The New South Wales Supreme Court decision of Aurora Australasia Pty Ltd v Hunt Prosperity Pty Ltd trading as trustee of the Aurora Australasia Investment Fund Unit Trust[1] highlights the importance of having precise and clear contractual agreements within a company structure.
David Driver and Adam Hartley were both directors of the Aurora Australasia Investment Fund. When one director tried to redeem funds from the investment, he discovered the relevant unit certificate was registered to the company and not himself. This led to legal proceedings to compel the redemption request to be processed.
Background
Mr Driver and Mr Hartley together had set up a fund to invest in foreign exchange (FX) trading, called the Aurora Australasia Investment Fund Unit Trust (Fund).
The company was owned equally by Mr Driver and AMHP Pty Ltd (Mr Hartley’s Company), each held 100 shares.
The Fund was performing well and both Mr Driver and Mr Harley received performance fees on a monthly basis. The fees were re-invested by them back in the Fund. Two Unit Certificates were issued to record these investments, being Certificate No 3 and No 4.
Through a series of four separate loans, Mr Hartley’s Company lent Mr Driver $7.5 million dollars.
The loan agreement between the parties was imperfectly recorded, drafted using a precedent obtained online.
The lender was recorded as Mr Hartley but Mr Hartley’s Company was not included as a lender. Notwithstanding the fact that two of the loans were provided by Mr Hartley’s Company.
Mr Driver agreed to repay the loan with an additional $2.5 million interest, making it a total loan of $10 million. The loan would be repaid “on initial receipt of funds” from Mr Driver’s other legal proceedings, for which a mediation was scheduled in June 2023.
When the mediation was pushed back to November 2023, Mr Hartley sent a letter of demand to Mr Driver for the $10 million owed.
Mr Driver attempted to get his money out of the Fund by submitting a redemption request.
A problem emerged when Mr Driver discovered that Certificate No 3 was not in his name, but in the name of the company, Aurora Australasia Pty Ltd (Aurora).
Mr Driver opened a bank account in Aurora’s name and tried to redeem the money again. This was also unsuccessful as payments on the Fund account required two signatories and Mr Hartley refused to approve the redemption.
Mr Driver commenced proceedings in the name of Aurora to seek orders to allow the redemption request to be processed into his name.
Issues and Court Findings
The matters the Court had to determine included the following.
Issue: Was Aurora Entitled to the Performance Fee?
Mr Hartley argued that Aurora's role was minimal and essentially a means to ‘skim off’ the profit for doing nothing.
Mr Driver on the other-hand pointed out that the memorandum clearly defined Aurora's role and entitlement to a one-third share of the monthly profits, regardless of the existence of a written agreement.
The Court noted that the determination of whether a contract existed is based on the parties' objective intentions and conducts over time.
Despite the lack of a formal written agreement, the consistent treatment of Aurora as the Investment Manager indicated a mutual understanding of its role and entitlement to the profit share.
Issue: Should the Units Issued to Aurora be Cancelled?
Mr Hartley argued that Aurora should not be entitled to these units. He claimed that the proper process for issuing units was ignored, as outlined in the information memorandum and trust deed. He further argued that Aurora did not contribute financially to the Fund. But he on the other-hand, provided millions to the corpus of the Fund. Mr Hartley asserted that issuing unit certificates in the name of Aurora constituted a breach of trust and sought cancellation of the certificates.
Mr Driver maintained that the units were validly issued in accordance with the agreement which appointed Aurora as the Investment Manager. There was no breach in issuing the units to Aurora in return for it investing its profit share into the Fund.
The Court agreed with Mr Driver in that there was no breach of trust in issuing the units, as all parties were in agreement regarding the arrangement. Even if the units were to be cancelled, Aurora would still be entitled to its performance fees.
Issue: Are the Loans Presently Due and Payable?
The Court concluded that the language of the loan agreement is unambiguous and the Court must give effect to the language used. The repayment was to be made on initial receipt of the funds from Mr Driver’s other court case. Since repayment was tied to any funds received in relation to that case, which have yet to be received, the Court held that Mr Driver is not presently obligated to repay the loans.
Issue: An Equitable Charge?
In the event that Aurora is entitled to receive the redemption proceeds of Certificate No 3, Mr Hartley sought an equitable charge of the redemption proceeds so that Aurora held the certificate in favour of Mr Hartley to secure the $10 million loan.
The Court noted that an equitable charge could arise from intention without a formal contract. Mr Driver’s intention is clearly express in his email. In the email, Mr Driver offered to secure the loans by pledging shares in Aurora and units in the Fund to Mr Hartley. Mr Hartley was therefore, entitled to the relief sought in respect of the equitable charge.
Issue: What To Do with the Redemption Request?
The Court considered the trust deed's provisions regarding the redemption process, noting that the trustee is entitled to treat the registered unit holder, Aurora, as the absolute owner. Any informal agreements about ownership between Mr Driver and Mr Hartley should be disregarded.
Ultimately, the Court ruled in favour of Mr Hartley, granting him the relief sought to prevent the redemption request from being processed, allowing him to protect his equitable interest in the units.
Take Away
If you are a director or officer of a company, this case highlights the importance of clear and formal documentation of company arrangements.
Within a company structure, each parties’ roles and entitlements should be well-defined to avoid disputes.
It is important to remember that in the absence of a formal written contract, each parties’ intention expressed through conducts, may be the basis for how an arrangement is interpreted by a court.
If you would like to discuss this article or any company restructuring that you are considering engaging in please contact:
Alicia Hill
Principal
T +61 3 9611 0180 | M +61 484 313 865
E ahill@sladen.com.au
Inshani Ward
Senior Associate
T +61 3 9611 0110 | M +61 413 557 157
E iward@sladen.com.au
Meagan O’Connor
Principal
T +61 3 9611 0106| M +61 438 531 978
E moconnor@sladen.com.au
Dean Beaumont
Special Counsel
T +61 3 9611 0131 | M +61 437 257 648
E dbeaumont@sladen.com.au
Samuel Zhang
Law Graduate
T +61 3 9611 0135
E szhang@sladen.com.au
[1] [2024] NSWSC 1054.
