Weinstock v Beck

Judgment 1GILES JA: I agree with Handley AJA. 2YOUNG JA: This is an appeal from a judgment of Hamilton AJ on a short, though difficult and significant, point of corporations law. Hamilton AJ's judgment is [2010] NSWSC 1068, reported at (2010) 241 FLR 235. 3His Honour, sitting in the Probate List, had before him a series of disputes involving the Weinstock family. All but one of those disputes settled, leaving the present matter alone to be decided. 4The outstanding matter is whether the shares held by the late Mrs Hedy Weinstock (hereafter "Hedy") were properly redeemable preference shares and validly redeemed for $8 or not. 5The primary judge answered this question in the negative with the consequence that the subject shares may have a value of millions of dollars. Members of the family adversely affected by this decision have appealed. 6The appeal was heard on 16 June 2011, Mr D Jackson QC and Mr S Nixon appeared for the appellants and Mr R G McHugh SC and Mr D Barnett appeared for the respondent. 7The basal facts are not in dispute. On her death on 6 July 2004, Hedy held 8 shares in the third appellant, LW Furniture Consolidated (Aust) Pty Ltd (the "Company"). Her shares were designated "C" Redeemable Preference shares. 8In July 2004, the directors of the Company resolved to redeem Hedy's shares at $1 per share. They sent a cheque to the Public Trustee for $8 to consummate their resolution. This was done as the Public Trustee was the statutory repository of Hedy's estate. This cheque was returned, but later resubmitted when probate was granted in Hedy's estate. 9The respondent, who is one of Hedy's executors, claims that the true value of those eight shares on a winding up would be $7,266,000. Although that claim is not admitted, the material suggests that, if the shares were not redeemable, they may well have a value of some millions of dollars. 10The Company was incorporated on 30 April 1971. Its Memorandum of Association provides that its authorised capital is $20,000 divided into 20,000 shares of $1 each. 11The Articles of Association specify that the capital is designated into classes and authorise the allotment of four sets of preference shares classified "A" to "D" and ten classes of ordinary shares designated "E" to "N". However, the only shares that were ever allotted were "A", "C" and "D" class shares. 12Article 4 was in the standard form which placed the unissued shares under the control of the directors. 13Article 66 provided that at each Annual General Meeting the directors retire, but were eligible for re-election. It would seem that this requirement was disregarded. Indeed no-one had any voting rights. There is, however, no point taken about this in the present case. 14In the court below, a constitution was tendered which appeared to have been filed with ASIC after the Corporations Act 2001 (Cth) (the " Corporations Act ") came into force. However, as there were never any shareholders with voting rights, both sides agreed that this document had no significance and that the parties' rights stemmed from the Memorandum and Articles of Association as originally filed. 15The subscribers to the Memorandum and Articles, subscribed for what they described as "A" 5% Convertible Preference Shares. How this could be is hard to understand. The "A" shares were the only shares that could be considered on issue. 16Mr McHugh for the respondent, submits, and this must be correct, that the subscriber shares must be taken as having been validly issued. However, he puts (I consider correctly for reasons which will subsequently appear) that they were not "preference shares" despite their description. 17The "A" Class shares were designated "A" 5% Convertible Preference Shares. They carried no right to vote but were to rank in a winding up both as regards return of capital and dividend accrued up to the commencement of the winding up and not declared and also, in a reduction of capital as regards return of capital, in priority to all other shares in the Company. However, they did not carry any right to further participation in surplus assets or profits. 18The "A" Convertible Preference Shares could be converted into "A" Preference Shares with different rights. However, the "A" shares could only be converted during Leo Weinstock's lifetime and this did not happen. 19Later, the directors allotted what they termed "C" and "D" Redeemable Preference Shares. The rights of those two classes were identical. No "B" class shares were ever issued. 20Excluding reference to the shares held by Hedy, as at the date of trial the issued shares in the Company comprised: "A" class; "C" class; "D" class. 21I will set out in full later in these reasons the full text of the rights of the "C" Class shareholders. In essence, the "C" (and "D") shares had no right to vote, rights to return of capital after the "A" shares and rights to dividend and were to be redeemed at par on or before 30 June 2016 or on the death of the holder. 22The respondent claimed below: 9A A declaration that the 8 C "Redeemable Preference Shares" that Hedy Jadwiga Weinstock held in (the Company) as hereinafter defined were not preference shares within the meaning of the Corporations Act and, accordingly, were not able to be redeemed by the fifth defendant. 9B A declaration that the purported redemption of such shares was void and of no effect. 9C An order under section 175 of the Corporations Act rectifying the register of the fifth defendant and ordering compensation 23The primary judge noted (at [6]) that the questions posed for his determination were: (1) Whether the 8 "C" Class Shares held by Hedy in the Company were redeemable preference shares within the meaning of the Corporations Act 2001 (Cth). (2) Whether there was sufficient evidence of a resolution to redeem those shares. (3) Whether the redemption should have been at fair market value and whether their fair market value was no greater than the $8 that was paid on their redemption. 24The primary judge answered those questions: (1) No; (2) This does not arise, if it did, the answer is "Yes"; (3) This does not arise, if it did, the redemption would be at par. 25The appellants challenge the answer to the first question. The respondent seeks to support it. 26Hedy's shares were allotted at a time when the applicable legislation was the Companies Act 1961 (NSW) (the "1961 Act"). 