Edwards v Idaville Pty Ltd

[1996] FCA 864

CATCHWORDS

CORPORATIONS - oppression or unfairness within s.260 of the Corporations Law - whether any relief should be granted.

Corporations Law, s.260

Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60
Dynasty Pty Ltd v Coombs (1995) 59 FCR 122
Re: Lowes Park Pty Ltd; Headlam v Lowes Park Pty Ltd (1994) 62 FCR 532

NEIL LUKE EDWARDS -V- IDAVILLE PTY LTD & ANOR

WAG 48 of 1996

Burchett, Ryan and Lee JJ
Perth
17 September 1996

IN THE FEDERAL COURT OF AUSTRALIA )  
  )
WESTERN AUSTRALIA DISTRICT REGISTRY)  WAG 48 of 1996
  )
GENERAL DIVISION                 )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:NEIL LUKE EDWARDS

Appellant

AND:IDAVILLE PTY LTD

First Respondent

AND:     GRAHAM FRANCIS EDWARDS

Second Respondent

CORAM:    Burchett, Ryan and Lee JJ.
PLACE:    Perth
DATE:     17 September 1996

MINUTE OF ORDERS OF THE COURT

THE COURT ORDERS THAT:

(1)The appeal be allowed to the extent that the order in respect of costs made below be set aside, but otherwise be dismissed.

(2)In lieu of the order set aside, it be ordered that the costs of all parties be paid out of the assets of the trust.

(3)The costs of all parties of the appeal be paid out of the assets of the trust.

NOTE:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA ) 
  )
WESTERN AUSTRALIA DISTRICT REGISTRY)  WAG 48 of 1996
  )
GENERAL DIVISION                 )

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:NEIL LUKE EDWARDS

Appellant

AND:IDAVILLE PTY LTD

First Respondent

AND:     GRAHAM FRANCIS EDWARDS

Second Respondent

CORAM:    Burchett, Ryan and Lee JJ.
PLACE:    Perth
DATE:     17 September 1996

REASONS FOR JUDGMENT

BURCHETT and RYAN JJ:

This appeal is concerned with the problem whether relief should have been granted to the appellant under s.260(2) of the Corporations Law on the ground that the affairs of the first respondent company were "being conducted in a manner that [was] oppressive or unfairly prejudicial to, or unfairly discriminatory against" the appellant, a member of the company.  At the root of this problem, however, were events which occurred before the company was formed.  The appellant, who is the son of the second respondent, lost a kidney surgically following a football injury sustained at the age of twenty.  The consequences were particularly devastating for
him, because he had been born with only one kidney.  As a result, he has had two subsequent transplant operations.  In an action for damages for medical negligence, the appellant recovered, by settlement, a net sum of $650,000.  That sum was made the subject of a trust, to be administered by a company incorporated to act as trustee, of which the appellant ("the son") and his father ("the father") were made the shareholders and directors.  This company is the first respondent. 

By the instrument of trust, the power of appointment of a new trustee was conferred on the father, and the trust was declared to be a discretionary trust of which the primary objects included both the father and the son.  A particular feature of the documents is important for the issues involved in this dispute.  In the accounts of the trust, the sum of $650,000 is shown as a loan to it by the father.  There was express agreement, during the proceedings below, that the parties were not raising the accuracy of that entry as a question to be decided in the present case.

Although the situation was somewhat different previously, since 1992 the whole of the earnings of the trust have been allocated, in the exercise of the trustee's discretion, to the appellant. 

Sadly, differences have come to fester in the relationship between father and son, and this proceeding has resulted. The appellant sought orders, as mentioned, on the basis of a case mounted under s.260(2) of the Corporations Law.  He relied on the dominant position conferred on his father, as the person with power to appoint a new trustee, being at the same time an equal director and shareholder of the company, and also its major creditor, by virtue of the arrangements concerning the company and the trust.   It was pointed out that the father had failed to ensure the holding of meetings.  However, the appellant had an equal power to call meetings, and the trial judge found that the business in fact transacted in his absence was not of an oppressive kind.  Indeed, as has been said, the whole of the income has for a substantial period been allocated to the appellant. 

