Wain v Drapac

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IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

CORPORATIONS LIST

No. SCI 2010 01061

ENDOLINE PTY LTD (ACN 051 437 499)

ASHLEY JOHN WAIN & ORS

Plaintiffs

MICHAEL JOHN DRAPAC & ORS

Defendants

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JUDGE:	FERGUSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	2- 4, 9-13, 16-18 May, 20-23, 27 June, 3, 4, 9 August 2011
DATE OF JUDGMENT:	26 April 2012
CASE MAY BE CITED AS:	Wain & Ors v Drapac & Ors
MEDIUM NEUTRAL CITATION:	[2012] VSC 156

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EQUITY – Beneficial ownership of shares in companies and units in trusts – Employees holding copy share and unit certificates - Whether copy share and unit certificates held as an escrow – Whether resulting trust

CORPORATIONS – Oppression – termination of employment and removal as director – Conduct of director in relation to loan by related company – Plan to dilute shareholders’ interests – No reasonable offer to purchase – Whether orders for purchase of shares and units at fair value should be made - Corporations Act 2001 (Cth) ss 53, 232, 233

APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr I.G. Waller SC with Mr H.L. Redd	Isakow Lawyers
For the Defendants	Mr P.B. Murdoch QC with Dr A.P. Trichardt	B2B Lawyers

TABLE OF CONTENTS

Introduction......................................................................................................................................... 2

Observations about the main witnesses........................................................................................ 5

Mr Michael Drapac....................................................................................................................... 5

Ms Melissa Weston (formerly Lazzaro)..................................................................................... 5

Mr Wain.......................................................................................................................................... 6

Mr Murchie.................................................................................................................................... 6

Mr Mercuri..................................................................................................................................... 7

Are Mr Wain and Mr Murchie beneficially entitled to the shares and units that they hold?..... 7

Has there been oppression?........................................................................................................... 46

Termination of Mr Wain’s employment.................................................................................. 46

1-13 Cobden Street, South Melbourne..................................................................................... 47
High Street, Kew...................................................................................................................... 51
36, 36a and 38 Church Street, Hawthorn................................................................................ 57
Fortitude Valley, Brisbane........................................................................................................ 58
Events leading to the termination of Mr Wain’s employment.................................................. 60
Conduct in relation to Le Boulevard........................................................................................ 66

Removal of Mr Wain as a director............................................................................................ 79

Resignation of Adam Murchie.................................................................................................. 81

Copy of the server....................................................................................................................... 82

Conclusion in relation to oppression....................................................................................... 84

What is the appropriate relief?....................................................................................................... 89

Did Mr Wain and Mr Murchie breach their employment agreements or duties as directors? 95

Conclusion......................................................................................................................................... 96

Schedule – The Drapac Group...................................................................................................... 97

HER HONOUR:

Introduction

Michael Drapac has been a successful businessman.[1] With the assistance of his staff, he has built a profitable property development and investment business over a period of more than two decades through a number of companies and trusts that he controlled (“the Drapac Group”). A list of the Drapac Group companies and trusts is attached to these reasons.
[1]Mr Drapac is the first defendant and a plaintiff by counterclaim. The other defendants and plaintiffs by counterclaim are companies controlled by Mr Drapac.

Over time, Mr Drapac has employed a number of young people in the business. Two such employees were Ashley Wain and Adam Murchie.[2] In a two year period from July 2004 to July 2006, Mr Wain and Mr Murchie (either directly or through companies that they control) were issued with shares in two companies, Endoline Pty Ltd and Drapac Management Ltd, and units in trusts that form part of the Drapac Group. Other employees (including Santino Mercuri, who was a witness in this proceeding) were also issued with shares and units. Mr Wain holds a 13.5% interest and Mr Murchie a 3.5% interest in the relevant entities.
[2]Mr Wain and Mr Murchie are the first and fourth plaintiffs and the first and fourth defendants to counterclaim. The other plaintiffs and defendants to counterclaim are companies controlled by either Mr Wain or Mr Murchie.

Although they worked together harmoniously for a number of years, the relationship between Mr Drapac, on the one hand, and Mr Wain and Mr Murchie on the other hand, soured. Mr Wain’s employment was terminated in October 2009. Mr Murchie resigned in December 2009.

Mr Wain and Mr Murchie seek orders under s 233 of the Corporations Act 2001 (Cth) for the purchase by Mr Drapac and entities that he controls of the shares and units they hold. Among other things, s 233 provides for relief to be given where the conduct of a company’s affairs is oppressive to, unfairly prejudicial to, or unfairly discriminatory against a member, whether in their capacity as a member or not.[3]
[3]Sections 232 (a), (e) and 233 Corporations Act.

The first issue in this proceeding is whether Mr Wain and Mr Murchie are beneficially entitled to the shares and other interests registered in their names or whether they hold them for the benefit of entities controlled by Mr Drapac. There are no documents recording that any of the interests held by Mr Wain and Mr Murchie and their companies were issued on trust for Mr Drapac or his company, Briaroaks Pty Ltd. However, part of Mr Drapac’s case is that the employees were only to have equity in the Drapac Group if they remained employed for a period of ten years to 31 December 2014. He alleges that no agreement for equity participation was entered into by the parties and they paid no consideration for the shares and units that were issued to them. He claims that the shares and units issued to Mr Wain, Mr Murchie and their companies are held as an escrow or on trust for entities related to him.

If Mr Murchie and Mr Wain hold the shares for themselves, then there is a question as to whether there has been oppressive conduct entitling them to the relief that they seek. In this regard, they rely on the manner in which their employment came to an end, matters concerning one of the Drapac Group projects (known as Le Boulevard), an alleged plan to dilute their interests in the Drapac Group and the absence of a reasonable offer to purchase their interests.

There is also an issue as to whether or not Mr Wain or Mr Murchie breached their employment contracts and duties as directors. These allegations mainly concern the retention and use of confidential information and three properties which the Drapac Group may have been interested in pursuing, but which it is alleged Mr Wain diverted away from the group.

By consent of the parties, the trial proceeded on all issues except:

(a)the valuation of the shares and units issued to Mr Wain, Mr Murchie and their companies; and
(b)the quantification of the claims by Mr Drapac and the other plaintiffs by counterclaim.

For the reasons which follow, I have determined that the shares and units are held beneficially by Mr Wain, Mr Murchie and their companies and that the conduct of the affairs of Endoline and Drapac Management is oppressive to and unfairly prejudicial to Mr Wain and Mr Murchie. Orders should be made for the purchase of their interests at fair value. Mr Wain and Mr Murchie did not breach their employment contracts.

The matter should be listed for further directions in advance of a trial on the remaining issues.

The structure of the remainder of these reasons is as follows:

·my observations about the key witnesses;
·consideration of whether Mr Wain, Mr Murchie and their companies own the various shares and units beneficially (beginning with the factual matters relevant to that issue);
·consideration of whether there has been oppression (including a review of various allegations concerning oppressive and unfair conduct – principally, the events leading to the termination of Mr Wain’s employment (including his conduct in respect of properties at Cobden Street, South Melbourne, High Street, Kew, Church Street, Hawthorn and Fortitude Valley, Brisbane));
·the conduct of Mr Wain and Mr Drapac in respect of the Le Boulevard, Surfers Paradise project;
·Mr Wain’s removal as a director and the circumstances in which Mr Murchie resigned;
·consideration of what relief is appropriate under s 233 of the Corporations Act;
·brief consideration of the defendants’ counterclaim.

Observations about the main witnesses

Before considering each of the issues, I will say a few things about the main witnesses who gave evidence about critical issues that were in dispute.

Mr Michael Drapac

Mr Drapac’s recollection of events was hazy. He had difficulty recalling the detail of discussions and the timing of them. He could not recall his state of mind at various points. He stated that things come and go from his memory. He struck me as someone who does not retain any detail of conversations. This meant that I could not rely on his evidence unless it was supported by contemporaneous documents or other credible evidence. Mr Drapac’s evidence was that he relied heavily on professional advisers (lawyers and accountants). He expected them to look after the documentation. For example, if a trust was to be created, he expected that they would attend to any documentary requirements. Whenever a document did not exist or a document was signed by him that did not support his case, Mr Drapac gave evidence to the effect that he had relied on professional advisers.[4] When documents were put to him that had been prepared by his lawyer or personal assistant, he was quick to distance himself from the content if it did not support his case. It is not surprising that Mr Drapac would rely on professional advisers and his personal assistant, but it is difficult to accept that they were off on a frolic of their own, or were acting other than in accordance with his instructions.
[4]See, for example, [121].

Ms Melissa Weston (formerly Lazzaro)

From mid 2008, Ms Melissa Weston (or Lazzaro as she was then known) acted as Mr Drapac’s personal assistant. Ms Weston subsequently became the general manager of the Drapac Group. She sent and received emails on behalf of Mr Drapac. Although she was cross examined in a very fair manner, she was, at times, visibly upset when she was giving her evidence. Ms Weston gave evidence the day after Mr Drapac. She denied receiving or reading the transcript of Mr Drapac’s evidence or of speaking to Mr Drapac about his evidence. However, even allowing for the pressure or stress she appeared to be under in the witness box, and the effect that this might have on her evidence, her oral testimony seemed rehearsed and tailored to suit Mr Drapac’s case.

Her evidence was often in direct conflict with the plain meaning of contemporaneous documents that she had authored. For example, because of the way that the defendants put their case, much of the evidence went to whether there was a contract between Mr Drapac and the employees that entitled them to equity in the Drapac Group. In emails and documents prior to these proceedings that were authored by her, Ms Weston referred to the “current agreement” relating to the equity entitlement of Mr Wain and Mr Murchie. She did not refer to it as a draft agreement. However, in her affidavit evidence and the oral evidence that she gave during the trial, she assiduously used the word “draft” when referring to the agreement.[5] She denied doing this because she thought it would assist Mr Drapac’s case. Overall, her evidence was not reliable unless it was supported by contemporaneous documents. Other examples of unsatisfactory evidence that she gave appear in what follows below.[6]
[5]See, for example, [91], [92], [107]
[6]See [85], [222] and [256] below.

Mr Wain

Mr Wain was cross examined over a number of days. At times, he was not as forthcoming with answers as might have been expected in other circumstances. On occasion, he prevaricated. Given the length and nature of his cross examination, this is perhaps not surprising. In the main, his evidence accorded with the contemporaneous documents. One exception was that he was initially not willing to concede that the colloquial term “hand cuffs” had been used to describe the ten year restriction on the employees before they could realise their interests in the Drapac Group. As will be seen from what follows, that term is littered throughout the documents that Mr Wain received and some that he signed.

