Reported Decision : 67 ACSR 192 New South Wales Supreme Court CITATION : Heesh v Baker [2008] NSWSC 711 HEARING DATE(S) : 09/07/08 JUDGMENT DATE : 15 July 2008 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Declaration that holders of redeemable preference shares are not creditors for purpose of voluntary administration. CATCHWORDS : CORPORATIONS - share capital - redeemable preference shares - cumulative dividends at fixed rates - dividend instalments not paid - some shares not redeemed at time fixed by terms of issue - company in voluntary administration - whether non-payment of dividend or redemption sum caused shareholder to be "creditor" of company for purpose of voluntary administration provisions Bankruptcy Act 1966 (Cth), s 82(2) LEGISLATION CITED : Companies Act 1929 (Eng), s 46 Corporations Act 2001 (Cth), Part 5.3A, ss 9, 124(1(a), 135(2). 140, 254A, 254A(1)(b), 254A(2). 254A(3), 254J, 254K, 254L, 254T, 254V, 254W, 436A, 439A, 553, 588G(1A) Uniform Civil Procedure Rules 2004, rule 7.4(2) CATEGORY : Principal judgment Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 Commissioner of Taxation v Sun Alliance Investments Pty Ltd [2005] HCA 70; (2005) 80 ALJR 202 Edwards v Attorney-General [2004] NSWCA 272; (2004) 60 NSWLR 667 Federal Commissioner of Taxation v Coppleson (1981) 39 ALR 30 Fitzgerald v Masters (1956) 95 CLR 420 Godfrey Phillips Ltd v Investment Trust Corporation Ltd [1953] 1 All ER 7 Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616 CASES CITED : Re Marra Developments Ltd (No 2) (1978) 3 ACLR 798 MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) [1999] HCA 51; (1999) 198 CLR 494 Mutual Life and Citizens Assurance Co Ltd v Mosgiel Ltd [1994] 1 NZLR 146 Re Dividend Fund Incorporated [1974] VR 451 Re Media World Communications Ltd; Crosbie v Naidoo [2005] FCA 51; (2005) 216 ALR 105 Re Wakley; Wakley v Vachell [1920] 2 Ch 205 Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd (1979) 144 CLR 596 TNT Australia Ltd v Normandy Resources NL (1989) 53 SASR 156 UOB Venture Investments Ltd v Tong Garden Holdings Pte Ltd [2001] 1 SLR 362 Timothy Paul Heesh - First Plaintiff PARTIES : Paul Desmond Sweeney - Second Plaintiff Michael Kevin Baker & Deanne Clare Baker and persons named in Schedule to originating process - First Defendants York Group Holdings Pty Ltd - Second Defendant FILE NUMBER(S) : SC 3571/08 COUNSEL : Mr J Stoljar/Mr M A Friedgut - Plaintiffs Mr F Kunc SC - Defendants SOLICITORS : Addisons - Plaintiffs Levitt Robinson - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 15 JULY 2008 3571/08 TIMOTHY PAUL HEESH & ANOR v MICHAEL KEVIN BAKER & DEANNE CLARE BAKER & ANOR JUDGMENT Background 1 The question in this case is whether holders of redeemable preference shares issued by York Capital Ltd ("York") are "creditors" of that company for the purposes of Part 5.3A of the Corporations Act 2001 (Cth) solely by reason of their rights against the company under its constitution and the terms of issue of the relevant shares. 2 The plaintiffs are the administrators of York under Part 5.3A. They were appointed on 5 June 2008 by the company itself pursuant to s 436A. The meeting of creditors required by s 439A has not yet been held. Austin J made an order extending the convening period for that meeting. His Honour did so in order that uncertainty about who could participate in the meeting might first be resolved by determination of the question now before me. 3 The first defendants are the joint holders of a parcel of redeemable preference shares issued by York. They sue not only in their own right but also as representatives under rule 7.4(2) of the Uniform Civil Procedure Rules 2005 of all other holders of such shares. The plaintiffs' claims are for declaratory relief. The proceedings are thus constituted in the way indicated as appropriate by Finkelstein J in Re Media World Communications Ltd; Crosbie v NaidooI [2005] FCA 51; (2005) 216 ALR 105. 4 York was registered as a company under the Corporations Act on 25 July 2006. Almost immediately – that is, on 28 July 2006 – it lodged with Australian Securities and Investments Commission a prospectus inviting subscription for redeemable preference shares referred to in both the constitution and the prospectus itself as "CPRPS" shares. A further prospectus was lodged with ASIC on 11 August 2006. It is described as a "replacement prospectus". The hearing before me took place on the agreed footing that all redeemable preference shares on issue were issued pursuant to the second prospectus and that the second prospectus embodies the terms of issue of those shares. References in these reasons to "the prospectus" are references to the replacement prospectus dated 11 August 2006. References to "CPRPS shares" are references to shares issued under that prospectus. 5 The question before me is to be determined by reference to a combination of provisions of the Corporations Act, provisions of York's constitution and the terms of issue contained in the prospectus. Before turning to those provisions, however, I should note that, while the CPRPS shares on issue have common features, there are also differences. There are different times for redemption. There are also different expressed rates of dividend and different times for payment of dividends. In some cases, several dividend payments have been made. In all cases, stipulated dividends have not been forthcoming. In some cases, the time for redemption has passed without redemption having occurred. In other cases, the time for redemption lies in the future. The statutory provisions 6 Section 124(1)(a) of the Corporations Act makes it clear that every company has the capacity to issue shares in its own capital. Section 254A(1)(b) says that that power extends to the issue of "redeemable preference shares", an expression defined in s 9: " redeemable preference share means a preference share in a body corporate that is, or at the body's option is to be, liable to be redeemed." 7 That definition is amplified, for the purposes of s 254A, by s 254A(3): "Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed. They may be redeemable: (a) at a fixed time or on the happening of a particular event; or (b) at the company's option; or (c) at the shareholder's option. Note: Redeemable preference shares are dealt with in sections 254J-254L" 8 It is thus clear that a share cannot be a "redeemable preference share" unless it is a "preference share". This makes relevant s 254A(2) which says that a company "can" issue preference shares only if the rights attached to the shares with respect to certain matters are set out in the company's constitution or have been "otherwise approved" by special resolution of the company. There is no suggestion that rights as to all relevant matters are not included in York's constitution. 9 Section 254J is in these terms: "(1) A company may redeem redeemable preference shares only on the terms on which they are on issue. On redemption, the shares are cancelled. Note: For the power to issue redeemable preference shares see paragraph 254A(1)(b) and subsections 254A(2) and (3). (2) This section does not affect the terms on which redeemable preference shares may be cancelled under a reduction of capital or a share buy-back under Part 2J.1." 