27Section 66(1) of the 1961 Act made a special provision with respect to preference shares. That subsection was as follows: 66. (1) No company shall allot any preference shares or convert any issued shares into preference shares unless there is set out in its memorandum or 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, voting, and priority of payment of capital and dividend in relation to other shares or other classes of preference shares. 28As the primary judge pointed out, s 254A(2) of the Corporations Act is the current provision of the legislation that corresponds to the former s 66(1). It is the same in substance though it differs in a few words. 29Section 61(1) of the 1961 Act dealt with redeemable preference shares. It authorised the issue of "preference shares which are, or at the option of the company are to be liable to be redeemed." The subject is now dealt with, though not in the same way in the definition of "redeemable preference share" in s 9 and in ss 254A(3) and 254J-254L of the Corporations Act . Section 254J(1) of the Corporations Act provides that: "A company may redeem redeemable preference shares only on the terms on which they are on issue ... Unless a share may be so redeemed, it can only be cancelled under a reduction of capital or a share buy-back under Part 2J.1. 30Article 3(4) of the Articles of Association provided as follows with respect to the rights of the holder of "C" class shares: (a) The said "C" Redeemable Preference Shares shall not confer any right to vote at any general meeting of the Company but the holder thereof shall be entitled to notices of and to attend general meetings of the Company. (b) The said "C" Redeemable Preference Shares shall rank as regards return of capital in a winding up and in a reduction of capital next after any "A" 5% Convertible Preference Shares or "A" 5% Preference Shares and any "B" Redeemable Preference Shares issued in the capital of the Company and subject thereto (but pari passu with any "D" Redeemable Preference Shares) in priority to all other shares in the capital of the Company. (c) Subject to the provisions of section 61 of the Act the said "C" Redeemable Preference Shares shall at the option of the Company be liable to be redeemed at par on or before 30th June 2016 by notice in writing to the holders at their respective registered addresses and each such notice shall be accompanied by the Company's cheque or by a bank cheque bank draft or money order for the amount payable to the holder to whom the notice is sent. (d) Notwithstanding anything hereinbefore contained the said "C" Redeemable Preference Shares or the number thereof then issued and unredeemed shall be redeemed by the Company upon the death of the holder thereof and in the event of redemption in consequence of the death of the holder payment of the amount required for such redemption to the auditor for the time being of the Company on trust for such holder's personal representatives shall be deemed payment to such holder's personal representatives and such payment to the said auditor shall be a full and sufficient discharge to the Company for such payment and shall relieve the Company and its directors from all liability to see to the application of the moneys so paid. (e) The said "C" Redeemable Preference Shares shall confer on the holders thereof the right to receive such dividends as may be declared thereon pursuant to Article 101 hereof and subject to the provisions of sub-clause (3) of that Article shall rank as regards such dividends pari passu with the Ordinary Shares in the Company. Such dividends (if any) shall be non-cumulative. (f) The said "C" Redeemable Preference Shares shall not carry the right to any further participation in surplus profits or assets. 31The whole structure seems very odd. There was no-one who could vote at a general meeting, the directors retired at the first annual general meeting and could not be re-elected unless all the corporators agreed to do so and, as no one was entitled to any surplus assets, there was a real risk that those assets passed to the Crown as bona vacantia. I will not dwell on these matters as they have become the subject of subsequent proceedings, see Beck v LW Furniture Consolidated (Aust) Pty Ltd [2011] NSWSC 235. 32The appellants say that it is obvious that the structure was adopted for death duty reasons. During the life of the paterfamilias (in this case Leo), he would have control, but, on his death, the "A" class shares would only be worth $1 each. The directors could then allot new ordinary shares which would carry the right to the surplus assets. 33This may well have been the "inspiration" for the structure, indeed, it is hard to think of any alternative reason for it. However, if it was, it was not well implemented. 34The respondent does not accept the suggested inspiration. However, she says, that, even if it was correct, it is difficult to see how it could assist with the construction of the Memorandum and Articles or the relevant statutes. That is probably true. 35It was submitted by the respondent before the primary judge that: (a) to be a preference share the share must be given a preference both as to repayment of capital and as to dividends; (b) the preference given must be a differentiation from issued shares; a differentiation from unissued shares is not sufficient. Furthermore, it may be that the differentiation must be from ordinary shares as opposed to another class or classes of preference shares. 36The primary judge rejected the first proposition. It was the subject of a notice of contention. That notice was abandoned at the hearing, so the point need not be further considered. 37Thus, the appeal focuses on the second proposition as well as a submission that the court should not have made any order in favour of the respondent, even if it accepted her basal propositions. 