Mr Murchie

Mr Murchie was also cross examined at length. He struck me as an honest witness. There were some occasions when he was argumentative, but again, given the nature of the dispute and the length and nature of the cross examination, that was not surprising. He was a careful notetaker during the relevant period and I found his evidence to be reliable.

Mr Mercuri

Mr Mercuri was not a party to the proceeding. He gave evidence in a forthright and open manner. I formed the view that he was a witness of truth.

Are Mr Wain and Mr Murchie beneficially entitled to the shares and units that they hold?

Mr Drapac has been involved in property investment and development since about 1979. He founded the Drapac Group in 1987. In more recent times, the Drapac Group has established several managed investment schemes.

In February 1996, whilst he was still a student, Mr Wain undertook a placement with Briaroaks[7] trading as Michael John Drapac & Associates and Drapac Consulting. As previously mentioned, Briaroaks is a company controlled by Mr Drapac. At the end of 1996, Mr Wain became a full time employee as a property manager. At this time, the Drapac Group had four employees (including Mr Wain and Mr Drapac). From November 2005, Mr Wain was employed by Drapac Consulting Pty Ltd until his employment was terminated.
[7]Briaroaks Pty Ltd is the second defendant and first plaintiff by counterclaim.

Mr Wain’s role in the Drapac Group was to source and investigate prospective property acquisitions, manage the financial modelling for the projects, secure debt funding and manage projects through the building stage to their completion. Mr Wain was involved in a number of the important projects that the Drapac Group undertook.

From the beginning of 1999, Mr Mercuri worked full time in the Drapac Group. He was responsible for sourcing new investment and development opportunities for the Drapac Group with most of his time spent on managing the investment projects. He and Mr Wain worked together closely.

Mr Drapac and Mr Murchie share an interest in cycling. They met when they both had roles at Cycle Sport Victoria – Mr Murchie was the executive officer and Mr Drapac was a director. Mr Drapac offered Mr Murchie employment with the Drapac Group and he became a fulltime employee in 2001. By this time, there were about ten staff working in the Drapac Group. Originally Mr Murchie performed a project co-ordinator role and later he moved on to other roles. From late 2002 or early 2003, Mr Murchie became involved in the funds management arm of the Drapac Group. Mr Murchie was employed by Drapac Consulting Pty Ltd until he resigned.

Over time, Mr Wain, Mr Murchie, Mr Mercuri and some other employees came to be referred to as the “key employees”. In addition to their wages, the key employees were paid bonuses on a project by project basis, calculated as a percentage of project profits. The percentage of profit share paid to each employee varied, with the largest percentage commonly being awarded to Mr Wain. Some of the agreements about these bonuses were recorded in writing. Sometimes the bonus took the form of a percentage of units in the relevant trust vehicle for the project.

By about mid 2004, Mr Drapac realised that to grow and ensure the future sustainability and profitability of the Drapac Group he had to involve and retain some of the employees. He was conscious that in the property investment and development industry, it was not uncommon for competitors to poach a team from a rival business. Mr Drapac determined that the key employees who were to share equity in the Drapac Group would include Mr Wain, Mr Mercuri and Mr Murchie, together with a limited number of other employees. Mr Drapac says that he told the employees that he would ensure that those who committed to grow and develop the business over the following ten years from the start of 2005 would be entitled to equity in the Drapac Group, which would include a share of ongoing profits at the end of the period. Those interests were to be in addition to salaries and bonuses.

There were a number of discussions between Mr Drapac and the key employees as the concept evolved and, from time to time, shares and units in Drapac Group entities were issued to the key employees including Mr Wain and Mr Murchie and their companies, Burayda[8] and Murchie Investments respectively.[9]
[8]Burayda Pty Ltd is the second plaintiff and the second defendant to the counterclaim.
[9]Murchie Investments is the fifth plaintiff and the fifth defendant by counterclaim.

The first units issued were in the Drapac Trust Number 2 on 28 July 2004. Drapac Management is the trustee of that trust. The trust was established in respect of an investment property at 140 Bourke Street, Melbourne. 130 units were issued to Burayda, 35 units were issued to Murchie Investments and Mr Drapac’s company, Briaroaks, was issued with 630 units. Minutes of a director’s meeting of 28 July 2004 of Drapac Management (as trustee for Drapac Trust No 2) record the resolution for the allotment of these units. A unit certificate of the same date certifies that Burayda (as trustee for the Ashley John Wain Family Trust) is the registered holder of the fully paid ordinary units. The certificate is signed by Mr Drapac and Mr Wain. Mr Wain says that he paid a nominal amount for Burayda’s units. Mr Murchie says that he paid $1 per unit although that amount was not paid in cash but rather by way of loan account. There was no written loan agreement.

There is a dispute as to whether the arrangement for the key employees to have equity in the Drapac Group was subject to them continuing employment within the group for a particular period (which started out as 12 years and later became ten years). According to Mr Drapac, the employees were only to be entitled to equity once they had completed a further ten years service in the Drapac Group after the beginning of January 2005. Mr Drapac says that he told the key employees this many times both in group and one on one meetings. He says that the key point was to grow as a cohesive team and develop a sustainable diversified Drapac Group.

Mr Wain denies that there was any suggestion that the key employees were only entitled to equity after a further ten years service, or that he agreed to such a condition. According to him, Mr Drapac said that the arrangement was a new group structure to ensure that the team stayed together and grew over a ten year period with capital to be re-invested during that period. Mr Wain says that the first time he became aware that Mr Drapac was claiming that the interests were held as a trustee or custodian was when he received a copy of the defence and counterclaim in this proceeding in May 2010. He accepted that there was a lot of talk about ten year handcuffs with the intention to keep the group together for a ten year period, but he says this was an aspiration or an ambition and not a precondition or obligation that Mr Drapac was insisting upon. According to Mr Wain, the discussions between the key employees and Mr Drapac never got to a point of saying it was ten years or nothing. In cross examination, Mr Wain did accept that an early proposal was that there would be a hybrid arrangement where some assets would be held for ten years so that a fund of $50 million would be accumulated and would only be paid out after the expiration of the ten year handcuff period. However, Mr Wain says that the structure was simplified and this proposed arrangement did not proceed.

Mr Murchie says that in 2004 the general tenor of the discussions that he had with Mr Drapac was that a staff equity scheme was being worked on, that as he was a key employee he would be getting some equity in the Drapac Group and that Mr Drapac wanted him to commit to the group for a period of time. According to Mr Murchie, the scheme was being developed by others and he did not know all the details for it. His evidence was that the allotment of shares and units to him was not conditional on his agreement to spend the next ten or twelve years with the Drapac Group. From Mr Murchie’s perspective, he had committed to the Drapac Group in good faith and was seeing that through.

Mr Mercuri denied that Mr Drapac ever said that his units or shares were provisional when they were issued to him. Mr Mercuri’s evidence was that the first time that it was suggested to him that he was not the beneficial owner of his interests in the Drapac Group was when his accountant received a letter from Mr Drapac dated 6 July 2010. He recalled that Mr Drapac had wanted him to commit to work for a period of 10 years for the Drapac Group with the intent of trying to keep a motivated group of employees together to grow and develop the business. In cross examination he accepted that it was probably correct that in order to obtain equity participation in the Drapac Group it was a condition that they stay as a team for ten years.

Graham Haydar was the Drapac Group’s external accountant. At the suggestion of Mr Haydar, Argyle Partnership Lawyers (“Argyles”) were engaged to advise on the tax implications of the equity participation scheme. Argyles prepared draft trust documents in this regard, although those documents were never executed.

The correspondence that passed between Mr Haydar and Argyles lends support to the original idea being that the key employees would be entitled to income distributions prior to expiry of the handcuff period (originally 12 years) with any capital benefit only to be available after the handcuff period had expired. For example, in a letter from Argyles of 3 August 2004 to Mr Haydar, the following appears:

“The terms of the employee deed (together with the rights attaching to the units) must be structured to decrease the potential of an employee claiming (whether as part of an unfair dismissal claim or otherwise) their proposed entitlement under the DSIT should Michael Drapac terminate their employment for any reason prior to the expiration of the 12 years”.

Another example is an email between Argyles and Mr Haydar of 9 September 2004, in which the question was asked whether a decision had been made as to the maximum entitlement to units being issued upfront so as to minimise the future capital gains tax and fringe benefit tax issues. The response was that the maximum entitlement to capital that each employee may ultimately become entitled to should be provided for on the terms of issue of the units (that is, upfront). It was said that this would minimise the potential tax issues.

In about September 2004, Mr Wain approached Mr Haydar to become the General Manager of the Drapac Group. To this end, Mr Wain sent an employment offer to him. The terms of the offer included a permanent share in the Drapac Staff Investment Trust which was conditional on execution of a 10 year employment contract until 31 December 2014. The following was also included in the letter:

Drapac Ongoing Infrastructure

Key Staff (Ashley Wain, Santino Mercuri, Adam Murchie) to execute minimum 10-year employment contracts until 31 December 2014 in conjunction with the settlement of the Drapac Staff Incentive Trust.

Attached to the letter of offer was a table setting out what Mr Wain described as “the proposed breakdown of the staff incentive trust between our various staff members.” Amongst other things, that table showed “fixed trust entitlements” of 13% for Mr Wain and 3.5% for Mr Murchie and “annual allocation 2004/2005” for each of them of 11% and 1.75% respectively.

Mr Haydar took on the role of General Manager of the Drapac Group from January 2005. Some documents prepared by Mr Haydar from early 2005 support the contention that the entitlement to capital in the Drapac Group (through what was then known as the “Drapac Staff Incentive Trust” and later became the Drapac Holdings Trust) was to be linked to ten years of service from 1 January 2005. For example, there are a number of documents prepared by Mr Haydar that include statements such as:

“Payout of capital is only after ten years of service from 1^st January 2005 or upon reaching a trigger event as defined under the Trust Deed.”

In addition, many of the early documents include references to the “ten year handcuff period.”

The objectives of the equity scheme were recorded from about this time as two fold. First, “to offer the key employees in the Drapac Group ownership of the business and to reward them for their loyalty to the business (‘capital entitlement’)” and secondly, “to allocate a share of annual profits to all employees in the Drapac Group for their loyalty, commitment and performance during the year (‘annual income entitlement’).”

