PARTIES: IN THE MATTER OF SULLIVANS COVE IXL NOMINEES PTY LTD (IN LIQUIDATION) ACN 104 321 682)

Corporations - Share capital - Shares - Classes of shares and shareholders - Generally - Whether the holders of the "B" class ordinary shares are to receive a distribution from a surplus on winding up - Whether an agreement between shareholders conferred any special privileges, rights or conditions on the "B" class ordinary shares.

Birch v Copper (1889) 14 App Cas 525, Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28; (1948) 77 CLR 143, Re Yanollee Pty Ltd (In Liquidation) [2006] NSWSC 705; (2006) 24 ACLC 1087, Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Company Ltd [1949] UKHL 3; [1949] AC 462, referred to.

Applicant Liquidator: M E O'Farrell SC, P A Kimber

Respondents/Defendants: C A Sweeney QC, A J Abbott SC

Respondents/Plaintiffs: Slater & Gordon Lawyers

Judgment Number: [2011] TASSC 9

IN THE MATTER OF SULLIVANS COVE IXL NOMINEES PTY LTD

RICHARD CRAWFORD and KARINA CRAWFORD v FLORA DE KANTZOW, SIGNE DE KANTZOW and LIDO PTY LTD (ACN 053 114 088)

1 The plaintiffs applied under the Corporations Act 2001 (Cth), ss232 and 461, for the winding up of Sullivans Cove IXL Nominees Pty Ltd. On 24 June 2009 it was ordered that the company be wound up and Paul John Cook was appointed official liquidator.

2 The liquidator applied under ss479(3), 485(2) and 488(2) for:

1 Directions as to the entitlements (if any) attaching to 200,000 "B" class shares in the company to receive dividends and a distribution from the surplus on winding up;

2 Orders adjusting the rights of the contributories among themselves; and

3 Special leave to distribute any surplus among the persons entitled to it.

3 Under s479(3), a liquidator may apply to the Court for directions in relation to any matter arising under a winding up. Under s485(2), the Court must adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it. Under s488(2), a liquidator may distribute a surplus only with the Court's special leave. [1]

The shareholding in the company and the surplus

4 The holders of 480,000 ordinary shares that have been issued are Ms Signe de Kantzow, 40,000, Lido Pty Ltd, 247,265, and Mr and Mrs Crawford jointly as to 192,735. In addition, Lido, is the holder of 200,000 "B" class shares.

5 As at 12 April 2010, the liquidator was holding $3,277,111.16 for distribution among the shareholders. Although it is clear that the ordinary shareholders will share equally per share as between themselves, the disputed question that requires determination is the entitlement of Lido as the holder of 200,000 "B" class shares.

6 The case of Mr and Mrs Crawford is that as the holder of the 200,000 "B" class shares, Lido is entitled only to a repayment of $200,000 capital. The case of Lido and Mrs Flora and Ms Signe de Kantzow is that as the holder of the "B" class shares, Lido is entitled to share equally per share with the holders of the other shares. The liquidator has taken a neutral position but requires the determination of the Court.

7 The division of the nominal capital into different classes of shares is governed by Article 10 of the Constitution:

"The Directors may specify that the nominal capital shall be allocated to different classes of shares. Each class of Shares shall have the rights and conditions in regard to dividends, voting rights, the return of capital or such other matters determined by the Directors and provided for in these Articles and these rights and conditions may be varied by the Directors by special resolution."

8 Concerning rights and conditions of issue of shares, Article 11 provides:

"The Shareholders including any Shareholders who hold a special class of shares may:

(a) receive notice of, attend and vote at all General Meetings and any other meeting conducted by the Company;

(b) receive Dividends; and

(c) enjoy any other right applying to Shareholders under the Constitution or the Law;

under these Articles and any special conditions, restrictions or privileges that may be endorsed in writing on the Shares on the instructions of the Board at the time the Shares are issued provided that to do so does not breach the Law."

9 To make sense, Article 11 should be read as if the word "under" appeared before "any special conditions".

10 Articles 12 to 14 provide for the issue by the Board of redeemable shares subject to special conditions and for their redemption.

11 Article 18 provides that subject to the Corporations Law, the directors may issue shares with any special privileges, rights or conditions as they may determine.

12 Provisions for the keeping of a register of members are made by Article 19. It requires that the register include the names and addresses of each shareholder, the manner and type of shares issued to each shareholder and details of any special privileges, rights or conditions that may attach to the shares.

