Plaintiffs v Defendants

WORDS AND PHRASES - Meaning of "creditors" in s 493A of the Corporations Act 2001

1 BM2008 Pty Ltd (in liquidation) ("the company") was placed into voluntary liquidation on 22 December 2008 and the defendants ("the liquidators") were appointed its liquidators. On 28 November 2009, a shareholder of the company ("Sartori") agreed to transfer his shares in the company to the plaintiffs for a sum of money. The plaintiffs asked the liquidators to consent to the transfer as the transfer of the shares, without the liquidators' consent, will be void because the company is in liquidation.[1] The liquidators consented to the transfer but on the condition that the plaintiffs pay a judgment debt they owe to the company. The plaintiffs have applied under s 493A(5) of the Corporations Act 2001 (Cth) ("the Act") for an order setting aside the condition. Section 493A(6) of the Act prescribes that the Court may set aside a condition of consent if it is satisfied that the condition "is not in the best interests of the company's creditors as a whole". I have concluded that an order setting aside the condition should not be made.

2 The facts were not in dispute and can be shortly stated.

3 The company went into voluntary liquidation on a member's winding up. The company was solvent when it was placed into liquidation. The directors made a declaration of solvency, estimating the surplus of assets over liabilities to be in excess of $8,000,000. Shareholders will receive a distribution of the surplus assets, although the final amount has yet to be determined.

4 Prior to being placed into liquidation the company had conducted a national transport business which it had sold to the first plaintiff ("Perth Freight Lines"). The terms of sale were in writing in a "Business Acquisition Agreement" entered into by the parties on 25 June 2008 and Perth Freight Lines' performance of the agreement was guaranteed by the second and third plaintiffs. Although the sale of business settled on 8 August 2008, Perth Freight Lines disputed its obligation to pay some of the monies due under the agreement, which remained outstanding because of the dispute. The dispute was arbitrated, following which the arbitrator made an award in favour of the company of an amount of $2,320,485.20 plus interest. On 11 August 2009 the plaintiffs sought leave to appeal to the Supreme Court of Victoria against the award of the arbitrator under s 38(4)(b) of the Commercial Arbitration Act 1984 (VIC). On 19 November 2009, Hargrave J refused leave to appeal and gave leave to the company to enforce the award as a judgment debt. The judgment debt has not been paid and remains outstanding to the company.

5 Under a Share Sale Agreement made 28 November 2009, Sartori agreed to sell his shares in the company to the plaintiffs for the total purchase price of $2,500. Clause 4 of that agreement provided:

Each of the parties hereto agrees without further consideration to execute and procure the execution of all further documents and do all such acts or things necessary to obtain the consent of the Liquidator of the Company to the transfer herein unconditionally or upon conditions which the Vendor hereby agrees to satisfy and in the event that the Liquidator refuses to give consent to the transfer herein then the Vendor shall use all necessary endeavours to obtain authorisation of the transfer from a Court having jurisdiction under 493A of the Corporations Act 2001 to assist the Purchasers to obtain that authorization. Title to and risk in the shares remains solely with the Vendor and shall pass to the Purchasers only upon satisfaction of the matters set out in this clause.

6 On 3 December 2009 the plaintiffs' solicitors wrote to the liquidators seeking their consent to the transfer of the shares. It was apparent to the liquidators upon receipt of that request that the purchasers of the shares were the plaintiffs against whom the company was entitled to enforce the arbitrator's award. By letter received 9 December 2009, the liquidators' solicitors sought various information from the plaintiffs' solicitors including details of how it was said that the transfer was "in the best interests of the company's creditors (or indeed the company) as a whole" and seeking advice as to when the judgment debt would be repaid. The plaintiffs' solicitors responded on 14 December 2009 that the sole question for the liquidators under s 493A(2) of the Act was whether or not the transfer was in the best interests of the company's creditors as a whole. The letter also noted that as the company had no creditors there was no basis upon which the liquidators could fail to give consent to the transfers. On 16 December 2009 the liquidators' solicitors responded (omitting formal parts):

