FEDERAL COURT OF AUSTRALIA HNA Irish Nominee Limited v Kinghorn [2010] FCA 311 Citation: HNA Irish Nominee Limited v Kinghorn [2010] FCA 311 Parties: HNA IRISH NOMINEE LIMITED and ANOR v GEOFFREY ANDREW KINGHORN and ORS File number: NSD 94 of 2010 Judge: EMMETT J Date of judgment: 31 March 2010 Date of hearing: 22 and 23 March 2010 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 39 Counsel for the Plaintiffs: M Leeming SC with J Hewitt Solicitor for the Plaintiffs: Chang, Pistilli & Simmons Counsel for the Defendants: SD Robb QC with J Clarke Solicitor for the Defendants: DibbsBarker IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 94 of 2010 BETWEEN: HNA IRISH NOMINEE LIMITED First Plaintiff ALLCO MANAGED INVESTMENTS LIMITED Second Plaintiff AND: GEOFFREY ANDREW KINGHORN First Defendant DAVID LLOYD VEAL Second Defendant KV AVIATION HOLDINGS PTY LIMITED Third Defendant RIL AVIATION VQZ PTY LIMITED ACN 110 563 007 Fourth Defendant RIL AVIATION VQW PTY LIMITED ACN 110 562 831 Fifth Defendant RIL AVIATION MSN 163 PTY LIMITED ACN 111 127 087 Sixth Defendant RIL AVIATION MSN 185 PTY LIMITED ACN 111 127 130 Seventh Defendant RIL AVIATION VQU PTY LIMITED ACN 114 265 833 EIGHTH DEFENDANT RIL AVIATION VQT PTY LIMITED ACN 114 265 842 Ninth Defendant RIL AVIATION VQS PTY LIMITED ACN 114 265 860 Tenth Defendant RIL AVIATION VQR PTY LIMITED ACN 114 265 922 Eleventh Defendant RIL AVIATION VQQ PTY LIMITED ACN 114 265 940 Twelfth Defendant RIL AVIATION VQP PTY LIMITED ACN 114 265 968 Thirteenth Defendant RIL AVIATION 9V-SFG PTY LIMITED ACN 116 838 905 Fourteenth Defendant RIL AVIATION 9V-SLE PTY LIMITED ACN 115 858 298 Fifteenth Defendant RIL AVIATION EI-DLN PTY LIMITED ACN 115 857 488 Sixteenth Defendant RIL AVIATION EI-DLO PTY LIMITED ACN 115 857 684 Seventeenth Defendant RIL AVIATION VQG PTY LIMITED ACN 115 079 751 Eighteenth Defendant RIL AVIATION EI-DLR PTY LIMITED ACN 121 180 470 Nineteenth Defendant RIL AVIATION EI-DPB PTY LIMITED ACN 122 128 830 Twentieth Defendant RIL AVIATION EI-DPD PTY LIMITED ACN 122 642 031 Twenty-First Defendant RIL AVIATION EI-DPC PTY LIMITED ACN 122 641 963 Twenty-Second Defendant RIL AVIATION EI-DPT PTY LIMITED ACN 124 271 236 Twenty-Third Defendant RIL AVIATION EI-DPW PTY LIMITED ACN 124 850 255 Twenty-Fourth Defendant RIL AVIATION EI-DPX PTY LIMITED ACN 124 850 317 Twenty-Fifth Defendant RIL AVIATION OJJ PTY LIMITED ACN 102 697 709 Twenty-Sixth Defendant RIL AVIATION OJG PTY LIMITED ACN 102 697 914 Twenty-Seventh Defendant RIL AVIATION OJH PTY LIMITED ACN 102 697 549 Twenty-Eighth Defendant RIL AVIATION VQY PTY LIMITED ACN 110 562 957 Twenty-Ninth Defendant RIL AVIATION VQX PTY LIMITED ACN 110 562 902 Thirtieth Defendant RIL AVIATION VQV PTY LIMITED ACN 110 562 699 Thirty-First Defendant RIL AVIATION VQJ PTY LIMITED ACN 115 079 171 Thirty-Second Defendant RIL AVIATION VQI PTY LIMITED ACN 115 079 322 Thirty-Third Defendant RIL AVIATION 9V-SLD PTY LIMITED ACN 115 857 899 Thirty-Fourth Defendant RIL AVIATION VQH PTY LIMITED ACN 115 079 635 Thirty-Fifth Defendant RIL AVIATION HL 7744 PTY LIMITED ACN 119 743 627 Thirty-Sixth Defendant RIL AVIATION HL 7745 PTY LIMITED ACN 114 467 364 Thirty-Seventh Defendant RIL AVIATION EI-DPO PTY LIMITED ACN 123 795 997 Thirty-Eighth Defendant JUDGE: EMMETT J DATE OF ORDER: 31 MARCH 2010 WHERE MADE: SYDNEY THE COURT DECLARES THAT: 1. Para 2(a)(ii) of Schedule 14 Part C of the constitutions of the companies set out in the attached Schedule (the RILAs) does not entitle a holder of preference shares to vote on resolution 1 contained in the notices of general meeting of the RILAs dated 3 February 2010. THE COURT ORDERS THAT: 2. Prayer 3 of the prayers for relief contained in the Further Amended Originating Process filed 11 March 2010 be dismissed. 3. The matter be listed for further directions at 9.30 am on Monday, 12 April 2010. Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 94 of 2010 BETWEEN: HNA IRISH NOMINEE LIMITED First Plaintiff ALLCO MANAGED INVESTMENTS LIMITED Second Plaintiff AND: GEOFFREY ANDREW KINGHORN First Defendant DAVID LLOYD VEAL Second Defendant KV AVIATION HOLDINGS PTY LIMITED Third Defendant RIL AVIATION VQZ PTY LIMITED ACN 110 563 007 Fourth Defendant RIL AVIATION VQW PTY LIMITED ACN 110 562 831 Fifth Defendant RIL AVIATION MSN 163 PTY LIMITED ACN 111 127 087 Sixth Defendant RIL AVIATION MSN 185 PTY LIMITED ACN 111 127 130 Seventh Defendant RIL AVIATION VQU PTY LIMITED ACN 114 265 833 EIGHTH DEFENDANT RIL AVIATION VQT PTY LIMITED ACN 114 265 842 Ninth Defendant RIL AVIATION VQS PTY LIMITED ACN 114 265 860 Tenth Defendant RIL AVIATION VQR PTY LIMITED ACN 114 265 922 Eleventh Defendant RIL AVIATION VQQ PTY LIMITED ACN 114 265 940 Twelfth Defendant RIL AVIATION VQP PTY LIMITED ACN 114 265 968 Thirteenth Defendant RIL AVIATION 9V-SFG PTY LIMITED ACN 116 838 905 Fourteenth Defendant RIL AVIATION 9V-SLE PTY LIMITED ACN 115 858 298 Fifteenth Defendant RIL AVIATION EI-DLN PTY LIMITED ACN 115 857 488 Sixteenth Defendant RIL AVIATION EI-DLO PTY LIMITED ACN 115 857 684 Seventeenth Defendant RIL AVIATION VQG PTY LIMITED ACN 115 079 751 Eighteenth Defendant RIL AVIATION EI-DLR PTY LIMITED ACN 121 180 470 Nineteenth Defendant RIL AVIATION EI-DPB PTY LIMITED ACN 122 128 830 Twentieth Defendant RIL AVIATION EI-DPD PTY LIMITED ACN 122 642 031 Twenty-First