Beck v Weinstock

Case [2013] HCA 15

HIGH COURT OF AUSTRALIA

FRENCH CJ,
HAYNE, CRENNAN, KIEFEL AND GAGELER JJ

TAMAR RIVQA BECK  APPELLANT

AND

AMIRAM DAVID WEINSTOCK & ORS  RESPONDENTS

Beck v Weinstock

[2013] HCA 15

1 May 2013

S56/2012

ORDER

Appeal dismissed with costs.

On appeal from the Supreme Court of New South Wales

Representation

R G McHugh SC with D J Barnett for the appellant (instructed by McCabes Lawyers Pty Limited)

D F Jackson QC with J O Hmelnitsky for the first and second respondents (instructed by Baker & McKenzie Solicitors)

No appearance for the third respondent

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Beck v Weinstock

Corporations law – Shares – Redeemable preference shares – Shares issued as "redeemable preference shares" – No shares over which redeemable preference shares took preference then or later issued – Whether preference shares required ordinary shares to be issued – Whether redemption of shares effective.

Words and phrases – "issued share", "ordinary share", "preference share", "redeemable".

Companies Act 1961 (NSW), ss 61, 66.
Corporations Act 2001 (Cth), ss 254A, 254J.

FRENCH CJ.

Introduction

  1. Companies raise capital by the issue of shares and in a variety of other ways.  The shares in a company may be divided into different classes with different rights attaching to them.  Preference shares confer priorities on their holders, over ordinary shareholders, with respect to dividends or repayment of capital or voting rights or combinations of those things.  They can be used to raise additional capital for a company or to raise original capital or for other purposes.

  2. In this appeal, which represents a particular aspect of a wide-ranging and complex family dispute, it is said that preference shares in a company cannot validly be issued unless there are ordinary shares already issued.  The issue of redeemable preference shares to the appellant's mother was said to have been invalid for that reason.  The right to redeem the shares in the absence of issued ordinary shares was also said to offend against the principle of the maintenance of capital.  The arguments are based largely upon historical grounds relating to the original purpose of preference shares, which was to raise additional capital for companies, and implications derived from longstanding legislative restrictions on the reduction of capital.

  3. The arguments of the appellant rest upon an unduly narrow view of the legitimate purposes for which preference shares can be used.  They also seek to draw an unwarranted implication limiting the powers of companies with respect to the issue and redemption of such shares by reference to a generalised conception of the statutory policy in favour of the maintenance of capital.  For the reasons that follow the appeal should be dismissed with costs.

    Facts and procedural background

  4. LW Furniture Consolidated (Aust) Pty Ltd ("LWC") was incorporated on 30 April 1971.  Article 3 of the articles of association ("the Articles") stated that its capital was $20,000.00, divided into twenty thousand shares of one dollar each.…

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Details
AGLC
Beck v Weinstock [2013] HCA 15
Case
[2013] HCA 15
Decision Date

CaseChat Overview and Summary

The appeal concerned the validity of redeemable preference shares issued by LW Furniture Consolidated (Aust) Pty Ltd ("LWC"). The appellant, Tamar Beck, sought to challenge the redemption of certain "C" class redeemable preference shares. The core of the dispute revolved around whether these preference shares were validly issued, particularly in circumstances where no ordinary shares had been issued by the company at the time of their creation or subsequently. The High Court of Australia considered the appeal from the judgment of the New South Wales Court of Appeal.

The legal issues before the High Court were whether the "C" class redeemable preference shares were validly issued, and consequently, whether their redemption was effective. This required the Court to determine the essential characteristics of preference shares, specifically whether their validity depended on the existence of another class of shares over which they conferred a preference. The Court also had to consider whether the company's articles of association and relevant corporations legislation implied any limitations on the issuance and redemption of preference shares, particularly in the absence of issued ordinary shares.

The High Court dismissed the appeal, finding that the appellant's arguments rested on an overly narrow interpretation of the purposes for which preference shares can be issued and sought to draw an unwarranted implication limiting company powers. The Court held that the directors retained the power to issue ordinary shares at all times, subject to equitable constraints. Therefore, the "C" and "D" class shares were validly issued, conferring preferential rights that remained potential until ordinary shares were issued. The Court found no impediment to the redemption of these shares. The appeal was dismissed with costs.

Orders

Orders of the court

Appeal dismissed with costs.