38The primary judge found the second proposition well founded. He said: [23] The second argument is that the shares fail to be preference shares within the meaning of the legislation because the preference that they were given on issue was not over ordinary shares that were on issue. The argument is that the legislation ought not be construed as contemplating the valid issue of preference shares by reason of a preference given over unissued ordinary shares. The reason for this is that this could lead to a situation in which the only issued shares were redeemable preference shares, which could, at appropriate times, be redeemed, leaving the company without issued shares and thereby circumventing the basic rule against the reduction of capital. 39It will be remembered that s 61(1) of the 1961 Act described a redeemable preference share as a preference share which might be redeemed. It should also be remembered that the section did not permit the conversion of preference shares into redeemable preference shares: In re St James' Court Estate Ltd [1944] Ch 6. 40So that one must look to see whether the "C" shares can properly be described as "preference shares" and then whether they were properly classed as "redeemable preference shares". 41The primary judge found support for his view in what he described as the "only relevant decision" to which he was referred, the decision of Barrett J in Re Capel Finance Ltd [2005] NSWSC 286; 52 ACSR 601. 42Barrett J said in Capel at 605-6: [10] ...a share issued on the terms set out in Sch 1 will not be a redeemable preference share at all. This is because it will not have one of the two characteristics made essential by the s 9 definition: it will not be a 'preference share'. The Corporations Act does not attempt to define "preference share", but the concept is well entrenched in company law. Preference shares can only exist by way of juxtaposition with other shares. 43With respect, I cannot endorse the proposition that the concept of "preference share" is well entrenched in company law. 44Mr McHugh took us through the text of a book by George Evans British Corporation Finance 1775-1850: A Study of Preference Shares (The John Hopkins Press, 1936). In his summary in Chapter X(pp 149-50), Evans says: Preference shares grew out of the financial embarrassments of the early transportation companies. Such projects were almost invariably started without an adequate understanding of the engineering difficulties to be overcome, and in consequence the construction costs exceeded expectations. In many cases, before the works were completed the original capital had been exhausted.... To entice new money into an enterprise in such straits would have been difficult under the most favourable circumstances; but circumstances were not most favourable for early canals and railways. ... The sale of shares was thus the only device to which these companies could have had recourse if they were to act in a legal manner. But a sale of shares could not have been effected in view of the desperate condition of the companies unless the shares were made attractive to the existing proprietary or the public. 45In her essay on preference shares in The Law of Public Company Finance (eds Austin & Vann, LawBook Co, 1986), Jennifer Hill wrote at p 140: There were two main reasons for the emergence of preference share issues. They constituted a means of raising capital for further expansion by attracting outside investors, who would have greater security than ordinary shareholders. They were also necessary as a practical matter in the situation where existing shares were trading at below par value... 46However, whilst the origin of the preference share may well have been as those writers have noted, as Jennifer Hill notes at p 139, the role of the preference share "changed markedly during the 20 th century", partly caused by the taxation laws. 47The appellants say that, in any event, this history is of no assistance in ascertaining what is meant by the term "preference share" in the 1961 Act. 48I do not share this view. Whilst I do not consider the history is of great assistance, I do consider that it has some relevance when endeavouring to find out what, if anything, are the inherent qualities of a preference share. 49There is very little in the authorities which is of great assistance. In Re Powell-Cotton's Resettlement [1957] Ch 159; 1 All ER 404, Roxburgh J observed at 161 that "preferred stock" is stock which has some preference or priority over ordinary or common stock and, in logical analysis, there is no difference in that context between the words "preferred" and "preference". 50Mr McHugh submitted that one starts the analysis by realising that a company must have members and that, basically, those members share equally. That proposition is clearly correct; see eg Hutton v The Scarborough Cliff Hotel Company Ltd (1865) 4 De G J & S 672; 46 ER 1079. 51Thus, the law cannot suffer the situation where all the shares in the company are redeemable preference shares so that the company could get to the position where there were no members. 52In this, he is supported by what Barrett J said in Re Capel Finance at 605-6: [11] The base from which such things are measured is that identified by the House of Lords in Birch v Cropper; Re Bridgewater Navigation Co Ltd (1889) LR 14 App Cas 525, namely, that members of a company participate and enjoy entitlements according to the numbers of the shares they hold. That was the principle there applied in relation to a surplus on winding up but it has long been recognised as the basic rule applicable to all forms of shareholder participation and entitlement in the absence of contrary provision. Any departure from that rule of proportionate equality according to shares held must arise from the company's constitution or from terms of issue capable of displacing or modifying the general rule. Provisions of that kind affording some priority or superior position to the holders of particular shares are the thing that causes those shares to be "preference shares". It is not possible for "preference shares" to exist except as a result of a process of differentiation from shares which are not "preference shares" which sees the "preference shares" entitled to some comparative advantage, commonly with respect to one or more of the matters referred to in s 254A(2) to be mentioned presently. ... [14] It was faintly suggested on behalf of the company that the right of the holder to require redemption by the company makes the shares preference shares. That cannot be so. That feature makes them redeemable shares, which represents one of the two attributes contemplated by the s 9 definition of "redeemable preference share". The characteristics that make a share a "preference share" are distinct from those that make it redeemable. 