(c) Proposed settlement
The terms of the settlement provided for the deed of company arrangement to be varied to reflect a new priority regime by which the administrators would distribute assets to priority creditors. As a result, the Trustee’s claims were given priority over those of unsecured creditors.
(d) Approving the terms of settlement and the proposed distribution of assets by the Trustee
(i) Terms of settlement
Generally the courts will not give directions to administrators approving decisions of a purely commercial or business nature. However, this case involved legal issues as rights and duties were being compromised and causes of action were being given up.
So far as the Trustee was concerned, the Court has the power to make orders and give directions regarding the conduct of litigation and the compromise of claims by trustees. Although the court can direct that it is proper for a trustee to enter into terms of settlement, the court will not examine the precise terms of the compromise as this is solely the concern of the trustee. Similarly, a court cannot direct a trustee how to exercise a discretion, however the trustee may seek a direction that it is not improper or beyond power to exercise its discretion in a particular way.
Whilst the court has the power to make appropriate orders and directions regarding the variation of a deed of company arrangement under the Corporations Act, there was an issue as to whether it was appropriate for the court to sanction the settlement. The court emphasised that it can only decide whether the parties have the power to enter into the terms of the settlement. The Court will not settle the provisions of the terms of settlement. Seeking the court’s approval to enter into the terms of settlement merely provides the parties with the protection of an order protecting them from collateral attack for entering into the compromise on the basis that they had no power to do so or that it was an improper or inappropriate exercise of power to do so.
The effect of an order to vary a deed of company arrangement would deny creditors the opportunity to vote on the variation of the deed. Therefore the competing interests of the parties to the deed needed to be evaluated. In deciding whether to approve the terms of settlement, the court considered the competing interests of the parties; whether all interests that might be affected by the terms of settlement were represented in court; the nature of the litigation; the time it had taken for the matter to come to trial and the prospects of the litigation continuing through to another appellate hearing. The overarching concern was the substantial delay (over two years) in Ansett employees gaining access to their entitlements. The effect of approving the terms of settlement was that a distribution could be made to Ansett employees.
In these circumstances, the court approved the terms of settlement and the Trustee entering into the terms of settlement.
(ii) Proposed distribution of assets by the Trustee
The Trustee had received advice from an actuary on what would constitute a fair and equitable allocation of the assets remaining in the Plan and sought the Court's approval of a distribution of assets in accordance with that advice.
The court directed the Trustee to distribute the remaining assets in accordance with the actuary's advice. The manner in which the Trustee proposed to distribute the assets was devised on a fair consideration of the interests of members, on the advice of an experienced actuary, and in circumstances where there was no suggestion of a lack of good faith or ulterior purpose.
5.9 Ability of trustee to implement a scheme of arrangement and whether this would constitute fraud on the minority
(By Adam Schwab, Freehills)
Arakella v Paton [2004] NSWSC 13, Supreme Court of New South Wales, Justice Austin, 30 January 2004
The full text of this judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2004/january/2004nswsc13.htm
or
http://cclsr.law.unimelb.edu.au/judgments/
(a) Background
The GNS Trading Trust (“Trading Trust”) is a wholesaler of stationary and office supplies. Most of its customers are newsagents which operate in New South Wales, Queensland and Victoria. The Trading Trust was established in 1989 to concentrate the buying power of disparate newsagencies into a single entity and allow the small newsagencies to obtain supplies at cheaper prices. The Trading Trust has 3,400 customers (most of whom are newsagents) and 365 unitholders.
Unfortunately, the Trading Trust deed was poorly drafted and as a result, the deed had been breached in various ways. In addition, the Trading Trust failed to comply with the registration and disclosure requirements of the Corporations Act 2001 (Cth) (the “Corporations Act”) relating to the issue of units.
To overcome these problems, the Trustee proposed that a new company (“NewCo”) be established to acquire the units of the Trading Trust. The acquisition would occur via a scheme, in which existing unitholders would be issued with 100 per cent of the shares in NewCo. NewCo will subsequently operate in accordance with the (relatively) inexpensive regime applicable to private companies. NewCo’s constitution would not include the unworkable aspects of the Trading Trust deed.
However, for the proposal to be accepted, the court needed to determine:
whether section 81 of the Trustee Act 1925 (NSW) (“Trustee Act”) (see below) is wide enough to confer upon the trustee the ability to amend the trust deed to allow it to implement a scheme of arrangement; and
whether amending the terms of the trust deed for the purpose of implementing the transaction (upon receiving approval from a special majority of shareholders) will be considered ‘fraud on the minority’ in light of the principles enunciated by the High Court in Gambotto v WCP Limited (1995) 182 CLR 432 (“Gambotto”).