Defendant RIL AVIATION EI-DPC PTY LIMITED ACN 122 641 963 Twenty-Second Defendant RIL AVIATION EI-DPT PTY LIMITED ACN 124 271 236 Twenty-Third Defendant RIL AVIATION EI-DPW PTY LIMITED ACN 124 850 255 Twenty-Fourth Defendant RIL AVIATION EI-DPX PTY LIMITED ACN 124 850 317 Twenty-Fifth Defendant RIL AVIATION OJJ PTY LIMITED ACN 102 697 709 Twenty-Sixth Defendant RIL AVIATION OJG PTY LIMITED ACN 102 697 914 Twenty-Seventh Defendant RIL AVIATION OJH PTY LIMITED ACN 102 697 549 Twenty-Eighth Defendant RIL AVIATION VQY PTY LIMITED ACN 110 562 957 Twenty-Ninth Defendant RIL AVIATION VQX PTY LIMITED ACN 110 562 902 Thirtieth Defendant RIL AVIATION VQV PTY LIMITED ACN 110 562 699 Thirty-First Defendant RIL AVIATION VQJ PTY LIMITED ACN 115 079 171 Thirty-Second Defendant RIL AVIATION VQI PTY LIMITED ACN 115 079 322 Thirty-Third Defendant RIL AVIATION 9V-SLD PTY LIMITED ACN 115 857 899 Thirty-Fourth Defendant RIL AVIATION VQH PTY LIMITED ACN 115 079 635 Thirty-Fifth Defendant RIL AVIATION HL 7744 PTY LIMITED ACN 119 743 627 Thirty-Sixth Defendant RIL AVIATION HL 7745 PTY LIMITED ACN 114 467 364 Thirty-Seventh Defendant RIL AVIATION EI-DPO PTY LIMITED ACN 123 795 997 Thirty-Eighth Defendant JUDGE: EMMETT J DATE: 26 MARCH 2010 PLACE: SYDNEY REASONS FOR JUDGMENT INTRODUCTION 1 This proceeding is concerned with the respective rights of holders of ordinary shares and holders of preference shares in some thirty five companies, each of which is a defendant in the proceeding (the RILAs). The constitution of each of the RILAs is either identical to all of the others or substantially similar. The names of the RILAs are derived from Record Investments Limited, the former name of Allco Finance Group Limited (Allco). 2 Each of the RILAs is the owner of an aircraft, and the name of each RILA contains registration particulars of the aircraft that it owns. Each RILA has entered into an agreement for the hiring of its aircraft to a particular carrier. 3 The first and second defendants, Messrs Geoffrey Kinghorn and David Veal, are directors of the third defendant, KV Aviation Holdings Pty Limited (KV Aviation). They are also the only directors of each of the RILAs. KV Aviation is the holder of Ordinary shares in each of the RILAs. The first plaintiff, HNA Irish Nominee Limited (HNA), is a subsidiary of HNA Group (Hong Kong) Co Limited, which trades as Hong Kong Aviation Company. On or about 6 January 2010, HNA acquired certain assets of the aviation business of Allco from the receivers and managers of Allco. The assets acquired by HNA included preference shares in each of the RILAs. As a consequence, HNA holds an equitable interest in preference shares in all the RILAs, which were registered in the name of Allco Managed Investments Limited (Allco Managed). HNA claims to be the registered holder of preference shares in the fourth to twenty fifth and twenty ninth to thirty eighth defendant RILAs. The second plaintiff is the registered owner of preference shares in the twenty sixth to twenty eighth defendant RILAs. If HNA is the holder of any of the preference shares it acquired from Allco, the preference shares are held by Allco Managed. 4 By notices of meeting dated 3 February 2010, a general meeting of each of the RILAs was convened. The meetings of the twenty ninth to thirty eighth defendant RILAs were held on 3 February 2010 and meetings for the fourth to fourteenth and sixteenth to twenty eighth defendant RILAs were held on 25 February 2010. No meeting was held of the fifteenth defendant RILA. 5 In their further amended originating process, HNA and Allco Managed sought: · declaratory relief in relation to the purported issuing of further ordinary shares in the RILAs; · orders setting aside the purported issue of ordinary shares; · declaratory relief in relation to the conduct of, and resolutions passed at, the general meetings of the RILAs referred to above; · injunctive relief with respect to conduct that Messrs Kinghorn and Veal are alleged to have engaged in or propose to engage in, which is alleged to constitute contravention of ss 181, 182 and 183 of the Corporations Act 2001 (Cth) (the Corporations Act); · relief pursuant to ss 232 and 233 of the Corporations Act with respect to the conduct of the affairs of the RILAs, which is alleged to have been contrary to the interests of the members as a whole, and oppressive to, unfairly prejudicial to, or unfairly discriminatory against the owners of preference shares in the RILAs. 6 By consent, the Court has now made declarations that no ordinary shares in the RILAs were issued on or after 3 February 2010. That has resolved some of the claims for relief. The Court has also been asked to determine, as preliminary questions, separately from and prior to the determination of all other questions in the proceeding, whether certain provisions of the constitutions of the RILAs entitle the holder of preference shares to vote on resolutions in the form specified in the notices of meeting of 3 February 2010 and whether, if the answer to that question is affirmative, such resolutions would vary the rights attached to ordinary shares in the RILAs, such that they cannot validly take effect without the consent of the holders of the ordinary shares. The parties accept that if either of those questions is answered in the negative, certain of the relief claimed by HNA and Allco Managed must be dismissed. THE CONSTITUTION OF RILA VQY 7 In order to put the present dispute into context, it is necessary to say something about the constitutions of the RILAs. Most of the RILAs have only two classes of issued shares, being ordinary shares and preference shares. However, several of the RILAs have two classes of preference shares. RIL Aviation VQY Pty Limited (RILA VQY) is in the latter category. It is convenient, therefore, to take, as a sample, the constitution of RILA VQY (the Constitution) and the notice of general meeting dated 3 February 2010 given in respect of RILA VQY (the Notice of Meeting). 