53The appellants submit that the primary judge was in error in considering that the Capel case was of assistance. They say that [12]-[13] of the Capel judgment show that the point in that case was that if shares are not given any rights of priority at all, they cannot fairly be described as "preference shares". 54The appellants' submission may well be technically correct. However, by exactly the same reasoning, if there is no share with which the rights of the alleged preference share can be compared, the share cannot be a preference share. 55The appellants then say that there is no reason in policy why preference shares cannot be issued with prior rights as compared with shares that potentially may be issued. 56I am not at all sure that this is the correct way of looking at the present issue. What matters of policy were considered by the legislature of 1961 as being appropriate to endorse is a side issue. The prime thrust is what did the legislature mean by the term "preference share". 57I consider that to answer that question, one must go outside s 66 of the 1961 Act. It is useful to examine how s 66(1) of the 1961 Act came into being and how it operates. 58Section 66 first appeared in the Victorian 1958 Act and was adopted in the NSW 1961 Act, according to Wallace & Young, Australian Company Law & Practice (LawBook Co, 1965) p 253, in order to deal with the problem that there were too many disputes as to the respective rights of preference and ordinary shareholders because the company's constitution was not definite enough in specifying such rights. It was not inserted as a definition of "preference share". 59The section prescribes a small penalty for non-compliance. There do not appear to have been any reported decisions on the section. In the commentary on the corresponding section of the Singapore Companies Act (Cap 50 1994 ed), Walter Woon on Company Law, revised 3 rd ed (Sweet & Maxwell, 2009) says at 11.70 that an issue of preference shares contrary to the section is still valid and the holders of the various classes of shares are remitted to the former system of having the court construe the constitution of the company to determine the rights. 60That would appear to be correct, though, in Australia it does not matter as s 63 of the 1961 Act (now s 254E of the Corporations Act ) gives the court a power to validate. 61At one stage of his submissions, Mr Jackson put that s 66 of the 1961 Act operated so that, if one did not comply with the requirements of the section, the share could not be a preference share, but, if one did comply, the share was, by statute, a preference share. 62I cannot accept that submission. Section 66 makes it a criminal offence to issue a preference share unless the stated conditions are observed. It does not operate merely to downgrade the share to a non-preference share. 63It does not help the quest that the legislation does not define what is meant by an ordinary share. Gower and Davies' Principles of Modern Company Law , 7 th edition (Sweet & Maxwell, London, 2003) at p 624 says that ordinary shares are the residue of rights to the company's assets after the special rights have been taken. This, however, is hardly helpful in the instant case. 64Indeed, there can be situations, such as a company formed to be the legal owner of a block of company law title home units, where each share has different rights. 65One gets little assistance from the key text books on company law. The 7 th edition of Gower and Davies p 620 says that the term "preference share" covers a wide field from equity shares to quasi debentures. 66The 4 th edition of Gower (1979) at p 412 is slightly more enlightening when the author says that preference shares are of "various types, the distinguishing features of all being that they confer on the holders some preference over other classes in respect either of dividend or of repayment of capital or both." 67To like effect is Jowitt's Dictionary of English Law , 3 rd ed (Thomson Reuters, 2010) p 1768, which defines "preference shares" as "shares in a company having some preference over other ('ordinary') shares". 68The decided cases are of little help. In Rubas v Parkinson [1929] 3 DLR 558, 661 (Ontario SC Appellate Division), Masten JA (with whom Orde and Fisher JJA agreed) said: The term "preference shares" is not interpreted or defined by the Companies Act of Canada. It is a somewhat indefinite term, having a commercial or popular rather than a strictly legal import. I find no case in Canada or England in which the term has been authoritatively defined.... 69Masten JA set out in his judgment extracts from dictionaries and textbooks dealing with the term and concluded at 563: that in practice, and as understood by the profession and the public, shares which carry a preference may properly be denominated preference shares, though in certain respects they may be shorn of the rights which belong to common shares. 70The decision of the Appellate Division of the New York Supreme Court in Re Schaffer Stores Co Inc 229 NYS 735, 739 (1928) again gives a bland definition, based on Webster's Dictionary: A "preference share" is one "giving its owner a preference either as to receipt of dividends or as to payment in case of winding up or as to both" ... Preference shares have preferential rights; common shares have rights, but not preferential rights." See also to the same effect, Hogsett v Aetna Building and Loan Association 96 P 52 (Kan SC) (1908). 71In Starring v American Hair & Felt Co 191 A 887, 890 (Del Ch) (1937), the court defined "Preferred Stock" as "stock which in relation to other classes enjoys certain defined rights and privileges." 72The American Words and Phrases Vol 33 pp 454 et seq cites a number of American cases which define "preferred stock" by differentiating between issued preferred stock and common stock. A typical example is People ex rel S Cohn & Co v Miller 72 NE 525 (NY) (1904). 