Reported Decision : 241 FLR 235 New South Wales Supreme Court CITATION : Beck v Weinstock [2010] NSWSC 1068 HEARING DATE(S) : 13, 14, 15, 16 September 2010 JUDGMENT DATE : 17 September 2010 JURISDICTION : Equity Division Probate List JUDGMENT OF : Hamilton AJ DECISION : Purported redemption of redeemable preference shares void. CATCHWORDS : CORPORATION [1117] - Share capital - Shares - classes of shares and shareholders - Redeemable preference shares - Shares issued as redeemable prefrence shares given no preference over issued shares, only over unissued shares - No valid issue of redeemable preference shares - Purported redemption invalid. LEGISLATION CITED : Companies Act 1961 Corporations Act 2001 (Cth) CATEGORY : Principal judgment CASES CITED : In re Brighton and Dyke Railway Company (1890) 44 Ch D 28 Re Capel Finance Ltd (2005) 52 ACSR 601 Ford's Principles of Company Law (14th ed, 2010 and loose leaf ed) TEXTS CITED : Halsbury's Laws of England (4th ed), Vol 7 (reissue, 1988) Halsbury's Laws of England (5th ed, 2009) Vol 15 Tamar Rivqa Beck (First Plaintiff) Alem Pty Limited (Second Plaintiff) Amiram David Weinstock (First Defendant) PARTIES : Helen Weinstock (Second Defendant) Zipor Pty Limited (Third Defendant) John Halliday (Fourth Defendant) LW Furniture Consolidaed (Aust) Pty Limited (Fifth Defendant) FILE NUMBER(S) : SC 287773 of 2007 J Simpkins SC with him T M Thawley (Plaintiffs) COUNSEL : CRC Newlinds SC with him P Silver (First, Second and Fifth Defendants) Karl Burnett (solicitor) (Third Defendant) S Balafoutis (Fourth Defendant) Harris Freidman (Plaintiffs) SOLICITORS : Milne Berry Berger & Freedman (First, Second and Fifth Defendants) Karl Burnett (Third Defendant) Chang Pistilli & Simmons (Fourth Defendant) - 12 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION PROBATE LIST HAMILTON AJ 17 SEPTEMBER 2010 07/287773 TAMAR RIVQA BECK & ANOR V AMIRAM DAVID WEINSTOCK & ORS JUDGMENT 1 The subject matter of these proceedings is extensive disputes in what may be called the Weinstock family concerning shares in private companies held by various members of the family and the administration of certain estates. The majority of these disputes were settled by agreement and I have made complicated and detailed consent orders relating to their disposal. 2 The only issues that remain for disposal are questions arising out of prayers 9A, 9B and 9C in the amended statement of claim. These relate to 8"C" Class Redeemable Preference Shares in the fifth defendant ("LWC") that were held by Hedy Jadwiga Weinstock ("Hedy") at her death on 6 July 2004. Those prayers are as follows: "9A A declaration that the 8 C "Redeemable Preference Shares" that Hedy Jadwiga Weinstock held in LWC as hereinafter defined were not preference shares within the meaning of the Corporations Act and, accordingly, were not able to be redeemed by the fifth defendant. 9B A declaration that the purported redemption of such shares was void and of no effect. 9C An order under section 175 of the Corporations Act rectifying the register of the fifth defendant and ordering compensation." 3 A search of LWC shows:- a. the currently issued shares are:- i. "A" class – 5 shares; ii. "C" class – 2 shares; iii. "D" class – 2 shares; b. at an earlier time, Hedy held the 8 "C" Class Shares referred to in the relevant prayers ("the subject shares"); c. the only shares ever issued have been the "A", "C" and "D" Class Shares. 4 The "A" Class Shares are described in LWC's Constitution as Convertible Preference Shares and the "D" Class as Redeemable Preference Shares. No ordinary shares in the company have ever been issued. 5 After Hedy died, LWC purported to redeem the subject shares for $8. The purported cancellation of the subject shares was notified to ASIC. 6 There was argument before me concerning the matters arising from prayers 9A, 9B and 9C. That argument raised three questions: (1) Whether the 8 "C" Class Shares held by Hedy in LWC were redeemable preference shares within the meaning of the Corporations Act 2001 (Cth) ("the CA"). (2) Whether there was sufficient evidence of a resolution to redeem those shares. (3) Whether the redemption should have been at fair market value and whether their fair market value was no greater than the $8 that was paid on their redemption. 7 Section 254J(1) of the CA provides that:- "A company may redeem redeemable preference shares only on the terms on which they are on issue…" Unless a share may be so redeemed, it can only be cancelled under a reduction of capital or a share buy-back under Part 2J.1. 8 In order to be so redeemed, the share must be capable of being characterized as a "redeemable preference share". 