Capel Finance Ltd [2005] NSWSC 286

Reported Decision : 52 ACSR 601 (2005) 23 ACLC 527

New South Wales Supreme Court

CITATION : Capel Finance Ltd [2005] NSWSC 286

HEARING DATE(S) : 04/04/05

JUDGMENT DATE : 4 April 2005

Equity Division JURISDICTION : Corporations List

JUDGMENT OF : Barrett J

DECISION : Order for the convening of meeting of members refused

CATCHWORDS : CORPORATIONS - arrangements and reconstructions - scheme of arrangement coupled with reduction of capital - holders of cancelled shares entitled to cash or new shares designated redeemable preference shares - adequacy of information to be given to shareholders as to availability of cash and capacity of company to redeem new shares - CORPORATIONS - corporate finance - redeemable preference shares - concept of "preference share" - need for preference or priority over other shares - inability of company to redeem except out of profits or proceeds of new issue

LEGISLATION CITED : Corporations Act 2001 (Cth) ss.254A, 254K 256C, 411(1), 411(4)

Birch v Cropper; Re Bridgewater Navigation Co Ltd (1889) LR 14 App Cas 525 CASES CITED : Re Powell-Cotton's Resettlement [1957] 1 All ER 404

PARTIES : Capel Finance Limited - Plaintiff

FILE NUMBER(S) : SC 2203/05

COUNSEL : Mr M.B. Oakes SC - Plaintiff

SOLICITORS : Cowley Hearne Lawyers Pty Limited - Plaintiff

LOWER COURT JURISDICTION :

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

MONDAY 4 APRIL 2005

2203/05 - APPLICATION OF CAPEL FINANCE LIMITED

JUDGMENT

1 The plaintiff seeks an order under s.411(1) of the Corporations Act 2001 (Cth) for the convening of a meeting of those of its shareholders designated "scheme shareholders" for the purpose of considering and, if thought fit, agreeing to a proposed arrangement between the company and those shareholders. 2 The company was formerly on the official list of the Australian Stock Exchange but was delisted in September 2003. It is not at present conducting any business and has no current plans to undertake any new business activity. A share buy back was undertaken during 2002 to give shareholders an opportunity to realise their investments. Few chose to do so. The arrangement now proposed is a new opportunity for shareholdings to be liquidated. 3 The essence of the proposed arrangement is cancellation of all existing shares other than those held by two nominated members on a specified future date called the "record date". There are currently on issue 21,873,887 shares and the two members in question currently appear to hold about 7 million shares. The number of shares those two shareholders will hold on the specified future date is, of course, potentially subject to change. At all events, the shares other than the excluded shares of the two named shareholders are referred to as the "scheme shares" and the holders of those shares are the "scheme shareholders". 4 It is recognised that the cancellation of the scheme shares involves a reduction of capital governed by Division 1 of Part 2J.1 and that it is a "selective reduction". In order to comply with the provisions of that division, two special resolutions are proposed for adoption at meetings separate from the meeting the court is asked to order under s.411(1). One of those special resolutions will be a resolution in accordance with s.256C(2)(a) and the other will be a resolution in accordance with the concluding part of s.256C(2), that is, the part that comes after s.256C(2)(b). The reduction of capital will be to the extent of 8.4 cents multiplied by the number that in due course turns out to be the number of the scheme shares, and the capital liberated by the reduction, whatever it turns out to be, will be applied in accordance with the scheme. 5 It is envisaged that before the scheme becomes binding under s.411(4), holders of scheme shares may deliver election forms to the company which, if they meet certain criteria set out in the scheme as it eventually takes effect, will have significance to the working of the scheme. Basically, a form lodged by a particular holder of scheme shares will determine how the part of the liberated capital referable to that holder's shares will be applied. There are three possibilities: that the sum referable to the particular holder's shares will be applied in paying up new shares in the company itself to be issued to the holder on the basis of one new share for each cancelled share; or that that sum will be paid to the holder in cash; or that the sum will be applied partly in one of these ways and partly in the other. A member who makes no election will receive new shares. That will be the default position. 6 On the figures I have mentioned, the consequence, if all holders of scheme shares elected for cash, would be that the company would be required to pay out about $1.2 million, while if all elected for new shares, there would be an issue of about 15 million new shares. These are the extremes. The result that actually comes to pass will very likely be somewhere between those extremes. 7 The proposed explanatory statement says that, if the maximum cash outlay becomes payable, it will be funded from the company's "cash resources". There is no further explanation of the source of funds. The balance sheet as at 30 June 2004 (now more than nine months ago) shows cash of only $129,947, but a loan (designated a current asset) of $1,417,097. There is evidence that, since that date, that loan has been repaid and that the proceeds are held in cash, so that cash on hand at this point may be of the order of $1.5 million or a little more, depending on what else has happened since 30 June 2004. In my opinion, the explanatory material needs to be amplified in this area to identify clearly the arrangements that are in place to ensure the availability of the maximum cash requirement. Where one company puts before the shareholders of another a proposal to acquire their shares by off-market takeover bid, it must make detailed disclosures about the availability and source of the necessary cash in conformity with s.636(1)(f): "In relation to the cash consideration (if any) offered under the bid—details of: (i) the cash amounts (if any) held by the bidder for payment of the consideration; and (ii) the identity of any other person who is to provide, directly or indirectly, cash consideration from that person's own funds; and (iii) any arrangements under which cash will be provided by a person referred to in subparagraph (ii)."