We are instructed that pursuant to s 493A(1) of the Corporations Act 2001, our client consents to the transfer of the shares referred to in the Share Sale Agreement between Garry James Sartori and Perth Freight Lines Pty Ltd, VFS Group Pty Ltd and Steve Iliopoulos (collectively, the "purchasers") dated 28 November 2009 subject to the Purchasers paying to the Company all amounts owing by them under the Business Acquisition Agreement made on 25 June 2008 (being the amounts subject to the award of the arbitrator appointed pursuant to the Commercial Arbitration Act 1984 and the decision of the Supreme Court of Victoria in proceeding No. 8280 of 2009).

It is the condition of consent contained in this letter which is the subject of this application.

7 By s 493A of the Act, a transfer of shares in a company that is made after the passing of a resolution of the members for the voluntary winding up of the company is void, except if the liquidator has consented to the transfer. Section 493A regulates the giving of consent. A liquidator may only give consent to a transfer of shares if he or she is satisfied that the transfer is in the best interests of the company's creditors as a whole.[2] The consent may be conditional.[3] If the liquidator refuses to give consent the Court may make an order authorising the transfer on the application of the prospective transferor, the prospective transferee or a creditor.[4] Where a liquidator gives conditional consent the Court can set aside the condition.[5] The Court's exercise of power to make an order authorising the transfer is dependent upon the Court being satisfied "that the transfer is in the best interests of the company's creditors as a whole."[6] The exercise of the Court's power to set aside a condition depends on the Court being satisfied that the condition is not in the best interests of the creditors as a whole.[7]

Transfer of shares

(1) A transfer of shares in a company that is made after the passing of the resolution is void except if:

(a) both:

(i) the liquidator gives written consent to the transfer; and

(ii) that consent is unconditional; or

(b) all of the following subparagraphs apply:

(i) the liquidator gives written consent to the transfer;

(ii) that consent is subject to one or more specified conditions;

(iii) those conditions have been satisfied; or

(c) the Court makes an order under subsection (4) authorising the transfer.

(2) The liquidator may only give consent under paragraph (1)(a) or (b) if he or she is satisfied that the transfer is in the best interests of the company's creditors as a whole.

(3) If the liquidator refuses to give consent under paragraph (1)(a) or (b) to a transfer of shares in the company:

(a) the prospective transferor; or

(b) the prospective transferee; or

(c) a creditor of the company;

may apply to the Court for an order authorising the transfer.

(4) If the Court is satisfied, on an application under subsection (3), that the transfer is in the best interests of the company's creditors as a whole, the Court may, by order, authorise the transfer.

(5) If the liquidator gives consent under paragraph (1)(b) to a transfer of shares in the company:

(a) the prospective transferor; or

(b) the prospective transferee; or

(c) a creditor of the company;

may apply to the Court for an order setting aside any or all of the conditions to which the consent is subject.

(6) If the Court is satisfied, on an application under subsection (5), that any or all of the conditions covered by the application are not in the best interests of the company's creditors as a whole, the Court may, by order, set aside any or all of the conditions.

9 It was contended on behalf of the plaintiffs that the Court should be satisfied that the condition is not in the best interests of the company's creditors as a whole by reason that:

(a) this is a voluntary winding up where there is a substantial surplus of assets;

(b) all "creditors" will receive 100 cents in the dollar regardless of whether or not the plaintiffs become the registered proprietors of the shares; and

(c) the timing of payments to the creditors will not be impacted by whether or not the plaintiffs become the registered proprietors of the shares.

10 The plaintiffs' submissions were premised on the contention that the condition imposed by the liquidators in giving their consent relates to the interests of the shareholders of the company in that capacity, not in their capacity as "creditors" of the company. The contention that the shareholders are not "creditors" of the company was put in two ways:

(a) it was submitted the shareholders merely have an expectation in a winding up that they will receive a distribution upon the completion of the winding up, which does not qualify them as creditors;

(b) it was submitted that the statutory scheme in the context of liquidations makes the distinction between "creditors" and "contributories" and that the inquiry under s 493A with respect to the "interests of the company's creditors as a whole" did not extend to the interests of shareholders of the company.

