Beck v Weinstock

[2013] HCA 15
[2013] ALMD 2741
(2013) 87 ALJR 570
(2013) 297 ALR 21
(2013) 93 ACSR 251

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(Judgment by: Gageler J)

Beck
v Weinstock

Court:

Judges: French CJ
Hayne J
Crennan J
Kiefel J

Gageler J

Judgment date: 1 May 2013

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Judgment by:
Gageler J

[77] French CJ has set out the facts and procedural history. I adopt his abbreviations and agree that the appeal should be dismissed.

[78] The appeal is to be determined by reference to the 2001 Act as at the date of putative redemption of the C class shares in LWC on or about 29 July 2004. The question is whether those shares were on that date "redeemable preference shares" liable to redemption and cancellation by LWC under s 254J(1) of the 2001 Act.

[79] Tamar's argument that the C class shares in LWC were not then "redeemable preference shares" is founded on the proposition that a share is a "preference share" within the meaning of the 2001 Act only where it has preference or priority over another share that is on issue. That argument, as French CJ has demonstrated, lacks the historical foundation Tamar claimed for it.

[80] Questions of contemporary corporate finance are not readily determined by implications drawn from practices of past centuries. Tamar's argument is to be rejected because it finds no toe-hold in the text of the 2001 Act or in any policy that can be discerned to be reflected in the 2001 Act.

[81] The provisions of the 2001 Act governing shares in companies and transactions affecting the share capital of companies are in large measure the product of amendments made by the Company Law Review Act 1998 (Cth) to the Corporations Law. Their application, through transitional provisions, to companies registered under earlier legislation, such as the 1961 Act, provides no basis for reading references to preference shares in the 2001 Act more restrictively than is warranted by the proper construction of the 2001 Act in its application to companies brought into existence by registration under the 2001 Act itself.

[82] Under the 2001 Act, a company must have at least one member, but need only have one member. ^[96] A company comes into existence on the day on which it is registered, ^[97] at which time shares to be taken up by members as specified in the application for registration are taken to be issued to members. ^[98] For a company limited by shares, the application for registration must state "the number and class of shares each member agrees in writing to take up". ^[99] At the time of registration, a company limited by shares must therefore have at least one share of at least one class but need only have one share of one class.

[83] Amongst other circumstances in which a company may adopt a constitution, a company adopts a constitution on registration if each person specified in the application for registration as consenting to become a member agrees in writing to the terms of the constitution before the application is lodged. ^[100] A constitution has effect as a contract between the company and each member, between the company and each director and company secretary, and between each member and each other member from time to time. ^[101]

[84] The 2001 Act provides that a company has power to issue and cancel shares, ^[102] and to determine the terms on which its shares are issued as well as the rights and restrictions attaching to those shares. ^[103] A variation or cancellation of rights attached to shares in a class can occur only in accordance with such procedure for variation or cancellation (if any) as is set out in the company's constitution or otherwise by special resolution of the company and either a special resolution of the relevant class or the written consent of members with at least 75% of the votes in the class. ^[104] However, a company having one class of shares that issues new shares to which different rights attach is not thereby taken to vary the rights attached to the shares already on issue if the rights attaching to the new shares are provided for in the company's constitution. ^[105]

[85] The power of a company to issue shares is expressed to include the power to issue "preference shares (including redeemable preference shares)". ^[106] In relation to the issue of preference shares, s 254A(2) provides:

A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company's constitution (if any) or have been otherwise approved by special resolution of the company:

(a)

repayment of capital;

(b)

participation in surplus assets and profits;

(c)

cumulative and non-cumulative dividends;

(d)

voting;

(e)

priority of payment of capital and dividends in relation to other shares or classes of preference shares.

[86] The expression "redeemable preference share" is defined to mean "a preference share in a body corporate that is, or at the body's option is to be, liable to be redeemed". ^[107] Reflecting that definition, s 254A(3) provides:

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.