13 By Article 20, share certificates are required to be issued by the company to each shareholder and to state the type of share issued and details of any special privilege, right or condition attached to the shares.

14 Provision for the payment of dividends is made by Articles 133 to 141. Article 133 authorises the directors to declare dividends to be paid out of the profits of the company, including any reserves created or set aside for this purpose, provided that to do so does not breach the Corporations Law. The other articles concerning dividends are of no assistance in the resolution of this case.

15 Concerning the distribution of the company's assets on a winding up, Article 153 provides that the liquidator may, on the instructions of a special resolution of the company, divide the company's assets between the members in accordance with the Corporations Law and any terms and conditions applying to the issue of the shares.

The issue of the ordinary shares and the B class ordinary shares

16 The company was registered on 4 April 2003. The first directors were the first defendant, Mrs de Kantzow, who was its chair, the first plaintiff, Mr Crawford, who was an executive director, and a Mr Millington, who was the chief executive director. Mr Millington later ceased to be a director and the second defendant, Ms de Kantzow, became a director on 4 June 2007. At all material times, Mrs de Kantzow was the secretary of the company.

17 The company was established to formalise the tender for and an agreement to lease the Henry Jones Art Hotel and to manage and operate the hotel. It was initially proposed that the paid up capital would be $400,000 made up of $204,000 from Mrs de Kantzow's company, Lido, and $98,000 each from Mr Crawford and Mr Millington. Shares of one dollar each were to be issued and therefore, it was proposed that Lido would own 51 percent of the shares and Mr Crawford and Mr Millington 24.5 percent each.

18 An informal tender on behalf of the yet to be formed company was submitted to the owner of the hotel on or about 12 March 2003. The tender document referred to what was proposed by way of capital, shareholdings and directors.

19 However, the owner requested that the capital of the company be $600,000 and not $400,000. Mrs de Kantzow undertook to provide the additional capital. On 19 March 2003, her husband sent a letter to the hotel owner on behalf of the yet to be formed company with a revised offer. When advising that Mrs de Kantzow would provide the additional capital of $200,000, which he said would be "issued and paid up capital", he added that "the previously advised shareholding percentages shall not change". That could not have been correct.

20 Mrs de Kantzow did not personally take up capital in the company. The company of which she is the sole shareholder and office holder, Lido, subscribed what she had undertaken to subscribe and shares were issued to it rather than to her.

21 Ordinary shares were issued initially by 204,000 shares at $1.00 fully paid to Lido, 98,000 shares at $1.00 fully paid to Mr and Mrs Crawford and 98,000 shares at $1.00 fully paid to Mr Millington. I will refer to them as the ordinary shares.

22 The 200,000 "B" class shares were issued on 30 June 2004. By an application in writing bearing that date, Lido applied to the company for an allotment of the shares, describing them as $1.00 B class ordinary shares fully paid. I will refer to them as the "B" class shares.

23 The company issued a share certificate to Lido bearing the same date. It simply certified that Lido was the registered holder of 200,000 $1.00 fully paid B class ordinary shares in the company subject to the Constitution. There was no mention of any special privilege, right or condition attached to the shares or to any other matters that may have been determined by the directors. There is no evidence that the directors made any relevant determination. The evidence of Mr Crawford was that annexed to his affidavit were copies of all minutes of the company. What was annexed included minutes of meetings of directors and of management meetings. None of them dealt with the issue of the B class shares.

24 In July 2004, the hotel commenced operations under the management of the company.

25 On 8 February 2005, Mr Millington sold his ordinary shares. Lido purchased 35,385 and the balance of 62,615 were purchased by Mr and Mrs Crawford. Lido then held a total of 239,385 ordinary shares (60 percent) and Mr and Mrs Crawford held 160,615 (40 percent). Lido also held the 200,000 B class shares.

26 To raise additional capital of $80,000 for the installation of a new kitchen in the hotel, 80,000 more ordinary shares were issued in September 2007, 7880 to Lido, 32,120 to Mr and Mrs Crawford and 40,000 to Ms de Kantzow. The current shareholdings resulted. They are described in par[4] of these reasons. Lido now has 52 percent of the ordinary shares, Mr and Mrs Crawford 40 percent and Ms de Kantzow 8 percent. In addition, Lido owns the 200,000 B class shares.