8 The Constitution was adopted on 18 August 2004. Clause 3.1 provides that RILA VQY is a proprietary company limited by shares. Under clause 2.3 of the Constitution, any expression used in the Constitution that deals with a matter dealt with by a particular provision of the Corporations Act is to have the same meaning as in that provision of the Corporations Act. Clause 2.4 provides that the schedules to the Constitution are part of it and that their provisions prevail if they conflict with any other provision of the Constitution. 9 Clause 8.1 provides that RILA VQY may, by resolution passed in general meeting, appoint any eligible person as a director. Under clause 8.2, the directors may also appoint any eligible person as a director. There is no minimum number or maximum number of directors that may be acting at any time, other than as may be set by the Corporations Act. Under clause 11.1, the business of RILA VQY is to be managed by, or under the direction of, the directors. Under clause 11.2, the directors may exercise all the powers of RILA VQY except any powers that the Corporations Act or the Constitution, if any, requires to be exercised in general meeting. 10 Clause 30.1 provides that notice of meetings may be sent by fax or email or by other means, including electronic means, agreed to in advance by all members entitled to cast a vote at a general meeting. Section 249H(1) of the Corporations Act provides as a general rule that at least twenty one days' notice must be given of meetings of a company's members. A note to clause 30.1 refers to section 249H(2), which provides for shorter notice of meetings of members for a general meeting of a proprietary company if members with at least ninety five percent of the votes that may be cast agree beforehand. 11 Clause 40.1 provides that a resolution put to the vote at a meeting of members is to be decided on a show of hands unless a poll is demanded. If a poll is demanded, it is to be taken when and in the manner directed by the chairman of the meeting. 12 Clause 60.1 provides that, without prejudice to any special rights conferred on the holders of existing shares or classes of shares, shares in RILA VQY may be issued by the directors and may be issued with such preferred, deferred or other special rights or such restrictions, with regard to dividend, voting, return of capital or otherwise, as the directors by resolution determine. Clause 64.1 provides specifically that the directors may issue shares in the capital of RILA VQY from the classes set out in Part A of Schedule 14. 13 Relevantly for present purposes, the classes of shares set out in Part A of Section 14 include the following: Class Name Authorised number (if any) Reserve Price Ordinary None specified $1.00 A Class Preference 100 $1.00 B Class Preference 100 $1.00 14 Clause 64.2 of the Constitution is of critical significance for the second question under consideration. Clause 64.2 provides that, while ever the share capital is divided into different classes of shares, the rights attached to any class may, whether or not RILA VQY is being wound-up, be varied with the consent in writing of the holders of 75% of the issued shares of the class or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class. 15 Clause 65.1 of the Constitution provides that the rights and conditions of the shares in the classes set out in Part A of Schedule 14 are summarised in the table in Part B of Schedule 14 and Part C of Schedule 14. Part B of Schedule 14 summarises the rights of shares in those classes as follows: Class Equity In Assets (Y/N) Votes per share Dividend pro-rata (Y/N) Dividend variable Redeemable Preference (Y/N) Ranking On Windup Other rights (Y/N) (Y/N) Ordinary Yes 1 Yes No No 1 No A Class Preference Refer to schedule 14 – Part C B Class Preference Refer to schedule 14 – Part C 16 The provisions of Part C of Schedule 14 are set out in the Appendix to these reasons. The provisions of paragraphs 2 of Part C, which deals with voting, and paragraph 6, which deals with conversion, are critical to the first question under consideration. Paragraph 2 relevantly provides as follows: A Preference Share does not entitle its holder to vote at general meeting of [RILA VQY] except: (a) on a proposal: (i) to reduce the share capital of [RILA VQY]; (ii) that affects rights attached to a Preference Share; (iii) to issue preference shares other than A Class Preference Shares or B Class Preference Shares; or (b) on a resolution to approve the terms of a buy back agreement; (c) during a period in which a dividend or part of a dividend on the relevant Preference Share is in arrears. (emphasis added) Paragraph 6 provides that Preference Shares cannot be converted into ordinary shares. THE PROPOSAL IN THE NOTICE OF MEETING 17 The first resolution proposed in the Notice of Meeting provides for the deletion of paragraphs 2 and 6 and the substitution of new paragraphs 2 and 6. The proposed new paragraphs 2 and 6 deal with the A Class Preference shares and the B Class preference shares separately. There is no relevant change so far as the A Class preference shares are concerned. However, there is a significant change proposed in relation to the B Class preference shares. 