Stuck in the middle with you: exiting an investment in a tightly held venture
Melrob Investments Pty Ltd v Blong Ume Nominees Pty Ltd  SASCA 29
Melrob Investments Pty Ltd v Blong Ume Nominees Pty Ltd  SASCA 29 provides an interesting example of a minority interest holder in a tightly held investment vehicle being unable to extricate itself from the venture and unable to realise its interest, including through the oppression provisions in the Corporations Act, notwithstanding that the two other interest holders had applied the property for their own benefit and, on one view, had excluded the minority from involvement in decision making.
Messrs Orfanos, Michaels and Ouwens (the “Principals”) agreed to purchase an office property (the “Property”). The shared intention of the Principals was that they would operate their respective professional practices from the Property. The Principals agreed that a nominee company (the “Trustee”) would purchase the Property as trustee for three corporate beneficiaries associated with each (Orfanos Nominees in the case of Mr Orfanos, Melrob in the case of Mr Michaels and OCS in the case of Mr Ouwens) (collectively, the “Corporate Beneficiaries”). Each of the three Principals became a director of the Trustee and each held one of the three shares issued in it.
The Corporate Beneficiaries entered into a Joint Venture Deed (the “JVD”). Clause 3.1 of the JVD specified the sole purpose of the joint venture to be to acquire and hold the Property as an investment in the manner mutually agreed between the Corporate Beneficiaries from time to time and, if agreed, to further develop the Property. If a Corporate Beneficiary wished to dispose of its interest in the Property, cl 9.1 conferred on the other Corporate Beneficiaries a right of first refusal to purchase the interest. The Corporate Beneficiary could only offer to sell its interest to a third party after complying with that process, on terms set out in cl 9.6 of the JVD.
On the same day as the JVD was executed, the Corporate Beneficiaries and the Trustee also made a trust deed (the “Trust Deed”). Under cl 4, the Trustee acknowledged and agreed with the Corporate Beneficiaries that the Trustee would not deal with the Property other than as agreed in writing between the Trustee and the Corporate Beneficiaries from time to time.
Upon becoming registered proprietor of the Property, the Trustee leased most of the Property to the three Principals’ professional practices. Later, Mr Orfanos fell into dispute with Mr Ouwens, and Mr Orfanos’s practice vacated the Property. Mr Orfanos and his related companies commenced proceedings, claiming, amongst other things, that the Trustee had failed to carry out its obligations, and seeking equitable compensation and an order for the winding up of the Trustee. It was found that the Trustee had breached its duties as a trustee by failing to take steps to ensure that the Property was leased at market rent: Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd (2019) 135 SASR 385.
Following this, what remained for determination was (i) the Orfanos entities’ claims for, relevantly, the winding up of the trust pursuant to s 59C of the Trustee Act 1936 (SA); and (ii) the Orfanos entities’ claims for remedies under ss 232, 233 and 461 of the Corporations Act 2001 (Cth), including to wind up the Trustee.
Under s 59C(1), the Court could vary or revoke a trust, or, where a trust was revoked, distribute the trust property in such manner as the Court considered just. Under s 59C(3)(d), before the Court exercised its power under the section, the Court had to be satisfied, amongst other things, that the proposed exercise of powers accorded as far as reasonably practicable with the spirit of the trust.
The primary judge (Kourakis CJ) found that the criteria under s 59C were met for the revocation of the trust and the distribution of the proceeds to the beneficiaries:  SASC 22. As such, his Honour considered that it was not necessary to determine the alternative claim under s 233 of the Corporations Act, though he indicated that he would have exercised those powers to wind up the Trustee, with consequential orders to the same effect as he proposed under s 59C. Messrs Michaels and Ouwens and their related entities appealed. Mr Orfanos and his related entities cross-appealed, contending that if the primary judge erred in making orders under s 59C, he ought to have made orders under either ss 233 or 461(1) of the Corporations Act.
The Court allowed the appeal and dismissed the cross-appeal.
Justice Bleby (with whom Lovell JA and David JA agreed) concluded that the Chief Justice erred in finding that there was good reason to exercise the discretion conferred by s 59C to revoke the trust, direct the sale of the Property and order the distribution of the proceeds of sale equally.
First, Bleby JA held that the spirit of the trust did not extend to the provision of accommodation for the professional practices of the three Principals, even though that may have been a subjective purpose of each of the three Principals at the time the Corporate Beneficiaries entered into the JVD. The sole purpose of the joint venture as expressed in cl 3.1 of the JVD was to acquire and hold the Property as an investment. It could not be said that this purpose had been met.