Background

Background to the litigation

The arguments of the appellant rest upon an unduly narrow view of the legitimate purposes for which preference shares can be used. They also seek to draw an unwarranted implication limiting the powers of companies with respect to the issue and redemption of such shares by reference to a generalised conception of the statutory policy in favour of the maintenance of capital. For the reasons that follow the appeal should be dismissed with costs.Facts and procedural background LW Furniture Consolidated (Aust) Pty Ltd ("LWC") was incorporated on 30 April 1971. Article 3 of the articles of association ("the Articles") stated that its capital was $20,000.00, divided into twenty thousand shares of one dollar each. Its shares included fourteen classes designated "A" to "N". Classes "A" to "D" were described as "preference shares" comprising[1]:"5 'A' 5% Convertible Preference Shares, 5 'B' Redeemable Preference Shares, 10 'C' Redeemable Preference Shares, 10 'D' Redeemable Preference Shares".Article 3 also provided for 1,997 of each of the remaining ten classes designated "E" to "N" and described as "ordinary shares". [1]Articles, Art 3(1). None of the shares in classes "A" to "D" carried voting rights[2]. The founding directors of the company were Leo and Hedy Weinstock. Leo, as one of the subscribers to the memorandum of association ("the Memorandum"), held four of the "A" class shares and the other subscriber, a solicitor, Brian Nagel, held the remaining "A" class share on trust for Leo. Leo had the right during his life and while he held at least four of the "A" class shares to convert them to five per cent preference shares carrying voting rights at general meetings of the company. At some time or times Hedy was issued with a total of eight "C" class shares[3]. Leo and Hedy's children, Amiram Weinstock and Tamar Beck, were each issued a single "C" class share. Two "D" class shares were issued to a company associated with Amiram. The arrangements were designed to reduce death and estate duties payable on the death of Leo[4].[2]Articles, Art 3(2)(a), (3)(b), (4)(a), (5)(a).[3]At trial, Hamilton AJ noted that the parties proceeded on the basis that the subject shares were issued in 1971, but that it was not clear on the evidence when the other issued shares were issued: Beck v Weinstock (2010) 241 FLR 235 at 237 [13].[4]The arrangements may have been inspired by Robertson v Federal Commissioner of Taxation (1952) 86 CLR 463; [1952] HCA 71, which concerned a scheme to alter a shareholder's rights upon his death so that the value of his shares was significantly reduced for estate duty purposes. Leo died in 2003 and Hedy on 6 July 2004. At the time of Hedy's death the issued shares in the company were:•Five "A" 5% convertible preference shares, of which four were held by Leo's estate and one by Mr Nagel.•Ten "C" redeemable preference shares, of which eight were held by Hedy and one each by Amiram and Tamar.•Two "D" redeemable preference shares held by a company connected with Amiram. No ordinary shares were ever issued.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

FRENCH CJ (dissent) HAYNE, CRENNAN AND KIEFEL JJ (dissent) GAGELER J
On 10 February 2012, this Court (Gummow and Heydon JJ) granted Tamar special leave to appeal from the whole of the judgment and order of the New South Wales Court of Appeal[8]. [8][2012] HCATrans 034.The decisions at first instance and on appeal The primary judge held that it was an essential quality of a preference share that it confer an advantage over another class of share[9]. Neither the 1961 Act nor the 2001 Act contemplated that preference shares could validly be issued on the basis that they conferred a preference over unissued ordinary shares[10]. 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 the basic rule against the reduction of capital thereby circumvented. His Honour concluded that preference shares could not be created unless there had been issued, at the time of their creation, shares over which they had preference, as to capital or as to dividend or as to both[11]. His Honour appears to have relied upon implications limiting the powers conferred by the 1961 and 2001 Acts for provision to be made in company constitutions relating to the issue and redemption of preference shares.[9](2010) 241 FLR 235 at 239–240 [23]–[28]. His Honour followed the reasoning of Barrett J in Re Capel Finance Ltd (2005) 52 ACSR 601.[10](2010) 241 FLR 235 at 239 [23]–[24].[11](2010) 241 FLR 235 at 240 [29]. In the Court of Appeal, Handley AJA, with whom Giles JA agreed, held that the power conferred on the directors by Art 4 of the Articles to issue new shares from available nominal capital could be exercised at all times. It was not affected by the state of the company's share register[12]. The directors validly in office could have issued ordinary shares at all times and could still do so, subject to the equitable constraints derived from the fiduciary nature of their power[13]. [12](2011) 252 FLR 462 at 478 [146].[13](2011) 252 FLR 462 at 478 [147]. Handley AJA held that it must follow that the "C" and "D" class shares were validly issued and conferred on their holders the preferential rights defined in the Articles. Those rights would remain potential only, without effective content, unless and until the directors issued ordinary shares[14]. His Honour held there was nothing unusual about that situation. The preferential right to a dividend was dependent on the company earning divisible profits and the decision of the directors to declare a dividend. Until then the right was potential only[15].[14](2011) 252 FLR 462 at 478 [148].[15](2011) 252 FLR 462 at 478 [149]. Young JA in dissent said that although the history of the concept of the preference share in Australia and other jurisdictions provided little assistance, it pointed in one direction, namely that a preference share is one which has preferred rights over another class of share. If there is no other class of share, there cannot be a preference share[16]. Unissued shares have no existence[17]. If preference shares confer preferred rights over something else, that something else must exist[18]. In the event, his Honour came to the same conclusion as the primary judge[19].[16](2011) 252 FLR 462 at 471 [75].[17](2011) 252 FLR 462 at 472 [82]. An observation not always strictly accurate: see Central Piggery Co Ltd v McNicoll and Hurst (1949) 78 CLR 594 especially at 599–600 per Dixon J in relation to the distinction between allotment and issue; [1949] HCA 19. Lindley in A Treatise on the Law of Companies, 5th ed (1889) at 394 said that unissued shares "belong to the company", citing York and North-Midland Railway Co v Hudson (1845) 16 Beav 485 [51 ER 866].[18](2011) 252 FLR 462 at 472 [83].[19](2011) 252 FLR 462 at 473 [96].The grounds of appeal

Ratio Decidendi

Legal Principle Established

Established by: GAGELER J

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