27 In December 2007, the business of the company was sold. The sale resulted in the current surplus held by the liquidator.

28 The issue of the "B" class shares was preceded by an agreement between shareholders. It was a seven page document entitled "Shareholders Agreement". It was dated 1 July 2003. It was executed by Lido and signed by Mr and Mrs Crawford and Mr Millington. It has not been contended that it was not intended as a legally binding agreement between the shareholders. Its interpretation is one of the central issues in the proceedings.

29 The agreement described as its "Shareholder Parties (Parties)" Lido, Mr and Mrs Crawford and Mr Millington. Under the heading "Shareholding Of Each Party" it stated that Lido would hold 51 percent, Mr and Mrs Crawford 24.5 percent and Mr Millington 24.5 percent. That was an accurate description of the percentage holdings of what were then described as A class ordinary shares, but did not reflect the percentages if the B class shares were taken into account.

30 The next thing to appear in the agreement was the following:

B Class Ordinary Shares of $1 each fully paid - non voting

31 The agreement then provided for the name of the company and its purpose. Under the heading "The Responsibilities of the Parties" it provided for the non-executive role of Mrs de Kantzow as a director and chairman of directors, the executive role of Mr Crawford as an executive director and the executive role of Mr Millington as chief executive director. Under the heading "Meetings of the Board" it dealt with what was proposed in that regard.

32 Under the heading "Sale of the Business" the agreement provided for a future sale of the business through a broker or brokers by the shareholders, after obtaining a valuation or valuations, unless agreed otherwise. Next, under the same heading it dealt with the situation of a shareholder wishing to dispose of its shares. In that regard, it required that the shares first be offered to the remaining shareholders and provided for the price to be determined by agreement or, failing that, valuation. It also stated:

"Where the Parties have agreed upon the price of the shares being sold:

i. First, to the remaining shareholders in proportion to their existing shareholdings.

ii. Second, where one shareholder does not wish to purchase the shares then all shares shall be offered to the remaining shareholder."

33 Under the heading "Sale to Other Parties" the agreement provided for how a shareholder might sell its shares in the event of none of the remaining shareholders wishing to acquire them.

34 Under the heading "Termination of Service Agreement - Kim Millington", the agreement provided that if Mr Millington's services were terminated, his shareholding in the company, unless otherwise agreed by the parties, "shall first be offered to the other Parties in proportion to their existing shareholdings". It also provided for the determination of the price.

35 Importantly for the purposes of this case, the agreement then dealt with the payment of dividends:

"Dividend Policy

The Board shall determine the amount and dates dividends are payable to shareholders of the company provided:

1 Dividends payable to shareholders shall commence provided net shareholders equity of the Company is not less than $600,000. (Net shareholders equity shall include the value attributable to the business enterprise as determined by an independent Valuer.)

2 Subscribers to the B Class ordinary shares have been repaid in full and these shares have been cancelled.

3 Unless otherwise agreed by the Board all shareholders loans have been repaid.

Unless otherwise agreed by the Board dividends shall be payable quarterly provided the company has net operating funds (cash in bank) of not less than $200,000."

36 In his affidavit, Mr Crawford said that at no time did anyone on behalf of Lido suggest to him that the rights attached to the B class shares included a right to be repaid or paid on any basis other than that they would be repaid at a face value of $1.00 per share. He said that on 19 March (no year was stated but it seems likely to have been 2003) Mr de Kantzow, the managing director of Standard Excellence Pty Ltd, the nominee for the company yet to be formed, told him that the B class shares would be non-voting and not attract any entitlements other than to be repaid at face value.

37 I note that the agreement that the B class shares would have non-voting rights conflicted with the provisions of Article 11(a).

38 No dividends have been declared or paid since the company commenced to operate.

39 The "B" class shares were not issued to Lido until 30 June 2004, which was 12 months after the date of the shareholder agreement. The delay is explained, I think, by the fact that the company did not commence to operate the new hotel until July 2004. Building works had to be carried out by the owner before the hotel was leased to the company. I infer that the injection of the extra capital of $200,000 was not required until then.

The Corporations Act

40 Relevant provisions of the Act were as follows on 30 June 2004.

41 Under s124, the company had the power to issue and cancel shares, and by s254A, the power included the power to issue bonus shares, preference shares (including redeemable preference shares) and partly paid shares.