10 Section 254K imposes restrictions: "A company may only redeem redeemable preference shares: (a) if the shares are fully paid-up; and (b) out of profits or the proceeds of a new issue of shares made for the purpose of the redemption. Note: For a director's duty to prevent insolvent trading on redeeming redeemable preference shares, see section 588G." 11 Section 254L preserves the validity of a redemption made by a company in contravention of s 254J or s 254K. 12 Some of the provisions of the Corporations Act dealing with dividends should also be set out. Section 254T provides: "A dividend may only be paid out of profits of the company. Note: For a director's duty to prevent insolvent trading on payment of dividends, see section 588G." 13 Section 254V is in these terms: "(1) A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then. (2) However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared." 14 Section 254W, so far as relevant, provides: " Shares in public companies (1) Each share in a class of shares in a public company has the same dividend rights unless: (a) the company has a constitution and it provides for the shares to have different dividend rights; or (b) different dividend rights are provided for by special resolution of the company. Shares in proprietary companies (replaceable rule—see section 135 . …" York's constitution 15 York's constitution contains a provision stating that the replaceable rules in the Corporation Act do not apply. Having regard to s 135(2), therefore, all replaceable rule provisions may be ignored. 16 Article 4.1 of the constitution is as follows: "Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares but subject to the Corporations Act and this Constitution, shares in the Company are under the control of the Directors who may allot or dispose of all or any of the same to such person at such times at such price and on such terms and conditions and having attached to them such preferred deferred or after special rights or such restrictions whether with regard to dividend voting return of capital or otherwise and whether as preference shares that are at the option of the Company likely to be redeemed as the Directors think fit." 17 The word "likely" appearing towards to the end must be read as "liable". I say this because the words "liable to be redeemed" have formed part of legislative provisions about redeemable preference shares ever since such shares were first permitted by s 46 of the Companies Act 1929 (Eng) (see now Corporations Act 2001 (Cth) s 254A(3) and the s 9 definition of "redeemable preference share"). In order to avoid inconsistency between the constitution and the enabling statute, correction of "likely" to "liable" is required: see Fitzgerald v Masters (1956) 95 CLR 420 per Dixon CJ and Fullagar J at 427. 18 Article 24.5 of the constitution is headed "CPRPS to CPRPS 1,000,000,000 Classes of Shares – Cash Box Type". Seventeen sub-articles follow an introductory statement. Article 24.5 should be set out in full: "Subject to the rights, privileges and conditions attached to other classes of shares as hereinafter provided, the ' CPRPS1' to CPRPS '1,000,000,000' Classes that are divided into five sub classes (see clause 24.5.17) of shares shall confer on the holders thereof the following rights, obligations and privileges: 24.5.1 Each CPRPS share shall confer on the holder thereof the right to serve notice in writing to the Company requesting that the rights attached to the share be varied so as to be the same or substantially in accord with the rights of another class of shares specified in this Constitution or any amendment thereof or otherwise approved by the Company in accordance with Section 254A Corporations Act 2001. The Company has the right to decline any such application in its sole discretion. 24.5.2 Upon the issue of a notice in accordance with clause 24.5.1 the holders of the 'H' class shares shall hold an irrevocable proxy vote and be the irrevocably appointed proxy representative of the holder of the share providing such notice to attend and vote at a class meeting to be convened for the purposes of varying rights attached to such share in accordance with the request contained in the written notice provided to the Company in accordance with clause 24.5.1. 24.5.3 The holders of the 'H' class shares shall hold a proxy vote and be the proxy representative of the holder of the share in the event a class meeting is required at law due to the allotment of other classes of shares or variation of rights attached to other classes of shares which affect rights of the holder of the shares. 24.5.4 Without limiting the preceding sub-clause the holders of the 'H' class shares shall hold a proxy vote and be the proxy representative of the holder of the share in the event the Board resolves to convene an extraordinary general meeting for the purposes of amending this Constitution in the interests of the members as a whole or otherwise perform a buy-back of the share or a reduction in capital on the share provided that it is proposed under the buy-back arrangement or proposed capital reduction that the subscribed capital for the original issue of the share and unpaid cumulative dividends will be paid back or returned upon completion of the proposed buy-back or reduction in capital. 24.5.5 Subject to the provisions of sub-clauses 24.5.2, 24.5.3 and 24.5.4 referred to above, the holders of the 'H' class shares have an absolute discretion when exercising the rights for a variation of class rights in classes ' CPRPS' 1 to ' CPRPS' 1,000,000,000 shall be bound by a resolution approved and in conformity with their form of notice referred to in clause 24.5.1 above. 24.5.6 The holders of the 'H' class shares as proxy holder and representative of the shareholder may sign a resolution in accordance with clause 26 for the purposes of sub-clauses 24.5.2, 24.5.3 and 24.5.4. 24.5.7 The right to a cumulative preferential dividend at the Coupon Rate in priority to any payment of dividend to the holders of the ordinary shares and the holders of 'P' Class Redeemable Preference Shares but shall rank equally and pari passu with the dividend entitlements of holders of the ' CPRPS 1' to ' CPRPS 1,000,000,000' classes of shares. 24.5.8 In addition to the dividend entitlement referred to in the preceding sub-clause the shares within the classes of shares CPRPS 1 to CPRPS 1,000,000,000 shall confer upon the holder or holders thereof the right to payment of such dividends as the Directors may from time to time recommend. 24.5.9 The right to participating dividends pursuant to sub-clause 24.5.8 shall rank equally with the [sic] any payment of dividend to the holders of the ordinary shares and the holders of 'P' Class Redeemable Preference Shares and the holders of 'CPRPS 1' and 'CPRPS 1,000,000,000' classes of shares. 