On 12 April 2005, Mr Haydar sent an email to Argyles with a number of queries in relation to the “Drapac Staff Incentive Trust”. Mr Haydar indicated that he wanted to finalise the draft documents and that the key employees were in the process of taking the drafts for legal review. One of the queries that Mr Haydar had was as follows:

“The deed needs to spell out the mechanism to calculate the redemption value of Ordinary Units if made either before 10 years or after 10 years? My thoughts are if redeemed within ten years, these are redeemed at cost and if redeemed after ten years, these are done at current market valuation.”

In a document created in about mid-2005, the key features of the “Drapac Staff Investment Trust” were set out in bullet points. Under the heading “Profit Share Criteria”, the following appears:

“Payout of capital is only after 10 years of service from 1^st January 2005 or upon reaching a trigger event as defined under the Trust Deed. (eg tripper events include death of KE, winding up of the DSIT Trust, floating of the business, selling of the ASIC licences, et cetera).”

Mr Murchie says that by 2005, a period of 10 years was mentioned as the period of commitment the employees were expected to give. Mr Murchie understood from Mr Haydar that the Drapac Holdings Trust (which was established on 27 June 2005) was to be one of the vehicles through which the equity scheme would be given effect. By the time of the establishment of this trust, Mr Murchie understood that his interest was to be 3.5%. This accords with the 7 units that were issued to Murchie Investments on 27 June 2005. Burayda was issued with 26 units (13%). From the time that these units were issued, Mr Wain says that he understood (based on his discussions with Mr Haydar and Mr Drapac) that he would receive 13% of all profits from within the Drapac Group. Units were also issued to Briaroaks, amongst others.

Mr Wain and Mr Murchie say that consideration was given for the units allotted to Burayda and Murchie Investments. In the case of Burayda, Mr Wain’s evidence (which was not challenged in cross examination) was that $1 per unit was paid. Mr Murchie’s evidence was that there was a loan for payment of the amount per unit issued to Murchie Investments, although he could not say who the lender was or the terms and conditions of the loan. According to Mr Murchie, that was all being dealt with by Mr Haydar.

Endoline is the trustee of the Drapac Holdings Trust. Mr Drapac holds the majority of the shares in Endoline. On 27 September 2005, 130 shares in Endoline were allotted to Mr Wain, for which he says he paid $1 per share. Again this was not challenged in cross examination. 35 shares in Endoline were allotted to Mr Murchie for which he says he paid a nominal amount. The allotment of shares followed written applications by Mr Wain and Mr Murchie. Share certificates were issued for all the key employees and Mr Drapac, with each certificate being signed by him. A memorandum of the resolutions of the Directors as to the issue of the shares was signed by Mr Drapac. Mr Drapac also signed an ASIC form 484 notifying a change to the company’s details in respect of the changed shareholdings. That form records that Mr Wain held 130 shares which were fully paid and held beneficially. In respect of Mr Murchie, the number of shares held was recorded in the ASIC form as 35 and again records that they are held beneficially and were fully paid.

The following day, Mr Wain, Mr Murchie and Mr Mercuri joined Mr Drapac as directors of Endoline.

Mr Drapac says he raised with Mr Haydar concerns he had with issuing the shares to the key employees but was assured by Mr Haydar that the employees had no entitlement to them.

In late June 2006, the units in Drapac Trust No. 2 were capitalised and unit holdings were increased. Taking the increase into account, Burayda holds 821,982 units and Murchie Investments holds 236,304 units. Additionally, another of Mr Wain’s companies, AJ & KM Pty Ltd,[10] was allotted 15,000 units in the trust.
[10]AJ & KM Pty Ltd is the third plaintiff and third defendant to the counterclaim.

Drapac Management is an unlisted public company and holds a financial services licence. Burayda is the registered holder of 26 shares in Drapac Management and Murchie Investments holds 7 shares. The shares were transferred to Burayda and Murchie Investments from Drapac Holdings Pty Ltd.[11] The documents relating to the share transfers are all dated 20 July 2006. There is a standard transfer form signed by Mr Wain and Mr Drapac which recites the transfer of 26 shares from Drapac Holdings to Burayda. The consideration is expressed to be $24,700. Mr Wain says that that amount was paid for the shares. There is also a copy share certificate certifying that Burayda is the holder of 26 shares in Drapac Management and that document has been signed by Mr Drapac. Burayda gave written notice to the Secretary of Drapac Management on 20 July 2006 that it held those shares on behalf of the Ashley John Wain Family Trust.
[11]Drapac Holdings Pty Ltd is the seventh plaintiff by counterclaim.

There is also a standard transfer form in respect of Mr Murchie’s interest in Drapac Management. It records that Drapac Holdings transferred 7 shares in the company to Murchie Investments for a consideration of $6,650. Mr Murchie claims to have paid that amount for the shares. There is a copy share certificate certifying that Murchie Investments holds the shares.

Finally, there is a memorandum of resolutions of the Directors which records the resolution to approve transfers of shares from Drapac Holdings to, among others, Burayda and Murchie Investments. The consideration for each share transferred was recorded as $950 and was said to be based upon the independent market valuation prepared by HLB Mann Judd dated 4 July 2006. The memorandum of resolution was signed by Mr Drapac, Mr Mercuri and Mr Wain. In addition to Mr Drapac, Mr Wain and Mr Mercuri were both directors of Drapac Holdings for a number of years prior to their departure from the Drapac Group. Mr Murchie was a responsible manager of Drapac Holdings for about 18 months prior to his departure.

Mr Drapac says that the HLB Mann Judd valuation was obtained to set a baseline valuation for capital gains and fringe benefits tax purposes. Mr Wain says that the valuation was to ensure that all assets acquired by the new Drapac Group structure were acquired on commercial terms and that the valuation informed the consideration that Burayda paid for its shares in Drapac Management.

None of the documents signed by Mr Drapac stated that the shares or units were held on trust for Briaroaks or Mr Drapac. There is no documentary evidence supporting a contention that the units and shares issued to the key employees or companies that they controlled were held on trust for Mr Drapac or entities controlled by him when they were issued.

Distributions were made from the Drapac Trust No. 2. For example, Murchie Investments as trustee for the Adam Murchie Family Trust received a net distribution of $2,924.96 on 13 October 2006 and Burayda received $10,864.12 on that day.

Mr Drapac gave evidence that the interests issued to the key employees in the Drapac Group companies and trusts were paid by loan accounts with accounting entries made to reflect this but that no cash consideration was paid, nor was any application for units accompanied by cash or something standing in place of cash. This was consistent with the evidence given by Mr Murchie. It also accords with an email that Mr Haydar sent to Mr Wain on 25 October 2007 in which he stated that on 26 July 2006, Mr Wain’s trust had purchased 26 shares in Drapac Management for a total price of $24,700, with the amount owing on those shares being loaned to Burayda by Endoline (as trustee for the Drapac Holdings Trust). In respect of Drapac Trust No. 2, Mr Haydar stated that on 28 July 2004, Mr Wain’s trust was allocated 130 of the initial units representing 13% of the total issued units, with the purchase price being paid by Mr Drapac on behalf of Mr Wain. He continued that on 28 June 2006, the Drapac Trust No. 2 was capitalised and Mr Wain’s initial 130 units were cancelled and his trust was allotted more units on that date. Mr Haydar stated that again, no money changed hands, but the amount paid for the units was loaned to Mr Wain’s trust by the Drapac Holdings Trust. Mr Haydar attached copies of unit and share certificates relating to Drapac Management and Drapac Trust No. 2 to his email.

Mr Drapac says that the shares in Endoline and Drapac Management and the units in the relevant trusts were issued when they were to minimise legally the capital gains and fringe benefits tax implications of the allocation of interests on or after the ten year hand cuff period had expired (said to be 1 January 2015). Argyles had given advice about this. According to Mr Drapac, at the time the units and shares were issued or transferred to the key employees, he told them (among other things) that they had to commit to grow and develop the Drapac Group over the following ten years from the start of 2005, that they would get a share of the ongoing profits at the end of the period, to minimise the capital gains and fringe benefits tax implications the units and shares would be issued at the beginning of the ten year period. He contended that the shares and units were held by the key employees as custodians[12] or on trust for Briaroaks, or for the Drapac companies or trustees which transferred or issued the units or shares, pending execution of a written agreement setting out the terms of the proposal Mr Drapac had made for them to share in the equity of the Drapac Group. Mr Wain says that he did not have any conversations with Mr Drapac in which he said that he was issuing shares or units on behalf of Briaroaks. Mr Murchie says he did not have any communication with Mr Drapac (either written or oral) where it was suggested to him that his interests in the Drapac Group were being held on trust by him for Briaroaks.
[12]The claim that the shares and units were held as custodian was abandoned by the Drapac parties in closing submissions.

After the shares were issued in Drapac Management, there were further documents prepared in an attempt to record the key functions of the employee incentive scheme. One such draft document entitled “Drapac Holdings Trust” sets out bullet points in relation to a summary of the key features and profit share criteria. The document records that “payout of capital/redemption of units in DHT and shares in DML is only after 10 years of service from 1^st January 2005 or upon reaching a trigger event as defined under the Trust Deed. (e.g. Trigger events include death of KE, major illness of KE, winding up of DHT, floating of the business, selling of the ASIC licences, et cetera)”.

Some notes prepared by Mr Murchie on 21 January 2008 record “unplanned resignation is any resignation before December 2014 unless there is death or disability, loans are to remain until 2014”. As to the equity payment, he recorded:

“- 100% if you stay ten yrs, death, disablement
- 70% if you leave early, are terminated et cetera
- 5% for ‘big time’ breach such as gross theft, negligence”

In early 2008, a management consultant, David Bristow, was retained to develop strategies for improving the business going forward and its overall operation.

At about this time, Mr Wain says that Mr Drapac was not happy with Mr Haydar’s performance and that he (Mr Wain) suggested that if the business relationship between them was not working out, then there should be an amicable split. According to Mr Wain, Mr Drapac told him that he thought Mr Haydar was misappropriating funds. Mr Wain was concerned that this was just being used as a reason to get rid of Mr Haydar. Mr Drapac says that it was Mr Wain who was dissatisfied with Mr Haydar and that it was Mr Murchie and other employees who had raised concerns about improper accounting practices of Mr Haydar. Mr Murchie denies raising any concerns about Mr Haydar’s conduct. In any event, Ernst & Young were retained to investigate Mr Haydar’s conduct. Mr Drapac told Mr Wain that the investigation by Ernst & Young revealed that Mr Haydar had misappropriated funds. Mr Wain says that he was not shown any written Ernst & Young report although Mr Drapac says that it was circulated to all directors.

Mr Haydar’s employment was terminated in mid June 2008. Mr Murchie says that the first he learnt of any alleged accounting impropriety was when Mr Drapac told him that Mr Haydar had been terminated for fraudulent behaviour and gross misconduct.

