REASONS FOR JUDGMENT
Introduction
1 On 17 April 2003, Onslow Salt Pty Ltd ("Onslow Salt") applied to the Court for an order validating the issue of redeemable preference shares in the company which were issued in 1997 and 1998. The issues did not comply with the requirements of the Corporations Law that the rights attaching to such shares be set out in the Memorandum or Articles of Association of the company. On 28 April, I made the orders sought. My reasons for so doing follow.
Factual History Leading to the Application
2 Onslow Salt is a company which has been involved, since the mid-1990s, in the development and operation of a salt processing project at Onslow in the State of Western Australia. Companies funding the project included Salt Asia Holdings Pty Ltd ("SAH") and Gulf Holdings Pty Ltd ("Gulf").
3 Agreements relating to the terms and conditions of the funding of the project were made in 1996 and 1997. Their detail is not relevant for present purposes except to note that SAH and Gulf became the sole shareholders of Onslow Salt in proportion to their contributions of 92 per cent and 8 per cent respectively. They are the only shareholders of that company. An amended Subscription Agreement made on 9 April 1997 between these three companies and another company called Akzo Nobel Chemicals Pty Ltd and other parties, whose identity is not material for present purposes, led to a dispute and litigation. The litigation was initiated by Gulf in October 2000 naming Onslow Salt, Akzo and SAH as respondents (W182 of 2000). Gulf alleged misrepresentation inducing its entry into the Subscription Agreement, the making of calls other than in accordance with the agreement and breach of contract.
4 The proceedings initiated by Gulf were settled in accordance with the terms of a Deed of Settlement and Variation which was executed by all parties. An issue arose in the course of negotiating the settlement concerning the validity of the purported issue of redeemable preference shares in Onslow Salt by a resolution of directors of the company which had been passed on 15 July 1997. There was, at the time of the resolution, no provision in the Memorandum or Articles of Association of Onslow Salt setting out the rights of the holders of such shares. At the time s 200 of the Corporations Law provided:
"A company shall not allot any preference shares or convert any issued shares into preference shares unless there are set out in the memorandum or articles of the company 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."
5 The relevant resolution passed at a meeting of the directors of Onslow Salt held on 15 July 1997 was in the following terms, as recorded in the minutes:
"The meeting considered the proposal by Salt Asia Holdings Pty Ltd to issue redeemable preference shares.
IT WAS RESOLVED THAT issues of redeemable preference shares be made by the company to reflect the issue of redeemable preference shares within Salt Asia Holdings Pty Ltd. The issues of shares will be:
A$7M shares fully paid to A$1 issued on 1 October, 1997
A$5.5M shares fully paid to A$1 issued on 19 January, 1998
A$5 shares fully paid to A$1 issued on 6 April, 1998
IT WAS RESOLVED that the Company Secretary will issue a notice of the issue of shares to Salt Asia Holdings Pty Ltd."
6 The wording of the resolution left much to be desired. It was intended to refer to and authorise the issue of redeemable preference shares as follows:
. 7 million shares fully paid to A$1 issued on 1 October 1997
. 5,500,000 shares fully paid to A$1 issued on 19 January 1998
. 5 million shares fully paid to A$1 issued on 6 April 1998
According to the company secretary of Onslow Salt, Mr Colin Grundy, who had been appointed on 9 April 1997, the "intention" of the resolution was that funds received by SAH from its issue of redeemable preference shares would be used by it to subscribe to redeemable preference shares in Onslow Salt. This was in order that Onslow Salt could apply the funds against the cost of the development and operation of the proposed solar salt plant at Onslow.
7 Shares were issued pursuant to the resolution with the following variations:
. only 4,675,000 redeemable preference shares were issued under the second tranche because one of SAH's shareholders had failed to pay the subscription price for, and therefore had not been allotted, redeemable preference shares in SAH
. 8,050,000 shares were issued under the third tranche instead of the 5 million which the resolution had intended to authorise because the costs of the development and the operation of the project exceeded those contemplated at the time of the resolution
8 The Deed of Settlement and Variation referred to earlier in these reasons is expressed to be subject to the satisfaction of two relevant conditions. Clause 2.1 provides:
"2.1 Conditions
This Deed is conditional upon:
(a) an order being granted by the Federal Court of Australia pursuant to Section 254E of the Corporations Act 2001 validating or confirming the terms of the issue of the 19,725,000 redeemable preference shares in the Company; and
(b) subject to the granting of the above order, the 19,725,000 redeemable preference shares in the Company being converted into fully paid ordinary non-voting shares."