24.5.10 The right to notices of and to attend general meetings where the holder pursuant to clause 24.5.11 has rights to vote at such meeting. 24.5.11 Subject to clause 24.5.10, the right to vote (on a show of hands to one vote, and on a poll, to one vote for each ' CPRPS 1 ' and ' CPRPS 1,000,000,000' Share of which he is the holder) at general meetings in the event that: (a) the matter to be decided is a proposal for the winding up of the Company or the sale or disposal of the Company main undertaking not in the ordinary course of business; (b) a receiver or administrator is appointed in respect to the Company or upon the appointment of a liquidator or the entering of any arrangement under Part 5.3 of the Corporations Act; (c) upon the lapse of the Redemption Date; (d) upon a resolution passed by the Board of Directors resolving that the holders of the ' CPRPS 1 ' and ' CPRPS 1,000,000,000' shares shall thereafter have voting rights at general meetings; whichever shall first occur. 24.5.12 Where the holder of the share holds another share or shares within the classes of shares CPRPS 1 and CPRPS 1,000,000,000 the maximum number of votes on a show of hands at a general meeting shall be one vote in respect to all of the shares held by the holder within the classes of shares 'CPRPS 1' and 'CPRPS 1,000,000,000'. 24.5.13 The right upon a reduction of capital or winding up of the Company in priority to any payment to the holders of any other class of shares to the Residual Surplus Capital of the Company up to the amount paid up on the issue of the shares and all dividends in arrears but shall not participate in any further or other distribution of profits or assets of the Company; and 24.5.14 The share shall be redeemed on or before the Redemption Date by the payment to the holders thereof the sum paid up on such share, and all arrears of dividend. 24.5.15 The Company may issue new preference shares which rank equally with existing shares within the classes of shares ' CPRPS 1 ' and ' CPRPS 1,000,000,000' at any time and such an issue of shares shall not be taken or deemed to be a variation of rights attached to existing preference shares. 24.5.16 The holder of the share acknowledges and agrees that the right conferred to in sub-clause 24.5.1 above is unique and personal to the holder of each share within the classes of shares described as ' CPRPS 1 ' and ' CPRPS 1,000,000,000' under this Constitution and that the holder of any of such share may unilaterally under this Constitution request that the share rights attached to the share be varied to correspond with that of another share class of the Company and that such right constitutes each share as a separate and distinct class within the classes of shares described as ' CPRPS 1 ' and ' CPRPS 1,000,000,000'. The holder also acknowledges that sub-clause 24.5.8 confers to each class of shares dividend entitlements which are unique to each class of shares. 24.5.17 The ' CPRPS 1 ' and ' CPRPS 1,000,000,000' issued under this Constitution will be divided into five distinct subclasses of ' CPRPS ' shares, A Class ' CPRPS ' shares are the shares typified in the shares issued under allocation ' CPRPS ' 1 - 200,000,000'; B Class ' CPRPS ' shares are the shares typified in the shares issued under allocation ' CPRPS ' 201,000,000 – 402,000,000, C Class ' CPRPS ' shares are the shares typified in the shares issued under allocation ' CPRPS ' 403,000,000 – 604,000,000, D Class CPRPS ' shares are the shares typified in the shares issued under allocation ' CPRPS ' 605,000,000 – 806,000,000 and E Class ' CPRPS ' shares are the shares typified in the shares issued under allocation ' CPRPS ' 807,000,000 – 1,000,000,000." 19 The several references here to "the holders of the 'H' shares" take their meaning from article 24.3 which makes provision for "H" class shares each of which carries voting rights but no dividend rights and, upon a winding up, the right to repayment of the capital paid up on the share but no right to participate in what is called "any Residue Surplus Assets of the Company". Although that unusual expression is used, it does not appear to be defined (there is a definition of "Residual Surplus Capital", but that seems to be something different: see, for example, article 24.5.13). The constitution also contemplates the issue of "ordinary shares" (article 24.2) and "'p' class redeemable preference shares" (article 24.4). 20 The evidence shows that "H" class shares are on issue, in addition to CPRPS shares. Shares referred to in article 24.2 as "ordinary shares" are also on issue. They have rights that one normally associates with ordinary shares. There do not appear to be any "P" class redeemable preference shares on issue. 21 In construing article 24.5 relating to CPRPS shares, one starts with the opening words, "Subject to the rights, privileges and conditions attached to other classes of shares as hereinafter provided". The last three words cause the rights, privileges and conditions attached to the CPRPS shares to be subservient to those applying to classes of shares for which provision is made in articles after article 24.5. But since, on the evidence, there do not appear to be any shares of a class mentioned subsequently in the articles, no detraction is effected by those opening words. And since the three provisions dealing with particular classes of shares that appear before article 24.5 all begin with the same opening words, the conclusion must be that those provisions are subservient to article 24.5, so far as the rights, privileges and conditions attached to shares are concerned. 22 For the purposes of the present inquiry, the provisions of article 24.5 concerning alteration of rights (and associated procedures) may be disregarded. The core rights enjoyed by a holder of a CPRPS shares are a right to a "cumulative preferential dividend" under article 24.5.7, a right to such additional dividends as the directors may "recommend" (articles 24.5.8 and 24.5.9), the right to vote at general meetings in the limited circumstances specified in article 24.5.11 (with voting power determined by a combination of that provision and article 24.5.12), the right to receive notice of and attend general meetings at which the voting rights are exercisable (article 24.5.10) and the right upon a reduction of capital or winding up to participate in "the Residual Surplus Capital of the Company" to the limited extent specified in article 24.5.13. 23 In addition, of course, a holder of CPRPS shares has under the constitution certain rights in relation to redemption. They are set out in article 24.5.14. In approaching that article, it is necessary to have regard to the definition of "Redemption Date" in article 1.1: " 'Redemption Date' shall mean (i) the date prescribed by the Board at the time of the issue and allotment of the relevant Shares or such longer time as is mutually agreed in writing between the shareholder and the Company; or (ii) upon the Company giving seven days notice in writing of its intention to redeem the shares, delivered or posted to the last known address of the registered holder of the share together with the amount paid up in respect of shares to be redeemed together with any accrued cumulative dividends and such redemption shall take place immediately upon the expiry of seven days from the delivery or posting of the said notice of redemption and cheque." 