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: Hayne J, Crennan J, Kiefel J)

Beck
v Weinstock

Court:

Judges: French CJ

Hayne J
Crennan J
Kiefel JGageler J

Judgment date: 1 May 2013

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Judgment by:
Hayne J
Crennan J
Kiefel J

[47] A company incorporated under the Companies Act 1961 (NSW) ("the 1961 Act") had five subscriber shares, described as "'A' 5% Convertible Preference Shares". It later issued further shares described as "'C' Redeemable Preference Shares". The company issued other preference shares having the same rights as the "C" class shares, but never issued any ordinary shares, whether before or after the issue of the "C" class shares.

[48] The only issue in this appeal is whether the company's purported redemption of certain "C" class shares was valid. The "C" class shares could be redeemed validly only if they were "preference shares" liable to be redeemed. There were no other issued shares over which the "C" class shares had preferential rights. Were the "C" class shares preference shares?

[49] These reasons will show that the "C" class shares were preference shares. The redemption of the shares was valid.

The facts and proceedings

[50] LW Furniture Consolidated (Aust) Pty Ltd ("the Company") was incorporated under the 1961 Act. It was formed ^[73] as a proprietary company, limited by shares, by two persons (Mr Leo Weinstock and a solicitor) subscribing their names to a memorandum of association and complying with the 1961 Act's requirements as to registration.

[51] In accordance with s 18 of the 1961 Act, the memorandum of association of the Company stated, among other things, the amount of share capital with which the Company proposed to be registered ($20,000) "and the division thereof into shares of a fixed amount" ^[74] (20,000 shares of $1 each). In accordance with the same section, the memorandum of association also stated that the liability of the members was limited and that the subscribers were "desirous of being formed into a company in pursuance of the memorandum and ... respectively agree[d] to take the number of shares in the capital of the company set out opposite their respective names". ^[75]

[52] The company's articles of association provided for several different classes of shares: "5 'A' 5% Convertible Preference Shares, 5 'B' Redeemable Preference Shares, 10 'C' Redeemable Preference Shares, 10 'D' Redeemable Preference Shares" ^[76] and a balance of 19,970 ordinary shares divided into 10 classes. The two subscribers to the memorandum of association each agreed to take "A" class shares. Mr Leo Weinstock agreed to take (and took) four; the solicitor agreed to take (and took) the remaining share of that class. Eight "C" class shares were later issued to Mr Leo Weinstock's wife, Mrs Hedy Weinstock. Argument proceeded on the basis that these shares were issued to Mrs Weinstock in 1971. Two further "C" class shares and two "D" class shares were also issued, but the details of those issues need not be considered.

[53] The company's articles of association set out the rights attaching to the several classes of shares. The "A" class shares: carried the right to a fixed cumulative preferential dividend at the rate of five per cent per annum on the amount paid up on the shares; gave no right to vote at any general meeting of the Company; and had priority in a winding up "both as regards return of capital and dividend accrued up to the commencement of the winding up and not declared" or on a reduction of capital as regards return of capital. Until his death, or until he ceased to hold at least four of the "A" class shares (whichever was the earlier), Mr Leo Weinstock could convert the "A" class shares into the only shares carrying a right to vote at a general meeting. The "C" class shares: did not carry any right to vote at any general meeting; ranked as regards return of capital after the "A" class shares but equally with the "D" class shares in priority to ordinary shares; ranked as regards dividends equally with both the "D" class shares and ordinary shares; and were liable to be redeemed on the death of the holder. The "C" class shares thus gave their holder preference to the return of capital over the holder of any ordinary shares but otherwise had no preferential rights. And no ordinary shares were ever issued.

[54] Mr Leo Weinstock predeceased his wife. On the death of Mrs Hedy Weinstock, the Company purported to redeem, at their nominal value of $1 per share, the eight "C" class shares she had held. Mrs T R Beck, daughter of Mr and Mrs Weinstock and an executor of the estate of Mrs Weinstock, alleged that the "C" class shares her mother had held ("the disputed shares") were not redeemable because they were not preference shares.

[55] At first instance in the Supreme Court of New South Wales, Hamilton AJ concluded ^[77] that "preference shares cannot be created unless there are on issue at the time shares over which they have preference". On appeal to the Court of Appeal, that Court (Giles JA and Handley AJA, Young JA dissenting) held ^[78] that the disputed shares were preference shares and had been validly redeemed. By special leave, Mrs Beck appealed to this court. The appeal should be dismissed.

The appellant's arguments

[56] The appellant framed the issue in the appeal to this court as whether a share can be a "preference share" for the purposes of the Corporations Act 2001 (Cth) ("the 2001 Act") when the rights attaching to the share do not confer any preference or priority over the rights attaching to any other share actually on issue in the company.

