Salt Asia Holdings Pty Ltd ACN 078 013 895 [2004] FCA 122

WESTERN AUSTRALIA DISTRICT REGISTRY W 3031 OF 2003

REASONS FOR JUDGMENT 1 Salt Asia Holdings Pty Ltd (SAH) is a company incorporated in Western Australia on 26 March 1997. It appears from the records of the company at the Australian Securities and Investments Commission (ASIC) that it was initially formed by the law firm, Minter Ellison. Mr Shervington, a partner in that firm, was a director and the secretary of the company from the date of its incorporation. The day following its incorporation, Mr Shervington ceased to be secretary. He was replaced by Mr Colin Grundy. 2 SAH was formed in connection with the development and operation of a salt processing project at Onslow in the State of Western Australia. It is and has at all material times been the majority shareholder in Onslow Salt Pty Ltd. The rest of the shares in that company were held by Gulf Holdings Pty Ltd. 3 As appears from the judgment in Onslow Salt Pty Ltd [2003] FCA 429, agreements relating to the terms and conditions of the funding of the project were made in 1996 and 1997. SAH held 92% of the shares and Gulf held 8%. An amended Subscription Agreement which was made on 9 April 1997 between those three companies and Akzo Nobel Chemicals Pty Ltd and other parties led to a dispute and litigation. The proceedings, instituted by Gulf in this Court in October 2000, named Onslow Salt, Akzo and SAH as respondents. 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 were settled under the terms of a Deed of Settlement and variation executed by all the parties. An issue arose in the course of the negotiations of the settlement about the validity of the purported issue of redeemable preference shares in Onslow Salt pursuant to a resolution of directors of the company which was passed on 15 July 1997. At the time of that resolution there was no provision in the Memorandum or Articles of Association of Onslow Salt setting out the rights of the holders of such shares as required by s 200 of the Corporations Law. 5 By an order made on 28 April 2003, I directed that pursuant to s 254E of the Corporations Act 2001 the issue of those redeemable preference shares be validated and confirmed. It has now emerged that a similar problem exists with respect to the issue of redeemable preference shares in SAH. Mr Grundy is, and was at all material times, the company secretary of Onslow Salt as well as of SAH. 6 By a resolution made during a meeting of the Board of Directors of SAH on 15 July 1997 it was resolved that the following issues of redeemable preference shares be made by the company:

(a) 7 million shares fully paid to $1 issued on 1 October 1997 (Tranche 1)

(b) 5,500,000 shares fully paid to $1 issued on 19 January 1998 (Tranche 2)

(c) 5 million shares fully paid to $1 issued on 6 April 1998 (Tranche 3).