24 The only other provisions of the constitution that should be quoted in full are articles 18.1 and 18.2: "18.1 Subject to the rights of persons (if any) entitled of shares with special rights to dividend, the Directors may declare a final dividend out of profits as they see fit but in accordance with the Corporations Act and may authorise the payment or crediting by the Company to the Members of such a dividend. 18.2 The Directors may authorise the payment or crediting by the Company to the Members of such interim dividends as appear to the Directors to be justified by the profits of the Company as they see fit but in accordance with the Corporations Act." 25 The power to cause the company to pay dividends is thus given to the directors. In the case of what article 18.1 calls "a final dividend", the power is a power to declare such dividends as the directors see fit but, in the case of shares with special rights to dividend, so that there is recognition of those rights in the first instance. The prospectus 26 As I have said, the terms of the issue of the CPRPS shares now on issue are to be found in the replacement prospectus dated 11 August 2006. In relation to dividends, it is sufficient to quote extracts as follows (with numbering added for ease of reference): [1] "The Distribution Rates applicable may vary from time to time depending on the sufficiency of profits and other factors as described in the Prospectus. The Company intends to pay the following distributions based on the availability of profits: CPRPS ("6 month") Shares - 7.25% pa; CPRPS ("1 year") Shares - 9.50% pa; CPRPS ("2 year") Shares - 9.95% pa; CPRPS ("3 year") Shares - 10.25% pa. The Distribution Rate that applies to a Security shall be subject to the terms and class of Security to which the Investor subscribes, is fixed for the term of the investment and is specified on the Certificate." [2] "The Directors of York have two main obligations under the Corporations Act 2001 with respect to the payment of dividends. They are: that dividends may only be paid out of profits of the Company; and that as the dividend constitutes a debt of the Company once declared, that the declaration of a dividend does not prejudice the solvency position of York and does not place in jeopardy the capacity of York to meet its obligations as and when they fall due." [3] "York has a financial year-end date of 30 June in each year. It is the policy of the Directors that, subject to York being duly able to declare and pay dividends, declaration and payments of such dividends will be as follows: On the final day of each calendar month, or, where that day is not a Business Day, on the Business Day immediately afterwards. York may select a common date to declare dividends for the Cash Box Shares. Thereafter, York may declare further dividends on a common date in successive periods and prior to redemption of shares. Payment of all dividends will be made within one month of the declaration date." [4] "The Directors of York will determine available profit after the payment of any fees and expenses. The Securities carry the right to a cumulative preferential dividend at the Distribution Rate ('cumulative dividend entitlement') plus further dividends, if any, declared by the Directors ('participating dividend entitlement')." [5] "The cumulative preferential dividend at the Distribution Rate, is only a right ascribed to the Security and should not be construed as a representation or guarantee that York will in fact have profits to be able to meet such dividend entitlement, or that York will have the capacity in the future to declare the dividend." [6] "The Distribution is a cumulative preferential dividend entitlement. This means that should the cumulative preferential dividend component at the Distribution Rate not be declared, the undeclared entitlements of the Investor are carried forward into the next succeeding period until declared." [7] "Where there are insufficient profits to fully pay the Distribution entitlement, York may declare and pay a lesser Distribution out of available profits. Any shortfall from the Distribution entitlement shall carry forward to a successive period until declared and paid." [8] "In the event York is wound up or undertakes a reduction of capital, the holders of the Securities have priority to other classes of shares for payment of dividends. Such entitlement is contingent upon York declaring the dividends beforehand. Such dividends would include both the cumulative preferential dividend entitlement and participating dividend entitlement." [9] "Once duly declared as a final dividend, the rights to a dividend would constitute a debt of York, and investors would have ordinary debt recovery options available to them for such a debt." 27 The matter of redemption of CPRPS shares offered by the prospectus is dealt with as follows (again with numbers added): [10] "The Securities offered under this Prospectus are redeemable at the Redemption Date. [11] The Redemption Date depends on the class of share and the specific investment period adherent to each share class, after the date of issue of the shares or otherwise agreed in writing between the Investor and York. [12] Prior to the Redemption Date, York will send the Investor a notice advising that the investment is about to mature. [13] At least two (2) Business Days prior to the Redemption Date, the Investor may request in writing that the investment: · be redeemed upon the expiration of the current investment terms; or · be reinvested for the same investment term as the expiring investment; or · be reinvested for a different investment term to the expiring investment. [14] The Investor may also request a partial redemption of the investment provided the minimum investment balance of $5,000 is maintained. Additional investments may also be made, in multiples of $1,000. [15] Where York is unable to comply with Section 254K of the Corporations Act 2001 in regard to the redemption of Securities, due to there being insufficient profits or proceeds from Security issues issued for the purposes of enabling redemption, York may, as an alternative to redemption, undertake a selective buy-back of the shares. [16] Under Section 257A of the Corporations Act 2001, a company may buy back its own shares if the buy-back does not materially prejudice its ability to pay its creditors and the company follows the procedures set out in Division 2 Chapter 2J of the Corporations Act 2001. [17] Under Section 256(C) of the Corporations Act 2001 a selective share buy-back may occur if it is approved by either: · a special resolution passed at a general meeting of York, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or · a resolution is approved by all the ordinary investors of York. [18] York