18 The regime in relation to voting by the holders of the B Class preference shares under proposed amended paragraph 2 would be as follows: A B Class Preference Share does not entitle its holder to vote at any general meeting of [RILA VQY], except: (d) on a proposal or resolution: (i) to reduce the share capital of [RILA VQY] (other than a reduction of the ordinary share capital of [RILA VQY] by way of a return of capital to the ordinary Shareholders of an amount not exceeding the paid up capital on each such shares); (ii) that affects rights attached to a B Class Preference Share; (iii) to elect, appoint or remove directors; (iv) to amend [RILA VQY's] constitution; (v) to wind-up [RILA VQY]; (vi) to convert ordinary shares into a larger number; (vii) to alter the voting rights of any shares on issue; (viii) to issue preference shares other than A Class Preference Shares or B Class Preference Shares; or (e) on a resolution to approve the terms of a buy back agreement (other than a buy back agreement relating only to one or more ordinary shares for an aggregate consideration of no more than the paid up capital on each such share); (f) during a period in which a dividend or part of a dividend on the B Class Preference Share is in arrears; or (g) during a winding-up of [RILA VQY]. (emphasis added to indicate new provisions) 19 It is also proposed that the following be inserted into paragraph 6: "Any B Class Preference Share may be converted into an ordinary share at the election of the holder of such class B Class Preference Share by notice in writing to [RILA VQY]. Any such conversion will occur automatically upon delivery of such notice." 20 Clearly enough, the rights attached to the A Class preference shares would be significantly enlarged and enhanced if the proposed changes to paragraphs 2 and 6 of Part C of Schedule 14 are made. The first question under consideration is whether the holder of A Class preference shares would be entitled, under the Constitution as it presently stands, to vote at the general meeting convened by the Notice of Meeting. HNA contends that the holder of the B Class preference shares would be entitled so to vote because the proposal is one that affects rights attached to the B Class preference shares within the meaning of paragraph 2(a)(ii). KV Aviation, the holder of the ordinary shares, disputes that proposition. KV Aviation also says that, even if the proposal is one that affects the rights attached to B Class preference shares, the proposal would involve a variation of the rights attached to the ordinary shares and KV Aviation has not consented, and will not consent to such variation and will not vote in favour of a special resolution sanctioning the variation as would be required by clause 64.2 of the Constitution. Accordingly, it says, the proposed resolution would not be valid. That is the second question. PROPOSAL THAT AFFECTS RIGHTS ATTACHED TO B CLASS PREFERENCE SHARES 21 The first question is whether the proposal in resolution 1 in the Notice of Meeting is one that affects rights attached to the B Class preference shares. HNA says that the proposal both positively affects rights attached to the B Class preference shares and negatively affects rights attached to the B Class preference shares within the meaning of paragraph 2(a)(ii). 22 Under the Constitution, including Part C of Schedule 14 in its present form, the holder of B Class preference shares is not entitled to vote at general meetings except on a proposal of one of the sorts referred to paragraphs 2(a)(i), 2(a)(ii) or 2(a)(iii), or on a resolution to approve the terms of a buy back agreement or during the period in which a dividend is in arrears. If the proposed resolution in the Notice of Meeting were passed, the holder of B Class preference shares would be entitled to vote at a general meeting in each of those circumstances, but would also be entitled to vote during a winding-up, as well as on any proposal: · to appoint or remove directors; · to amend the Constitution; · to wind-up RILA VQY; · to convert ordinary shares into a larger number; · to alter the voting rights of any shares. Further, whereas, under the Constitution in its present form, the preference shares cannot be converted into ordinary shares, if the proposal were to be implemented paragraph 6 of Part C would have the effect that any B Class share may be converted into an ordinary share at the election of the holder of the B Class preference share. Thus, HNA says, in that way, the proposal in the Notice of Meeting affects the rights attached to the B Class preference shares. It affects the rights by enlarging and enhancing them quite significantly, including the creation of new rights. 