9 "Redeemable preference shares" are "preference shares" that are issued on terms that they are liable to be redeemed, inter alia, on the happening of a particular event: section 254A(3) of the CA. 10 The provisions of the Constitution of LWC ("the Constitution") relating to the "C" Class Shares are as follows: 30.4 The rights privileges and conditions attached to the said 10 "C" Redeemable Preference Shares are as follows: (a) The said "C" Redeemable Preference Shares shall not confer any right to vote at any general meeting of the Company but the holder therefore shall be entitled to notices of and to attend general meetings of the Company. (b) The said "C" Redeemable Preference Shares shall rank as regards return of capital in a winding up and in a reduction of capital next after any "A" 5% Convertible Preference Shares or "A" 5% Preference Shares and any "B" Redeemable Preference Shares issued in the capital of the Company and subject thereto (but pari passu with any "D" Redeemable Preference Shares) in priority to all other shares in the capital of the Company. (c) Subject to the provisions of Parts 2H.1 and 2H.2 of the Corporations Act the said "C" Redeemable Preference Shares shall at the option of the Company be liable to be redeemed at par on or before 30 th June 2016 by notice in writing to the holders at their respective registered addresses and each such notice shall be accompanied by the Company's cheque or by a bank cheque bank draft or money order for the amount payable to the holder to whom the notice is sent. (d) Notwithstanding anything hereinbefore contained the said "C" Redeemable Preference Shares or the number thereof then issued and unredeemed shall be redeemed by the Company upon the death of the holder thereof and in the event of redemption in consequence of the death of the holder payment of the amount required for such redemption to the auditor for the time being of the Company on trust for such holder's personal representatives shall be deemed payment to such holder's personal representatives and such payment to the said auditor shall be a full and sufficient discharge to the Company for such payment and shall relieve the Company and its directors from the liability to see to the application of the moneys so paid. (e) The said "C" Redeemable Preference Shares shall confer on the holders thereof the right to receive such dividends as may be declared thereof pursuant to Article 17 hereof and shall rank as regards such dividends pari passu with the Ordinary Shares in the Company. Such dividends (if any) shall be non-cumulative. (f) The said "C" Redeemable Preference Shares shall not carry the right to any further participations in surplus profits or assets. 11 As can be seen, the Constitution provides that the "C" Class Shares:- d. rank after "A" Class Shares and equally with "D" Class Shares for the return of capital "in priority to all other shares in the capital of the Company": article 30.4(b); e. rank equally with the ordinary shares for dividends: article 30.4(e). 12 Thus, they have a preference over ordinary shares as to the return of capital but none as to dividends. In any case, no ordinary shares in the Company have ever been issued. 13 The parties have proceeded on the basis that the subject shares were issued in 1971. It is not clear on the evidence when the other issued shares were issued. 14 The statutory provision that applied to the issue of redeemable preference shares at the time of the issue of the subject shares was s 66(1) of the Companies Act 1961. That subsection was as follows: "66. (1) No company shall allot any preference shares or convert any issued shares into preference shares unless there is set out in its memorandum or articles the rights of the holders of those shares with respect to repayment of capital, participation in surplus assets and profits, cumulative or non-cumulative dividends, voting, and priority of payment of capital and dividend in relation to other shares or other classes of preference shares." 15 The corresponding provision of the CA is s 254A(2). That provision states the requirements as to redeemable preference shares in lettered paragraphs and differs from s 66(1) in a few words, but is the same in substance. 16 The arguments that were put relating to the questions raised were as follows: (1) The shares were not redeemable preference shares for the following reasons: (a) to be a preference share the share must be given a preference both as to repayment of capital and as to dividends; (b) the preference given must be a differentiation from issued shares; a differentiation from unissued shares is not sufficient. Furthermore, it may be that the differentiation must be from ordinary shares as opposed to another class or classes of preference shares. (2) There is no evidence or sufficient evidence of a resolution to redeem the shares. (3) The redemption was not on the basis of the fair market value of the shares; it cannot be determined on the evidence that their fair market value was no greater than $8. 