In Heesh v Baker  NSWSC 711, the New South Wales
Supreme Court considered whether the holders of redeemable
preference shares could be "creditors" for the purposes
of Part 5.3A of the Corporations Act 2001 (the Act).
In July 2006, York Capital Limited (York) lodged a prospectus
inviting prescription for redeemable preference shares. Various
types of preference shares were issued pursuant to the
On 5 June 2008, York was placed into voluntary administration in
accordance with section 436A of the Act. The Administrators then
applied to the court for a declaration as to whether any of the
holders of the preference shares were creditors of York, solely for
the reason of their rights against the company.
The shareholders argued that even though York was not required
to redeem their shares at the time its administration began, there
was an implied term of their contract of membership with York, that
required the company to do all things necessary to enable the
shareholders to have the benefit of their shares. It was argued
that the shareholders held accruing rights against York to the
redemption value of their shares and on that basis the shareholders
were contingent creditors of York.
When determining the issue, the court focused upon the terms of
York's constitution and the terms of the issue of the
preferential shares as set out in the prospectus. The court
concluded that the members' contracts with York were consistent
with the statutory constraints contained in the Act including, in
particular, the various sections which require payments of
dividends and payments for the redemption of redeemable preference
shares to be derived from the profits of a company.
As such, the court rejected the shareholders argument and found
that, on its true construction, the shareholders' contracts
with York did not impose an obligation on York and the rights
attaching to the shares would only be triggered if the company had
made a profit. As York had not made a profit, the court determined
that the preferential shareholders were not creditors of York for
the purposes of Part 5.3A of the Act.
What it all Means
Whilst, in this case, the holders of redeemable preferential
shares were not held to be creditors for the purposes of Part 5.3A,
each case will turn on its own facts. This case is instructive as
it serves as a reminder that consideration must be had to the
precise terms of a company's constitution, any relevant
prospectus and the Act when giving advice to shareholders regarding
their rights against a company.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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