Oppressive Conduct Regime: can unitholders take advantage?
The oppressive conduct regime in the Corporations Act 2001 (Cth) (the Corporations Act) is designed to provide protection and extensive remedies for oppressed minority shareholders. It is one of a number of means to ensure Directors conduct the company’s affairs in good faith and in a manner which is in the interests of all shareholders.
Sections 232 and 233 of the Corporations Act allow shareholders to seek relief against oppressive conduct in circumstances where the conduct of the company’s affairs is alleged to be:
- contrary to the interests of the members as a whole – s232(d); or
- oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member – s232(e).
The Court has broad powers under section 233 to grant relief to oppressed shareholders, including the power to wind up the company, appoint a receiver/manager, grant injunctions and, importantly, providing for the buy-out of shareholders.
The question considered here is whether “unitholders” of a unit trust can seek the same relief as “shareholders” under those provisions. The law in this respect is uncertain; hence the importance of having a Unitholders Agreement or equivalent right in the unit trust deed. The uncertainty arises because the jurisdictions of NSW and VIC have taken different positions on whether unitholders can seek relief under the oppressive conduct provisions of the Corporations Act, even where there is a corporate trustee.
The New South Wales Approach
The NSW approach is that claims of oppression and entitlement to relief under the Corporations Act are limited to the company only, and does not apply to its capacity as a trustee in the course of administering the trust. This is so, notwithstanding that the sole purpose of the company may be to act as trustee. Even where oppression has occurred against a trust beneficiary in a company which holds all its assets on trust, there is no diminution in value of the complainant’s share in the company (the shares in the company being valued at nil or the nominal amount of $1) and therefore no prejudice or unfairness occurs.
Plainly, the NSW position is that “oppression” against a beneficiary of a trust is a matter to be raised as “a breach of trust” not a Corporations Act cause.
The Victorian Approach
Victoria has departed from the NSW approach in that Courts will look at the conduct of the majority unitholders “as a whole” regardless of whether the conduct relates to their position as a shareholder or as a unitholder or both. The Courts have considered the application of section 53 of the Corporations Act in the interpretation of the oppression provisions.
For conduct to be oppressive it must be in relation to the “conduct of a company’s affairs’. Section 53 provides that “affairs of a body corporate” include:
- business, trading, transactions and dealings as trustee; and
- where a company is a trustee: matters concerned with beneficiaries, their rights under the trust and any payment they have received or are entitled to receive under the terms of the trust.
It has been held that section 53 is broad enough to extend to the oppression remedy where the oppression relates to the operation of the trust which has a corporate trustee and potentially extends oppression of a member to include their interests and associated interests as a “unitholder”. Even if that was so, it nevertheless may be that in many cases it is possible to separate the affairs of the company from those of a trust. Whether that can be done depends on the facts.
The Australian Capital Territory Approach
Unfortunately the ACT approach is unclear as the issue appears untested. In our view the NSW approach is likely to prevail for reason that a corporate trustee is bound to act in accordance with the Trust Deed and if the Trust Deed does not set out conduct which (if reached) could be unconscionable, then the corporate trustee cannot be engaging in unconscionable or oppressive conduct separately. Our view is that the rights of a beneficiary under a trust are determined according to the terms of the trust and the law of trusts.
Whether the laws of oppression reliant on the Corporations Act 2001 apply or don’t apply should be an academic question. The advantage in having a Unitholders Agreement is that if the document is well prepared, there will be clear rights and obligations on each of the parties to identify what conduct is or is not acceptable, reducing or even removing the possibility of claims of oppression and providing unit holders with a clear path out of the unit trust. If a business is designed to be an investment it should also be designed to be realised.
This article is intended to provide a summary of the subject matter only. It does not purport to be comprehensive or to render legal advice. No one should act on the basis of any matter contained in this article without first obtaining specific professional advice.