Managed Funds Pty Ltd holds one hundred percent of the issued ordinary shares in York. [19] It is, therefore, the intention that all Securities will be redeemed or acquired by York under a share buy-back mechanism, at the subscription amount of $1.00 per Security or the paid-up capital on the Security, thus returning the full capital amount." The dividend provisions 28 As I have said, the articles place the matter of release of dividends in the hands of the directors who must, however, recognise special rights to dividends carried by any shares. The CPRPS shares are clearly shares with special rights to dividend. The dividend on those shares is a "preferential dividend". It follows that no dividend may be paid on issued shares other than CPRPS shares (that is on "H" class shares or ordinary shares) unless the stipulated dividend in respect of the CPRPS shares has been paid. 29 If, at a time for payment of a dividend on CPRPS shares, the profits available for dividend are insufficient to permit the payment of the stipulated dividend in full, the whole of the available profits must be applied towards that dividend. This is the effect of the requirement that payment be made at a fixed rate specified on the share certificate (prospectus item [1]). The deficiency will then be carried forward to the next payment date so that, on the subsequent occasion, the dividend referable to that occasion plus the deficiency carried forward enjoy the priority call on profit available for dividend. This is the effect of the dividend being a cumulative dividend. The dividend right on the subsequent occasion is a priority right to the aggregated amount: see Re Wakley; Wakley v Vachell [1920] 2 Ch 205 at 225-6. 30 Where dividends are expressed to be cumulative, it is not, strictly speaking, correct to speak of "default" or "arrears" if there are no profits available for dividend or those available are sufficient to cover part only of the dividend. The shareholder's right is to have the deficiency carried forward in the way described so that the stated priority is enjoyed as to future profits: Godfrey Phillips Ltd v Investment Trust Corporation Ltd [1953] 1 All ER 7. Carrying forward is the prescribed method of dealing with the right to the extent that it is not satisfied by payment. 31 All this is expressly recognised, in the present case, by item [6] in the prospectus. Dealing with the situation where a preference dividend is not "declared", that provision says that the "undeclared entitlements" are "carried forward into the next succeeding period until declared". This not only states explicitly what is implied by the description "cumulative" but also makes it clear that the determinant of whether the "entitlement" for a particular period is satisfied is whether a dividend in fulfilment of the entitlement is "declared" (see also prospectus item [3]). That, read in conjunction with the constitution, shows that the extent of satisfaction depends on "declaration" of dividends by the directors. The same message emerges from item [7] of the prospectus where the words "declared and paid" are used. 32 Item [9] of the prospectus states that no debt for a dividend exists until a final dividend is declared. This is a reflection of the effect of s 254V(2) of the Corporations Act. The redemption provisions 33 The constitution provides in article 24.5.14 that a CPRPS share "shall be redeemed on or before the Redemption Date by the payment to the holders [sic] thereof [sic] the sum paid up on such share, and all arrears of dividends". The words "by the payment" show that it is the payment that effects the redemption and that the act of payment by the company marks the point at which redemption occurs. Since redemption is the event that, by operation of the second sentence of s 254J(1), causes the share to be cancelled, it must follow that payment by the company results instantaneously in the redemption and simultaneous cancellation of the share. The process is not one under which redemption gives rise to an obligation to pay, so that the rights of the shareholder are "transmuted by the redemption process into the entitlement to the price": MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) [1999] HCA 51; (1999) 198 CLR 494 at [34]. 34 Having regard to s 254J, it is lawful to redeem CPRPS shares on the terms stated in article 24.5.14, they being terms of issue. But under s 254K, York "may only redeem" the shares "out of profits or the proceeds of a new issue of shares made for the purpose of the redemption". It follows that if neither "profits" nor "proceeds" of the kind mentioned are, at the particular time, available, it is not lawful for the company to redeem the shares and they must not be redeemed; and this is so despite the terms of issue. 35 This is expressly recognised in the prospectus and thereby accommodated by the terms of issue. Prospectus item [15] raises the possibility that York will be "unable to comply with Section 245K of the Corporations Act 2001 in regard to the redemption of Securities". The provision goes on to describe "an alternative to redemption" that York "may" adopt. The reference to a possible alternative carries implicit recognition that redemption is not required unless it can be effected lawfully. 36 It is also made clear by prospectus item [15] that the stated alternative (selective buy-back of the relevant CPRPS shares under Division 2 of Part 2J.1) is, from York's perspective, optional. This comes from the word "may", coupled with prospectus item [17] outlining the hurdles that must be negotiated to effect such a buy-back. The ability to effect a selective buy-back is thus presented as itself potentially problematic. Furthermore, prospectus item [19] shows that redemption or buy-back so as to return "the full capital amount" is no more than an "intention". 37 The terms of issue thus provide that there will be neither redemption nor buy-back unless all conditions making the particular action lawful are satisfied. Observations on the availability of profits 38 Both the constitution and the prospectus intend to accommodate, and do accommodate, the rule in s 254T of the Corporations Act that a dividend "may only be paid out of profits of the company". 39 As I have said, the description of the dividend as a "cumulative preferential dividend" recognises the possibility that sufficient profits may not be available when the time fixed for payment of a dividend arrives. The concept of availability of profits for dividend – or, I suppose, the question of what it is that s 254T requires – should be briefly examined. 40 It is not necessary, in the present context, to consider what may and what may not properly be regarded as components of "profits". The emphasis is, rather, on process: at what point and in what manner do profits come into existence, as it were, so as to be a proper source of dividends? 