23 On the other hand, under paragraph 2 of Part C as it presently stands, the holder of B Class preference shares is entitled to vote on a proposal to reduce the share capital of RILA VQY and on a resolution to approve the terms of a buy back agreement. If the proposal is implemented, the holders of B Class preference shares would not be entitled to vote on: · a proposal to reduce the share capital, if the reduction was no more that a return of capital to the ordinary shareholders of an amount not exceeding the paid up capital on those shares; or · a proposal to approve the terms of a buy back agreement relating to only one or more ordinary shares for an aggregate consideration of no more than the paid up capital on those shares. To that extent, the rights attached to the B Class preference shares would be diminished or reduced if the proposal were implemented. If that were the extent of the proposal, it is clear enough that the proposal would be one that affects rights attached to the B Class preference shares within the meaning of para (2)(a)(ii) of Part C of Schedule 14 as it stands. That is to say, it would affect the right to vote on a proposal to reduce capital or to approve a buy back agreement. 24 However, the proposal, for the reasons already indicated, goes well beyond diminishing or reducing particular rights attached to the preference shares. Further, it goes beyond merely altering or affecting exiting rights. The question is whether a proposal that creates additional rights for holders of B Class preference shares is one that affects rights attached to them within the meaning of paragraph 2(a)(ii) of Part C. 25 The Court has been asked to consider the question in the abstract, in the sense that the parties have consciously eschewed adducing evidence as to the economic value of the various classes of shares in the RILAs. It is necessary, nevertheless, to approach the question, of the construction of paragraph 2(a)(ii) in the context in which that provision appears in the Constitution of RILA VQY. That context includes the incorporation into the Constitution of references to the Corporations Act together with the provisions of the Corporations Act pursuant to which and under which RILA VQY is given independent legal existence. 26 One such provision of the Corporations Act is s 140, which provides that the Constitution has effect as a contract between the company and each member and between a member and each other member. Another provision is s 254A(1)(b), which empowers a company to issue preference shares. That term is not defined in the Corporations Act, but it is one that is well known in company law. A preference share is one that is given some preference or priority over other shares in the capital of a company, normally referred to as ordinary shares. It is common for preference shares to be given a preference or priority over ordinary shares in relation to the payment of fixed dividends on the preference shares and the return of the paid up capital on the preference shares. Otherwise the profits of a company and any surplus assets of the company would ordinarily be available for distribution to the holders of the ordinary shares. That arrangement is by no means dictated by the Corporations Act or by particular practice. It is, however, a not uncommon arrangement. 27 The capital structure of RILA VQY, and the other RILAs, is unusual in the way in which it provides for holders of ordinary shares and preference shares to share in profitability and assets. Thus, paragraph 4 of Part C provides that, so long as there are unredeemed Preference Shares, RILA VQY may not declare or pay any dividend or make any distribution in respect of shares of any class other than the Preference Shares. Further, under paragraph 7, if there is a return or distribution of capital, whether on a winding-up, dissolution or otherwise, the holders of the Preference Shares are entitled to receive all surplus assets and capital of RILA VQY and the holders of the ordinary shares are to be entitled to receive only the return of their initial contribution. 28 Paragraph 3 of Part C provides for redemption of the preference shares and for a preferred dividend calculated in the manner specified in Part C, the particular details of which are not presently relevant. The capital structure provided for in the Constitution is unusual, in the sense that, so long as there are preference shares on issue, which have not been redeemed, the preference shares have the lion's share of the immediate benefits flowing from prosperity or profitability and of any return of capital or surplus assets. On the one hand, the contingency of redemption leaves open the possibility that there may well be significant residual value attaching to the ordinary shares. 29 The language of paragraph 2(a) of Part C of Schedule 14 is not unique to the RILAs. Section 254A(2) of the Corporations Act provides that a company can issue preference shares only if the rights attached to the preference shares with respect to certain matters are set out in the company's constitution or are sanctioned by a resolution of members. Those matters are as follows: · repayment of capital; · participation in surplus assets and profits; · cumulative and non-cumulative dividends; · voting; · priority of payment of capital and dividends in relation to other shares. The purpose of that provision is to ensure that the interests of existing shareholders are protected by requiring them to agree to the terms of preference shares. A consequence of the issue of preference shares in contravention of s 254A would be that the issue would be invalid. 