Sellers; in the matter of Beckley Forge Pty Ltd (Administrators Appointed) [2003] FCA 523

REASONS FOR JUDGMENT 1 I am unable to make the order sought by the administrators of Beckley Forge Pty Ltd (Administrators Appointed) and Beckley Appliance Components Pty Ltd (Administrators Appointed), but not for reasons which would prevent the allotment of the shares to which the proposed order relates. The administrators were appointed because the directors believed, and the administrators have since confirmed, that the two companies were insolvent. Nevertheless, the administrators hope to put a proposal to the creditors which, if accepted by them, will potentially save the companies. For the proposal to have any prospects of success, the companies must continue trading. There will be nothing to save if the business is closed down. To continue trading, the companies must have money to buy stock, pay wages and meet other debts. The companies do not have those funds. One of the directors, Mr Barbano, is willing to provide $480,000 to the administrators, a sum which is enough to enable the companies to carry on business until the proposal has been put to creditors. The administrators, however, will not permit the companies to borrow the money because they will become personally liable to repay the loan. That is too much of a risk for the administrators to take, and they cannot be criticised for avoiding that risk. Mr Barbano has come up with an idea to meet the situation. He is willing to subscribe $480,000 for an allotment of preference shares. Those preference shares will entitle him, on a winding up or on a reduction of capital, to the repayment of the amount subscribed in priority to the rights of ordinary shareholders, together with a right to receive a cumulative dividend of 5 per cent in priority to any dividend payable on other classes of shares. The shares can be redeemed by the holder on 6 months notice provided there is a sufficient profit to make the redemption. The shareholders have approved the creation of this class of share and have authorised the preference shares to be issued. The administrators have not yet allotted the shares being of the opinion that s 437F of the Corporations Act 2001 (Cth) stands in their way. That section provides: "A transfer of shares in a company, or an alteration in the status of members of a company, that is made during the administration of the company is void except so far as the Court otherwise orders." This section can be traced to ss 131 and 153 of the Companies Act 1862 (UK), a section which has been applied to all companies which are being wound up, whether the company is a limited or unlimited liability company and whether its shares are fully paid up or not. The question raised by this application is whether, on its true construction, s 437F prevents a company under administration from issuing new shares, the effect of which will be to water down the value of the shares held by other shareholders, but which will not otherwise affect them. So far it has not been necessary for any court to define precisely what amounts to an alteration in the "status" of a shareholder. Plainly enough, the section is not concerned with persons with a disability or other peculiar legal condition, which is the usual meaning of "status". The section is designed to maintain the status quo as regards the rights and obligations of shareholders existing at the commencement of an administration. If the status quo is not maintained, then the rights that a company in administration or later liquidation may have against its shareholders could be impaired or lost. Undoubtedly, there will be an alteration in status if a preference shareholder becomes an ordinary shareholder, except perhaps in the unusual circumstances that exist in In re Blaina Colliery Co [1926] WN 30. There will also be an alteration in status if partly paid shares are converted to fully paid shares without payment of the balance of the uncalled capital (see In re Oriental Commercial Bank (1868) LR 5 Eq 420). So also if the register is rectified to remove the name of a shareholder (In re London & Suburban Bank (1872) LR 15 Eq 274). There will be an alteration in status in each of these cases because there has been a change in the rights that subsist between the company and the shareholder (see In re National Bank of Wales (1897) 1 Ch 298). This case, however, falls beyond the reach of the section. Here, none of the rights or privileges which are vested in, nor any of the corresponding duties or obligations which are imposed upon, existing shareholders will in any way be affected by the allotment. For that reason, the proposed allotment is not struck down by s 437F. It may be accepted that, in a practical sense, the effect of the allotment will be to diminish the value of existing shares (if they have any value). But a diminution in the value of a share does not change the status of that share or the status of the shareholder. Section 437F is concerned with a change in legal rights, not with adverse commercial consequences. The application seeking leave to implement the share allotment proposal will therefore be dismissed. I note that the application was made ex parte. In my opinion, it should have been brought on notice to creditors, perhaps even joining one of their number in a representative capacity. There seems to be a growing trend, at least in Victoria, to bring cases under the companies legislation without notice to persons who may be affected. The sooner the practice is stopped, the better. I certify that the preceding one (1) paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.