In the recent decision of Mir v Mir [2023] NSWSC 408 the Supreme Court of New South Wales considered a company structure that was developed initially with tax benefits top of mind.
In the 1950s three brothers started a business which became successful. It was run as a group of companies and trusts that grew in value and complexity.
The group was run informally by the three brothers (and later their kids) and structured pursuant to tax advice.
In 2018, the plaintiff sued seeking to divide the business into three equal parts; each part passing to each brother’s family or estate.
The Court accepted the relationships broke down for “unclear and complicated” reasons including issues with a parcel of land allegedly owned by the plaintiff and issues with the new generation running the group.
The plaintiff said the group was operated by an “overarching” partnership; saying the group had many of the attributes of a partnership (run by three brothers, profit share etc.)
However, the group’s underlying assets were held on trust. A partnership can be a beneficiary of a trust, but not a legal owner of assets held on trust.
Fatal to the plaintiff’s claim: if a receiver was appointed to the “partnership” what could that receiver do about the assets held on trust? Nothing outside of the trust deeds’ bounds.
The plaintiff alleged parts of the group was a “sub-partnership” between the brothers’ spouses. However, the spouses were trustees, not partners.
The group was found to be an “overarching” partnership.
The plaintiff then said the group should be wound up on the just and equitable grounds.
In 2017 one brother died, his child then represented his interests. Negotiations to divide the group were conducted and failed. This litigation was commenced. Together this showed the group could not return to its state when run by all three brothers.
However, the appropriate question re s461 is whether *each company* (many of which were trustees) should be wound up. The plaintiff did not make submissions on each company.
No suggestion was made that each company was failing in its obligations with no suggestions trust assets were in jeopardy.
In the absence of this evidence and submissions, it was not for the Court to try to find a basis for a s461 order.
The plaintiff sought the dissolution of the trusts in the group, but the only basis for that would be bringing forward each one’s vesting date. In the absence of hearing from the beneficiaries the falling out between the brothers was not a basis for the Court to direct the trustees to so exercise their powers.
The plaintiff was not itself a party to the partnerships in the group and so could not dissolve them.
The Court considered its conclusions “could not be regarded as a satisfactory resolution of the case”.
The Court found that the brothers, having chosen this structure in large part for tax effectiveness, must now live with the consequences and sought submissions on next steps.
This case illustrated the importance of getting proper legal advice when starting a company. If you would like advice in relation to tax law or corporation law, please do not hesitate to reach out to our Corporate and Commercial Law team.
This article was prepared with the assistance of Christie Preston.
If you have any questions or concerns please contact Stipe Vuleta on 02 6188 3600