30 The Corporations Act also contemplates a distinction between voting shares and non-voting shares. Non-voting shares are shares other than voting shares. A voting share is one that carries any voting rights beyond the following: · a right to vote while a dividend in respect of the share is unpaid; · a right to vote on a proposal to reduce share capital; · a right to vote on a resolution to approve the terms of a buy-back agreement; · a right to vote on proposal that affects the rights attached to the share; · a right to vote on a proposal to wind-up; · a right to vote on a proposal for the disposal of the whole of the property business and undertaking; · a right to vote during winding up. It follows that a share that carries only the above rights and no more is a non-voting share for the purposes of the Corporations Act. 31 Under paragraph 5 of Part C, the rights attaching to the Preference Shares must not be varied without the consent or sanction of the holders of the Preference Shares, in accordance with the Constitution. In particular, the issue of preference shares, or the conversion of existing shares into Preference Shares, which rank pari passu or in priority to the preference shares, is to be treated as a variation of the rights of the Preference Shares. Paragraph 5 is consistent with the exception contained in paragraph 2(a)(ii) of Part C, which is necessary to enable the holders of Preference Shares to vote on a proposal to vary the rights attached to preference shares. The specific prohibition in paragraph 5 mirrors, and perhaps duplicates, the protection afforded to different classes of shares generally by clause 64.2 of the Constitution. 32 It is necessary to consider the respective powers that would be conferred upon the holders of the B Class preference shares if the proposal were implemented, as compared with their powers under the Constitution as it presently stands. Thus, there is presently no right to vote on the appointment of directors, but specific power would be given by proposed paragraph 2(d)(iii). Further, proposed paragraph 2(d)(iv) would confer power to vote on proposals to amend the Constitution whereas there is presently no such power. Similarly, proposed paragraph 2(d)(v) would confer power to vote on a proposal to wind-up where there is presently no such power. Under the proposed amended paragraph 6, specific power to convert preference shares into ordinary shares would be conferred, whereas under the Constitution as it stands at present, there is an express prohibition on conversion. 33 I consider that the exception in paragraph 2(a)(ii) is limited to a proposal that affects existing rights attached to the preference shares under the Constitution and does not apply to a proposal that has the effect of adding material new rights. That is to say, it must be possible to identify rights that are presently attached to the preference shares and determine whether those rights are affected by the proposal. That follows from the use of the word "attached" in paragraph 2(a)(ii), which signifies rights that are actually in existence, and therefore attached to the shares at the time when the proposal is put forward. Rights that are not so attached, but would arise, and thereafter be attached, if a proposal is implemented, are not envisaged by par 2(a)(ii). 34 To construe paragraph 2(a)(ii) otherwise would be inconsistent with the clear intention of the overriding prohibition in paragraph 2 on the holder of the preference shares voting at general meetings except in the restricted circumstances specified. The overall intention to be gleaned from the provisions of paragraph 2 is that the holders of preference shares would not, except in the circumstances expressly contemplated by paragraph 2, be entitled to vote on a matter that involves the control of RILA VQY. 35 HNA says that to construe paragraph 2(a)(ii) as being limited to existing rights is to impose a restrictive gloss on the plain language of the Constitution. Further, HNA says that such a construction would be inconsistent with established principle. 36 For example, a scheme of arrangement between a company and its members, whereby the company would be authorised in general meeting to make a buy back offer in relation to preference shares and acceptance of the terms of the buy-back offer would be compulsory for all holders of preference shares, may well be a proposal affecting rights attaching to the preference shares. The buy-back resolution may have no legal effect upon the rights attaching to the preference shares of itself and the buy back offer would have no operative existence independently of the scheme. Further, the buy-back resolution would be meaningless without reference to the scheme and inseverable from it. Nevertheless, the existing rights attached to the preference shares would be affected by such a proposal, which would entitle the company to buy-back all the preference shares, resulting in the compulsory acquisition and cancellation of the preference shares (see Re Village Roadshow Limited 48 ACSR 167 at [28]). Those principles, however, are not inconsistent with the proposition that paragraph 2(a)(ii) refers to existing rights of preference shareholders. An existing right of the holder of a preference share is to continue to be the holder of the preference share. It is inconsistent with that right for the right to be extinguished (See Gambotto v WCP Limited (1995) 182 CLR 432). 