeding, it is probably also the case that a combination of trust remedies and recourse to the buy-out provisions of the trust deed will ultimately provide adequate relief for the plaintiffs (if any is required). It is probably also the case that the shares in the trustee companies will be found as is usual to have no value, so that an order of the kind made in Re Bodaibo Pty Ltd should not be made (even assuming that such an order is ever appropriate under s.246AA in the case of a trustee company) (see too: re Bountiful Pty Ltd (1994) 12 ACLC 902, 905). Nevertheless, I do not think that the prospect of relief under s.246AA can be ruled out in the case of a trustee company, however unlikely that prospect may be. In that regard, it must be remembered that the powers of the court under that section are not confined to orders for winding up or for the compulsory sale and purchase of shares but include orders restraining a person from engaging in specified conduct or from doing a specified act and requiring a person to do a specified act.

140. However, there is a significant procedural reason why I think that paragraphs 108 to 110 together with the associated claims for relief should not be permitted to remain in the amended statement of claim. The Supreme Court (Corporations Law) Rules 1999 require that an application under section 246AA of the Law be instituted by originating process supported by affidavit and the various other requirements of Order 5 must be complied with, where applicable. I see no reason why those requirements should be disregarded in the present matter. Indeed, it is preferable that the plaintiffs, insofar as they seek to rely on s.246AA, proceed under the Rules and verify the facts and relate them to the relief sought.

143. I will next deal seriatim with some criticisms made by the defendants of a number of specific claims made by the plaintiffs.

146. Paragraph 38 relates to the ninth defendant (Mrs Jess). In my view, it has a number of deficiencies. It pleads participation in all of the alleged breaches of directors duties (rather than in the alleged breaches of trust) and in addition gives no material facts to support the wide allegations made in paragraphs 38(a) and (b). Paragraph 38(c) raises specific factual matters which no doubt could be relied upon in proper form but leads to ambiguity as to whether these are the only matters relied upon, or the only matters from which Mrs Jess is said to have benefited. The claim against Mrs Jess should be repleaded with all material facts and proper particulars. The same deficiencies exist in paragraphs 50 to 65 in relation to the eleventh, twelfth, thirteenth and fourteenth defendants. These paragraphs should also be repleaded.

149. Paragraph 10 of Schedule 2 alleges that Jess caused the Practice Trust trustee to misappropriate its cash reserves to the extent of approximately $540,000 for the purpose of "developing and promoting the business opportunity of the eighteenth defendant (Fexco Australia Pty Ltd - "Fexco"). Paragraph 11 of Schedule 2 alleges that Jess caused the Practice trust trustee to "write off $322,585 against billable time recorded in [its] books and records ... in the name of [Fexco]". Paragraph 66 of the statement of claim baldly asserts that Fexco knew or ought to have known of these matters and participated in them. No material facts are pleaded. This too should be repleaded with all material facts and particulars.

152. At paragraph 111, the pleading begins to deal with a separate claim in relation to a trust called the "Nicholson St. Unit Trust" the trustee of which was the seventh defendant (Vincent Lodge Pty Ltd - "Vincent"). Paragraphs 111 to 142 seek to deal, inter alia, with an alleged misappropriation by the fifteenth defendant, at the direction of Jess, of the sum of $75,000 payable to Vincent, by paying it instead to the sixteenth and/or seventeenth defendants. A claim is sought to be made by Klopsch, as a director of Vincent, on behalf of Vincent against Jess and the fifteenth, sixteenth and seventeenth defendants. Is this sustainable? In any event, the pleading does not explain how, in the light of the facts pleaded as to the origins of the said sum of $75,000, it was ever payable to Vincent. This claim should be repleaded - if it can be.

155. Paragraph 163 should plead material facts and particulars as to the agreement therein alleged.

158. There are also a number of deficiencies or omissions in the prayer for relief which were adverted to in argument.

161. For the foregoing reasons, and in all the circumstances, it is appropriate to strike out the original statement of claim in toto in order that it may be replaced by an amended statement of claim. There will be general leave to amend the statement of claim. The amended pleading should take into account and comply with the various rulings made above and with the spirit of these reasons generally. It would no doubt be prudent if the latest version of the statement of claim were not only recast to deal with the specific matters found herein adversely to the plaintiffs but also to meet a number of the practical complaints made by the defendants (all of which are not set out) in order to avoid any further attack on the pleading and to facilitate a clearer statement of the issues for trial.