9 Clause 2.2 provides:
"2.2 Satisfaction of Conditions
If the Conditions are not satisfied by 31 March 2003, or by such later date as may be agreed in writing by the Parties, this Deed automatically shall cease to be of effect and no Party shall have any further right or obligation to the others under this Deed."
According to a supplementary affidavit sworn on 23 April 2003 by Mr Grundy the date referred to in cl 2.2 of the Deed was extended to 28 April.
10 A resolution of shareholders was recently passed by a Circular Resolution pursuant to s 249A of the Corporations Act 2001. The resolution provided:
"All the shareholders of Onslow Salt Pty Ltd, acknowledging that they have been fully informed by the directors of Onslow Salt Pty Ltd through the Explanatory Statement dated 16 April 2003 hereby resolve:
1. as a special resolution, that the Articles of Association of the Company be amended as provided for in the SCHEDULE 1: AMENDMENTS TO THE ARTICLES OF ASSOCIATION OF ONSLOW SALT PTY LTD (ACN 050 159 558) conditional upon the directors of Salt Asia Holdings Pty Ltd ACN 078 013 895 passing a resolution consenting to the amendments as provided for in Schedule 1; and
2. as an ordinary resolution:
(a) conditional upon the granting of orders by the Federal Court of Australia under section 254E(1) of the Corporations Act 2001 validating and confirming the terms of a purported issues (sic) of redeemable preference shares by the Company referred to in a resolution of directors dated 15 July 1997 (Preference Shares); and
(b) conditional upon and to take effect simultaneously with copies of those orders being lodged with the Australian Securities and Investments Commission,
each of the Preference Shares in Onslow Salt Pty Ltd be converted into an ordinary non-voting share in Onslow Salt Pty Ltd.
11 The amendments to the Articles of Association of Onslow Salt were set out in Schedule 1 to the resolution which provided as follows:
"Delete Article 3.4 and replace with a new Article 3.4:
Subject to the Corporations Law the Company may issue redeemable preference shares on the following terms:
(a) The redeemable preference shares do not confer any voting rights, nor dividend rights, nor rights to receive notices, reports, profit and loss accounts or balance sheets.
(b) The redeemable preference shares are liable to be redeemed only at the Company's option. Upon redemption the Company must pay the holder of the redeemable preference shares a sum equal to the issue price.
(c) If there is a return of capital, the holder of the redeemable preference shares will be entitled to receive a sum equal to the issue price before any return of money is made to holders of ordinary shares or other classes of shares ranking behind the redeemable preference shares. In this respect, redeemable preference shares rank equally with all other preference shares.
(d) Redeemable preference shares confer on their holders no further right to participate in any surpluses and/or profits of the company.
(e) The issue of any further redeemable preference shares shall not be deemed to have varied the rights of the redeemable preference shares."
Article 3.4 as it previously stood was in the following terms:
"Subject to the Corporations Law, the Company may issue and allot preference shares that are, or at the option of the company are to be, liable to be redeemed."
12 The shareholders' resolution was expressed to be conditional upon a resolution of the directors of SAH consenting to the amendment to the Articles. That consent was contractually required by a Shareholders Agreement dated 28 May 1997, between SAH and others who were shareholders in SAH. A unanimous vote of the parties to that agreement was required for any change to the Subscription Agreement unless otherwise agreed by all of the SAH directors. The Shareholders Agreement required like unanimity in relation to any decision to procure the amendment of the Articles of SAH or Onslow Salt.
