Citation: Arakella v Paton [2004] NSWSC 13
Court: Supreme Court of New South Wales, Equity Division
Date: 30 January 2004
Judge(s): Austin J
Background
The plaintiff, Arakella Pty Ltd, was the trustee of the GNS Trading Trust, a trading trust established to support a group newsagency supplies business. The trustee wished to restructure the trust by amending the trust deed in a way that would irrevocably affect the rights of unitholders. Because the existing trust deed lacked an adequate amendment power, the trustee sought an order from the Supreme Court under s 81 of the Trustee Act 1925 (NSW) conferring the necessary power.
The proceeding was originally filed as an ex parte application for judicial advice under s 63 of the Trustee Act. It was later reconstituted as an inter partes proceeding, with Geoffrey Douglas Paton appointed as a representative defendant for the approximately 365 unitholders of the trust. Letters were sent to unitholders notifying them of the proceeding, and none objected to Mr Paton's appointment or sought to appear.
The trustee's restructuring proposal was described as akin to a scheme of arrangement, requiring the approval of a special majority of unitholders before any amendment could be implemented. Two legal questions were identified as potential obstacles and were set down for determination as separate questions.
Legal Issues
- Whether s 81 of the Trustee Act 1925 (NSW) is wide enough to empower the Court to confer on a trustee a power to amend a trading trust deed in a way that affects the rights of beneficiaries.
- Whether an amendment to the trust deed, made after obtaining the approval of a special majority of unitholders, would constitute a fraud on the power of amendment so as to bind dissident unitholders.
- Whether the principles from Gambotto v WCP Ltd (1995) 182 CLR 432 (concerning compulsory acquisition of minority shareholdings under a corporate constitution) apply to the amendment of a trading trust deed.
- Whether the proceeding was appropriately constituted as a representative proceeding under Part 8 rule 14 of the Supreme Court Rules.
Decision
Austin J answered both separate questions in terms favourable to the trustee. On the first question, his Honour held that s 81 of the Trustee Act does empower the Court to confer on a trustee a power of amendment to a trust deed, even where the amendment will affect the rights of beneficiaries. Section 81 permits the Court to confer powers on trustees that are expedient in the management or administration of trust property, and this extended to the proposed amendment power in the circumstances.
On the second question, his Honour held that an amendment made after the approval of a special majority of unitholders would not, of itself, constitute a fraud on the power. Obtaining unitholder approval was a condition, not a mechanism to perpetrate an improper purpose, and the fact that dissident unitholders would be bound did not render the exercise of the power fraudulent in the relevant equitable sense.
On the Gambotto question, Austin J considered whether the High Court's principles governing compulsory acquisition of minority shareholdings applied to the amendment of a trading trust deed. His Honour concluded that the Gambotto principles did not apply to the present case on two independent grounds. However, he also addressed the matter in the alternative: even if the principles did apply, the trustee's proposal would satisfy them because its substantial purpose was to avoid immediate detriment or harm to the trust, not merely to secure administrative or financial advantages. The trustee faced the choice between restructuring and winding up, and winding up would be to the serious detriment of newsagent unitholders.
On procedural matters, the Court addressed the appropriateness of the representative proceedings. The appointment of Mr Paton as a representative defendant under Part 8 rule 14 of the Supreme Court Rules was confirmed as appropriate in the circumstances, given the large number of unitholders and the absence of any objection following proper notification.
Orders Made
No orders were made in this decision.
Key Takeaways
- Section 81 of the Trustee Act 1925 (NSW) is broad enough to permit the Supreme Court to confer on a trustee a power to amend a trading trust deed, even where the amendment will irrevocably affect the rights of beneficiaries.
- An amendment to a trust deed made after a special majority of unitholders have approved it does not, without more, constitute a fraud on the power of amendment capable of invalidating the exercise of that power against dissenters.
- The Gambotto principles, developed in the context of compulsory acquisition of minority shareholdings in companies, were held not to apply to the amendment of a trading trust deed in this case, on two independent grounds.
- Where a restructuring proposal's substantial purpose is to avert immediate harm or destruction of a trust business, rather than to deliver collateral financial or administrative benefits, the Gambotto framework would not invalidate the proposal even if it were otherwise applicable.
- A representative defendant procedure under Part 8 rule 14 of the Supreme Court Rules can be an appropriate mechanism for constituting proceedings involving a large class of trust beneficiaries, provided those beneficiaries receive adequate notification and an opportunity to participate.
Legislation and Cases Referenced
Legislation:
- Trustee Act 1925 (NSW), ss 63, 81
- Supreme Court Rules, Part 8 rule 14; Part 31 rule 2
- Corporations Act (references to s 479(3) in the judgment)
Key Cases:
- Gambotto v WCP Ltd (1995) 182 CLR 432
- Chapman v Chapman [1954] AC 424
- Vatcher v Paull [1915] AC 372
- Re GB Nathan Pty Ltd (in liq) (1991) 24 NSWLR 674
- Heydon v NRMA Ltd (2001) 51 NSWLR 1
- Carnie v Esanda Finance Corporation (1995) 182 CLR 398
- Mobil Oil Australia Pty Ltd v Victoria (2002) 189 ALR 161
- Permanent Trustee Co Limited v National Australia Managers Limited (NSWSC, 8 August 1994, unreported)
- Re Downshire Settled Estates [1953] Ch 218
- Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457
- Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 40 ACSR 221