17 As to the first argument, two matters were put in support of this. The first was the view of Lopes LJ in In re Brighton and Dyke Railway Company (1890) 44 Ch D 28 at 38 where his Lordship said: "What I understand to be the definition of a preference share is this – a right conferred upon the holder to receive interest in priority to the ordinary shareholders." This is said to express the common law view that the essence of a preference share was a preference as to the payment of interest or dividend on the share. It is suggested that s 66(1) (and s 254A(2)) should be interpreted on the basis of this common law view of the nature of a preference share. 18 The second matter relied on is a reading of the sections themselves and, in particular, the conjunction in the statement "priority in payment of capital and dividend", which should be taken to indicate that there must be preference in both regards for a share to be a preference share. 19 These are both very thin arguments as to matters that ought govern the interpretation of the sections. Looking at the face of each statute there does not appear to be any real indication that there must be a preference provided in respect of both those matters or, indeed, in respect of more than one of the several matters specified in the sections. 20 It is perhaps surprising how little authority there is in relation to the nature of redeemable preference shares and the interpretation of the relevant legislation. 21 There is a statement in Halsbury's Laws of England that appears to endorse the view that a preference as to any one of the many matters specified is sufficient. This statement is referred to in Ford's Principles of Company Law at [17.370]. The statement appeared first in Halsbury's Laws of England (4th ed), Vol 7 (reissue, 1988) [176]. The statement is repeated in the current version of that work being Halsbury's Laws of England (5th ed, 2009), Vol 15 [1059]. The statement is in the following terms: "It is not necessary that equal rights and privileges should be attached to all shares; some may be preferential either as to capital or as to dividend, or as to both, or may have peculiar privileges in the matter of voting, or in other respects." 22 My conclusion is that it is not necessary for a share to have preferential rights both as to repayment of capital and as to dividends to be a preference share and the "C" Class Shares in question do not fail to be preference shares because of having preferential rights in only one of these regards. 23 The second argument is that the shares fail to be preference shares within the meaning of the legislation because the preference that they were given on issue was not over ordinary shares that were on issue. The argument is that the legislation ought not be construed as contemplating the valid issue of preference shares by reason of a preference given over unissued ordinary shares. The reason for this is that this could lead to a situation in which the only issued shares were redeemable preference shares, which could, at appropriate times, be redeemed, leaving the company without issued shares and thereby circumventing the basic rule against the reduction of capital. 24 It seems to me that there is great force in this argument. It receives support from the only relevant decision to which I was referred. This is the decision of Barrett J in Re Capel Finance Ltd (2005) 52 ACSR 601. 25 In that case his Honour refused to make an order convening a meeting to consider a proposed scheme of arrangement a central aspect of which was the creation of what were claimed to be "redeemable preference shares". The proposed shares would, however, have been the only class of shares. His Honour concluded that you could not have preference shares as your only class of shares because it was an essential quality of a preference share that it have an advantage over another share. 26 His Honour said:- "[10] Second and fundamentally, a share issued on the terms set out in Sch 1 will not be a redeemable preference share at all. This is because it will not have one of the two characteristics made essential by the s 9 definition: it will not be a "preference share". The Corporations Act does not attempt to define "preference share", but the concept is well entrenched in company law. Preference shares can only exist by way of juxtaposition with other shares. As Roxburgh J observed in Re Powell-Cotton's Resettlement [1957] 1 All ER 404, "preferred stock" is stock which has some preference or priority over ordinary or common stock and, in logical analysis, there is no difference in that context between the words "preferred" and "preference". [11] The base from which such things are measured is that identified by the House of Lords in Birch v Cropper; Re Bridgewater Navigation Co Ltd (1889) LR 14 App Cas 525, namely, that members of a company participate and enjoy entitlements according to the numbers of the shares they hold. That was the principle there applied in relation to a surplus on winding up but it has long been recognised as the basic rule applicable to all forms of shareholder participation and entitlement in the absence of contrary provision. Any departure from that rule of proportionate equality according to shares held must arise from the company's constitution