Proceedings against Mr Haydar were brought in the County Court of Victoria. In his defence and counterclaim, Mr Haydar admitted that the shares and units issued to him were to facilitate the distribution of the annual profit share pursuant to the profit share entitlement and in anticipation of the equity condition being fulfilled so as to provide Mr Haydar with the equity entitlement. He pleads that by reason of the failure of Drapac Consulting to give him the opportunity to execute a ten year employment agreement, the equity condition was not fulfilled. He makes no claim that he has an entitlement to the shares and units, and upon receipt of appropriate transfer forms indicated that he would transfer the shares and units to Briaroaks.

Shortly before the termination of Mr Haydar’s employment, Melissa Lazzaro (now Weston) was employed as Mr Drapac’s executive assistant. As will be seen from what follows, she was involved in many of the relevant events.

After Mr Haydar’s employment was terminated, the relationship between Mr Wain and Mr Drapac deteriorated. Mr Wain was not comfortable with the handling of Mr Haydar’s removal. Mr Drapac felt that Mr Wain’s attitude to him and the Drapac Group changed, that he became less diligent in performing his duties, failed to allocate and devote energy and time to developing, mentoring and supervising junior staff, that he did not listen to Mr Drapac or take his advice.

Mr Wain approached Mr Drapac to see if they could sort out their issues. Whilst they did continue working together, their relationship was (at best) strained and worsened over time.

Drapac Management is also the responsible entity of the Drapac Sustainability Fund. A unit certificate dated 26 June 2008, signed by Mr Mercuri and Mr Wain, certifies that Murchie Investments as trustee for the Adam Murchie Family Trust is the registered holder of 100,000 ordinary units. Murchie Investments also holds 12,857 performance units in this fund. Mr Murchie says that he paid $1 per unit for his ordinary units in the fund. Endoline also holds 3,462,000 ordinary units in this fund.

Despite the deteriorating relationship between Mr Drapac and Mr Wain, the profit share scheme continued to evolve. Mr Bristow was engaged to assist with developing a new scheme that was to be simpler to administer. None of the foundation key employees were to be disadvantaged with the transition to the new scheme. It was proposed that for the foundation key employees, their existing minimum entitlements would be fixed and carried forward into the new scheme and forfeiture provisions would be developed which would recognise entitlement should an employee have been employed longer than a set period, the length of which was still to be determined.

By August 2008, Mr Bristow had developed a discussion paper. The paper progressed through a number of drafts. As part of the discussions between the employees and Mr Bristow, Mr Wain stated in an email that the discussion paper needed to be amended as there was “already an agreement in place – this is only improving and clarifying the existing agreement”. Mr Bristow responded that, as he understood the situation, there was no formal agreement and that when he interviewed the key employees, they were all frustrated that there was no agreement.

On 12 August 2008, the final form of the discussion paper was signed by Mr Drapac, Mr Wain, Mr Mercuri, Mr Murchie and another of the key employees. On a page headed “Agreement to Proceed” and beneath the words “We agree with the principles outlined in this document as the basis for finalising the Drapac Share Scheme”, each of the parties signed. The introduction to the document states:

“A share scheme with key employees has been a point of discussion prior to January 2005. It has been through a number of iterations.
Even though unsigned the Key Employees and Michael have been working on the basis that the spirit of the document will be fulfilled and will apply from January 2005.
The purpose of this discussion paper is to distil the points of contention with the draft scheme and to finalise the arrangements with key employees.”

The objectives of the draft scheme were recorded in the discussion paper as being to offer the key employees ownership of the Drapac Group (capital entitlements), a share of ongoing profits (annual profit entitlement) and to reward them for their loyalty to the Drapac Group both then and into the future. A second objective was to ensure that the executive team remained intact for the medium to long-term to grow the Drapac Group into a sustainable and diversified investment group. The key features of the scheme were described as to include the ability of the key employees to gain equity in Drapac Holdings Trust, Drapac Trust No. 2 and in Drapac Management from 1 January 2005, with equity holdings to be purchased at market rates. The discussion paper listed the interests of each of the employees and included Mr Wain at 13% and Mr Murchie at 3.5%.

The discussion paper reviewed what it described as the “draft scheme”. In respect of what it described as the “proposed scheme”, the paper recorded that no foundation key employees would be disadvantaged with the transition to the finalised scheme. For those employees, their existing minimum entitlements were to be fixed and carried forward into the proposed scheme. The key employees were to gain a shareholding in the Drapac enterprise and not in individual property trusts. The legal entity for the Drapac enterprise was said to be the Drapac Holdings Trust. That trust was to be the equity holder of all of the investments by the Drapac enterprise and management companies as at 1 January 2005.

The discussion paper recorded that the existing key employees (including Mr Wain and Mr Murchie) were to be nominated as foundation employees in the scheme and were to gain unit holdings in Drapac Holdings Trust from 1 January 2005. Each foundation key employee was to purchase their entitlements at the going market rate as at 1 January 2005, with this to be taken up as a loan to them and repaid from future dividends. If a key employee was to leave Drapac, they would be required to sell their shares and the following would apply:

“If an unplanned exit occurs (e.g. unplanned resignation) the value of their share entitlement will be reduced by 30% (unplanned departure penalty) for the amount representing the difference between Loaned Employee Capital and the Net Asset Value. All loaned capital held by the group on behalf of the Employee will be retained by the group until 31/12/2014 and will be paid Overdraft Interest annually and secured via a subordinated debt facility.
Beyond 31/12/2014 ‘unplanned exit’ is deemed to be no less than six months notice unless a reduced notice period is agreed by the Board.
An ‘unplanned’ departure penalty relating to an exit prior to 31/12/2014 can be reduced with the consent of the Board.
If terminated for an unlawful act of a serious nature (i.e: theft or fraud) the value of their share entitlement will be reduced by 95%.
The governance process will also allow individual foundation key employees to grow the amount of their unit holding.”

An appendix to the paper describes the “pros and cons of ten year handcuffs”.

Mr Drapac says that they agreed on the document and it was to form the basis of a formal document with the paper containing the principles upon which the formal document would be prepared. His view was that there was a lot that had to be developed from the paper. According to him, much of 2009 was spent endeavouring to formalise an agreement. All that they had, he said, was an agreement to enter into an agreement, but no agreement as to equity was reached and the key employees’ entitlements were provisional provided that they did certain things. Mr Drapac says that whenever he used the word “entitlements” he meant provisional entitlements.

A few days later, Mr Wain contacted Norton Gledhill, solicitors, and stated:

As discussed we are seeking assistance in the drafting of a Shareholders Agreement for the Drapac Group.
A scheme has been in place since 2005 however to date has not been fully completed. Attached is a recently signed discussion paper that outlines the key principles of the Shareholders Agreement.
Given your involvement with the dispute between Drapac and Graham Haydar, we though (sic) it would be appropriate for your firm to prepare/finalise all necessary documentation surrounding the Drapac shareholding.
We look forward to discussing further next week.

Mr Bruce Cameron of Norton Gledhill took on the role of drafting an agreement. On 4 September 2008, he sent an email to Mr Drapac and Mr Wain in which he set out the background as he understood it. He included the following:

5.Participants in the Drapac Group all work for the Group and were granted their interest in Endoline, the Drapac Holdings Trust and Drapac Management in about 2005, and they acquired those interests for full market value although they have yet to pay the amount which is due.
6. The broad terms of the Equity Participants Agreement were agreed in 2005, but the terms have never been comprehensively set out in a written agreement, and that is what you would now like me to undertake for you.

He went on to set out what he understood were to be the terms of the “Equity Participants Agreement”. Mr Drapac did not respond to Mr Cameron’s email to state that any part of his understanding as to the background to the agreement was incorrect.

A draft document was prepared by Mr Cameron. That draft recorded the shareholding and unit holdings of Mr Drapac and the key employees and made provision for the mechanism for the sale and transfer of those interests. Mr Drapac did not correspond with Mr Cameron seeking amendments to the draft. His view was that the document was a draft for discussion.

Mr Wain’s evidence was that although there was already an agreement in place, effort was put into a formal written agreement because it would be better to provide more certainty to the parties. Mr Murchie’s evidence was that a formal documented agreement was required to deal with the broader mechanics of issuing new units, redeeming units and so forth.

By letter dated 12 September 2008, Mr Drapac wrote to Mr Wain confirming his salary for the financial year 2008/2009. Part of the salary package was an amount of $50,000 to be made up of a $30,000 advance payment against distributions from his equity entitlement as set out in the Drapac share scheme paper, and the additional $20,000 subject to meeting his Key Performance Indicators (KPIs) that had been agreed between them. In the event that Mr Wain failed to meet his KPIs, the additional $50,000 would be allocated entirely as an advance against distributions from Mr Wain’s equity entitlement as set out in the Drapac share scheme paper. A similar letter of the same date was sent to Mr Murchie.

In early December 2008, Mr Wain sent an email to Mr Drapac with comments on the proposed agreement that had been prepared by Norton Gledhill. By this time, the employees had engaged Maddocks to advise them. There were a number of commercial matters for discussion, including the “ten year handcuff”. In this regard, Maddocks stated (somewhat prophetically):

The details of the ten year handcuff issue need to be considered in more detail. For example, should the Company be compelled to hire each employee under this arrangement for the ten year period? If the employee is terminated prior to the end of the ten years, is the Company then required to pay them out? What are the obligations and ramifications of an employee voluntarily leaving before the end of the ten year period?

It was the practice, at least by 2009, for executive team meetings to be held on a monthly basis. Mr Drapac and the key employees attended those meetings. Such a meeting took place on 19 February 2009. According to Mr Murchie’s note of the meeting, the attendees included Mr Drapac, Mr Wain and Mr Murchie. There was a discussion concerning the staff incentive plan and Mr Murchie recorded that when there was an unplanned exit, then equity would be converted into a loan at 35%. There would be a 95% haircut for a “monumentally serious breach”. According to Mr Murchie, this was said by Mr Drapac at the meeting.

On 10 March 2009, Mr Wain sent an email to Mr Cameron noting that he was waiting for Mr Drapac to respond to outstanding queries so that the “Equity Participants Agreement” could be finalised. Mr Wain stated that they had held several discussions with Mr Drapac and had reached agreement on three of the four departure scenarios. In the case of fraud or theft, the interest of the shareholder was to be discounted by 95%. Where an employee resigned, there was to be a 30% penalty applied. In the event that the employee was made redundant, the company would pay out the employee’s entitlements on departure in full with no discount applied. Where the employee was asked to leave the employment of the Drapac Group, the decision to terminate needed to be determined by a special majority vote of 85%. If 85% voted in favour of that termination, then there was to be a 30% discount on equity and the interest was to be “quarantined” until the end of the ten year period. The item not agreed, according to Mr Wain, was termination of employment instigated by the company.