As a side issue, Justice Austin made an order under Part 8 rule 14 of the Supreme Court Rules allowing the unitholders of the Trading Trust to be represented by a Mr Geoffrey Paton. His Honour noted that “Mr Paton has the qualification and experience to act appropriately as a representative of the unitholders, and that his connections with the Trustee…do not compromise his position.”
Findings
(b) Is a Trustee able to amend a trust deed to implement a scheme under the Trustee Act?
The Trustee submitted that section 81 of the Trustee Act empowers a trustee to amend the terms of a trust instrument for the purposes of making a beneficial transaction (notwithstanding the fact the trust instrument does not permit amendments).
Section 81 provides that the court may confer upon the trustee the necessary power where any:
“…sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure or transaction is in the opinion of the court expedient, but…cannot be effected by reason of the absence of power.”
Justice Austin stated that the court cannot exercise its power under section 81 unless:
the court is of the opinion that the proposed transaction is expedient in the management or administration of the trust; and
the transaction cannot be effected by reason of the absence of any power vested in the trustee.
Justice Austin noted that the second limb of the test would clearly be satisfied as the Trading Trust deed does not permit the transfer of unitholders’ units to NewCo in exchange for the issue of shares in NewCo.
His Honour also agreed with the Trustee in relation to the first limb of the test, noting that:
“trusts created by the Trading Trust deed are trusts for the purpose of conducting a business for the benefit of participating newsagents. [An] essential component of such a business trust is that in normal circumstances, beneficiaries are expected to enter into participation when they commence a newsagency business, and depart when they cease to conduct their newsagency business. [Therefore] matters touching upon the issue, redemption and transfer of units are therefore matters arising in the management and administration of the stationary and office supply business conducted by the Trustee.”
(c) Can an order be made empowering a Trustee to affect a beneficial interest?
An issue also arose with respect to section 81 as to whether “there is an implied limitation to the effect that it [section 81] cannot be used where the transaction in question involves an alteration of beneficial interest.”
In relation to this point, his Honour considered various authorities, most notably, the decisions of Rath J in Perpetual Trustees Limited v Godsall and McLelland CJ in Permanent Nominees (Aust) Limited v National Australia Managers Limited. Justice Austin noted that [at 112]:
“[while] the Court’s power under section 81 cannot be used to subvert the beneficial disposition in the trust instrument…if an order is made in the management or administration of trust property, it is permissible under the section to accommodate the beneficial interests to the new situation created by the order.”
However, despite agreeing in principle to the Trustee’s submissions, Justice Austin declined to make an order under section 81 in this instance until he was satisfied that the unitholders have an appropriate opportunity to be heard in relation to the proposal.
(d) Will a scheme accepted by 75 per cent of unitholders be upheld under the Gambotto principles?
The other key issue considered by the court was whether the circumstances of the amendment to the Trading Trust Deed for the purposes of implementing the transaction would constitute a fraud on the minority, according to the principles enunciated in Gambotto.
The majority of the High Court in Gambotto held that alteration of a company’s articles of association so as to confer upon the majority power to expropriate the shares of a minority will be a fraud on the minority unless: (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders.
However, Justice Austin rejected the application of the Gambotto principles in this case because:
in the present case, the trust instrument will be amended pursuant to the orders of the Court. If the Court were to form the view that there was some procedural or substantive unfairness to unitholders or any group of them in the implementation of the proposal, it would be duty-bound to decline to make the order.
the proposed amendment will treat all unitholders equally, uniformly replacing their units with shares. Noting the decision of the majority of the New South Wales Court of Appeal in Heydon v NRMA Ltd (2001) 51 NSWLR 1, Justice Austin held that “the ratio in Gambotto has no application where the proposed amendment will replace all interests with another species of property in a manner that treats the interest-holders equally, at any rate (as here) there is no ‘majority’ voting bloc”; and
even if the Gambotto principles do apply, the amendments to the Trust Deed are being undertaken for a “proper purpose”. In this case, if the proposal is not adopted, the trustee will have to close down or sell the newspaper supplies and office products business as a result of the breaches of trust and the Corporations Act. As such, the “proper purpose” test from Gambotto would be satisfied.
5.10 Section 197(1) Corporations Act (director’s personal liability) applied despite full indemnity from trust assets available to corporate trustee
(By Emma Bailey, Mallesons)
Hanel v O’Neill [2003] SASC 409, Supreme Court of South Australia, Mullighan, Debelle and Gray JJ, 11 December 2003
The full text of this judgment is available at:
http://cclsr.law.unimelb.edu.au/judgments/states/sa/2003/december/2003sasc409.htm
or
http://cclsr.law.unimelb.edu.au/judgments/
(a) Parties
Mr O’Neill owned a shopping centre in Kingswood.