[57] The appellant referred to the 2001 Act on the footing that it was the provisions of that Act (in particular, s 254J) which governed the purported redemption of the disputed shares. The appellant submitted that, if the disputed shares were not "preference shares", they could not be "redeemable preference shares" as that term was used in either s 254A of the 2001 Act (dealing with a company's power "to issue bonus, partly-paid, preference and redeemable preference shares") or s 254J(1) (providing that "[a] company may redeem redeemable preference shares only on the terms on which they are on issue").

[58] Because the Company had not exercised the power to issue ordinary shares, the existence of that power was treated by the appellant as irrelevant to whether the disputed shares were "preference shares". The appellant submitted that the disputed shares were not "preference shares" because they conferred no preference or priority over the only other classes of shares ever issued by the Company: the "A" and "D" classes.

Which Act?

[59] There was no dispute that the provisions of the 2001 Act relating to redemption of redeemable preference shares applied to the Company. In particular, there was no dispute that the Company was a company registered under the 2001 Act ^[79] and thus a "company", both as defined in s 9 and as referred to in ss 254A and 254J of the 2001 Act. But the appellant did not submit that if the disputed shares were validly issued as redeemable preference shares they had ceased to be redeemable preference shares when the Company purported to redeem them. It was not suggested that any provision of any of the several intervening forms of corporations legislation which applied to the Company after it issued the disputed shares in 1971 (when the 1961 Act applied) bore upon whether the shares were properly described, when issued, as preference shares liable to be redeemed.

[60] It is necessary, therefore, to consider the 1961 Act's provisions about redeemable preference shares.

Redeemable preference shares under the 1961 Act

[61] Section 61(1) of the 1961 Act provided that "if so authorised by its articles" a company having a share capital might "issue preference shares which are, or at the option of the company are to be liable to be redeemed" and that the redemption was to be effected "only on such terms and in such manner as ... provided by the articles". Subsection (2) provided that "[t]he redemption shall not be taken as reducing the amount of authorised share capital of the company".

[62] Consistent with the principle of maintenance of capital, firmly established as a cardinal principle of company law by the end of the nineteenth century, ^[80] s 61 prevented redemption of the shares by using the company's capital and provided for the maintenance of an amount equal to the nominal amount of the shares redeemed as part of the company's capital. Thus, s 61(3) prohibited redemption of redeemable preference shares except out of profits otherwise available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of the redemption and unless the shares were fully paid up. If redeemable preference shares were redeemed otherwise than out of the proceeds of a fresh issue of shares, s 61(5) required that a sum equal to the nominal amount of the shares redeemed be transferred out of profits otherwise available for dividend "to a reserve called the 'capital redemption reserve'" and provided that, subject to other provisions of s 61, ^[81] the provisions of the 1961 Act relating to reduction of capital applied to the capital redemption reserve as if it were paid up share capital of the company.

Preference shares

[63] Section 66(1) of the 1961 Act provided that:

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.

[64] Section 66(1) gave some indication of the respects in which the rights attaching to one class of shares might be preferred over the rights attaching to another. ^[82] But the 1961 Act contained no definition of "preference share" and no provision of the 1961 Act set out any essential characteristics of a preference share. ^[83] As was remarked in one leading text of the time, ^[84] "[t]hat this should be so is not surprising any more than that there is no definition of 'ordinary' shares". The absence of legislative definition of a "preference share" is unsurprising because "[t]he rights of ... preference shareholders are, of course, ordinarily to be ascertained from the memorandum and articles of the company and the terms upon which the issue of preference shares was made, and their rights are to be ascertained from those documents or terms as a matter of construction". ^[85] What was a "preference share" was not a matter regulated by some rule of positive law. Section 66 provided that a company could not issue preference shares except in accordance with its memorandum and articles of association. Otherwise, however, the issue of preference shares was treated as a matter not regulated by the 1961 Act but by whatever were the provisions actually made in the company's constituent documents. ^[86]

[65] This treatment of the issue of preference shares was consistent with other provisions of the 1961 Act regulating the capital structure of a company limited by shares. The 1961 Act required ^[87] that the amount of a company's authorised share capital and its division into shares of a fixed amount be stated in the company's memorandum of association. It required that certain steps not be taken in relation to a company's share capital unless authorised by its memorandum or articles of association. Those steps included altering its share capital, ^[88] reducing its share capital, ^[89] varying or abrogating the rights attaching to any class of share ^[90] and allotting preference shares or converting issued shares into preference shares. ^[91] But subject to these statutory limits, the rights of the members of a company limited by shares were fixed by the company's memorandum and articles of association.

Preference over issued shares?

[66] The appellant's central submission in this appeal was that a share could not be a "preference share" unless the rights attaching to it gave some preference or priority over some other issued share. The appellant submitted that this construction accorded with "the development of the 'preference share' as a practical means of encouraging additional investment in companies in financial difficulty and with the terms and the legislative history of the relevant provisions" of the 2001 Act.