41 It is, in my opinion, clear that profits are available, in the relevant sense, only if disclosed by financial statements formally drawn up and adopted. The need for profits to be disclosed in that way was referred to by Mahoney JA in Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616 at 642-3: "The term 'profits' denotes a balance or a comparison between two statements of assets, and, where used in connection with companies, presupposes the existence of a process of accounts in which the assets of the company have been put into accounts or categorized in particular ways. To speak of a payment out of profits is, therefore, to speak of a payment out of a balance arising in the context of such a form of accounting. In this sense, payment means, in practical terms, the debiting or crediting of accounts … In relation to dividends, the principle that they shall be payable only out of available profits refers to the debiting of the amount of the dividend against an account showing a balance of available profits. Under the general law, the rule requires, at least normally, that when a dividend is declared and a right created in the shareholders against the company for payment of it, the appropriate profits account shall be debited with the amount of the dividend. Once this is done, then the requirements of the rule are satisfied. When the dividend is satisfied it is not required that there be another debiting of the profits. What, at least normally, then takes place, is the use of the profits which were, when the dividend was declared, set aside by that debit to meet the liability which the declaration created." 42 The constitution of York contains provisions about ascertaining profits and the distributable quantum. Article 18.4 says that the directors, "may, before declaring any dividend, set aside out of the profits of the Company such sums as they think proper as reserves, to be applied, at the discretion of the Directors, for any purpose for which the profits of the Company may properly be applied". Article 19.1 permits the capitalisation of profits. Under both these provisions, profits that might otherwise have been used to pay dividends may be applied in other ways. Only such residue of profits as remains after any such applications is properly available for dividend. 43 Circumstances may be such that it is either necessary or prudent to carry profits to a reserve rather than treating them as available for dividends. An unrealised capital gain arising by reason of revaluation and disclosed in the accounts may be the source of a dividend. As the High Court observed in Commissioner of Taxation v Sun Alliance Investments Pty Ltd [2005] HCA 70; (2005) 80 ALJR 202 at [49], "the concept of profits in the context of company law is sufficiently broad to encompass unrealised capital profits". But good practice or adherence to accounting standards may not only impose constraints upon revaluation (so that, for example, classes of assets rather than individual assets are considered) but also require that the unrealised surplus be carried to a revaluation reserve. 44 At an even earlier stage, directors will be called upon to exercise judgment and prudence in relation to contingencies. To the extent that debts owing to the company may be judged unlikely to be recovered, it will be appropriate to recognise a provision for doubtful debts which reflects in the determination of profits as such. 45 These and similar matters are of significance because they show not only that principles of prudence are to be applied in determining profits but also that profits, once ascertained, may be in part devoted to other purposes before being considered a proper source of dividends. This is sometimes said to represent the difference between distributable profits and profits available for dividend – the latter being, in the words of Maugham J in Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 at 202, those profits "available for dividend after making any reserve or other similar application which the directors, in good faith, acting on behalf of the company, think it is their duty to make in the interests of the company". The relevant concept of "creditor" 46 Against this background, it is possible to approach the question whether a holder of CPRPS shares is a "creditor" for the purposes of Part 5.3A of the Corporations Act. 47 It was accepted by the parties that "creditor" status for these purposes is to be determined in the manner indicated by the Court of Appeal of Victoria in Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24. It was there held that, unless a particular provision otherwise indicates, the "creditors" of a company for Pt 5.3A purposes are "those who would have been creditors had the company gone into liquidation", thus importing into Part 5.3A the criteria laid down by s 553 for participation by creditors in a winding up. 48 Since the enactment of the Corporate Law Review Act 1998 (Cth), all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) have been provable in a winding up pursuant to s 553. This includes claims sounding only in damages which were previously excluded through the application of s 82(2) of the Bankruptcy Act 1966 (Cth). 49 Of particular relevance here is the inclusion of claims that are "future" or "contingent". A future debt or claim is probably one which will become due and owing at a future time, if a present state of affairs continues until then, such as rent for a future period under an existing lease which will become due and owing unless the lease is terminated in the meantime. A contingent claim, by contrast, is one sourced in an existing obligation out of which a payment liability to pay will arise upon a future event, whether the event is one that must happen or only one that may happen: Edwards v Attorney-General [2004] NSWCA 272; (2004) 60 NSWLR 667 at [59]. 50 Central to both, however, are obligations or liabilities the performance, discharge or vindication of which consists of the payment of money. Applying the concept to this case 51 It was submitted by Mr Kunc SC on behalf of the defendants that they and all other holders of CPRPS shares have, as against York and by virtue solely of their CPRPS shareholdings, claims that would be cognisable pursuant to s 553 in a winding up of York. Mr Kunc approached the matter in two ways: first, by reference to what he called the "contingency analysis"; and, second, according to the "non-contingency analysis". 52 The "contingency analysis" proceeds on the basis that, if and when York has funds making it lawful to pay the stipulated dividends to CPRPS shareholders and to effect redemption of their shares consistently with s 254T and s 254K respectively, York will be obliged to make payments to them accordingly. The "non-contingency analysis" is to the effect that, having regard to the terms on which the CPRPS shares were issued, the holders of those shares have an accruing right to the stipulated dividends and the redemption sum. There is, it is said in the latter connection, an implied term that York will do all that is necessary on its part to enable the CPRPS shareholders to have the benefit of their contract, relevantly to ensure that it has funds available from the requisite sources. Reference was made to Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd (1979) 144 CLR 596 at 607. 