73There is little to be found in England, however, in Alliance Perpetual Building Society v Clifton [1962] 1 WLR 1270, Buckley J had to work out whether investment shares in a building society were ordinary shares or preference shares. He decided the question by looking at the constitution of the Society as to the indicia of what a preference share was and so the case is of no general assistance. 74There are definitions of "preference shares" in s 4 of the Singapore Companies Act and in the Malaysian Act, but these definitions, which focus on a preference shareholder not having a right to vote or only a limited right to have dividends or participate in capital, do not assist the present quest. As the commentators point out, they are inconsistent with the equivalent to s 66. One commentator explains this by saying that the latter section was "borrowed from Australia." 75The above analysis shows that what little there is on the subject points in the one direction, that is, that a preference share is one which has preferred rights over another class of share. It logically follows that, if there is no other class of share, there cannot be any preference shares. 76The appellants say that, whilst that broad proposition may be accepted, there is no reason why the Articles of Association cannot designate different classes of shares with differing rights and it matters not that the shares with superior rights are issued before the other shares. 77It is submitted that if it were otherwise, one could have the ludicrous situation that a share issued on 1 June 2011,at a time when there were no other shares issued, would not be a preference share, but, on 2 June, when ordinary shares were issued, it would become a preference share. 78As to that submission, Mr McHugh says that a share holds the same status as on the day it was issued. If, when it was issued, it was not in law a preference share, it remains a non-preference share even though, had it been issued after shares with inferior rights, it would have been a preference share. To my mind this is a good answer. 79On the respondent's case, when the subscribers subscribed for five "A" class shares, even though they were described as preference shares, they could not be as they were the only shares then on issue. Whether this is so or not, really is of no importance, but I consider it is so. 80When the "C" and "D" class shares were allotted, they had no preference over the "A" class shares (nor did the "C" class shares have any priority rights over the "D" class shares). Thus, the "C" class shares could not be preference shares. 81The opposing view that the "C" class shares had priority rights over the unissued (and never issued) "E" to "N" class shares, is not one which appeals to me. 82Unissued shares have no existence. The authorised capital of a company (a term now abandoned) had significance when share capital was being raised by prospectus from the public and, more latterly, enabled ASIC or its predecessors to calculate a registration fee. Despite the fact that Articles such as Article 4 in the instant case provide that the unissued shares are under the control of the directors, which gives the impression that they are in esse and just lying in a draw available when required, unissued shares have no existence. 83If the indicia of preference shares is that they have preferred rights over something else, that something else must actually exist. 84Yet it is put that there is no reason in policy why this should be so. I have already said that I do not consider this to be the correct question to ask. However, the answer is that, by definition, a preference share has to have rights over and above some other share in the company that actually has existence. 85Mr McHugh sometimes strayed into talking about a statutory preference share. I was at first disturbed by this as I have already said that, in my view, s 66 does not define the term "preference shares" it operates only to restrict companies from issuing them unless there is compliance with the conditions laid down in the section. 86On reflection I understand Mr McHugh to be submitting that the term "preference share" in s 66 of the 1961 Act (and in other parts of the relevant statute) was used in the sense I have described, that is, a share which had prior rights to some other issued share. Thus, even though a company's constitution might call a share a "preference share", it would not be a preference share within the meaning of that term in s 61 of the 1961 Act and so could not be a redeemable preference share. I agree. 87It was put that there is not only no actual authority for the proposition that one cannot have a preference share unless there are in esse other shares with lesser rights, but that it runs contrary to the well recognised rule in company law that companies are at liberty to structure their share capital in whatever way they think appropriate. 88We were referred to the decision of the Privy Council in Campbell v Rofe (1932) 48 CLR 258, 264 where Lord Thankerton on behalf of the Board summarised in more understandable terms what had been said in the classic case of Andrews v Gas Meter Co [1897] 1 Ch 361 with no hint at all that there was any restriction on allotting preference shares when there were no ordinary shares. 89However, the present point was not involved in the dispute being considered by the Privy Council so that little can be gained by noting that it did not refer to the matter. 90Then it is said that if the principle exists, it creates some artificial situations where people are allotted shares which are called "preference shares" but which, if the principle is correct, are not in law preference shares. 91The answer to that proposition is that it does not matter whether the shares are preference shares or not, save for one purpose and that is whether they are capable of being redeemable preference shares. 92Holding a redeemable preference share is a special privilege as it allows a shareholder to reclaim his or her investment despite it being invested as capital. It is not surprising that strict conditions would be put on such shares. 