11 In my view, it is not correct to characterise the interests of the shareholders in the company's surplus assets as a mere expectancy on their part. Their interest in the surplus on the winding up of the company is a legal right to a proportionate share of any surplus of assets of the company, remaining after all liabilities have been paid.[8] That legal right attaches to the shareholding itself.[9] As Dixon J pointed out in Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW):[10]

(1) ... While a shareholder has not a proprietary right or interest in the assets of an incorporated company, his "share" is after all an aliquot proportion of the company's share capital with reference to which he has certain rights. He is entitled among other things to have share capital applied in pursuance of the memorandum and articles of association and, so far as assets are available for the purpose, to have his paid up capital returned in a liquidation or upon a reduction of capital if that method of returning it is decided upon pursuant to the articles of association. These rights all arise out of the contract inter socios.

It is not unimportant that s. 158 (1) of the Companies Act 1936 (N.S.W) (which is based on s. 55 (1) of the English Companies Act 1929) empowers a company to reduce its capital only "if so authorized by its articles." The reduction involving the payment off of part of the paid up share capital must therefore be considered an effectuation of a provision of the contract of membership. The allotment of the share and the payment up of the liability thereon conferred upon the holder for the time being of the share a right to have the assets of the company used and applied in the various ways in which the articles expressly or impliedly require or authorize and this is one of them. It is an effectuation or realization of the rights obtained by the acquisition of the share in the same way as is the distribution of a dividend. The consideration given is the payment up of the share capital in satisfaction of the liability for the amount of the share incurred on allotment.

(2) ... The shareholder contributes the amount of the share of the capital of the Company. This contribution measures his right to any return of the capital which the Company may make, either as a going concern or in a winding up. Subject to any regulation the articles may make as to the basis upon which assets in excess of proportion in which he shares with other shareholders in a distribution of excess assets.[11]

The right reflects a shareholder's proportionate "interest" in the company's assets derived from the share. Any surplus which remains after discharging the debts of the company is divisible amongst the shareholders in the proportion of the number of shares held, subject to the provisions of the company's constitution otherwise providing. Relevantly here, the constitution does not otherwise provide.[12]

12 The right of a shareholder to a proportionate share of any surplus of assets is statutorily recognised in s 501 of the Act, which provides that the liquidators must distribute the surplus to the shareholders "according to their rights and interests in the company". In Re Driffield Gas Light Company[13] Wright J stated in relation to the comparative English statutory provision:

The winding up sections ... do not of themselves supply any rule for the mode of adjusting loss of capital or of distributing surplus, but only supply the necessary powers for giving effect to the rights and interests of the parties. Those rights in the case of a company constituted under the Companies Act must, in the absence of any provision in the memorandum or articles of association, be ascertained, in the view of one of the noble and learned Lords who took part in the decision of Birch v Cropper (1889) 14 App Cas 525, by recourse to general principles of equity; in the view of another of them, by reference to the principles and provisions of the Companies Acts. But in either view the result is the same, namely, that the capital account must first be equalized, and then there remains no ground for appropriating the balance in any other way than according to the nominal amount of the shares in the capital.[14]

The same principle applies under Australian law. The right of shareholders to a company's surplus is "not dictated by or derived from [s 501 of the Act]". [15] Rather, the function of s 501 of the Act is to empower liquidators to make a distribution of surplus assets to shareholders in accordance with their respective entitlements.

13 In a solvent voluntary winding up, shareholders have more than a mere expectation of receipt of any surplus. They have a legal right to that surplus and the liquidators must allocate the surplus amongst the shareholders according to their respective rights and interests.

14 This is a solvent winding up company and there is a surplus that is distributable to the shareholders. In my view, that entitlement is sufficient to constitute the shareholders "creditors" for the purposes of s 493A of the Act.