42 The Act did not define what was a preference share. However, by s254A(2), the company had the power to issue preference shares only if the rights attached to them with respect to the following matters were set out in the company's Constitution or had been otherwise approved by special resolution of the company:

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

Subsection (3) explained that redeemable preference shares were preference shares that were issued on terms that they were liable to be redeemed. The subsection went on to provide that they might be redeemable at a fixed time or on the happening of a particular event, at the company's option, or at the shareholder's option.

43 By s254B(1), the company was empowered to determine the terms on which its shares were issued and the rights and restrictions attaching to the shares.

44 Under s254U(1), the directors had power to determine whether a divided was to be paid. By s254W(2), the directors were authorised to pay dividends as they thought fit, subject to the terms on which shares were issued, and subject also, under s135, to displacement or modification by the company's Constitution.

45 Concerning the distribution of the property of the company upon there being a surplus, which is the case here, s485(2) requires, as I observed in par[3], that the Court adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it.

Entitlements if there was no shareholder agreement

46 There is no evidence that at the time of the allocation of the "B" class shares, the directors specified that the shares would have rights or conditions in regard to any matters that were different than those applying to the ordinary shares. The Constitution contained no such specification. There is no evidence of a register of members that details any such specification applying to the shares. The share certificate issued to Lido made no mention of any such specification.

47 In summary, I find that there is nothing in the Constitution, register of members, share certificates, minutes of meetings of directors or the Act that suggests that the rights on winding up of the holder of the "B" class shares are not the same as the rights of the holders of the ordinary shares.

48 The general principle is that a surplus upon winding up belongs to the members according to their proportionate interests in the share capital, measured according to the nominal amount - subject, however, to recognition of any preferred or superior claims created by the company's constitution. Birch v Cropper (1889) 14 App Cas 525 at 543; Re Driffield Gas Light Company [1898] 1 Ch 451 at 455. That general principle applies equally to the holders of all classes of shares, although its application is subject to the provisions of the company's constitution and the terms on which the respective shares have been issued by the company. The right of a member in accordance with the principle is a legal right that attaches to the shareholding itself. Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28; (1948) 77 CLR 143 at 153; Re BM2008 Pty Ltd (In Liq) [2010] VSC 337 at par[11]. Since the abolition of the concept of par value and nominal amount of shares by the Company Law Review Act 1998 (Cth), the reference to nominal amount in the general principle is now taken to mean the sum of all amounts paid to the company at any time for the share, not including any premium. Re Yanollee Pty Ltd (In Liquidation) (2006) 24 ACLC 1087, [2006] NSWSC 705 at par[13].

49 The application of the general principle to this case, absent the shareholder agreement, would mean that the respective entitlements of the company's shareholders to the surplus is in proportion to the number of shares held, regardless of the class of share.

Should the entitlements be different in this case because of the shareholder agreement?

50 It is an overriding principle throughout the cases that the point in dispute is one of construction and that, in turn, depends on the terms of the particular documents. It is generally accepted that the rights of the shareholders between themselves depend on the terms of the instruments which contain the bargain the shareholders have made with the company and each other. Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Company Ltd [1949] UKHL 3; [1949] AC 462 at 488; Pell v Marshall (1984) 8 ACLR 1015 at 1017. Cases decided upon different documents can only provide limited guidance. Will v United Lankat Plantations Company Ltd [1914] AC 11 at 15; Re Hawera County Electric Co Ltd (In liq) [1930] NZLR 1000 at 1005, 1012, 1013; Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Company Ltd (supra) at 489, 490, 503; Re Isle of the Thanet Electricity Supply Co Ltd [1950] 1 Ch 161; Re William Bedford Ltd (In liq) [1967] VicRp 52; [1967] VR 490 at 491; Re Capel Finance Ltd (2005) 52 ACSR 601, [2005] NSWSC 286 at par[11]. Usually those documents are the company's constitution or the terms of issue of shares, or both.

51 The plaintiffs rely on a line of authorities concerning the rights of the holders of preference shares in a company. An example of those authorities is Re National Telephone Company [1914] 1 Ch 755 at 774, where Sargant J said that the weight of authority was in favour of the view that, either with regard to dividend or with regard to the rights in a winding up, the express gift or attachment of preferential rights to preference shares, on their creation, was, prima facie, a definition of the whole of their rights in that respect, and negatived any further or other right for which, but for the specified rights, they would have been entitled. Earlier at 767, Sargant J made the point that if a company's articles of association provide that on winding up surplus assets should be divided in a particular way, that particular method will necessarily have precedence over any general equity or right.