53 A preliminary comment is that the "contingency analysis" might be employed to reach the conclusion that every shareholder of every company is a creditor of the company. If and when the company has funds making it lawful to pay a dividend and the processes necessary to cause a dividend to be payable have been undertaken, the company will be obliged to make payments to the shareholders accordingly. I am not at all convinced that, on that footing, every shareholder is, from the very first moment, a future or contingent creditor of some kind. 54 In support of the contention that there is an implied term of the kind postulated by the "non-contingency analysis", Mr Kunc referred to the decision of the High Court of Singapore (G P Selvam J) in UOB Venture Investments Ltd v Tong Garden Holdings Pte Ltd [2001] 1 SLR 362. That case concerned a contract between the plaintiff investor, the Tong Garden company, three directors of Tong Garden and a shareholder in Tong Garden. The plaintiff agreed to invest a stated sum by subscribing for redeemable preference shares in the capital of Tong Garden. The contract provided for the redemption of the shares by Tong Garden at the plaintiff's option in specified events. It positively required Tong Garden to redeem the shares upon exercise of that option by the plaintiff. The court held that there was an implied term generally of the kind for which Mr Kunc contends in this case. I quote from paragraph [20] of the judgment: "The plaintiffs' claims in contract. The contract provides that if the company defendants fail to secure a listing within the stipulated time, the plaintiffs may call for a redemption. Under the contract the obligation to redeem on notice is absolute. When the first defendants contracted for that obligation they were fully aware of s 70(3) of the Companies Act [analogous with Australia's s 254K]. They must therefore be presumed to have contracted on the basis of s 70(3) of the Companies Act. In the context of s 70(3) of the Companies Act, the company defendants' contractual obligation to redeem implies that they must bustle about to bring in the funds. They must expend all their energy in their veins to find the funds in the manner permitted by s 70(3) of the Companies Act. The defendants are not allowed to call in aid their own indolence and inaction. Nor can they seek shelter under s 70(3) of the Companies Act. Their contractual obligation implies that they will see to it that their subsidiary and related entities and persons will put them in sufficient profits or take up new shares to produce sufficient funds. Finding the funds by those two options, I repeat, is an absolute obligation. If they fail there are three remedies to the preference shareholder: equity can compel them to do so by an order for specific performance; common law can award damages; and company law can order them to be wound up. If damages are awarded they must come from profits or fresh share issue. In the event of liquidation the shareholders' claim would rank after the claims of creditors." 55 Reference was also made to the decision of the New Zealand Court of Appeal in Mutual Life and Citizens Assurance Co Ltd v Mosgiel Ltd [1994] 1 NZLR 146. It was there held that there was a contractual obligation to make the payment required by the terms of issue on the specified redemption date. The available remedies, however, "must not be inconsistent with the legislative constraints on the sources of redemption funds". This was a reference to the then New Zealand equivalent of s 245K. 56 The notion that a company which fails to redeem on the due date commits a breach of contract is also found in Re Dividend Fund Incorporated [1974] VR 451 at 454-456; TNT Australia Ltd v Normandy Resources NL (1989) 53 SASR 156 at 206 and Re Marra Developments Ltd (No 2) (1978) 3 ACLR 798. 57 A different analysis was made by the Full Federal Court in Federal Commissioner of Taxation v Coppleson (1981) 39 ALR 30. In what are, strictly speaking, obiter dicta, Bowen CJ, Franki J and Fisher J observed that both company and subscriber contracted on the basis of the law and, in particular, the then equivalent of s 245K. Their Honours continued: "The parties cannot be presumed to have assumed obligations which it is unlawful for one of the parties to fulfil. It is not a case where supervening legislation operates to make the fulfilment of its obligations by one party unlawful. Rather, the parties are contracting on the basis of a given law. In these circumstances, failing the availability of one or both of the funds specified in s 61(3), the company is not in default under its contract with the holders of redeemable preference shares if it fails to redeem after receipt of the requisite notice." 58 What these cases really show, in my view, is that the question is ultimately one of construction. It cannot be doubted that, upon and by virtue of subscription for and allotment of redeemable preference shares, a contract comes into existence between the company and the shareholder. The contract may or may not impose what the Singapore court found to be an absolute obligation to redeem (or, for that matter, to pay specified dividends at specified times). If the obligation is absolute, a breach of contract occurs when the company fails to perform; and this is so even if the failure is because of unavailability of a fund from which payment may lawfully be made. There are then questions about remedies, a matter to which I shall return. 59 In the present case, the contract between York and each holder of CPRPS shares includes not only the provisions of the constitution given contractual force by s 140 of the Corporations Act but also the terms of issue set out in the prospectus. When regard is had to the content of each, the contract is seen to be of the kind described in Federal Commissioner of Taxation v Coppleson above, both as to default in the payment of dividends and as to default in redemption. The contract requires only such performance as is consistent with the statutory constraints. There are no absolute obligations. 60 I say this because of what I consider to be the clear message to be gathered from the terms of issue. The cumulative nature of the dividend shows that the contract accommodates the possibility that, because of absence or insufficiency of available profits, the whole or some part of a particular dividend instalment on CPRPS shares may not be forthcoming on the specified date. If that is the case, the unpaid amount is carried forward and added to the next dividend sum. And that process is repeated as often as may be needed until the due date for redemption arrives. At that point, any continuing dividend deficiency is required by article 29.5.14 to be paid on redemption along with the sum paid up on the CPRPS shares concerned. The possibility that unavailability of profits may intervene to preclude dividend payments is recognised in items [2], [5], [6] and [7] of the prospectus. The contract itself mitigates the payment obligation if that unavailability eventuates. 