• Victoria 2 Mods

Introduction. 2.1 This chapter explores the key features of trusts and companies that relate to the grant of an oppression remedy.

The chapter focuses on the different types of express trusts, with an emphasis on those aspects that relate to trading trusts. 2.2 A theme running through the chapter is the twin distinction between investment/donatory trusts, and investment/trading trusts. The analysis introduces the key features of the express trust and shows how these features are adapted to trading trusts.

2.3 It is important to note at the outset that the idea of a trading trust arguably only reflects a difference in function, rather than a distinction between trading and other forms of trust based on principle. Similarly to other forms of investment trusts, a trading trust has a trustee which holds trust property on behalf of beneficiaries. The trading trust differs fundamentally in the sense that the trustee trades—i.e. Actively carries on a business. The overall question this consultation paper seeks to address is whether this functional difference generates different legal outcomes, in particular whether an oppression remedy is, or ought to be, available. 2.4 The last sections of the chapter deal with the key features of the corporate structure, in particular the doctrine of separate legal personality. This chapter shows how the doctrine relates to trading trusts, and the need for shareholder remedies.

Question1 In your view, what roles do the intention of the settlor and the law of contract play in unit trusts?. 2.19 It is not always clear whether the interest of a unitholder is of a proprietary character. In theory, a beneficiary of a trust is supposed to be beneficially entitled in equity to the trust property. However, the High Court has recently emphasised that the provisions of the trust deed are the starting point in considering whether a unitholder has a proprietary interest in the trust property. Question2 How relevant or important is the characterisation of a beneficiary or unitholder’s interest?.

2.22 The possibility of exclusion through the trust deed arguably collapses some of the distinctions between an interest under a unit trust and a share in a company. However, it is conventionally thought that there is a fundamental conceptual difference between the two. Question3 Is there another, more appropriate definition of ‘trading trust’? Could it include managed investment schemes?. 2.30 In the Commission’s view, an oppression remedy will rarely be appropriate in the context of a discretionary trust. A unitholder will have provided consideration for their beneficial interest in the trust.

However, a beneficiary under a family trust will often have provided no consideration for their beneficial interest in the trust estate. In such a case, a buyout is impossible since any interest that a beneficiary has will be at the discretion of the trustee. It is arguable, however, that an oppression remedy is appropriate in a limited range of circumstances. 2.31 Suppose that A and B are directors and shareholders of a company which is the corporate trustee of a family trust and jointly exercise powers of the appointor under the trust deed.

The objects of the trust will ordinarily include A and B and other family members such as spouses, children and grandchildren. If it is supposed that the trustee only makes distributions to A and B, it is unlikely that the other family members hold a beneficial interest in the trust estate. Arguably, following the reasoning of Vigliaroni, A or B could seek an oppression remedy against the other as an object of the trust, or the corporate trustee. Despite the presence of a discretionary trust, the structure closely resembles a small proprietary company where an oppression remedy would ordinarilybe granted. Questions4 Are oppression remedies appropriate for all trading trusts?5 Are there circumstances in which an oppression remedy might be appropriate for beneficiaries of a discretionary trust?. 2.32 The structure of a unit trust will often be determined by the role of the unitholders in the business.

Usually, a unitholder will provide capital to a unit trust as an investment in exchange for units. In this case, the management of the business will be conducted by the directors of the corporate trustee rather than the unitholder. Moreover, the unitholder will not ordinarily own shares in the corporate trustee. In fact, this scenario closely resembles the division between management and shareholders. 2.33 However, an alternative scenario is where parties use a unit trust to structure a joint venture. In this case, the original parties might be directors and shareholders in the corporate trustee and unitholders. Control of the business will ordinarily be determined by the percentage of shares in the corporate trustee.

As will be shown in Chapter 3, the case law suggests that the way the unit trust is structured is highly relevant to the question of whether an oppression remedy can be granted. 2.34 The role that a unitholder wishes to have in management is dependent upon the nature of the investment. As Spavold explains:An investor who contributes substantially all of the assets to be used in a business with which he is very familiar will want to have substantial involvement in the management of the business. In contrast involvement in management (except in extraordinary circumstances) will not be desired by an investor who only wishes to pool his funds with other persons so that the pooled fund may be efficiently and profitably invested by professional investment managers who are familiar with the financial markets.This is relevant in the context of oppression, since as will be shown in Chapter 3, the oppression remedy is most common in the case of small proprietary companies where the shareholders actively manage the business. A comparison of trading trusts and corporations. 2.35 A fundamental difference between a trust and company is that the latter is deemed at law to be a separate legal entity. The doctrine of separate legal personality means that:for certain purposes a company is a legal entity separate from the legal persons who became associated for its formation or who are now its members and its directors.

For certain purposes there is a corporate screen around the members and directors. Courts often refer to that screen as the ‘corporate veil’.To say that a company is a separate legal entity means that the company can have legal rights, privileges, duties or liabilities without them being rights, privileges, duties or liabilities of its members or directors.The importance of the doctrine of separate legal personality is illustrated by the fact that it applies even to a proprietary company, which only has a single controlling shareholder, who is also the manager of the business. Importantly, the reasoning from Salomon v Solomon & Co Ltd suggests that the doctrine applies even where the company has no substantial capital.