A more serious matter of complaint relates to the withdrawal of a sum of $75,000 on 8 February 1994 from the trust funds.  It appears that during 1993 a house was being built on the father's farm, which was then intended to be occupied by the father and his father, the appellant's grandfather.  They were going to provide the cost equally between them.  However, the grandfather died on 2 November 1993, and the father, who thought the appellant's living conditions at the time were very unsatisfactory, conceived the idea that he should provide a home for the appellant in this house.  On that basis, he thought it appropriate to withdraw the sum of $75,000 in respect of the cost of it.  The trial judge held it was "more probable than not" that the father failed to consult as he should have done with the son before taking this action.  As a result, "legitimate concerns on the part of the applicant and his advisers in relation to the security of the Trust funds ... led to the issue of the present application."  But his Honour added:

"Nevertheless, I am unable to conclude that the conduct relating to the two unauthorised withdrawals [there was a smaller withdrawal which was fully explained] reaches the level of being 'oppressive' or 'unfairly prejudicial' or 'unfairly discriminatory'.  It is not established that the withdrawal of the $75,000 was made in furtherance of the second respondent's personal ends.  The residence was built and was available for use by the applicant and his family.  When this withdrawal was made the second respondent had at least an arguable justification for debiting the applicant's beneficiary loan account.  However, that was not done.  The amount was treated as a drawing by the second respondent by way of loan."

The father's intention in respect of the home having miscarried, the amount of $75,000 was eventually repaid to the trust, but only just before the hearing at first instance, that is after some two years, and without interest.  So far as the question of interest is concerned, it is relevant to note that, early in the existence of the trust, moneys were distributed to the father who, at that time, was contributing to the son's support, but the father left those moneys in the trust without claiming or receiving any interest.  It has not been suggested that there is not a reasonable equivalence between the sums which would be involved if interest were paid both to the trust and to the father.

The cases make it clear that the Court should not take a narrow view in determining whether there has been shown the unfairness with which s.260 is concerned: Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60; and on appeal sub nom.  Dynasty Pty Ltd v Coombs (1995) 59 FCR 122 at 130; Re: Lowes Park Pty Ltd; Headlam v Lowes Park Pty Ltd (1994) 62 FCR 532 at 545 et seq., and the authorities there collected.

The appellant accepts that, apart from his complaint concerning the failure to pay interest upon the repayment of the sum of $75,000, the trust has for several years been administered solely for his benefit.  But it is contended that the problems which did occur, and led to the institution of these proceedings, justify a limited form of relief.  The relief sought is an order having the effect of adding to the father and son, as shareholders and directors, a third person, a professional money manager, who could provide an independent voice on the board of the company.  A difficulty about this, even if it were otherwise appropriate, would be the cost.  The income of an investment of the order of that held by the company is not immense.  The deduction of an independent director's professional fees would erode it significantly.  Indeed, an important asset of the trust, in practical terms, is the dedication to its success of the father himself, without remuneration.  To allow the difficulties that have arisen to lead to the dissipation of trust income would be unfortunate, unless the circumstances really make it necessary.  We agree with the trial judge that this has not been shown.  The step which has been taken of requiring all cheques to be signed by both directors, a procedure which has now been followed for some two years, and the fact that the father has concurred in decisions making the whole of the income available to the son, are circumstances supporting the decision under appeal. 

There is one aspect of the orders made below, however, which calls, in our opinion, for appellate intervention. The application was not merely dismissed, but dismissed with costs. It should not be overlooked that the appellant had established the "legitimate concerns" to which we have referred, and the repayment of the $75,000 was effected only after, and well after, the institution of the proceedings. Two points should be recognized. On the one hand, it would be quite wrong for the dismissal of the application with costs to send a signal to the father that the proceedings were wholly without justification, or that s.260 can be disregarded. The truth is that there was some justification for the proceedings, but that the circumstances as they appear at the present time do not call for the making of an order against the company or against him.  The other matter requiring to be acknowledged is that the difficulties which have arisen have their source in the trust arrangements, and in views which appear to have been genuinely held by the father and the son respectively as to how those arrangements ought to be implemented.  Our conclusion is that the appeal should be allowed to the extent that the order in respect of costs

should be set aside and, in lieu thereof, it should be ordered that the costs of both parties be met by the trust.