On 13 March 2009, Mr Cameron sent an email to Mr Drapac about the agreement. The email from Mr Cameron stated that the unresolved issues related to the discounted price at which the equity of founder members and future members of the scheme was to be bought back by the employer or the other members in a number of circumstances of termination and the date at which equity and loans were payable in these circumstances.

On 16 March 2009, Ms Weston sent Mr Drapac an email in which she informed him that Mr Wain wanted a copy of the email that Mr Cameron had sent the previous Friday afternoon. Ms Weston said that she would await approval from Mr Drapac before circulating that email. Mr Drapac responded to say that he did not have a problem and “we need to make it look like it was an oversight we hadn’t previously sent it”. Ms Weston then asked if Mr Drapac had any comment on the potential for key employees to “get out” by selling down unit holdings. She commented that she was a bit sceptical of Mr Wain using the failure to send the email from Mr Cameron as an out. Mr Drapac responded to say that there was an easy solution – “they can’t sell them until they’ve served the ten years!”

Ms Weston forwarded Mr Cameron’s email to Mr Murchie, Mr Wain and others later that day. In the covering email Ms Weston apologised for not forwarding the document sooner and said that it was an oversight on her behalf as she thought it had been sent to everyone. Mr Drapac responded “You are a smoothie. I’m glad your [sic] on my side”.

In relation to these emails, Mr Drapac’s evidence was that when the email from Mr Cameron (which was addressed to him alone) came in, he was overseas. When Ms Weston brought it to his attention, he told her he had no problem with it being forwarded to Mr Wain, that Ms Weston had been intimidated by Mr Wain and therefore, he told her to make it look like an oversight that the email had not been forwarded so that no tension would be created. His view was that her email to Mr Wain “smoothed” the tension. Ms Weston gave evidence that she was intimidated by Mr Wain and she was trying to minimise the tension. She said that her reference to “using it as an out” was a reference to getting out of the Drapac Group. In cross examination, Ms Weston said that she was prepared to send an untruthful statement (that not forwarding the email from Mr Cameron had been an oversight) to minimise the stress and tension on her from other staff in the office. She thought that she was just doing her job – the email was only addressed to Mr Drapac and the key employees were not entitled to it.

Throughout March 2009, negotiations continued in relation to the Norton Gledhill document. The outstanding issues by this time seemed to be limited to the discount to apply to their interest if a participant’s employment was terminated for poor performance and also as to restraint of trade issues.

Throughout May and June 2009, Mr Wain was pushing for the equity participants agreement to be finalised. According to him, Mr Drapac said that finalisation of the agreement was imminent. Mr Drapac denies this and says that he told the employees that his position (rather than the agreement) would be finalised. By this time, Mr Drapac had serious doubts about the commitment of Mr Wain and Mr Murchie to the Drapac Group and he had the impression that Mr Wain was planning his departure.

On about 27 May 2009, Drapac Capital paid trust distributions to Burayda and to Murchie Investments. Mr Drapac says that these payments were in anticipation of them complying with their employee obligations.

The business relationship between Mr Wain and Mr Drapac continued to worsen. In late June 2009, they made further attempts to repair it (with Mr Mercuri acting as mediator). However, things did not improve.

On 30 July 2009, there was an executive management meeting attended by Mr Drapac, Mr Wain, Mr Mercuri, Mr Murchie, Ms Weston and Ms Oliver (the Drapac Group finance manager). The minutes of the meeting record that Mr Drapac was finalising the equity participants agreement with Mr Cameron the following week. Mr Drapac’s evidence during cross examination was that he was finishing his input into the agreement - he could not finalise the agreement itself because it required the input of others. Mr Drapac had been overseas in the weeks preceding this meeting. He said that he had done some thinking while he had been away and he spoke about potential changes to the Drapac Group. Mr Drapac said that the business had not been profitable so he needed to look at a restructure. He told the other participants that he wanted to change the focus of the Drapac Group to a funds management business with a remaining commitment to agriculture. He raised the prospect of breaking the Drapac Group into separate business units – Property, Funds Management, Agriculture, Cycling and Administration. They ran out of time to discuss the matter fully at the meeting and it was agreed that they would reconvene at a later date.

At a meeting on 7 August 2009 (attended by the same people), a further discussion about restructuring the Drapac Group took place. Mr Drapac’s proposal was that there be three distinct Drapac Group units – funds management, Drapac Agriculture and property. An administration structure would support all three parts of the Drapac Group. The minutes record that there was a question as to what would happen if the individuals could not agree on the new structure – “is there an opportunity that an exit strategy can be reached on the current agreement”. Ms Weston typed the minutes during the course of the meeting. According to her, she understood the reference to the current agreement to be a reference to the draft agreement being prepared by Mr Cameron. According to Mr Wain, Mr Drapac stated that he wanted to step away from the day to day management of the Drapac Group and said that he would look at winding up the existing employee equity agreement over the next 12 months or so and distribute the proceeds. Mr Wain says that Mr Drapac reaffirmed that he wanted to focus on funds management predominantly and he was still committed to an agricultural business as well. Mr Wain says that Mr Drapac indicated that he and Mr Mercuri could pursue a property business and consult to the funds management and agricultural group. Mr Drapac asked them to give some thought to what he was proposing. Mr Mercuri’s evidence in relation to the meeting was consistent with Mr Wain’s evidence.

Ms Weston said that there was no discussion at either the meeting on 30 July or 7 August 2009 about paying out the entitlements of the key employees. She accepted that there was discussion at some time about entitlements under the “draft” agreement being paid out. Ms Weston confirmed that at one of the meetings (likely 30 July or 7 August 2009) Mr Drapac said that he did not want to be involved in the day to day operations and had asked the key employees to come back with another Drapac Group proposal or structure.

Ms Weston gave evidence that later in the day on 7 August 2009 she attended a further meeting with Mr Wain, Mr Mercuri and Mr Murchie and that during that meeting Mr Wain said that he wanted to leave and was not interested in the equity participation scheme but wanted to leave and take his money. According to Ms Weston, Mr Mercuri and Mr Murchie said that they did not want him to leave and he said he would think about it.

On 10 August 2009, Mr Murchie sent an email to Mr Wain and Mr Mercuri which contained information about how the three of them could proceed with a buy-out of the Drapac Group.

At a further meeting on 13 August 2009, Mr Wain raised concerns about the proposed new corporate structure that Mr Drapac had proposed. Mr Drapac said that he would provide the funding needed for the first 12 months and if it did not work, then it could be wound up. Mr Drapac did not want to be involved in the day-to-day operational side of the Drapac Group any more. He asked them to go away and think about it and come back with a written proposal.

Mr Mercuri prepared a draft discussion paper (dated 14 August 2009) in which he set out what he saw as the key principles for the current 10 year shareholders scheme (winding up the Drapac Group and realising the assets and distributing the proceeds to the shareholders). The discussion paper referred to the new Drapac Group, the basis of which would be a 40% ownership by Mr Drapac and 20% by each of Mr Wain, Mr Mercuri and Mr Murchie. Mr Drapac was to loan $2 million to the new Drapac Group for overheads for the first 12 months, with Mr Murchie, Mr Wain and Mr Mercuri to draw a wage from the overheads as an advance of future profits. The discussion paper referred to a review of the new Drapac Group to be undertaken at the end of 2009, with the profit to be treated such that Mr Drapac would receive the first $2 million (repayment of initial capital injection) and then the additional profits would be distributed in accordance with shareholdings.

The discussion paper was developed and forwarded to Mr Drapac on 17 August 2009 by Mr Murchie. The version sent to Mr Drapac had a similar structure to Mr Mercuri’s draft with the key principles dealing first with the “current ten year shareholder scheme” and secondly, the “new Drapac Group”. One of the key principles described in the paper was:

·     To appropriately effectively restructure, the existing Drapac Group needs to be wound up. In doing so, this necessitates the termination of the existing shareholders agreement effective end of 2009. Collective agreement has been reached on this point.
·     The current Drapac Group is proposed to be wound up as follows:
o   Determine which staff will be retained and for how long;
o   Calculate the necessary redundancies and termination payments;
o   Provide for a contingency to cover any windup of the Drapac Group (redundancies et cetera) and cover any capital requirements for remaining projects (Le Boulevard, Ridley etc);
o   Distribute any residual proceeds to the current shareholders in accordance with their current shareholdings;
o   Any assets that cannot be realised by the end of 2009 will continue to be owned by the Shareholders in accordance with the original shareholding agreement and equity/profit from these projects will be distributed to the Shareholders upon realisation.
o   There will be no caveats on Shareholders regarding any aspect of the dissolution of the original agreement. All Shareholders will be free to invest capital independent of the New Drapac Business.

The discussion paper again recorded that Mr Drapac would hold a 40% interest in the new Drapac Group and Mr Murchie, Mr Wain and Mr Mercuri 20% each. There was also still provision for Mr Drapac to loan $2 million to cover overheads. Again, repayment of the loan was to be the first priority.

An executive management meeting was held a few days later and was attended by, amongst others, Mr Drapac, Mr Wain, Mr Mercuri, Mr Murchie and Ms Weston. The purpose of the meeting was to discuss the proposal that Mr Wain, Mr Mercuri and Mr Murchie had put forward. According to Mr Murchie, the meeting began with Mr Drapac saying that they needed to wind up the existing agreement as the proposal by the key employees did not work for him. Mr Murchie says that Mr Drapac said that he would keep Mr Wain and Mr Mercuri as consultants and that he and Mr Murchie would run the funds management business. Mr Murchie says that Mr Drapac expanded by saying that if he was to wind up the existing agreement and pay out the entitlements that that pay out would be subject to certain caveats and, in the case of Mr Wain and Mr Mercuri, they would have to give “deal flow” (that is, access to property investment opportunities) to Mr Drapac for a certain period. At the end of the meeting Mr Drapac agreed to submit a paper to them outlining his view of how the Drapac Group may work going forward. The minutes record that there was discussion about creating three distinct Drapac Group units for funds management, Drapac Agriculture and property.

