‘Sequencing problem’ – the Court makes orders varying the operation of the Corporations Act to allow a voluntary administrator to transfer shares without owner consent

In the Supreme Court of New South Wales case of In the matter of Habibi Waverton (in liquidation) (administrator appointed),[1] the Court considered whether or not to permit a voluntary administrator to transfer shares in order to implement a Deed of Company Arrangement (DOCA) pursuant to section 444GA of the Corporations Act 2001 (Cth) (the Act). Importantly, the proposed transfer of the shares would be by an administrator (not a DOCA administrator) without the owner’s consent – the powers provided in section 444GA have not been used in this manner before.

Background

• Following the breakdown in the working relationship between the two directors and shareholders of Habibi Waverton Pty Ltd (Habibi), Michael Billingsley was appointed as voluntary liquidator of Habibi. Each of the shareholders held 50 shares in Habibi respectively.
• Mr Billingsley was subsequently appointed as administrator of Habibi. This was due to concerns to preserve a lease (which was a key asset of Habibi) and the company’s solvency.
• Each shareholder submitted a competing DOCA proposal which in essence would see that particular shareholder obtain ownership of Habibi.
• Ultimately, the administrator recommended one of the DOCA proposals which was subsequently approved by the creditors of the company. Importantly, that proposal included a condition by which the ‘other’ shareholder’s shares would be transferred for $1.[2] Under either DOCA proposal, there would be no return to shareholders. Accordingly, the administrator considered that the shares in Habibi had no value.
• There was one practical difficulty which was described as a ‘sequencing problem’ – the administrator could not transfer the shares without the owner’s consent as he was not yet a DOCA administrator. Mr Billingsley would only become a DOCA administrator on execution of the DOCA, which was conditional upon the transfer of the shares for $1.

The administrator’s application

In light of the above, the administrator applied to Court for the following orders:

• pursuant to section 447A of the Act, an order to vary the operation of Part 5.3A of the Act whereby section 444GA applied to a voluntary administrator; and
• pursuant to section 444GA(1)(b) of the Act, leave to transfer the shares without the consent of that shareholder in order for the DOCA to be implemented.

The Court’s decision

Justice Rees granted leave and made the orders sought.

Section 444GA of the Act provides:

‘(1) The administrator of a deed of company arrangement many transfer shares in the company if the administrator has obtained:

(a) the written consent of the owner of the shares, or

(b) the leave of the Court.

…

(3) The Court may only give leave under subsection (1) if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.’

As indicated above, the parties could not point to any authority supporting the notion that section 444GA could be used by an administrator (as opposed to a deed administrator) to transfer shares without the owner’s consent, in order to implement a DOCA.[3]

The Court’s leave – unfair prejudice

In this context, ‘prejudice’ means disadvantage. Consideration of whether a transfer would be ‘unfair’ only arises once prejudice has been established.

Her Honour noted that:

• the administrator bore the onus of satisfying the Court that the transfer would not prejudice the interests of members of the company;[4]
• any member claiming to be unfairly prejudiced bore the onus to establish facts relevant to that prejudice;[5] and
• whether a transfer is unfairly prejudicial is to be determined having regard to all the circumstances of the case and the policy of the legislation.[6]

Her Honour considered that the mere transfer of shares without compensation would not, of itself, establish unfair prejudice. This is because it is unlikely that members would suffer prejudice where the company has no residual value.[7]

Justice Rees commented on the Court’s role: “… the Court’s focus is more keenly on how to proceed such that the company is in the best position to pay its creditors as much as possible, rather than determining who is the villain of the piece and making sure they do not end up with the company, even if creditors receive less as a consequence.“[8]

Her Honour held that, aside from Mr Billingsley not being a DOCA administrator, this was an appropriate case for leave to be granted under section 444GA of the Act as the shares had no residual value. Accordingly, the shareholder whose shares were to be compulsorily transferred would not be unfairly prejudiced by that transfer.

Vary the operation of Part 5.3A of the Act

Her Honour considered that whether section 447A of the Act could be utilised to vary Part 5.3A as proposed was a matter of statutory construction. Whilst making the orders sought would enable an administrator to transfer a shareholder’s shares without their consent, “the expansion of power is not as wide as suggested where the Court must otherwise be satisfied that the transfer will not unfairly prejudice the interests of members of the company“.[9] Put another way, the ‘unfairly prejudice’ consideration constrained an administrator’s ability to transfer a shareholder’s shares without their consent.

Justice Rees was satisfied that the evidence established a proper basis for the orders sought, as it would overcome the ‘sequencing problem’ resulting from the conditions of the DOCA proposal and that there was ‘no doubt’ that the way in which Mr Billingsley wished to proceed would achieve the objective of Part 5.3A of the Act.[10]

Key takeaway

• The Court will consider using its general powers to vary the Act to overcome ‘sequencing problems’ in order to facilitate the implementation of a DOCA.
• Where a DOCA proposal involves the transfer of shares against the owner’s wishes, that owner needs to carefully consider whether to consent to the transfer as there may be cost consequences.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:

Guy Edgecombe, Partner
Tahlia O’Connor, Senior Associate

[1] [2021] NSWSC 1443.

[2] Under either DOCA proposal, there would be no return to shareholders. Accordingly, the Administrator considered that the shares in Habibi had no value.

[3] [2021] NSWSC 1443 at [44].

[4] [2021] NSWSC 1443 at [30] and cases cited therein.

[5] [2021] NSWSC 1443 at [30] and cases cited therein.

[6] [2021] NSWSC 1443 at [31] and cases cited therein.

[7] [2021] NSWSC 1443 at [31] and cases cited therein.

[8] [2021] NSWSC 1443 at [36].

[9] [2021] NSWSC 1443 at [53].

[10] The object of Part 5.3A of the Act is ‘to provide for the business, property and affairs of an insolvent company to be administered in a way that (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence — results in a better return for the company’s creditors and members than would result from an immediate winding up of the company’.