Secondly, his Honour held that on the proper construction of cl 3.1 of the JVD, once initial agreement had been reached on the manner of holding the Property as an investment, the parties were bound to proceed on that basis unless and until some different agreement was reached. Therefore, neither the JVD nor the Trust Deed was premised on a high degree of continuing cooperation between the parties.
Thirdly and finally, his Honour observed that Melrob and OCS were entitled to hold Orfanos Nominees to cl 9 of the JVD, and in circumstances in which Orfanos Nominees had never exercised its right under cl 9.6 of the JVD, it could not be said that Mr Michaels and Mr Ouwens had forced a minority discount on Mr Orfanos.
On the cross-appeal, Bleby JA held that the Orfanos parties had not demonstrated that the conduct of the Trustee’s affairs was contrary to the interests of the members as a whole for the purposes of s 232(d). Whilst the relationship between the Principals was poor, it was not such as to render the Trustee’s affairs unmanageable, given that the only business of the Trustee was the passive investment of the Property and it was open to engage an independent property manager. Mr Orfanos’s refusal to entertain such an engagement – at least until the determination of the litigation and his acquiescence in decisions made by the other Principals in the meantime – could not properly form the basis for the satisfaction of s 232(d).
Further, his Honour held that, in the circumstances, as it could not be said that Messrs Michaels and Ouwens had forced a minority discount on Mr Orfanos for the sale of Orfanos Nominees’ interest, s 232(e) was not enlivened on that basis.
Finally, Bleby JA held that whilst the conduct of Messrs Michaels and Ouwens in undervaluing market rents was oppressive to, unfairly prejudicial to and unfairly discriminatory against Mr Orfanos in his capacity as controller and beneficiary of Orfanos Nominees such as to fall within the scope of s 232(e) and enliven the power to wind up the Trustee under any of ss 233 or 461(1)(e), (f) or (g), the underpayments had been corrected and in all the circumstances it was not appropriate to wind up the Trustee.
A couple of aspects of the case may be of enduring interest.
First, Bleby JA would have held that the fact that a company’s activities comprise being the trustee of a trust does not preclude the application of s 232 and his Honour would not have followed cases that concluded otherwise. In such circumstances, it is apparent from his Honour’s discussion that whether the interests of a member that have been adversely affected in some capacity other than that of being a member (as for a shareholder in a corporate trustee) engage s 232(e) depends on the closeness of the relationship between the interest affected and the membership. Thus, on the premise that Mr Orfanos was a beneficiary of the discretionary family trust of which Orfanos Nominees was trustee (and which as its director he therefore had the capacity to direct the distribution of its equitable interest in the Property to himself), had oppression against him in that capacity been demonstrated, his Honour would have held that that capacity had a sufficiently close relationship to Mr Orfanos’s membership of the Trustee to be capable of enlivening s 232(e). Similarly, oppression against Mr Orfanos in his capacity as a director of the Trustee was capable of enlivening the section, because his membership of the Trustee, his directorship of it and his role as director of Orfanos Nominees and the discretionary family trust of which it was trustee were sufficiently interrelated.
Secondly, the result that the Court did not exercise the powers under ss 233 and 461(1) of the Corporations Act is noteworthy. One might have thought that, in the circumstances, the Orfanos entities had a reasonable oppression claim. However, the fact that Mr Orfanos was not prepared to contemplate the appointment of an independent property manager at least until the outcome of the proceeding clearly weighed heavily against the Orfanos entities’ claim, especially given that the investment in the Property was a relatively passive one. The intractability was therefore an “artifice” of Mr Orfanos’s own making. Viewed against that background, Mr Orfanos’s lack of involvement in corporate decision making was characterised not as his exclusion from it but rather his acquiescence in majority decision making. Finally, it is also clear that the fact that he had not engaged the sale process provisions of the JVD put paid to his argument that by the majority’s offer to purchase his interest at materially less than the value of his proportionate interest in the Property constituted the majority “forcing” a minority discount on him.
The case demonstrates that more is required to establish oppression in a tightly held company than simply poor relations between venturers and the (apparent) inability of one to realise its interest in the venture.
Liability limited by a scheme approved under professional standards legislation.
 To be reported in SASR.
 Section 59C is similar to s 63A of the Trustee Act 1958 (Vic), though the latter does not include, amongst other things, the ‘spirit of the trust’ requirement.
 Kizquari Pty Ltd v Prestoo Pty Ltd (1993) 10 ACSR 606, Trust Company Ltd v Noosa Venture 1 Pty Ltd (2010) 80 ACSR 485.