On 28 August 2009, Ms Weston sent an email to Mr Drapac with her comments and questions in relation to a document that Mr Drapac had prepared for the Drapac Group going forward. As part of her comments, Ms Weston stated the following:

5.% equity needs to be defined/Management control. I don’t think equity should be linked to tenure as it has failed in the past eg. look at yours and AW relationship now and how the agreement has made an exit strategy extremely difficult.
6.Treatment of current entitlements needs to be more clearly defined. Again I know each will be treated differently in some respect but you need to specify caveats (if any). Also, consider if it is fair to place caveats that restrict the employees to the point where they are still tied to the business unwillingly.

In cross examination, Mr Drapac said that the only agreement by this time was the Bristow discussion paper (an agreement to agree) and that they were working on an agreement. When questioned about what he understood the words “current entitlements” in point 6 to mean, Mr Drapac deflected the question and said that Ms Weston should be asked what she meant but that entitlements had always meant to him “provisional entitlements” or “conditional entitlements”. Although he could not point to any document recording the entitlements as “conditional” or “provisional” he says they were always referred to as “conditional” because an agreement had not been formalised or finalised. He also said that the word “entitlements” was thrown at him a thousand times by staff and what it meant to them and what it meant to him were two different things.

Mr Drapac’s evidence was that there were many discussions over a period of about two months as the employees maintained that they had equity and he maintained that any interest was conditional. Mr Drapac said he was trying to get a feel for whether he could still create a dedicated team to drive his business. In this regard, it was his view that if any of the key employees were to be paid any amount (which would have to be negotiated) then they would have to substitute something in place of serving 10 years as an employee. According to him, it was in that context that the word “caveats” was used. However, these discussions did not result in a resolution of the dispute.

Later that day, Ms Weston sent a draft of Mr Drapac’s business proposal to Mr Murchie, Mr Wain and Mr Mercuri. The introductory paragraph reads as follows:

Please find below a draft document. I have put as much detail in as possible but feel I need to have a 1:1 discussion with each of you to determine a more specific structure for moving forward. From this discussion, I would like to determine what your aspirations are, how (and if) you see your future in the Drapac business and also discuss the discharge of current equity entitlements.

Further on in the document, the following appears:

For the purpose of moving forward, it is suggested that the proposed staff incentive agreement not be finalised and any entitlements be individually dealt with and discharged.

Further on again in the document, it is stated:

The release of equity (and the concomitant Release of obligations) from the incentive agreement may carry caveats.

An executive team meeting was held on 31 August 2009 when Mr Drapac’s proposal was discussed. According to Mr Wain and Mr Murchie, they told Mr Drapac that the proposal he had put forward was not a workable business plan. There was discussion about the entitlements of the employees – Mr Drapac referred to them as conditional or provisional until a new agreement was worked out. Mr Wain said that the entitlements had never been provisional. Mr Drapac wanted to meet separately with each of the key employees, but they wanted to discuss things as a group. Mr Drapac’s view was that he had started the Drapac Group ten years before any of them had been employed in the business; they had no experience and skill in property development or funds management when they started but he trained them and gave them opportunities to develop themselves professionally; they did not make any financial contribution to the Drapac Group, but were employees who received salaries and bonuses for each profitable project; he was prepared to give them an interest in the Drapac Group on the basis that they commit to work for and grow it over a period of ten years, after which they would get the percentage interest in the Drapac Group as agreed in the final discussion paper of 2008; he had trusted them and allocated the units and shares to them provisionally and had subsequently negotiated with them to resolve the differences between them as to what the equity participation scheme should provide in case of them leaving the Drapac Group before the expiry of the ten year period. He felt that they were only intent on realising the assets and moving on for their own benefit which was not the vision that he had. According to Mr Murchie, Mr Drapac told them that the problem with their model for going forward was that he would not have control. According to Mr Mercuri, there was discussion at this meeting about conditions or restrictions (concerning a restraint on Mr Wain and Mr Mercuri from dealing with existing clients of the Drapac Group for a period of time and their providing “deal flow” to Mr Drapac giving him an opportunity to inject equity at cost for a certain percentage of equity for any project going forward) that would be imposed if entitlements were paid out. The meeting ended in a stalemate.

In email correspondence throughout the course of 2009, Ms Weston referred to a “current equity agreement”. For example, in an email she sent to Mr Murchie on 2 September 2009, she referred to “working out a way to exit the current equity agt [sic] and enter a new one”.

Mr Mercuri says that he met with Mr Drapac on 2 September 2009 at which time Mr Drapac expanded on the conditions that might apply if entitlements were paid out. They talked about clients of the Drapac Group, providing access to Mr Drapac to deals that they were able to secure in the future so that Mr Drapac could consider investing on a transaction by transaction basis. According to Mr Mercuri, Mr Drapac also talked about transition from the current workplace and how it was set up and going into the new venture; a potential consulting role for Mr Mercuri back to the Drapac Group for a period (mainly to look after existing projects) and the possibility of Mr Mercuri retaining a role on the compliance committee. Mr Mercuri says that Mr Drapac asked him to summarise what they had talked about and email it to him.

On 4 September 2009, Mr Mercuri sent to Mr Wain and Mr Murchie a document that he was planning to send to Mr Drapac. It was a similar discussion paper to that which had earlier been provided to Mr Drapac, but in an amended form. Under a heading, “Why the current ten year shareholder scheme will not work in the future”, the following is recorded:

·The incentive share scheme was based on good intentions;
·It envisaged that the core group of key employees would work together for a long period of time achieving success for the group which in turn would benefit each of the shareholders;
·The scheme becomes unworkable when:
okey employees have different aspirations;
okey employees have different vision for the future of the business;
okey employees have differences of opinion in major business decisions/lack of consensus;
okey employees who are not enjoying their work, not performing or are looking for a change in direction – incentive to see out their tenure for the wrong reasons;
oafter 5 years – we are still trying to finalise certain aspects of the agreement which has caused a huge amount of distraction, stress and uncertainty for all shareholders;

·After five years of the agreement, the Drapac Group is in an enviable position whereby the Group has cash at bank with the remaining projects having a defined exit strategy in a relatively short space of time;
·The fact that we are not tied into any long-term project/investments provides an excellent opportunity for an exit opportunity for any or all of the shareholders.

Mr Wain had a short discussion with Mr Drapac on 3 September 2009. Mr Drapac believed that the discussion had occurred but said he could not recall it. According to Mr Wain, during the discussion Mr Drapac said that for him, dissolving the current arrangement and parting ways was a simple cost benefit exercise with his key priority being to reduce his stress levels. According to Mr Wain, Mr Drapac was proposing that he provide deal flow to him for a period of two to three years with the right for Mr Drapac to invest up to 30% of the equity at cost. Mr Wain says that he asked whether if he agreed to this Mr Drapac would release his capital from the Drapac Group and that Mr Drapac looked him in the eyes and essentially gave him a firm undertaking that he would. On that basis, Mr Wain says that he told Mr Drapac that he was prepared to move forward. Mr Drapac gave evidence that those sorts of points were discussed. He could not recall the precise terms of the discussion but he denied that he said that Mr Wain’s “alleged” capital would be released.

On 7 September 2009, Mr Murchie sent Mr Drapac an email which he stated was a summary of an earlier discussion that they had had. Mr Drapac could not recall the discussion. In Mr Murchie’s view, there were two clear options in relation to the broader Drapac Group. The first involved winding up the “existing staff entitlement agreement”, resulting in the payment of “entitlements to all concerned (timing to be determined)”. Mr Murchie said that caveats may also need to be discussed and defined as appropriate in relation to this option. The second option related to re-engineering the funds management business.

At an executive team meeting on 14 September 2009, Mr Wain says that there was further discussion about Mr Drapac having a “look in” for future deals that he may generate. According to Mr Wain, Mr Drapac said that it was preferable if it was not a contractual obligation but more of a gentlemen’s agreement, but if it were to be contractual, it should be for as short a time as practicable, up to two to three years. He says that Mr Drapac was nodding his head and that when they left the meeting, he thought that they had agreed on the way their interests could be realised in an orderly fashion. Mr Drapac was to get back to them within a week to finalise arrangements. Mr Mercuri’s evidence was consistent with this. According to him, by the end of the meeting they had an agreement with Mr Drapac that their entitlements would be paid out if they adhered to certain caveats, being that they would not deal with clients of the Drapac Group and that they would provide Mr Drapac access to any deal flow for a designated period. Mr Drapac denies agreeing to anything at this meeting.

In an email of 16 September 2009 from Ms Weston to Mr Drapac, Ms Weston stated:

Please realise that I feel very caught in the middle of all this. Adam, Santo and Ashley are all my colleagues and whilst I agree with some of the things you say I don’t agree with everything. I have realised that most of the times I do say something you take it personally or negatively. This is not the way it is said. I am trying to make you see the other side of the story, or the legal side and some possible outcomes of what you are proposing. I am only trying to help.
I was thinking maybe it is worth having a ‘mediator’ in the meeting so everything is taken in the correct context. This may also speed up a resolution. Perhaps check with Bruce Cameron what he thinks.

With her email, Ms Weston sent a document headed “The Process Going Forward”. In the document, Ms Weston recorded some of the meetings that had been held since the end of July 2009 about the Drapac Group. Under a heading, “What needs to happen now?”, Ms Weston recorded that the three executives had agreed that they were happy for the current agreement to be wound up with caveats to be applied. For this to be done, it was necessary to define and document what the actual caveats were (according to Ms Weston) and these things fell into three categories: clients, deal flow and continuity of the business. Another question that Ms Weston raised in the document was as to the timeframe for the payment of moneys from the “previous agreement”. Another question she had included was whether, if the new arrangement (e.g. caveats, timing et cetera) could not be agreed by all parties, the arrangement reverted to the current equity agreement. She raised the question of, if not, how they would move forward. In relation to the statement “In principle, the three executives have agreed that they are happy for the current agreement to be wound up” Ms Weston said during cross examination that this referred to the draft agreement being prepared by Mr Cameron although she was not too sure how a draft agreement would be wound up. Although Ms Weston had sent the email she was not sure whether she had received input from the key employees before sending it. Mr Drapac gave evidence that the views expressed by Ms Weston in this email were hers and did not necessarily reflect his views.

There was another executive team meeting on 23 September 2009. An item on the agenda was “Appointment of an Arbitrator”. Mr Drapac said that he had decided to appoint an arbitrator as he found the situation extremely stressful and wanted someone independent to deal with the issues between him and the employees. He wanted to wind up the protracted dispute and to bring some finality to the matter which had been dragging on for a long time. He believed that there was no agreement but the employees were arguing that they had entitlements – if they were entitled to anything, Mr Drapac’s view was that they would get paid their entitlement but remained of the view that they were not entitled to anything.