I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett and his Honour Justice Ryan.

A/Associate:

Date: 17 September 1996

IN THE FEDERAL COURT    )
OF AUSTRALIA           )
WESTERN AUSTRALIA      )
DISTRICT REGISTRY      )
GENERAL DIVISION       )    NO. WAG48 OF 1996

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

B E T W E E N:     NEIL LUKE EDWARDS

Appellant

and

IDAVILLE PTY LTD

(ACN 009 392 492)

First Respondent

and

GRAHAM FRANCIS EDWARDS

Second Respondent

CORAM:    BURCHETT, RYAN, LEE JJ
DATE :    17 SEPTEMBER 1996
PLACE:    PERTH

REASONS FOR JUDGMENT

LEE J:

I have had the opportunity to read in draft the reasons prepared by Burchett and Ryan JJ and agree with the conclusion of their Honours that the appeal succeed in so far as the judgment is to be varied in respect of the order for costs.  As to the principal issue of the appeal I am not persuaded that on the case as presented to the trial Judge, his Honour erred in deciding that no relief should be granted under sub-s260(2) of the Corporations Law in respect of the affairs of the first respondent ("the corporation").  If, on the evidence, a view was formed that the second respondent had acted, and would continue to act, as he saw fit in directing the affairs of the corporation, it may have been considered unrealistic to expect the appellant as co-director to be able to restrain the second respondent without external assistance.Whether relief was to be granted was a matter of discretion for his Honour and although another mind may have concluded that the absolutist conduct of the second respondent required orders from the Court to restore balance in the administration of the corporation, the possibility of an alternative conclusion does not bespeak error in his Honour's execise of the discretion.

The central but unresolved issue in the matter is the status of the monies used by the corporation as trustee of the discretionary trust.  In the accounts prepared for the corporation, on the instructions of the second respondent, those monies are described as monies lent to the corporation by the second respondent.  His Honour was required to assume that the accounts reflected the true position.  The sum "lent" by the second respondent was the amount awarded to the appellant, by consent, in an action for damages for injuries suffered by the appellant by reason of medical negligence.  The appellant was not under a legal disability at the time the award was made.  It was not suggested that the appellant was indebted to the second respondent at the time the sum was received by the second respondent.  Subsequently the family
farming partnership was reformed without the appellant continuing as a partner.  Those limited facts may suggest that it is surprising that the second respondent asserts that he received an absolute gift of the damages awarded to the appellant and, without any obligation in equity to do so, lent those monies to the corporation to be repaid, apparently, on demand. 

Whether the second respondent can maintain such a claim is of substantial relevance to the quality of the second respondent's conduct as a director of the corporation. If the monies received by the second respondent from the appellant were received on trust for the corporation to be held and used by the corporation for the purposes of the discretionary trust, the position of the second respondent in contending that he was absolutely entitled to the sum received from the appellant, made his position as a director of the corporation untenable. In that event orders granting relief under s260 of the Corporations Law would be appropriate, given that such conduct by a director of a corporation acting as trustee would be antithetical to the performance of the duties of the trustee.

According to the conduct of the parties in this litigation that question appears set to be the subject of further proceedings and wasteful expense.

I certify that this and the preceding three pages are a true copy of the Reasons for Judgment of his Honour Justice Lee.

Associate:
              Date:

APPEARANCES

Counsel for the Appellant:  K.J. Martin

Solicitors for the Appellant:  Gibson & Gibson

No appearance for the First Respondent.

Counsel for the Second Respondent:  M. McCusker, Q.C.
  K.F. Sleight

Solicitors for the the Second Respondent:  Mayberry Hammond & Co

Date of Hearing  :  27 July 1996
Date of Judgment :  17 September 1996