93The appellants submit that there is no reason in policy why one cannot issue preference shares on 1 June and then ordinary shares on 2 June, whilst one can do the reverse. That may be correct, but it is no more strange than the fact that a person must be an Australian citizen before being elected to parliament. In some situations, A must precede B. 94The appellants then submit that the primary judge, as shown in his [23] set out above, placed store on the possibility that, if the only issued shares were redeemable preference shares, which could, at appropriate times, be redeemed, the Company could be left without issued shares and that this would be in defiance of the rule ensuring maintenance of capital. They point out that this is such a remote possibility that it should not be relied upon to disqualify what the parties did. 95Although the primary judge did indeed refer to the point in his [23], it does not seem to me that it affects the basic point made earlier. 96I have come to the same view as the primary judge. It seems to me that, unless there is some other type of share with which one can compare the type of share under review and then say as a result of that comparison that the share under review has some priority rights, the share under review is not a preference share. 97As the primary judge pointed out at his [15], the consequence of the shares not being preference shares which are redeemable preference shares is, of course, that they cannot be redeemed, except by future and separate compliance with either the capital reduction provisions or the share buy-back provisions. Either course would require separate decisions on each occasion of proposed redemption and the necessary corporate decisions might or might not be forthcoming on any particular occasion. 98The only other matter raised by the appellants is that this was not a case for a declaration of invalidity and consequential orders to be made. 99This matter was sought to be raised by an amendment to the notice of appeal. This was opposed. The Court allowed the argument to proceed and indicated that it would rule on the amendment application later. 100The written submissions put that the fact that the parties have acted on the basis that an allotment is valid may be a reason for declining equitable relief. It is questionable whether the present case involves equitable relief. Making a declaration is not equitable relief, nor is rectification of the register. 101Making a declaration is also a matter of discretion. It is put by the appellants that making a declaration in this case effectively worked a substantial alteration to the relative rights of the shareholders of the Company which had been in place for many years and it should not have been made. 102The respondent says that there was one question before the primary judge and that was whether Hedy's shares were redeemable preference shares. If they were not, the appellants conceded that the register should be rectified. Nothing was put to the primary judge as to whether he should exercise any discretion to refuse relief. 103In my view, we should not allow the amendment on the basis that the respondent's submissions are clearly correct. 104It follows that my view is that the appeal should be dismissed with costs. 105HANDLEY AJA: T his appeal from the decision of Hamilton AJ [2010] NSW SC 1068, concerns the validity of the purported issue of redeemable preference shares in LW Furniture Consolidated (Aust) Pty Ltd (the company) in 1971. The problem arises because the only shares the company has ever purported to issue are said to be preference shares. 106The case concerns a Robertson scheme to reduce death and estate duties payable on the death of the founder of a company. Under the scheme the founder owned shares which give him (or her) control of the company for life. The founder could pay salaries and dividends to himself and others during his lifetime at his discretion but the rights attached to those shares lapsed on death and their value accrued to other shareholders: Robertson v FCT [1952] HCA 71, 86 CLR 463. 107This appeal concerns an incomplete Robertson scheme which has gone badly wrong. 108The facts and the background are set out in the judgment of Young JA and I gratefully adopt his summary. Regrettably I have come to a different conclusion. 109Immediately before the death of the founder's widow, Hedy Weinstock (Hedy), on 6 July 2004 the company's issued share capital comprised: (a) 5 "A" Convertible Preference Shares (A shares), four held by the estate of the founder, Leo Weinstock, and one held by a solicitor; (b) 10 "C" Redeemable preference shares (C shares), 8 held by Hedy, and one each by the first appellant and the respondent; (c) 2 "D" Redeemable preference shares (D shares) held by a company. 110On or about 29 July 2004, following Hedy's death, the company purported, to redeem her 8 C shares pursuant to the power of redemption which arose on her death. 111The existence of the power was challenged but not its exercise if the power did exist. As the appeal was argued all relevant events, other than the redemption of Hedy's C shares, occurred while the Companies Act 1961 was in force (the Act). The sections referred to are those in the Act unless the context otherwise requires. 112Hamilton AJ held that the shares were not preference shares and were therefore not redeemable. 113The company was incorporated on 30 April 1971 with an authorised capital of $20,000. Article 3(1) provided, so far as relevant: "The capital of the Company is Twenty Thousand Dollars ($20,000.00) divided into Twenty Thousand (20,000) shares of one dollar ($1.00) each including 5 "A" 5% Convertible Preference Shares, ... 10 "C" Redeemable Preference shares, 10 "D" Redeemable Preference shares, ...". 114The article also provided for 10 classes of ordinary shares. 115Article 3(2) defined the rights of the A shares, article 3(4) the rights of the C shares, and article 3(5) the rights of the D shares. Young JA has summarised their effect. 116The A shares conferred on their holders defined rights "in priority to all other shares in the company". The C and D shares conferred on their holders defined rights pari passu (article 3(4)(b)) next after the A shares but "in priority to all other shares in the capital of the company". No "other" shares have ever been issued. 