Ms Weston gave evidence that at about this time, when she sent emails to Mr Drapac, they were quite frequently dictated to her by one or other of Mr Mercuri, Mr Wain or Mr Murchie. An example is an email of 28 September 2009. The email read:

Hi Michael,
I hope you are well and enjoying the relaxation of Gwinganna.
Just following up on our conversation on Friday re how to progress with the Employees Participants Agreement. Could you please advise if you have given it some more thought and determined which way you wish to move forward. I would like to ensure the ball is kept rolling whilst you are away as I believe if we can settle the agreement/arrangement soon it will greatly assist your level of stress and wellbeing. However I know it is not a cut and dry scenario but if I could make any necessary appointments for you (sic) return next week to bring this matter to a close, I think it would be greatly beneficial.
To that end, do you need another appointment with Bruce Cameron? If so, I believe it may be beneficial to have Adam, Santo and Ashley there as well as Bruce is acting on behalf of the group and it may be beneficial so you all know (including Bruce) where each other is coming from. Also, please advise if you would like me to set up an appointment with David Lurie for yourself.

[A] limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way. It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to “quasi-partnerships” or “in substance partnerships” may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words “just and equitable” sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.[43]

[42][1973] AC 360.

[43]Ibid at 379.

In considering this passage, Cooke J, of the England and Wales Companies Court, recently said that:

If it is found that the company falls into this quasi partnership category, the court is more likely to conclude that it is unfair to fail to give effect to, or bring to an end, arrangements which have been made on an informal basis, even though they do not give rise to legal entitlements, or to exclude a participator from the management or conduct of the company's business, if it was part of the arrangement that he should take part in it. Furthermore, the most commonly sought remedy in unfair prejudice petitions is an order that the petitioner's shares should be bought out by one or more of the respondents, and the establishment of a quasi partnership is normally a precondition for the court to find that such a buyout should be made without a minority discount.[44]

[44]Croly v Good [2010] EWHC 1 (Ch) at [8].

The Drapac parties criticised the way the case for the Wain and Murchie parties was put as a “global” claim. They submitted effectively that each entity had to be considered in isolation from the other, that is, each company had to be considered and each of the trusts had to be treated separately. For example, they submitted that the termination of Mr Wain’s employment by Drapac Consulting could not be regarded as conduct in the affairs of Endoline or Drapac Management.

The Wain and Murchie parties submitted that in accordance with the broad interpretation to be given to ss 232 and 233, those sections are intended to be beneficial provisions designed to benefit the oppressed, not to give comfort or protection to the oppressor. Counsel for the Wain and Murchie parties submitted that this is particularly so in circumstances where the corporate structure was chosen by Mr Drapac. They submitted that an artificially technical construction of the kind urged by the Drapac parties is antithetical to the way in which the provisions ought to be approached. Those submissions have much force, particularly when regard is had to s 53 which refers to the affairs of the company as including a company’s business, transactions and dealings conducted jointly with another and including transactions and dealings as trustee. In this case, that requires consideration of the business conducted by the Drapac Group. Separate legal entities with their own rights and obligations make up that group. However, it would be artificial in the extreme to classify, for example, the termination of Mr Wain’s employment as a matter only relevant to the conduct of the affairs of Drapac Consulting. Such an analysis would ignore the reality of how the business operated with the same natural persons making decisions no matter which company hat they were wearing and with the employees working for the Drapac Group although employed by Drapac Consulting. There is no proper basis to restrict the interpretation of ss 232 and 233 in this narrow way.

The Drapac parties submitted that this is not a “quasi partnership” case. They contended that here, Mr Wain and Mr Murchie were employees and the interests they were to have were not large (Mr Murchie 3.5% and Mr Wain 13%) and this was not the hallmark of partners going into business together. Although Mr Drapac held the majority interest in the companies and trusts that did not diminish the fact that the type of relationship he had with the key employees when their interests were granted was one of mutual confidence; Mr Drapac and the key employees expected to take an active role in management and there were to be restrictions on when the interests could be realised. In those circumstances, equitable considerations become relevant.

The relationship between the parties having broken down completely, there is perhaps little to be gained by a detailed analysis of why that has occurred.[45] The termination of Mr Wain’s employment was not based on proper grounds (given the findings that I have made). Mr Drapac used his power as the majority owner unfairly to exclude Mr Wain from management. Mr Murchie’s continued employment was untenable. There was no offer to purchase their interests. Rather, their equity was to remain trapped even though they would no longer be part of the Executive Team charged with management of the Drapac Group business. These are all hallmarks of oppression.[46]
[45]See the comments of Lord Hoffman in O’Neill v Phillips [1999] 1 WLR 1092 at 1104.
[46]Ibid. See also Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304.

In addition, there is the conduct of Mr Drapac in relation to the Le Boulevard project. The Drapac parties submitted that all that occurred in relation to this project was that an offer was made by Camindu on the basis that the beneficiary of the trust would be changed. That offer was not accepted because Drapac Management’s interests were being looked after by Mr Mercuri and Mr Murchie as directors and employees and Mr Bazzani as the company’s independent solicitor. They say that Mr Drapac was acting in his capacity as an officer of Camindu, not Drapac Management and therefore his conduct could not be oppressive. Viewed in isolation, what Mr Drapac did may be considered reasonable.[47] However, when considered in the context of the other conduct, including the plans to get rid of Mr Wain and Mr Murchie with “zero payout” if possible,[48] and to dilute their interests (but not the interests of Mr Drapac),[49] it can be seen that it was really aimed at diminishing the value of their interests. All of this simply adds to the conclusion that the allegations of conduct oppressive to, unfairly prejudicial to, or unfairly discriminatory against Mr Wain and Mr Murchie have been made out.
[47]See [247] above.
[48]See [191] above.
[49]See [251] – [256] above.

What is the appropriate relief?

The plaintiffs seek orders that Mr Drapac purchase the shares of Mr Wain and Mr Murchie in Endoline. They also seek orders that Briaroaks purchase their shares in Drapac Management and the units held by their companies in the various trusts on the basis that Briaroaks is a unit holder itself.

Counsel for the Drapac parties noted that Mr Wain and Mr Murchie are shareholders in Endoline but that neither of them directly holds units in the trusts. Rather, the unitholdings are held by their respective companies. They submitted that there are no authorities that would permit the Court to order Mr Drapac (in his capacity as a member of Endoline) to purchase the shares of Mr Wain and Mr Murchie in Endoline at a value that reflected the value of their companies’ unit holdings in the trust of which Endoline was trustee.

The Drapac parties also submitted that the trustees of the various trusts had done nothing wrong, but if they had, that would fall to be dealt with under the provisions of the Trustee Act 1958 (Vic) not under the oppression provisions in the Corporations Act. They submitted that the law does not lack remedies as there are plentiful remedies in the area of equity and trusts but the solution is not to be found in the oppression provisions of the Corporations Act.

In Vigliaroni v CPS Investment Holdings Pty Ltd[50] Davies J was of the view that, by virtue of s 53, there was power to grant relief concerning assets that a corporate trustee held on trust.[51] In reaching this conclusion, her Honour did not follow earlier authorities on the same topic.[52] Her Honour’s reasoning was as follows:
[50](2009) 74 ACSR 282.
[51]Ibid at [63]–[69].
[52]Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606; Re Bountiful Pty Ltd (1994) 12 ACLC 902; Re Polyresins Pty Ltd [1999] 1 Qd R 599; Surf Road Nominees Pty Ltd v James [2004] NSWSC 61; and McEwan v Combined Coast Cranes Pty Ltd (2002) 44 ACSR 244.

The Court is given the power under s 233 to make any order “that it considers appropriate in relation to the company”. The legislature deliberately conferred a wide discretion on the court, giving it extensive powers, so that the remedy will eliminate the oppression and enable the causes of any future oppression to be avoided. The High Court in Campbell v Backoffice Investments Pty Ltd very recently affirmed that ss 232 and 233 are to be read broadly and that “[t]he imposition of judge-made limitations on their scope is to be approached with caution”.

If oppression is found, counsel for Gargaro has urged me to follow Kizquari Pty Ltd v Prestoo Pty Ltd and to refuse relief under s 233, despite s 53 and the wide discretion. In Kizquari, Young J (as he then was) held that it was not the function of s 233 to remedy oppression within a trust and that an order could not be made under s 260 of the Corporations Law (the predecessor section to s 233) in respect of a trustee company.
In Kizquari the plaintiffs successfully proved oppressive conduct by directors of a corporate trustee in paying themselves and their wives excessive remuneration, which diminished the profits available for distribution to the unit holders. Young J observed that the oppression “may well cease” if the corporate trustee pursued the overpayments or stopped distributions until the money had been replaced. However, the plaintiffs wanted to be bought out by the defendants. The plaintiffs sought an order that the defendants purchase the plaintiffs’ shares in the corporate trustee at the fair value of their units in the unit trust. Young J formed the view that there were trust remedies that were available to effect the buy-out and would not make any order under s 260. His Honour reasoned as follows:
The company in question … 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 [the trustee company] 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.

Young J declined to follow the decision of Vincent J (as he then was) in Re Bodaibo Pty Ltd where his Honour had made an order under the oppression remedy requiring the purchase of shares of a trustee company at the value of the business which the trustee company conducted on behalf of a unit trust, although the oppressive conduct had not directly affected the company or decreased its value but “rather created a situation that is intolerable for the minority shareholder”. Young J commented that “it would not seem that [Vincent J’s] intention (sic) was drawn to the difficulty caused where the only business that the company carries on and the only assets it possesses are held pursuant to a trust in which it is not a beneficiary”. [53]

[53]Vigliaroni v CPS Investment Holdings Pty Ltd (2009) 74 ACSR 282, 304 - 305 at [64] – [66].