13 According to Mr Grundy's affidavit of 23 April the necessary resolution of the SAH directors was passed. It was not clear from his affidavit what was the sequence of the respective resolutions of the Onslow Salt shareholders and the SAH directors. It does not seem that the validity of the Onslow Salt shareholders' resolution would be affected by the terms of the Shareholders Agreement. Nevertheless, in my opinion, it was not sufficient that Mr Grundy merely said he held copies of the relevant signed resolutions. Copies of those resolutions bearing the seals of the relevant companies or the signatures of the relevant persons should have been exhibited to his affidavit. I required that an affidavit be filed exhibiting signed copies of those resolutions. Such an affidavit was subsequently filed.
14 On 17 April 2003, the solicitors for the applicants sent a letter to the WA Regional Commissioner of the Australian Securities and Investments Commission ("ASIC") advising of the application and enclosing a copy of it together with the supporting affidavit from Mr Grundy which had then been filed. A minute of proposed orders was also forwarded. Notice of the date of the hearing of the application was also given at this time. A copy of the supplementary affidavit of Mr Grundy sworn 23 April 2003 was sent to ASIC on that date together with a copy of the applicant's outline of submissions.
15 According to a supplementary affidavit of Mr Shervington sworn on 28 April, a solicitor with the Perth Office of ASIC rang a solicitor in his firm and advised that "… after a cursory look at the papers, ASIC had no immediate concerns about this application" and that it did not propose to attend on the hearing of the application.
The Statutory Framework
16 The present application is brought pursuant to s 254E of the Corporations Act which provides:
"254E(1) On application by a company, a shareholder, a creditor or any other person whose interests have been or may be affected, the Court may make an order validating, or confirming the terms of, a purported issue of shares if:
(a) the issue is or may be invalid for any reason; or
(b) the terms of the issue are inconsistent with or nor authorised by:
(i) this Act; or
(ii) another law of a State or Territory; or
(iii) the company's constitution (if any).
(2) On lodgment of a copy of the order with ASIC, the order has effect from the time of the purported issue."
17 Section 254E of the Corporations Act appears in Ch 2H headed "Shares" and Pt 2H.1 entitled "Issuing and Converting Shares". Section 254A refers back to the general power of a company under s 124(1)(a) to "issue and cancel shares in the company". It provides, in s 254A(1)(b) that the power to issue shares includes the power to issue "preference shares (including redeemable preference shares)…".
18 Section 254A(2) reflects, in substance, the terms of s 200 of the Corporations Law as it stood when the resolution in question in this case was passed. It now provides:
"254A(2) 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."
Redeemable preference shares are defined in s 254A(3).
19 Part 2H.1 also includes provisions relating to the power of a company to determine the terms on which its shares are issued (s 254B(1)), the issue of shares in no liability companies (s 254B(2)-(4)), no par value shares (s 254C), pre-emption for existing shareholders (s 254D), the prohibition of bearer shares and stock (s 254F), conversion of ordinary shares to preference shares and vice versa (s 254G) and the conversion of shares into a smaller or larger number (s 254H).
The Power to Validate Share Issues and to Confirm their Terms
20 Section 254E has a substantial ancestry in Australian companies legislation. The 1961 Uniform Companies Act provided for the validation or confirmation of the terms of "the issue or allotment" of shares whose creation, issue or allotment was invalid "… by reason of any provision of this or any other Act or of the memorandum or articles of the company or otherwise or where the terms of the issue or allotment were inconsistent with or unauthorised by any such provision". The Court was required to be satisfied that in all the circumstances it was "just and equitable" to make the validating or confirming order sought (s 63). In an early decision on the section, Burt J in Millheim v Barewa Oil and Mining NL (1971) WAR 65 at 67 said:
"For myself I think s 63 is designed to enable the court to make good what is really a defective title to shares in a company - using the words "defective title" in the quite non-technical sense.
It is directed to cases where the shares have been issued, which represent a bundle of rights proprietary in character and valuable in terms of money, and where it appears for some reason or other there has been an irregularity in the issue or the allotment which in strict law would result in the issue of the shares being, as the section says, "invalid"."
21 Section 122 of the Corporations Act 1981 was in substance in the same terms as s 63 of its predecessor although the provision was subdivided into paragraphs. It retained the language of purported issue or allotment of shares. Section 194 of the Corporations Act 1989 (Cth) was almost identical in its language to s 122 of the 1981 Act.