or from terms of issue capable of displacing or modifying the general rule. Provisions of that kind affording some priority or superior position to the holders of particular shares are the thing that causes those shares to be "preference shares". It is not possible for "preference shares" to exist except as a result of a process of differentiation from shares which are not "preference shares" which sees the "preference shares" entitled to some comparative advantage, commonly with respect to one or more of the matters referred to in s 254A(2) to be mentioned presently … [14] It was faintly suggested on behalf of the company that the right of the holder to require redemption by the company makes the shares preference shares. That cannot be so. That feature makes them redeemable shares, which represents one of the two attributes contemplated by the s 9 definition of "redeemable preference share". The characteristics that make a share a "preference share" are distinct from those that make it redeemable. [15] The consequence of the shares not being redeemable preference shares is, of course, that they cannot be redeemed, except by future and separate compliance with either the capital reduction provisions or the share buy-back provisions. Either course would require separate decisions on each occasion of proposed redemption and the necessary corporate decisions might or might not be forthcoming on any particular occasion." 27 Certainly in Ford's Principles of Company Law the learned authors take the view that it flows from Barrett J's decision that a company cannot create preference shares unless there is on issue another class of shares. It may be that those other shares must be ordinary shares. 28 Rather curiously, this view is expressed in different fashions in the most recent bound version of the work and in the current loose leaf version. In the 14th edition (2010) it is stated: "It seems to follow that a company cannot create preference shares unless there is already another class of issued share." In the current version of the loose leaf edition the statement is as follows: "So ingrained is the concept of a preference shareholder having some preference over ordinary shareholders that it is unlikely to be accepted that there can be preference shares without ordinary shares." 29 Whether or not it can be said that these propositions flow as such from Barrett J's judgment I take it as indicating that preference shares cannot be created unless there are on issue at the time shares over which they have preference in one or more of the stipulated regards, probably being ordinary shares. 30 I have therefore come to the conclusion that when the subject shares were issued they were not validly issued as redeemable preference shares. They are not therefore redeemable preference shares within the meaning of the CA and their purported redemption after Hedy's death was not valid. 31 That is sufficient to determine the matter, to attract declarations to the effect prayed for in prayers 9A and 9B and to entitle the plaintiffs to relief as set out in prayer 9C rectifying the register. I see no basis in the material before me for an order for compensation. 32 In these circumstances it is not necessary for me to adjudicate formally upon arguments (2) and (3) in [16] above. However, for the record I set out the views that I have come to on those subject matters. 33 As to the question of the sufficiency of a resolution to support the redemption, I am of the view that there was evidence of a sufficient resolution. It is correct, as submitted for the plaintiffs, that there was not in evidence the resolution or a minute of the meeting at which it was passed. However, there was a clear statement in a letter written at the time by a director of the company to the effect that such a resolution had been passed by the directors. In the absence of any contrary evidence I regard that as sufficient evidence of the requisite resolution. It may be that the plaintiffs could rely as well, if they needed to, on s 1274B of the CA. 34 As to the argument that the redemption, if otherwise effective, was required to be on the basis of the fair market value of the shares, I reject that argument. It was based upon the distinction between the provision in article 30.4(c), that the redemption referred to in that article was to be at par and the absence of any statement as to the financial terms of the redemption referred to in article 30.4(d). It does not seem to me that the only possible financial bases on which redemption may be made are at par on the one hand and at fair market value on the other. In my view it cannot be deduced by the silence as to financial terms in article 30.4(d) that any redemption under that article was to be at fair market value. 35 Short minutes should be brought in at a time to be appointed embodying the conclusions that I have come to. Any necessary argument as to costs can be had at that time. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.