[87] Section 254J(1) provides that a company "may redeem redeemable preference shares only on the terms on which they are on issue" and that, "[o]n redemption, the shares are cancelled". Section 254K further limits redemption under s 254J(1) to circumstances where the shares are fully paid-up and where the redemption is out of profits or the proceeds of a new issue of shares made for the purpose of the redemption. Section 254J(2) makes clear that redeemable preference shares may also be cancelled under a reduction of capital or a share buy-back under Pt 2J.1.

[88] Subject always to compliance with the general requirements of the 2001 Act concerning the variation of rights attached to shares in a class, a company can convert a preference share into an "ordinary share". ^[108] It can also convert an ordinary share into a preference share ^[109] provided the holders' rights with respect to the matters referred to in s 254G(2)(a) to (e) are set out in the company's constitution (if any) or have been otherwise approved by special resolution of the company. ^[110]

[89] The 2001 Act defines neither the expression "preference share" nor the expression "ordinary share". The Explanatory Memorandum for the Company Law Review Act 1998 (Cth) explained a "preference share" to be "a share that gives its holder some right or preference (for example, a guaranteed minimum dividend entitlement) not enjoyed by the holder of a share of another type". ^[111]

[90] The underlying concept of a preference share, as distinct from an ordinary share, was explained by Barrett J in Re Capel Finance Ltd ^[112] by reference to "the basic rule applicable to all forms of shareholder participation and entitlement in the absence of contrary provision", being "that members of a company participate and enjoy entitlements according to the numbers of the shares they hold". Barrett J explained:

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).

[91] The scheme of the 2001 Act neither requires nor assumes that a share cannot be a preference share, or a redeemable preference share, unless or until an ordinary share is on issue. It is inherent in the concept of a preference share that the rights attaching to it are differentiated from the rights attaching to an ordinary share. But it is not intrinsic to that differentiation of rights that there be ordinary shares on issue. It is sufficient that the share be of a class of shares in respect of which the constitution of the company provides that rights with respect to matters referred to in s 254A(2)(a) to (e) attach in addition or in priority to such rights as would attach to ordinary shares if and when issued. There is no reason why a company having a constitution registered under the 2001 Act cannot have, on registration, only members who hold preference shares of one or more classes or even a single member holding a single preference share.

[92] Shares of a class to which additional or preferential rights attach with respect to matters referred to in s 254A(2)(a) to (e) of the 2001 Act are, by reason of those rights being set out in the company's constitution, preference shares at the time of their issue. They are and remain preference shares, unless converted or redeemed, irrespective of whether or not ordinary shares are on issue. The rights attaching to preference shares under the company's constitution take effect in contract between the company and the holders of those preference shares immediately on issue. Those rights take effect in contract between the holders of those preference shares and the holders of ordinary shares if and when ordinary shares are issued.

[93] There is, as Tamar points out, potential for a company which has no ordinary shares on issue to be left without members by the redemption of redeemable preference shares. The solution is that the absence of members is a ground for winding up a company. ^[113]

[94] Tamar's more general argument is that redemption of redeemable preference shares in the absence of ordinary shares contradicts the scheme of the 2001 Act for the protection of creditors in so far as that scheme limits the circumstances in which there can be a reduction in a company's capital. The argument pays insufficient attention to a critical element of that scheme, s 254K. That section applies in every case of redemption under s 254J(1) to ensure that only fully paid-up redeemable preference shares can be redeemed and that their redemption can only be out of profits or the proceeds of a new issue of shares made for the purpose of the redemption. The net capital of the company therefore cannot be reduced by the redemption of redeemable preference shares. That is so irrespective of the existence or non-existence of ordinary shares at the time of redemption.

[95] Tamar's proposition that a share is only a preference share within the meaning of the 2001 Act where it has preference or priority over another share that is on issue is therefore to be rejected. Tamar has in consequence failed to demonstrate that the C class shares in LWC were not preference shares capable of redemption under s 254J(1).