[67] It is important, however, to begin by recognising that nothing in the 1961 Act provided any textual footing for the submission that a share was not a "preference share" unless the rights attaching to it gave some preference or priority over some other issued share. The emphasis given by the 1961 Act to the definition of the rights of shareholders in the memorandum and articles of association points very firmly against accepting the appellant's submission. What was a "preference share" for the purposes of the 1961 Act was to be determined by reference to the relevant company's memorandum and articles of association, not by reference to the state of the issued capital of that company at any time. That is, whether a share was a "preference share" did not depend upon what shares the company had issued. If a company's memorandum and articles of association provided that shares of an identified class carried some right with respect to repayment of capital, participation in surplus assets or profits, cumulative or non-cumulative dividends, voting, or priority of payment of capital or dividend which preferred the holder of a share of that class over the holder of some other class of share for which the memorandum and articles of association provided, those shares were preference shares.

[68] In this case, the Company's articles of association described the rights which attached to each of the classes of shares. In that regard it may be noted that the subscriber shares in the Company taken by Mr Leo Weinstock and the solicitor were described as preference shares even though, of course, no other shares had been issued. The appellant acknowledged that acceptance of her central argument entailed that those shares were not preference shares, at least when they were first taken by the subscribers.

[69] Whether, at the time of issue of any particular share, the rights attaching to that share then afforded any commercial advantage to the holder would no doubt depend upon the content of those rights and what other shares had then been issued. As Handley AJA rightly pointed out, ^[92] however, it is necessary to distinguish between the rights attached to a share and the enjoyment of those rights. The holder of a share has whatever rights the memorandum and articles of association attached to that share. If, after the share was issued and allotted, there were to arise some question about the order in which shareholders would be repaid capital, participate in surplus assets or profits, receive or accumulate an entitlement to dividends, vote, or obtain payment of capital or dividend, that question would be resolved according to the rights attaching to the respective shares. A share which had one or more preferential rights was properly described as a "preference share" not only at the time the immediate question about employment or exercise of rights fell for consideration but also at the time of issue.

[70] Further support for the conclusion that what was a preference share required consideration only of what was provided by the constituent documents of the company is found in the text of s 61(1) itself. That subsection provided that a company, "if so authorised by its articles", might "issue preference shares which are, or at the option of the company are to be liable to be redeemed" (emphasis added). Section 61(1) thus required that the company concerned have authority under its articles of association to issue the shares in question. But the effect of the appellant's argument was to add a further requirement to s 61(1): that the company concerned should have already issued some shares having rights inferior to those which were to be issued under the power given by s 61(1) and the company's articles of association. There is no basis for implying any additional requirement of that kind in s 61(1).

[71] The appellant submitted that if what is a preference share was determined by reference to what shares could be issued rather than what shares had been issued a company could be left without any members. This would follow, so it was submitted, if a company issued only redeemable preference shares and those shares were all redeemed.

[72] The result to which the appellant pointed may be theoretically possible. It may be doubted, however, that the directors of the company would, or consistently with their duties could, permit the result described in argument to come to pass. But regardless of whether those doubts are well-founded, the point made by the appellant is wholly met by the provisions of both the 1961 Act and the 2001 Act governing winding up by the court. The 2001 Act provided ^[93] that it was a ground for winding up by the court that the company had no members. The 1961 Act provided ^[94] that, subject to an exception that is not presently relevant, it was a ground for winding up by the court that the number of members of a proprietary company was reduced below two.

[73] Statute having dealt with the issue in this way, the possibility that a company issuing only redeemable preference shares may be left without members does not point, as the appellant submitted, to concluding that a share is a preference share only if it has rights which prefer the holder over the holders of other shares that have actually been issued.

[74] It may be accepted that, as the appellant submitted, preference shares were often issued in England during the nineteenth century to raise capital additional to what had been subscribed for the issue of ordinary shares. This observation about commercial practice is, however, not to the point. Likewise, and contrary to the appellant's submissions, it is not useful to consider what issues arose or what orders were made in approving a reduction of capital by cancellation of preference shares. ^[95] Neither the legislative history concerning statutory provisions for redeemable preference shares nor any wider historical examination of the commercial use of preference shares as a means of raising capital sheds any light on the central issue in this appeal. That issue is what was meant in the 1961 Act by "preference share". The 1961 Act required that what was a preference share be answered by reference to the rights that the company's memorandum and articles of association attached to that share and whether those rights preferred the holder of the share in question over the holder of any other class of share which the company could issue.

[75] The disputed shares had rights which preferred the holder of those shares over the holder of any ordinary share in the Company. That no ordinary shares were ever issued does not deny that the disputed shares were preference shares. The company's articles of association provided that the disputed shares were liable to be redeemed. They were redeemable preference shares.

Conclusion and orders

[76] For these reasons the appeal should be dismissed with costs.