37 I do not consider that the resolution proposed in the Notice of Meeting is one that affects rights attached to the B Class preference shares within the meaning of paragraph 2(a)(ii) insofar as it would create additional rights, being rights that are not presently attached to those shares. To the extent that the resolution would do so, it is not one on which the holders of the B Class preference shares are entitled to vote. The first question should be answered in the negative. VARIATION OF RIGHTS ATTACHED TO ORDINARY SHARES 38 It follows that the question of whether the proposal would vary the rights attached to the ordinary shares does not arise. I do not consider that it is appropriate to deal with the second question on a purely hypothetical basis. CONCLUSION 39 The first question should be answered no. The second question does not arise. There should be a declaration in terms of the first question. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 12 April 2010 THE APPENDIX SCHEDULE 14 PART C: PREF – Preference Shares – Summary of Rights ___________________________________________________________________________ 1 Issue price Each Preference Share will be issued as fully paid at an issue price of: (d) US$1.00 per A Class Preference Share; and (e) US$1.00 per B Class Preference Share. 2. Voting A Preference Share does not entitle its holder to vote at any general meeting of the Company, except: (a) on a proposal: (i) to reduce the share capital of the Company; (ii) that affects rights attached to a Preference Share; (iii) to issue preference shares other than A Class Preference Shares or B Class Preference Shares; or (b) on a resolution to approve the terms of a buy back agreement; (c) during a period in which a dividend or part of a dividend on the relevant Preference Share is in arrears; and A Preference Share does not entitle its holder to petition the Company for a winding up, vote on a proposal to wind up the Company or vote during a winding up. The holders of the Preference Shares will be entitled to attend or speak at any general meeting of the Company. The holders of the Preference Shares will be entitled to receive a copy of each document (including without limitation, notices of general meeting, circulars and annual reports) sent to the holders of any class of shares. 3. Dividends and Redemption (a) A Class Preference Shares: Each A Class Preference Share may only be redeemed out of Aircraft Profits in an amount equal to the subscription amount as at the date of redemption of the shares. Each A Class Preference Share may only be redeemed: (i) simultaneously with the repayment of the Asset Tranche of the Mezzanine Loan; or (ii) upon a sale of the Aircraft. Each A Class Preference Share Holder is entitled to a preferred dividend, payable in cash, out of Aircraft Profits in an amount equal to the A Class Profit Share, as reduced by: (i) the amount of any tax paid or payable by the Company in respect of that portion of its profits; and (ii) the amount paid or to be paid to the A Class Preference Shareholders in redemption of the A Class Preference Shares. The dividends must be franked to the extent possible. (b) B Class Preference Shares: The B Class Preference Share may only be redeemed out of Aircraft Profits after redemption of and payment of all dividends for all A Class Preference Shares in an amount equal to the subscription amount at the date of redemption of the shares. After redemption of all A Class Preference Shares and payment of the A Class Preference Share Dividends, the B Class Preference Share Holder is entitled to a preferred dividend payable in cash in an amount equal to the B Class Profit Share, as reduced by: (i) the amount of any tax paid or payable by the Company in respect of that portion of its profits; and (ii) the amount paid or to be paid to the B Class Preference Shareholders in redemption of the B Class Preference Shares. 4. Dividend lock-up So long as there are unredeemed Preference Shares on issue, the Company undertakes not to declare or pay any dividend or make any distribution in respect of shares or any class of shares other than the Preference Shares. 5. Variation of rights The Company must not vary any of the rights attaching to the Preference Shares without the consent or sanction of the holders of the Preference Shares in accordance with the Constitution of the Company. Without limitation, the issue of preference shares, or the conversation of existing shares into preference shares which rank pari passu or in priority to the Preference Shares, constitutes a variation of the rights of the Preference Shares. 6. Conversion The Preference Shares cannot be converted into ordinary shares. 