117While the company's issued capital remained in this condition the C and D shares were preferential in name only. Their preferential rights lacked any practical content. 118This appeal concerns the legal consequences of the tension between the state of the company's share register and its articles of association. 119Clause 5 of the memorandum of association identified the subscribers, Leo Weinstock who subscribed for four A shares, and a solicitor who subscribed for one A share. These were the only shares in existence when the company was incorporated. Section 16(5) which dealt with subscriber shares provided: "The subscribers to the Memorandum shall be deemed to have agreed to become members of the company and on the incorporation of the company shall be entered as members in its register of members ...". 120Section 54(7), which dealt with returns of allotments of shares, provided: "For the purposes of this section any shares issued without formal allotment to subscribers to the memorandum shall be deemed to have been allotted to such subscribers on the date of the incorporation of the company." 121The effect of these sections is clear. The subscribers' shares, created and allotted on incorporation, were A shares with the rights defined by article 3(2) although there were then no other issued shares. 122The effect of sections in this form was considered in Re Metal Constituents Ltd [1902] 1 Ch 707 where Buckley J held that a subscriber to a memorandum of association who had been induced to subscribe by fraud could not rescind the contract. He said at p 709: "The contract of the subscriber of a memorandum of association is of a very peculiar kind ... At the moment of registration two things take place by force of the Companies Act 1862 - the company springs into existence, and the subscribers to the memorandum of association become ... members of the company ... There is no contract at all until the moment when the corporation and the character of membership in the signatories to the memorandum come simultaneously into existence. I must, therefore, hold that the subscriber to the memorandum cannot have rescission on the ground that he was induced to become a subscriber by the misrepresentations of an agent of the company." 123Article 4 provided: "The shares of the company for the time being unissued ...shall be under the control of the directors who may allot or otherwise dispose of the same to such persons on such terms and conditions and at such times as the directors think fit ...". 124The articles of association formed part of a statutory contract or compact between the company and its members, and between the members inter se. Section 33(1) provided: "Subject to this Act the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles." 125The directors exercised their article 4 powers to issue the C and D shares. It was not suggested that they could not issue them but it was submitted that they could not be redeemable preference shares when there were no ordinary shares on issue which would give practical content to their preferential rights. Since, it was submitted, they could not be issued as preference shares, and when issued were not preference shares, they could not be, and were not, redeemable. 126The logical consequence of these arguments would be that the C and D shares were never validly issued. If for legal reasons the directors did not have the power to issue those shares, they were never issued. Unsurprisingly no one embraced this argument. 127Article 3(1) designated 15 $1 shares in the nominal capital as C and D shares. At that stage they did not exist as shares, but were shares which the directors could create by an exercise of their powers under article 4. As the plurality said in Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; 207 CLR 165 at 179: " Before the shares in question were issued, they did not exist as an item of property whether of the company or anyone else. It was the act of issuing the shares and agreeing to allot them which created the relevant item of property - property which was never owned by the company." 128The meaning of articles 3 and 4 cannot be affected by the state of the company's share register. 129The Court can determine the proper construction of articles of association but the result contended for by the respondent involved reconstruction. The submission implied that parts of articles 3 and 4 had no valid operation when the C and D shares were issued because those shares did not have all the rights defined in article 3(4) and (5). 130The process contended for bears some analogy to rectification for mistake. On the supposition here the directors were mistaken in thinking they could issue C and D shares with all the rights defined in article 3(4) and (5). However the Court cannot rectify a company's articles of association. In Scott v Frank F Scott (London) Ltd [1940] Ch 794 CA Luxmoore LJ, giving the judgment of the Court, said at 801, 802, 803: "... there is no room in the case of a company ... for the application to either the memorandum or articles of association of the principles upon which a Court of Equity permits rectification of documents ... The powers to alter and extend [the articles of association] are purely statutory and there is no hint ... of any power to rectify ... [T]he effect of registration of the memorandum and articles of a company ... is to bind the company (which ... only comes into existence after the registration is effected) and the members thereof to the same extent and in the same manner as if they had respectively been signed and sealed by each member and contained covenants on the part of each member ... to observe all the provisions of the memorandum and of the articles subject to the provisions of the Act. It seems plain that this ... does not admit of any rectification of the memorandum and articles apart from alterations under the express powers of the Act, for the only contract is a statutory contract in which the company is included by reference to the registered documents and to no other documents." 