22 Section 254E is differently expressed and refers only to the issue or purported issue of shares. It makes no reference to their creation or allotment. The term "creation" of shares in the predecessor sections was thought by Kennedy J "… to refer to the creation of new shares by an increase in share capital" - Re Monitronix Ltd (1987) 5 ACLC 1,063 at 1,074.
23 The distinction between issue and allotment is not clear. The learned author of Ford, Principles of Corporations Law, at 17181 observes that it was against a background of inconsistent usage that the High Court said, in relation to earlier Companies Legislation, that "allotment" and "issue" were not technical terms with precise meanings and that their application in particular circumstances often depended upon the context - Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285. Professor Ford suggests that:
"Although the Corporations Legislation after amendment on 1 July 1988 still refers at some points to the issue of shares and at others to the allotment of shares, and there is room for argument that "issue" now means the same as "allot", it is more likely that "issue" retains its case law meaning and is related to the act of entry of the allottee's name in the Register rather than the prior contract of allotment and appropriation of shares."
What occurred in the present case was, on any view, the purported issue of shares in the company, at least at the points at which the shares were actually taken up by their acquirers.
24 Section 254E widened the range of cases in which the Court's power to validate the issue of shares or confirm the terms of their issue could be exercised. Whereas, in the provisions of the 1961, 1981 and 1989 Acts, it was necessary to demonstrate the actual invalidity of the purported issue or allotment, it was now sufficient to demonstrate that the issue "is or may be invalid". In the earlier provisions invalidity could be attributable to a provision of the relevant corporation's statute or any other statute or the memorandum or articles of the company "or otherwise" (s 63) or "for any other reason" (ss 194 and 122). Given the width of the catch-all class of invalidity contained in those provisions, s 254E made no material change when it provided that the invalidity or possible invalidity may be "for any reason".
25 The alternative condition in s 254E(1)(b) that "the terms of the issue are inconsistent with or not authorised" by the Act or another statute or the company's constitution allows the Court to deal with the regularities which do not necessarily go to validity although it seems that this condition could cover cases of invalidity arising from such irregularities. The authority given by s 254E to "confirm[ing] the terms of a purported issue of shares" may be sufficient to deal with those cases of irregularity falling within s 254E(1)(b) that do not vitiate the issue as a whole. Nevertheless, in this analysis of the language of s 254E it must be accepted that the alternative categories of case defined in ss 254E(1)(a) and (b) are not mutually exclusive. There will be some overlap.
26 The extension of s 254E to cases in which the purported issue of shares "may be invalid for any reason" raises the question whether there is any threshold for curial intervention in cases where the Court is not asked to determine that the issue was invalid. The evident purpose of s 254E is to allow the Court, in an appropriate case, to rectify errors and irregularities affecting the issue of shares and to provide certainty where there is a real and arguable, as distinct from fanciful or speculative, uncertainty about the validity of an issue. The widening of the categories in which the Court may intervene to cases in which the purported issue "may be invalid" also enables the Court to provide desirable certainty without the delay and expense that might otherwise be involved in a close consideration of whether or not a share issue was in truth invalid.
27 The power to validate share issues and to confirm their terms is not lightly to be invoked. This proposition operates in two ways. First, it sets a threshold for the invocation of the Court's discretion. The section provides a practical approach to the resolution of real problems. It is not to be called upon simply out of an abundance of caution. The second way in which the proposition operates is as stated by Young J in Re Farnell Electronic Components Pty Ltd (1997) 15 ACLC 1676. If there is a contentious case and the parties do not all agree that a validation is proper, then it is for the applicant to point to some factor, over and above careless allotment, which justifies the validation (at 1678). In Re Carpenter Pacific Resources NL (1997) 15 ACLC 1766 at 1767, Young J restated his approach in Re Farnell by saying that "… the court does not lightly make orders validating issues of shares…".
28 The requirement that the Court be satisfied that it is just and equitable to make the validating or confirming order which applied in earlier legislation has not been imported into s 254E. It is not apparent that this involves any substantive change to the power. The Court has a discretion which is to be exercised having regard to the purposes of the Corporations Act and other relevant statutes whose application is in issue. It must also be exercised having regard to the interests of all parties affected by the issue of the shares and the public interest in ensuring compliance with statute law and company constitutions.