2.36 As we have seen, a trust is conceptually different from a company. Like a company, a trust requires real people to administer the trust property, and carry out the terms of the trust deed. However, unlike a company, a trust has no separate personality at law, meaning that individuals who act as trustees are personally liable in an action against the trustee. 2.37 In practice, the trustee can utilise two devices to mitigate personal liability. The first is to insert exclusion clauses into the terms of the trust deed. However, the validity of these clauses, and the extent to which they can exclude a trustee’s fiduciary duties, remains unclear.

2.38 Secondly, the trustee will usually be a corporate trustee. This affords certain tax advantages and limited liability, which follows from the doctrine of separate legal personality. Thus, a clear demarcation between trusts and companies is somewhat artificial since in practice businesses adopt a structure which utilises both.

However, the conceptual distinction is important since there is a clear difference at law between the two entities. Indeed, the problem that this reference seeks to address reflects this.Despite clear conceptual differences, Victorian case law has suggested that oppression remedies, which are shareholder remedies, can also apply to trusts. These issues will be explored further in Chapter 3. 2.39 The separate legal personality of the company means, however, that the company is the proper plaintiff in an action against the directors. Thus:if a company sustains a loss for which it has a right of action a member as such does not have a direct right of action for the loss. Under the separate entity doctrine the company’s loss is not in law the shareholder’s loss, even though the company’s loss might reduce the value of the member’s shares.It follows that, in a proceeding against the directors or other members of management designated with corporate authority whose conduct would have amounted to a legal wrong, the company is the proper plaintiff. However, as the directors control the company, including the ability to initiate legal proceedings, in practice it is unlikely that the company would seek redress for defective management.

This means that unlike beneficiaries, shareholders have little direct recourse against management. 2.40 However, the general law and the statutory regime under the Corporations Act create a number of exceptions to the rule from Foss v Harbottle that provides shareholder remedies either against the company or directors. The oppression remedy under section 232 of the Corporations Act is perhaps the broadest remedy available to a shareholder. Oppression is a broad concept, which includes excessive payment to management, issuing shares for the purpose of diluting a member’s shareholding and denying a shareholder access to information.

Where a shareholder has the requisite standing and oppression is proven, the court has the power to grant wide-ranging remedies including:. winding up. modification of the company’s constitution.

Victoria 2 Mods

the compulsory purchase of shares from either the company or another shareholder. 2.41 One question that this reference seeks to answer is whether the Corporations Act gives the court power to grant an oppression remedy in an action by the shareholder/beneficiaries against the trustee of a trading trust. The current legal position with respect to this question is unclear. A line of cases has held that the appropriate recourse of beneficiaries is limited to the forms of equitable relief. However, an alternate line of cases has held that the court’s power under section 232 is not limited to an action against the company, as such.

These cases are discussed in more detail in Chapter 3. 2.42 Unlike trading trusts, the Corporations Act imposes numerous formal requirements upon companies, such as reporting and auditing requirements. Moreover, companies must apply to be formally registered with the Australian Securities and Investment Commission.

In the case of small proprietary companies, which have no formal constitution, the Corporations Act contains provisions which act as replaceable rules, which together form the basis of the constitution. However, these replaceable rules will not apply to proprietary companies with a single member who is also the sole director.

2.43 The situation is formally different for private unit trusts. As Spavold explains:The unit trust is constituted by a deed of trust. Under the terms of the trust deed certain property is to be held in trust for the benefit of persons known as ‘unit holders’. Each unit holder owns a ‘unit’ in the trust fund. The beneficial interest of the trust is made up of a number of units. Each unit is equal to every other unit.

When an investor purchases a unit from the trustee or manager the money paid for the unit becomes part of the trust property and is invested by the trustee. The deed of trust regulates the rights powers and duties of the trustee unit holders and if applicable the manager. In this manner it serves the same purpose as the memorandum of association and articles of association of a company.Although the formal requirements are different, arguably the function that a unit trust deed serves is essentially the same as a company constitution.

The Victorian era witnessed significant reform of the political system. The Second Reform Act, passed in 1867, widened the electorate to include any man who either owned a house or paid rent of more than £10 a year, and also gave the vote to rural men owning very small parcels of land. Women remained unable to vote. Beginning in 1872, secret ballots removed much of the intimidation that had previously surrounded the electoral process, while the Third Reform Act of 1884 made the terms of voting identical across the country and changed electoral boundaries so that most constituencies elected only one member of Parliament to represent them at Westminster.

Following the Act of Union in 1801, Ireland was an integral part of the United Kingdom throughout the Victorian era and periodically dominated political headlines. Issues of land ownership rose to prominence in the 1850s and 1860s, while in 1871 the London Parliament voted to break the Anglican Church’s traditional link with the state in Ireland. The Irish Home Rule movement grew stronger toward the end of the Victorian era, but Parliamentary bills to grant Ireland a measure of self-government were defeated in both 1886 and 1893.