131If articles 3(4), (5) and 4 were in force, in accordance with their terms, when the directors purported to issue the C and D shares, their decision to do so must have had legal effect. What prevented it taking effect in accordance with its terms? 132The Court cannot hold that the directors issued C and D shares with different rights without holding that they amended article 3(4) and (5). They could not do this as directors. 133It was suggested that the C and D shares would become redeemable preference shares if and when the company issued ordinary shares. Until then they could not be preference shares and could not be redeemable. I am not aware of any principle which would enable a company, without appropriate provision in its articles, to convert shares which are not convertible into other shares. 134Decisions on variation of rights articles have distinguished between the rights attached to shares and the enjoyment of those rights. In White v Bristol Aeroplane Co Ltd [1953] Ch 65, 74, 80 Evershed MR said: "The question then is ... are the rights ... 'affected' by what is proposed? It is said in answer - and I think rightly said - No, they are not; they remain exactly as they were before ... It is no doubt true that the enjoyment of, and the capacity to make effective, those rights is in a measure affected ... But there is to my mind a distinction ... between an affecting of the rights and an affecting of the enjoyment of the rights or of the stockholders' capacity to turn them to account ... I am in no doubt ... that ... what is here suggested will 'affect' the preference stockholders 'as a matter of business'; and we are concerned with the question whether the rights of the preference shareholders are 'affected', not as a matter of business, but according to the articles, that is according to their meaning." 135This distinction is relevant here where the rights of the C and D shareholders are defined in articles 3(4) and (5), but some of those rights are not presently effective as a matter of business because there are no ordinary shares. 136The respondent's arguments come to this. The directors could have issued one ordinary share and then or later issued the C and D shares with the rights defined in article 3(4) and (5). Although they could do these things in that order they could not achieve the same result by first issuing the C and D shares and then the other share. I cannot accept that argument. 137Hamilton AJ found support for his decision in Re Capel Finance Ltd [2005] NSWSC 286, 52 ACSR 601. In my judgment that case is distinguishable. 138Barrett J heard an application by the company for an order under s 411(1) of the Corporations Act convening a meeting of some of its shareholders to consider, and if thought fit, approve a proposed arrangement between the company and those shareholders. 139The arrangement provided for the issue of what were described as redeemable preference shares. Barrett J held [20], for a number of reasons, that the Court could not allow the scheme in that form to be submitted to a meeting of the relevant shareholders. 140One of those reasons, which Barrett J regarded as fundamental, was that the new shares would not be preference shares at all [10]. He said [11]: It is not possible for 'preference shares' to exist except as a result of a process of differentiation from shares which are not 'preference shares' which sees the 'preference shares' entitled to some comparative advantage." 141Under the scheme the rights attached to the proposed redeemable preference shares conferred no priority whatever on their holders. Barrett J continued [13]: "Shares issued on the terms in schedule 1 would carry no priority in respect of any of [the matters referred to in s 254A(2)] and it is for that reason that they would not properly be regarded as 'preference shares' and so could not be issued as redeemable preference shares." 142Thus he focussed on "the rights" attached to the proposed shares, which failed as preference shares at the first hurdle. 143It is not surprising that the Judge would not allow the proposed arrangement to proceed in that form. 144Barrett J is a recognised expert on company law, and his views are entitled to the greatest respect. However he did not have to consider the position where the articles confer appropriate preferential rights on the holders of the relevant shares but those rights lack effective content because there are no ordinary shares. 145With respect I do not regard Barrett J's reasons as even a dictum on the present question. 146In my judgment the power in article 4 to issue new shares from the available nominal capital was exercisable at all times, and was not affected by the state of the company's share register. The power is a fiduciary one and its exercise is subject to equitable restraints, but the issue of the C and D shares has not been challenged on equitable grounds. 147If this is correct the directors validly in office could have issued ordinary shares at any time, and can still do so, subject to those restraints. 148It must follow that the C and D shares were validly issued and conferred on their holders the preferential rights defined in article 3(4) and (5). These rights would remain potential only, without effective content, unless and until the directors issued ordinary shares. 149There is nothing unusual about this situation. The preferential right to a dividend is dependent on the company earning divisible profits and a decision of the directors to declare a dividend. Until then the right is potential only. A preferential right to the return of capital in a winding up is dependent on a winding up, and on assets available for a return of capital to shareholders. Until then the right is potential only. 150I would therefore allow the appeal and make the following orders: (1) Appeal allowed with costs. (2) Orders 1 and 2 in the Equity Division set aside. (3) In lieu thereof substitute a declaration that the 8 C class shares held by the late Hedy Jadwiga Weinstock were redeemable preference shares which were validly redeemed by the company on or about 29 July 2004. (4) The respondent to pay the defendants' costs of and incidental to the hearing in the Equity Division on these issues. (5) The respondent Tamar Rivqa Beck is to have a certificate under the Suitors Fund Act for the costs of the appeal.