Her Honour then referred to the subsequent decisions that had referred to Kizquari with approval and continued:

These cases, properly considered, do not, in my view, place limitations on the kind of orders that I “consider[] appropriate in relation to the [CPS] company[ies]”, having regard to the particular circumstances before me. The point that I have to consider was not dealt with in Kizquari or any of the other cases mentioned above. None of those cases considered the scope of the oppression power and jurisdiction of the court to grant relief having regard to s 53, although s 53 appeared in the legislation at the time those cases were decided in terms similar to the provision as it now appears. It would appear that s 53 was not brought to the attention of the courts in those cases. Section 53 has been brought to my attention and I must decide in light of s 53 whether my powers are circumscribed so that I cannot make an order under s 233 in respect of a trustee company. In my view, s 53 puts beyond any doubt that the court’s jurisdiction and powers under the statutory oppression provisions are not circumscribed in respect of a trustee company and accordingly I conclude that I should depart from the view expressed by Young J in Kizquari and the cases which have supported that view, in view of s 53. I would also respectfully disagree with the view that Chesterman J expressed in Re Polyresins which Young JA cited with approval in McEwen that the equitable interests in the trust cannot be dealt with by the court under s 233. The only limitation imposed on the court on the kind of order that it can make under s 233 is the requirement for the order to be one that (sic) that the court considers appropriate “in relation to the company”. The phrase “in relation to” requires a rational and discernible link between the remedy and the company in which the oppression has occurred. In other words, any remedy granted under s 233 must not be extraneous to achieving the object of relieving the oppression and must be appropriate to putting an end to the causes of oppression, including where the company acts as trustee and the oppression relates to the affairs of the trust. In appropriate cases the remedy may include orders dealing with the equitable interests in the trust, in my view.[54]
[citations omitted]

[54]Ibid 305 - 306 at [68].

The Drapac parties submitted that the facts in this case are distinguishable from those in Vigliaroni because in that case, the relevant party was a beneficiary of the trust whereas here, Mr Wain and Mr Murchie are not beneficiaries. Rather, their companies are beneficiaries of the relevant trusts. However, a close reading of the decision suggests that this analysis is flawed. The schedule to her Honour’s reasoning makes it clear that the corporate structure in that case had many similarities to the structure of the Drapac Group.

The correctness of the decision in Vigliaroni was questioned in Trust Company Ltd v Noosa Venture 1 Pty Ltd.[55] In that case, Windeyer AJ found that there was no oppressive conduct. In case that was incorrect, Windeyer AJ went on to consider whether in any event an order could be made for purchase of the units held in the trust of which the relevant company was trustee and stated:

With respect to the decision of Davies J and accepting the requirement for coherence in corporations law I find it difficult to accept that an order “in relation to the company” includes an order in relation to the affairs of the company because if that were the legislative intention it would have been easy enough to insert the words “or the affairs of the company” after the words “the company” in the commencement part of s 233(1) of the Act. It is a question of power not scope. It follows that if it were necessary for me to decide this question I would not have felt bound to follow the decision in Vigliaroni in preference to the earlier decisions though accepting so far as those earlier decisions are concerned that at least their judgments do not appear to have given consideration to s 53 of the Act or its predecessors in earlier Acts. Thus I would not consider it within power to make an order requiring one trust beneficiary to buy out the interest of the other trust beneficiary. Such an order would, I think, be an order in relation to the trust not to the company.[56]

[55](2010) 80 ACSR 485.

[56]Ibid 516 at [105].

The words “in respect of” have a very wide meaning.[57] Bearing this in mind, and with respect, in my opinion Windeyer AJ’s construction of the legislation is too narrow. Were that interpretation to be accepted, then in cases such as the present, where there is a complex corporate structure that is a mixture of companies and trusts but in a real sense only one business is conducted by the corporate group, the legislation would be rendered virtually useless to remedy the real harm that has been caused by the oppressive conduct. It would strike me as odd if the Court could take into account oppressive or unfair conduct in the company’s affairs in determining whether relief may be granted but then could not give effective relief to redress the harm caused by that conduct. That this is not intended is, I think, clear from the terms of s 233 in respect of at least one form of order for which specific provision is made. In this regard, the section provides that the Court may make any order that it considers appropriate in relation to the company including an order regulating the conduct of the company’s affairs in the future.[58] As noted above, the company’s affairs includes its business, transactions and dealings with others.[59] In my view, it is clear that the legislative intent was to include the power to grant relief provided that (in the words of Davies J) there is a “rational and discernible link between the remedy and the company in which the oppression has occurred.” In a complex corporate structure (such as the Drapac Group) there is such a link between the companies and the relevant trusts which together operate the business. In my opinion there is power to grant the relief sought and consideration needs now to be given to whether, as a matter of discretion, it should be given.
[57]Technical Products Pty Ltd v State Government Insurance Office (Qld) (1988) 167 CLR 45 at 47.
[58]Section 233(1)(c) Corporations Act.
[59]See[271] above.

In this regard, in relation to the two companies, Endoline and Drapac Management, the Drapac parties submitted that the shares have only nominal value as those two companies only operate as trustees and do not hold any assets beneficially. In those circumstances, it was contended that the Court ought not to make orders for purchase of the shares. However, it seems to me that it is appropriate to make such orders so that there is a complete separation of the business interests of the Drapac parties from the Wain and Murchie parties. This will serve to redress some of the oppressive conduct.

The Drapac parties submitted that if the Court was satisfied that orders ought be made under s 233 of the Corporations Act because Mr Wain had been removed as a director of a company that only acted as trustee, then the appropriate order would be to order that he be permitted to be a director again. Because the companies only act as trustees, it was submitted that any inability of Mr Wain and Mr Drapac to work together in the future would not matter. Counsel submitted that every person who is a director of the trustee would be entitled to participate in the decision making, would be privy to all of the discussions and documents necessary to make decisions. This submission proceeds on the basis that the relief to be granted should be determined on an entity by entity basis. However, this seems to me to be a flawed approach. For the reasons given earlier, the Court can consider the cumulative effect of the conduct alleged to be oppressive, unfair or discriminatory and can take into account conduct that might strictly be conduct of only one entity but which does affect the conduct of the relevant companies. The natural progression from this is that when granting relief, the Court should look to make orders that overall will redress the harm caused by the conduct.

In relation to the Le Boulevard matter, the Drapac parties contended that if the Court formed the view that what occurred resulted in some loss then an order could be made to address that loss rather than to go to the drastic step of ordering a purchase of shares or units. Further it was submitted that if there had been oppressive conduct in relation to the Le Boulevard Trust, that could not be taken to be oppressive conduct in respect of a separate trust (such as the Drapac Holdings Trust) even if there was a common trustee. In those circumstances, as a matter of discretion, it was contended that the Court ought not to make orders for the purchase of units in the trust in respect of which there had been no oppressive conduct. I have already dealt with this last argument in respect of whether consideration can be given to conduct that might technically be said to only relate to one entity or trust. As a matter of discretion, this is not a proper basis for limiting the form of relief to be granted. Again, it seems to me that to redress the harm caused by the conduct complained of, there should be a complete separation of Mr Wain and Mr Murchie’s interests from those of Mr Drapac.

So far as the units in the relevant trusts were concerned, the Drapac parties contended that the correct approach would be for the unit holders to make an application for redemption of their units and for that redemption to be considered by the trustee. Further, one of the trusts (Drapac Trust No. 2) is a public trust in the sense that it is a registered managed investment scheme and the constitution needs to be followed (including in respect of the procedure for redemption of units). Counsel noted that in that scheme there are a number of unit holders other than the parties in this proceeding. The Wain and Murchie parties submitted that it makes no difference that there is a registered managed investment scheme. The responsible entity (Drapac Management) is controlled by Mr Drapac. The Wain and Murchie parties submitted that in those circumstances there was no point in following the procedure laid down in the constitution for redemption of units, just as there would be no point in following the constitution of any of the companies controlled by Mr Drapac. I accept those submissions.

I have formed the view that originally the plan in relation to equity participation was that the key employees would not be entitled to realise their interests until the end of 2014. However, over time, that changed. This can be seen in the August 2008 Bristow paper that the key employees and Mr Drapac all signed, and in the negotiations concerning the agreement that Mr Cameron was drafting. By September 2009, Mr Drapac, Mr Wain, Mr Mercuri and Mr Murchie had all come to the view that there had to be a parting of the ways with the key employees’ interests in the Drapac Group to be paid out albeit with some caveats to apply. In particular, I accept Mr Wain’s evidence that Mr Drapac effectively undertook to release his equity during the conversation that they had on 3 September 2009 that I have referred to in [110] above. It accords with the similar conversation that Mr Mercuri had with Mr Drapac the previous day.[60] Further, Mr Drapac’s evidence about the conversation with Mr Wain was vague and equivocal.
[60]See [109] above.

In the context of this case, it would be unfairly prejudicial and inequitable to deny the Wain and Murchie parties relief on the basis that the original date for realisation of their equity (that is, December 2014) has not yet arrived. They are entitled to orders that their interests in Endoline and Drapac Management and the units in the various trusts be purchased at fair value.

Did Mr Wain and Mr Murchie breach their employment agreements or duties as directors?

A number of allegations pleaded in the counterclaim brought by the Drapac parties were not the subject of cross examination of Mr Wain and Mr Murchie nor were they pursued by the Drapac parties in the closing submissions. In those submissions, the Drapac parties stated that the counterclaim relates to the reasons for termination of Mr Wain’s employment (which I have already dealt with above). Given the findings that I have made, the counterclaim must fail.

Conclusion

The Wain and Murchie parties are the beneficial owners of the shares and units issued to them in relation to the Drapac Group. Taken cumulatively, the conduct of the Drapac parties was oppressive or unfairly prejudicial to them within the meaning of s 232 of the Corporations Act. As sought in the prayer for relief to the statement of claim, the Wain and Murchie parties are entitled to orders for Mr Drapac and Briaroaks to purchase their interests at fair value.

Once the parties have had the opportunity to consider these reasons, I will hear submissions, at a mutually convenient time, as to directions to be made in advance of a trial on the fair valuation of the interests of the Wain and Murchie parties.

Schedule – The Drapac Group
The following companies and trusts form the Drapac Group. The list is taken from paragraph 1 of the amended defence of the Drapac parties filed 25 July 2011.
Endoline Pty Ltd
Drapac Management Ltd
Drapac Holdings Pty Ltd
Drapac Agriculture Pty Ltd
Drapac Private Pty Ltd
Drapac Consulting Pty Ltd
Drapac Finance Pty Ltd
Drapac Investment Pty Ltd
Drapac Car Park Pty Ltd
Drapac Developments Pty Ltd
Drapac Capital Pty Ltd
Drapac Operations Pty Ltd
1144 Nepean Highway Pty Ltd
Drapac Holdings Trust
Drapac Agricultural Resource Trust
Drapac Agriculture Fund
Drapac Unit Trust
Drapac Capital Trust
Drapac Victoria Street Trust
Drapac Trust No 1
Drapac Trust No 2
Drapac Trust No 4
Drapac Trust No 6
Drapac Japan Fund
Drapac Le Boulevard Trust
Drapac Hastings Trust
Drapac Sustainability Fund
Drapac Sustainability Mortgage Fund
Drapac Developments & Quigil Joint Venture

[2012] VSC 156

26 April 2012