15 The word "creditor" is not defined in the Act. Its ordinary and natural meaning includes:

16 In its ordinary and natural sense, the expression "creditors" would include shareholders as the surplus belongs to them and the liquidator must distribute the surplus to them. They are persons "to whom money is due".

17 The legislative context of s 493A does not require any different conclusion. The separate references in the Act and the Corporations Regulations to "creditors" on the one hand and "contributories" on the other do not control the meaning of "creditors". Rather, the term "contributory" appears where the Act and the Corporations Regulations recognise specific rights, duties and liabilities attaching by virtue of their status as a contributory. Furthermore there is explicit statutory recognition in ss 553A and 563A of the Act that a shareholder in the capacity as a member may have rights as a "creditor" of the company.

A debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is not admissible to proof against the company unless the person has paid to the company or the liquidator all amounts that the person is liable to pay as a member of the company.

Payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.

These sections are directed to altering the priority of payment of debts owed to a creditor who has the dual status of member.[17]

18 In my view it is an unwarranted restriction on the ordinary and natural meaning of the word "creditors" in the context of s 493A of the Act to exclude shareholders by virtue of the fact that a debt is owed to them in their capacity as contributories. Critically the text of s 493A does not limit the ordinary and natural meaning of "creditors". Moreover, it is not apparent from the legislative context of the section that Parliament intended that the interests of the shareholders who have a claim to any surplus remaining after payment, should not be taken into account by a liquidator in determining whether to consent to a share transfer. To the contrary, the requirement that any transfer of shares must have the consent of the liquidator is self evidently there for the protection of the very persons amongst whom the assets of the solvent company will be divided.

19 Having reached the conclusion that the shareholders are "creditors" as that expression is used in s 493A, it is clear in my view that the condition imposed by the liquidators "is in the best interests of the company's creditors as a whole" because payment of the judgment debt will augment the assets that the liquidator must distribute amongst the shareholders, being the persons entitled to the surplus of the company's property after payment of all debts. It follows that the plaintiff has failed to establish the criterion in s 493A(6) on which the Court may set aside the condition: viz that the condition "was not in the best interests of the company's creditors as a whole". The shareholders would clearly benefit from the plaintiffs' compliance with the condition for transfer of the shares to them.

20 In view of my conclusion, it is unnecessary to consider the liquidators' alternative argument which relied on provisions within the articles of association as the source of the liquidators' power to give conditional consent.

VICTOR RAYMOND DYE (IN HIS CAPACITY AS LIQUIDATOR OF BM2008 PTY LTD

ROGER DARREN GRANT (IN HIS CAPACITY AS LIQUIDATOR OF BM2008 PTY LTD

[1] Corporations Act 2001 (Cth) s 493A(1).

[2] Corporations Act 2001 (Cth) s 493A(2).

[3] Corporations Act 2001 (Cth) s 493A(1)(b).

[4] Corporations Act 2001 (Cth) s 493A(3)-(4).

[5] Corporations Act 2001 (Cth) s 493A(6).

[6] Corporations Act 2001 (Cth) s 493A(4).

[7] Corporations Act 2001 (Cth) s 493A(6).

[8] Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) [1948] HCA 28; (1948) 77 CLR 143 at 152; FAI General Insurance Company Ltd v FAI Car Owners Mutual Insurance Co Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164, 169-70 [16]-[22]; Yanollee Pty Ltd (In Liq), Re (2006) 24 ACLC 1087; Corporations Act 2001 (Cth) s 501.

[9] Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143, 152-153; Corporations Act 2001 (Cth) s 501.

[10] [1948] HCA 28; (1948) 77 CLR 143.

[12] FAI General Insurance Company Ltd v FAI Car Owners Mutual Insurance Co Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164, 169-70 [16]-[22].

[13] [1898] 1 Ch 451.

[15] FAI General Insurance Company Ltd v FAI Car Owners Mutual Insurance Co Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164, 170 [18].

[16] Macquarie Dictionary (4th ed, 2005) 342; see also Shorter Oxford English Dictionary (6th ed, 2007) 555_: "A person to whom a debt is owing"._

[17] The definition of "member" includes shareholder: s 9.