It was evidently intended that funds received by SAH from the issue of these shares would be used by it to subscribe for redeemable preference shares in Onslow Salt with the ultimate objective that Onslow Salt would apply the funds against the cost of the development and operation of a solar salt plant owned by it and situated at Onslow. In respect of Tranche 3 the minutes read that the resolution was to issue 'A $5 share fully paid to $1'. This was a typographical error and the resolution was for the issue of 5 million shares fully paid to $1. 7 Under the terms of the resolution, Tranche 1 of the redeemable preference shares was issued by SAH on 1 October 1997. The issue was as follows: (a) 4,550,000 redeemable preference shares (numbered 1-4,550,000) to Akzo Nobel Chemicals International BV. (b) 1,400,000 redeemable preference shares (numbered 4,550,001 - 5,950,000) to Hanwha (HK) Co Ltd (c) 1,050,000 redeemable preferences shares (numbered 5,950,001-7,000,000) to PT Sempurna Caturguna. Tranche 2 was issued on 19 January 1998: (a) 3,575,000 shares (numbered 7,000,001- 10,575,000) to Akzo Nobel Chemicals International BV. (b) 1,100,000 shares (numbered 10,575,001 - 11,675,000) to Hanwha (HK) Co Ltd. In his affidavit in support of the present application, Mr Grundy said that the number of redeemable preference shares issued differed from the 5,500,000 shares referred to in the resolution. One of the shareholders in SAH, PT Sempurna Caturguna failed to pay the subscription price for the shares and therefore was not allotted any. Tranche 3 was issued on 30 April 1998. 3,250,000 shares (numbered 23,225,001-26,475,000) were issued to Akzo Nobel Chemicals International BV. Mr Grundy points out that the number of shares differed from the 5 million shares referred to in the resolution. Two of the shareholders, PT Sempurna Caturguna and Hanwha (HK) Co Ltd failed to pay the subscription price for the shares in Tranche 3 and were therefore not allotted any in that Tranche. 8 On 21 March 2000, SAH made further issues as follows: (a) 2,613,845 redeemable preference shares (numbered 23,225,001-25,838,845) to Akzo Nobel Chemicals International BV; and (b) 1,293,103 shares (numbered 25,838,846-27,131,948) to Hanwha (HK) Co Ltd. 9 On 7 January 2002, 1,420,000 redeemable preference shares (numbered 27,131,949-28,551,948) were issued to Akzo Nobel Chemicals International BV. 10 It appears that the issues made in 1997 and 1998 did not comply with the requirements of s 200 of the Corporations Law which 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.' Similarly the issues made in 2000 and 2002 did not comply with the requirements of s 254A(2) of the Corporations Act 200, which is to like effect. That is to say, SAH did not have set out in its 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 and priority of payment of capital and dividend in relation to other shares or other classes of a vendor preference share. 11 In his affidavit, sworn in support of the present application, Mr Grundy said that the reason for what he called 'the possible failure' to comply with the statutory requirements was that compliance issues inherent in making such issues of shares were overlooked and reliance was placed exclusively on the directors' resolutions and the resolution of the annual general meeting. Mr Grundy has acknowledged that there was a failure to have regard to the requirements of the law. He asserts 'emphatically' that there was no blatant or reckless disregard of the law and that the application had been brought forward in order to ensure compliance at the earliest convenient opportunity. 12 He said that at all material times SAH has proceeded on the assumption that the redeemable preference shares were issued on the following terms: (a) They do not confer any dividend rights. (b) They confer upon the holders the same rights as the holders of ordinary shares to receive notices, reports and profit and loss accounts and balance sheets and to attend general meetings and vote. (c) They are liable to be redeemed only at the company's option. Upon redemption the company must pay the holder of the shares a sum equal to issue price. (d) Upon a return of capital the holder of the 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 the redeemable preference shares rank equally with all other preference shares. (e) The redeemable preference shares confer on their holders no further right to participate in any surpluses and/or profits of the company. (f) The issue of any further preference shares shall not be deemed to have varied the rights of the redeemable preference shares. 13 It appears that the shareholders of SAH have passed circular resolutions providing for the amendment of the Articles of Association to comply with the requirements of the Corporations Law in relation to the issue of redeemable preference shares of the kind that are the subject of this application. The resolutions also authorise SAH to make an application to the Court under s 254E(1) of the Corporations Act 2001 (Cth) for an order validating and confirming the terms of the purported issues. 14 According to Mr Grundy the relevant shares are unencumbered. SAH is solvent and able to meet its debts as and when they fall due. This position should not be affected by the orders sought or by the passing of the shareholders resolution. He was unaware that any prejudice would be caused to any third parties including creditors of SAH. 15 On 2 December 2003, Mr Shervington of Minter Ellison wrote to the WA Regional Commissioner of ASIC advising of this application. A copy of the application and the supporting affidavit of Mr Grundy were attached to that letter. The date of hearing of the application was also notified. The ASIC wrote back to Minter Ellison on 18 December 2003 stating: 'Based on the materials provided to ASIC on 3 December 2003, ASIC does not oppose the orders sought in the above matters and does not intend to appear at the hearing of the application under s254E of the Corporations Act 2001 set down for 16 February 2004.' 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 not 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 124(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). Whether the Shares Should be Validated 20 In Onslow Salt Pty Ltd [2003] FCA 429 at [20]-[29] I canvassed the principles affecting the exercise of the discretion to make an order validating the issue of the shares pursuant to s 254E. It is not necessary to repeat that discussion here. The circumstances which have given rise to the present application are very similar to those which gave rise to the application in Onslow Salt and appear in each case to be attributable to the company secretary's ignorance of the statutory requirements. 21 The pre-conditions for the exercise of the power under s 254E are met. The application is brought by the company which issued the shares. It relates to a purported issue of shares. The purported issues in 1997 and 1998 did not comply with the requirements of the Corporations Law and those in 2000 and 2002 did not comply with the requirements of the Corporations Act. The issues of the redeemable preference shares without the requisite provisions in the Memorandum and Articles of the company were invalid. 22 The shareholders in the company support the making of the order. It is non-contentious. There is no basis for inferring any prejudice arising out of the validation. Nor is there any reason to suppose that the failure to comply with the requirements of the statutes was attributable to anything other than ignorance and oversight. As in the case of Onslow Salt, the fault being attributable to the same company secretary, the non-compliance did not reflect a reckless or blatant disregard of the law. Nor was there any indication of any purpose to be served by the application which could be characterised as unworthy or contrary to public policy. I am prepared to make the orders sought in the terms proposed by the applicant.

I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Counsel for the Applicant: Mr P Jooste QC with Ms Keating