52 Other cases referred to by counsel for the plaintiffs, in which views similar to those in Re National Telephone Company were expressed, included Will v United Lankat Plantations Co Ltd (supra) at 17 - 18, 19; Re Isle of Thanet Electricity Supply Co Ltd (supra); Re William Bedford Ltd (In liq) (supra) at 491; Re Capel Finance Ltd (supra). In some of them, judges went so far as to state that there is an onus on the holders of preference shares to establish that on the terms of the issue of the shares to them they became entitled to the right they were asserting. See for example, Re Isle of Thanet Electricity Supply Co Ltd at 167 - 168; Re William Bedford Ltd (In liq) at 491.

53 The Act does not define what a preference share is and there is nothing in the constitution of the company, or on the face of the share certificate, to signify that the B class shares are preference shares. Nevertheless, it was argued for the plaintiffs that because of the provisions of the shareholder agreement, the B class shares are correctly to be described as preference shares for the purposes of the authorities to which I have referred.

54 Counsel for the plaintiffs relied on Re Capel Finance Ltd (supra) at par[11], where Barrett J said that it is not possible for "preference shares" to exist except as a result of a process of differentiation from shares which sees the "preference shares" entitled to some comparative advantage, commonly with respect to one or more of the matters referred to in the Act, s254A(2). In Beck v Weinstock [2010] NSWSC 1068 at par[22], it was said by Hamilton AJ that for a share to be a preference share it is not necessary that the share have preferential rights both as to repayment of capital and as to dividends. A preferential right in only one of those regards would be sufficient.

55 The B class shares are not preference shares when compared to the other shares. The holders of the B class shares have no voting rights, no rights to receive a dividend and no rights on winding up in priority to the rights of the other shareholders. The agreement prohibits the holders of the ordinary shares from receiving a dividend until the holder of the B class shares has been repaid what it subscribed for the shares and the B class shares have been cancelled, but at the same time no provision is made entitling the holder of the B class shares to require that it be repaid. On the face of the agreement, all the subscriber to the B class shares was to receive in return for its subscription of $200,000 was the issue of the shares. The holders of the ordinary shares were to have greater advantages, for they at least had a prospective right to receive dividends. Further, the shareholder agreement refers to both classes of shares as ordinary shares and when the company issued the B class shares it described them as ordinary shares.

56 A conclusion that apart from receiving a return of the $200,000 paid for them, the holder of the B class shares was to be entitled to nothing out of any surplus of assets on winding up cannot be reached unless the shareholder agreement so provides. It is silent about the matter and I conclude that it makes no such provision. It is not a term that should be implied in the agreement. It is not necessary to give business efficacy to the agreement, which is effective without it, and it is not a term which is so obvious that it goes without saying. BP Refinery (Western Port) Pty Ltd v Shire of Hastings [1977] HCA 40; (1977) 16 ALR 363 at 365[1977] HCA 40; , 52 ALJR 20 at 26; Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 347, 404.

57 For the reasons I have given, I find for the defendants.

58 I observe that the second defendant, Ms de Kantzow, was not a party to the shareholder agreement and there is no reason to think that she is entitled to any advantage, or subject to any detriment, because of it. So far as concerns her relationship with Lido as shareholders, they both hold shares which the company described on issue as ordinary shares and between the two of them they are entitled to share equally in the surplus for each share they hold. Ms de Kantzow is also entitled to share equally per share with the other holders of ordinary shares in the company. If the plaintiffs' claim to an unequal share as between them and Lido was to be successful, the respective entitlements of all shareholders would be irreconcilable.

1 The plaintiffs and the defendants are entitled to an equal share in the surplus on the winding up of the company for each share they hold in it.

2 Leave is given to the liquidator to distribute the surplus on winding up by paying to each of the contributories for each share they hold one six hundred and eighty thousandth share of the surplus.

[1] As to what "special leave" means, see Re D S Millard & Son Pty Ltd (1997) 24 ACSR 71; Re Klaus Maertin Pty Ltd (In liq): Maertin vKlaus Maertin Pty Ltd [2009] NSWSC 618 at par[40].