7. Ranking of Preference Shares The A Class Preference Shares rank equally amongst themselves in all respects. The B Class Preference Shares rank equally amongst themselves in all respects. The A Class Preference shares rank in priority to the B Class Preference Shares in all respects. The Preference Shares rank in priority to ordinary shares in all respects. If there is a return or distribution of capital, (whether on a winding up, dissolution or otherwise, voluntary or involuntary), the holders of the Preference Shares will be entitled to receive in respect of each Preference Share held, a sum equal to the aggregate of: (a) the amount of any dividend (whether declared or not) due and payable on the Preference Share up to but excluding the date of the winding-up; (b) all arrears of dividends described in paragraph (a); and (c) all surplus assets and capital of the Company, divided by the number of Preference Shares on issue, and the holders of the ordinary shares will be entitled to receive in respect of each ordinary share, the return of their initial contribution. 8. Transfer The Preference Shares are transferable at the holder's option with the prior consent of the Company (which consent must not be unreasonably withheld, delayed or conditional). 9 Registration The Preference Shares will be in registered form and the Company must maintain a register of the Preference Share as part of the register of members of the Company in accordance with the Corporations Act. 10. Definitions Terms in these conditions have the meaning given to them below. A Class Preference Shares means the shares of that designation issued by the Company on these terms. A Class Profit Share is calculated in accordance with the Schedule. Aircraft means the Airbus A320-200 passenger aircraft with aircraft serial number 2298 and Australian aircraft registration VH-VQY. Aircraft Profits means all profit derived by the Company from: (a) the sale or use of the Aircraft; (b) any Casualty Value A or Termination Value A (as defined in the Australian Lease); (c) any insurance proceeds received in relation to the Aircraft. B Class Preference Shares means the shares of that designation issued by the Company on these terms. B Class Profit Share is calculated in accordance with the Schedule. Lease Termination Date means the date the Australian Lease is terminated. Preference Shares means A Class Preference Shares and B Class Preference Shares. Remaining Aircraft Profits means the remainder of the Aircraft Profits after any application of the Aircraft Profits necessary to satisfy the Company's obligations under the Guarantee, the Residuary Interest Sale Agreement, and the other Transaction Documents. Terms not defined above have the meanings given to them in the Financing Deed entered into by the Company and others in connection with the Aircraft. Schedule Where the Lease Termination Date is on or before the Scheduled Termination Date, the Profit Share is the Remaining Aircraft Profits. SCHEDULE – FOURTH TO THIRTY-EIGHTH DEFENDANTS RIL Aviation VQZ Pty Limited Fourth Defendant ACN 110 563 007 RIL Aviation VQW Pty Limited Fifth Defendant ACN 110 562 831 RIL Aviation MSN 163 Pty Limited Sixth Defendant ACN 111 127 087 RIL Aviation MSN 185 Pty Limited Seventh Defendant ACN 111 127 130 RIL Aviation VQU Pty Limited Eighth Defendant ACN 114 265 833 RIL Aviation VQT Pty Limited Ninth Defendant ACN 114 265 842 RIL Aviation VQS Pty Limited Tenth Defendant ACN 114 265 860 RIL Aviation VQR Pty Limited Eleventh Defendant ACN 114 265 922 RIL Aviation VQQ Pty Limited Twelfth Defendant ACN 114 265 940 RIL Aviation VQP Pty Limited Thirteenth Defendant ACN 114 265 968 RIL Aviation 9V-SFG Pty Limited Fourteenth Defendant ACN 116 838 905 RIL Aviation 9V-SLE Pty Limited Fifteenth Defendant ACN 115 858 298 RIL Aviation EI-DLN Pty Limited Sixteenth Defendant ACN 115 857 488 Seventeenth Defendant RIL Aviation EI-DLO Pty Limited ACN 115 857 684 RIL Aviation VQG Pty Limited Eighteenth Defendant ACN 115 079 751 RIL Aviation EI-DLR Pty Limited Nineteenth Defendant ACN 121 180 470 RIL Aviation EI-DPB Pty Limited Twentieth Defendant ACN 122 128 830 RIL Aviation EI-DPD Pty Limited Twenty-First Defendant ACN 122 642 031 Twenty-Second Defendant RIL Aviation EI-DPC Pty Limited ACN 122 641 963 RIL Aviation EI-DPT Pty Limited Twenty-Third Defendant ACN 124 271 236 RIL Aviation EI-DPW Pty Limited Twenty-Fourth Defendant ACN 124 850 255 RIL Aviation EI-DPX Pty Limited Twenty-Fifth Defendant ACN 124 850 317 RIL Aviation OJJ Pty Limited Twenty-Sixth Defendant ACN 102 697 709 RIL Aviation OJG Pty Limited Twenty-Seventh Defendant ACN 102 697 914 RIL Aviation OJH Pty Limited Twenty-Eighth Defendant ACN 102 697 549 RIL Aviation VQY Pty Limited Twenty-Ninth Defendant ACN 110 562 957 Thirtieth Defendant RIL Aviation VQX Pty Limited ACN 110 562 902 RIL Aviation VQV Pty Limited Thirty-First Defendant ACN 110 562 699 RIL Aviation VQJ Pty Limited Thirty-Second Defendant ACN 115 079 171 RIL Aviation VQI Pty Limited Thirty-Third Defendant ACN 115 079 322 RIL Aviation 9V-SLD Pty Limited Thirty-Fourth Defendant ACN 115 857 899 RIL Aviation VQH Pty Limited Thirty-Fifth Defendant ACN 115 079 635 RIL Aviation HL 7744 Pty Limited Thirty-Sixth Defendant ACN 119 743 627 RIL Aviation HL 7745 Pty Limited Thirty-Seventh Defendant ACN 114 467 364 RIL Aviation EI-DPO Pty Limited Thirty-Eighth Defendant ACN 123 795 997