61 When it comes to redemption and moneys payable on redemption, the terms of issue, in the form of the provisions of the prospectus, show that the company's obligation to redeem (and, therefore, the obligation to make the payment that effects the redemption) will not be due for performance unless profits or the proceeds of a new issue are available so as to ensure compliance with s 245K. I refer again to what is said at paragraph [34] to [37] above. 62 My conclusion is that, in this case as in Federal Commissioner of Taxation v Coppleson, the company and the subscribers for its shares "contracted on the basis of the law", including, in particular, the parts of the law that forbid payment of dividends and redemption of redeemable preference shares unless certain conditions are met. Upon its true construction, the contract does not impose an obligation to make the payment which in turn effects the redemption due on a specified date if the payment and redemption will entail contravention of those parts of the law. Implications of the preferred construction 63 Several conclusions may now be stated in respect of the CPRPS shares: 1. If any dividend conforming to the specifications in prospectus item [1] has been declared but remains unpaid in respect of a share, York is indebted to the shareholder for the amount of the dividend. 2. If and to the extent that a dividend conforming to the specifications in prospectus item [1] is neither declared nor paid in respect of a share by the date applicable to that dividend under that provision, no debt arises, no breach of contract occurs and the deficiency is simply carried forward to the next such date. 3. If and to the extent that a dividend conforming to the specifications in prospectus item [1], augmented by any deficiency so carried forward, is neither declared nor paid in respect of a share by the date applicable to that dividend under that provision, no debt arises, no breach of contract occurs and the deficiency is carried forward to the next such date. 4. If and to the extent that any deficiency carried forward in either of these ways in respect of a share remains unsatisfied at the time fixed for redemption of the share, the deficiency is due for payment on redemption, together with the amount paid up on the share. 5. If, at the time fixed for redemption of a share, the company cannot redeem because of unavailability of profits or proceeds of the kind made necessary by s 245K, the redemption that would be required if the necessary profits or proceeds were available is not required, no debt for the amount payable on redemption arises and no breach of contract occurs. 64 On the evidence, the circumstance in 1 above has not occurred but cases within all of 2, 3, 4 and 5 above have arisen (see paragraph [5] above). Since, on the above analysis, there is neither a debt nor a breach of contract in any of those cases, there has not accrued to any holder of a CPRPS share, by reason of the circumstances mentioned, any claim cognisable under s 553 in a winding up. It follows that no such holder is, by virtue of the holding of the holder's CPRPS shares, a creditor of York for the purposes of Part 5.3A. 65 This is sufficient to dispose of the present proceedings. It is not necessary to consider the means of redress or vindication that might be available to a holder of CPRPS shares in a further case not mentioned above (and which, on the evidence, has not arisen in relation to York). I refer to the case where the holder's shares should have been redeemed according to the terms of issue and could have been redeemed consistently with the s 254K restrictions but were not redeemed. There would then be a breach of contract and questions of remedy would arise. There are suggestions in the cases to which I have referred that an award of damages might be made against the defaulting company. There are also suggestions, however, that any damages would have to be satisfied from a fund that could lawfully have been applied in making the payment that, in breach of contract, was not made. That tends to bespeak a remedy by way of specific enforcement rather than damages as such. Winding up on the just and equitable ground is another possibility recognised in the case law. 66 Winding up on the just and equitable ground might also be indicated in case 5 above. If the company has no ability to redeem and there is no likelihood that the position will be resolved quickly, it might be considered just and equitable, even in the absence of breach of contract, that rights to participate in a winding up be crystallised and made exercisable. In the case of a holder of CPRPS shares, the relevant right would be the priority right of participation conferred by article 24.5.13. 67 I would add, for the sake of completeness, that s 588G(1A), a provision mentioned in submissions, is irrelevant to the present inquiry. It deems particular actions to be the incurring of a debt by a company. One such action is the redemption of redeemable preference shares that are redeemable at the company's option. The deeming is solely for the purposes of s 588G. Disposition 68 The court makes the following declarations: 1. A declaration pursuant to rule 7.4 of the Uniform Civil Procedure Rules 2005 that the first defendants are acting in the capacity of representatives of the holders of CPRPS shares in the capital of York Capital Ltd, those holders being named in the schedule to the originating process. 2. A declaration that the first defendants and the persons named in the schedule to the originating process, being the holders of CPRPS shares in the capital of York Capital Ltd, are not creditors of York Capital Ltd (for the purposes of Part 5.3A of the Corporations Act 2001 (Cth)) solely by reason of their rights against York Capital Ltd as the holders of such shares under the constitution of York Capital Ltd and the prospectus dated 11 August (as later supplemented) of York Capital Ltd pursuant to which application for the shares was made. 69 In relation to costs, I make the following order which is both appropriate and in accordance with an agreement of the parties noted by Austin J on 3 July 2008: 3. Order that the plaintiffs pay the first defendants' reasonable costs and disbursements of the proceedings on the indemnity basis up to and including the hearing on 9 July 2008 and the costs of today (as agreed or assessed), with payment of those costs to be from the assets of York Capital Ltd as a cost of the administration. 70 Outstanding is a claim by the plaintiffs with respect to the future of the voluntary administration. I think it best that that receive separate attention, as it was not really ventilated before me. I accordingly make a further order as follows: 4. Order that the balance of the amended originating process stand over before the Corporations Judge at 10am on Monday 21 July 2008. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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