29 The public policy considerations supportive of compliance with the law are illustrated in cases under earlier provisions where validation was refused because of a "reckless" or "blatant" disregard of the provisions of the Act or the constitution of the company - Re Hatfield Enterprises Pty Ltd (1982) 1 ACLC 208 at 210 (Rogers J); Re Monitronix Ltd(1987) 5 ACLC 1063 at 1075 (Kennedy J). For that reason, if no other, it is generally appropriate that the ASIC be given notice of an application under s 254E as it was in this case - Re The Swan Brewery Co Ltd (No 2) (1976) 3 ACLR 168 at 169 (Gillard J). In Alpha Resources Ltd v Corporate Affairs Commission (1987) 5 ACLC 844 at 846, Waddell CJ in Equity, made an order validating an issue of shares on the basis, inter alia, that:
"… there does not seem to be any likelihood of prejudice to anyone if the allotments are validated. The Corporate Affairs Commission has been served with notice of the application and after consideration of the material has informed the Court that it does not oppose the application."
Some care should be taken in this respect however because, absent an express statutory role for ASIC in such applications whether under the Act or the Corporations Rules, it cannot be assumed that it regards it as part of its responsibility to carefully assess such applications. Indeed the evidence in the present case was that ASIC had advised the applicant's solicitors "… that after a cursory look at the papers, ASIC had no immediate concerns about the application". The Court can take little comfort from such a vague and qualified indication.
30 Plainly a non-contentious case where there is no prejudice to any party by the making of a validation or confirmation order and where prejudice may ensue in the absence of such an order, is a case in which, subject to the public policy considerations mentioned earlier, the Court will be inclined to look favourably upon the application.
31 Returning to the terms of s 254E the power which it confers upon the Court is broadly expressed but subject to preconditions which may be identified thus:
1. There must be an application to the Court by the company, a shareholder, a creditor or a person whose interests have been or may be affected by a purported issue of shares.
2. The application must relate to "a purported issue of shares".
3(a) The purported issue must be an issue which "is or may be invalid for any reason"; or
(b) The terms of the issue must be inconsistent with or not authorised by the Act or another law of a State or Territory or the company's constitution.
32 The application in this case is brought by the company which issued the shares so the standing requirement is met. The first pre-condition is satisfied.
33 The second pre-condition is that the application must relate to "a purported issue of shares". As already observed, what took place when the shares were taken up was an issue of the shares for the purposes of the Act. The resolution was not itself the issue but purported to authorise it. The application therefore relates to a purported issue of shares and the second pre-condition is satisfied.
34 The third pre-condition is satisfied by one or other of two requirements. The fact is that the purported issues did not comply with the requirements of the Act as it stood at the time when they were made. Given the prohibitory character of s 200 of the Corporations Law, I conclude that the issue of the redeemable preference shares, absent the requisite provision included in the Memorandum of Articles of the Company, was invalid. The third pre-condition is therefore satisfied.
35 The question remains whether or not the order sought should be made. Both shareholders support it. The application is non-contentious. There is no basis for inferring any prejudice to any person arising out of the validation. Nor is there any ground for inferring that the failure to comply with the statutory requirement was anything other than an oversight at the time it occurred. I note that the affidavit material did not explain the oversight. In the ordinary course such an explanation should be proffered. In this case however, there is no reason to suspect that the shares were issued other than with a careless failure to have regard to the requirements of the law. The terms of the resolution itself indicate a slap-dash approach to its form and content. But I do not think that the non-compliance reflects a reckless or blatant disregard of the law which attracts the public policy considerations referred to earlier. Nor is there any indication on the materials before me of any purpose, served by the application, which could be characterised as unworthy or contrary to public policy. The application has been brought, evidently because the irregularity in relation to the issue of the shares came to light in the course of negotiations leading to the settlement of the litigation referred to earlier.
36 In all the circumstances, I was prepared to make the orders sought in terms which are set out in the minute at the commencement of these reasons.
I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French..