Mr Hanel was the sole director of Daroko Pty Limited (“Daroko”), a tenant in the Kingswood shopping centre, in its capacity as the trustee of the Daroko Unit Trust.
(b) Background
In March 2001, Mr Hanel gave notice on behalf of Daroko that Daroko intended to vacate the property on 30 June 2001. Daroko vacated the premises on 30 June 2001, some two years and three months before the lease was due to expire on 30 September 2003.
In July 2002, Mr O’Neill obtained judgment against Daroko in the Adelaide Magistrates Court for breach of lease. Daroko failed to pay the judgment debt and Mr O’Neill then obtained judgment against Mr Hanel for the debt.
Daroko and the Daroko Unit Trust had no assets, because Mr Hanel had caused Daroko to pay the company’s net profit for the previous financial year to a beneficiary of the trust, in August 2000.
Clause 21 of the Daroko Unit Trust’s trust deed indemnified Daroko out of the assets of the trust.
This case was the appeal by Mr Hanel against that judgment.
(c) The legislation
The main legal issue was whether, in the absence of sufficient trust funds, Mr Hanel was personally liable for Daroko’s debts pursuant to section 197(1) of the Corporations Act 2001 (Cth).
Section 197(1) provides that a director of a corporate trustee will be liable for the debts of the trustee if the trustee:
“(a) has not, and cannot, discharge [all or part of] the liability…; and
(b) is not entitled to be fully indemnified against the liability out of trust assets.
This is so even if the trust does not have enough assets to indemnify the trustee...”.
There was a further question as to whether the magistrate should have considered Mr Hanel’s defence that O’Neill failed to mitigate his loss, by declining to approve an assignment of Daroko’s lease to a new tenant proposed by Mr Hanel.
(d) The court’s decision
Mr Hanel argued that personal liability under section 197(1) did not apply because Daroko was entitled to a full indemnity under the Daroko trust deed, irrespective of the fact that the Daroko Unit Trust did not have sufficient assets to cover the debt.
A majority of the court (Justice Debelle dissenting) rejected Mr Hanel’s argument. The court held that whether Daroko was entitled to be indemnified out of the assets of the Daroko Unit Trust was a question of fact as well as law. If there were no assets in the Daroko Unit Trust, there was no entitlement to be indemnified for the purposes of section 197(1).
(e) A purposive approach to section 197(1)
Section 197(1) is the statutory successor of section 233(2) of the Corporations Law. Section 233(2) had been interpreted such that where a corporate trustee was entitled to be indemnified out of the trust assets, its directors were not liable merely because the trust assets were insufficient to indemnify the corporation for the relevant liability.
The question arose as to whether the repeal of section 233 and enactment of section 197 indicated a legislative intention to alter the liability of directors of corporate trustees. A majority of the court held that section 197 represented an extension to the liability of trustee company directors.
Justice Gray found that section 197(1) did not simply re-enact section 233 by use of different words - the fact that a new provision had been enacted to replace the old indicated a legislative intention for change. Justice Gray said that the words “This is so…” would be superfluous, and have no work to do, if the mere fact that there was an indemnity in the trust deed meant the section would not apply.
On that basis, Justice Gray found that section 197(1) should be construed in such a way that directors of a corporate trustee would be personally liability for debts incurred by the corporation where there are insufficient trust assets to meet the debt.
Justice Mullighan agreed with this approach, and stated that it would be inconsistent with the purpose of section 197(1) for directors of corporate trustees to avoid personal liability simply by ensuring that the relevant trust deed indemnified the corporation against liability, even in circumstances where the directors caused depletion of the trust assets.
(f) The dissent
Justice Debelle (dissenting) found that the repeal and re-enactment of a legislative provision (albeit in different terms) cannot be assumed to evince an intention that Parliament “necessarily intended to alter the law”. Justice Debelle examined the words in section 197 and found they substantially re-enacted section 233. Justice Debelle found that the effect of the sentence “This is so…” is such that where there is a legal basis for a full indemnity of the corporate trustee, the directors will continue not to be liable for the corporations’ debts, even where the trust assets are insufficient to fully discharge those debts.
Justice Debelle gave effect to the indemnity in clause 21 of the Daroko trust deed and accordingly, found that Mr Hanel could not be held personally liable under section 197(1) for Daroko’s debts.
(g) Duty to mitigate loss
Mr Hanel also argued that an alleged breach by Mr O’Neill of a duty to mitigate his loss raised an arguable defence. Justices Mullighan and Gray agreed that the question of mitigation was relevant to the extent of Daroko’s liability and that the defence raised by Mr Hanel ought to have been considered by the magistrate at first instance. The appeal was allowed and the matter remitted to the magistrate for trial.
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Centre for Corporate Law and Securities Regulation 2003
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