In the matter of Alexandria Landfill Pty Limited

[2016] NSWSC 1503

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	In the matter of Alexandria Landfill Pty Limited [2016] NSWSC 1503
Hearing dates:	Friday, 18 September 2015
Date of orders:	25 October 2016
Decision date:	25 October 2016
Jurisdiction:	Equity - Corporations List
Before:	Brereton J
Decision:	Plaintiff to bring in short minutes including declaration to effect that resolution of second defendant as sole director of first defendant to declare but not pay an interim dividend to the ordinary shareholder (being the second defendant) is void
Catchwords:	CORPORATIONS – members’ rights and remedies – dividend – preference shares – where shareholder agreement gives right to minimum cash distribution with ability to accrue as a loan pending accrual of sufficient income to declare a dividend – where terms of issue refer to right to participate pari passu with other shares – where sole director resolves to pay dividend to ordinary shareholder – whether preference shareholders are entitled to participate pari passu in any dividend – whether pari passu rights additional to minimum cash distribution – whether dividend resolution creates an immediate enforceable liability, a deferred liability, or is mere statement of intention, or a nullity – whether resolution is inconsistent with the rights of, or oppressive to, the preference shareholders or contrary to the interests of the company as a whole – whether loans accrued in respect of past minimum cash distributions have become due and payable to the preference shareholders
Legislation Cited:	(CTH) Corporations Act 2001, s 254T(1)(b), s 254U, s 254V, s 588G (NSW) Companies Act 1961, Sch 4, Table A, art 102
Cases Cited:	BB Retail Capital Pty Limited v Alexandria Landfill Pty Limited [2014] NSWSC 1363 BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd [2015] NSWCA 319 Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 F de Jong & Co Ltd, Re [1946] Ch 211 Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616 Potel v Inland Revenue Commissioners [1971] 2 All ER 504 QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 Severn and Wye and Severn Bridge Ry Co, Re [1896] 1 Ch 559 Walter Symons Ltd, Re [1934] Ch 308 Wambo Coal Pty Limited v Sumiseki Materials Co. Limited [2014] NSWCA 326; (2014) 101 ACSR 657 Wood, Skinner & Co, Re [1944] Ch 323
Texts Cited:	American Jurisprudence, vol 19, 2d
Category:	Principal judgment
Parties:	BB Retail Capital Pty Limited (plaintiff) Alexandria Landfill Pty Limited (first defendant) Ian Raymond Malouf (second defendant)
Representation:	Counsel: N Hutley SC w J R Williams (plaintiff) C J Birch SC w B DeBuse (defendants)   Solicitors: Gilbert + Tobin (plaintiff) Pigott Stinson Lawyers (defendants)
File Number(s):	2015/048739

Judgment

1. The plaintiff (“BBRC”) and the second defendant (“Mr Malouf”) are each shareholders in the first defendant Alexandria Landfill Pty Limited (“ALF”). There are two classes of shares issued in ALF, namely A Class ordinary shares, and A Class preference shares. Mr Malouf holds all of the 193,906,683 issued A Class ordinary class shares; he is also ALF’s sole director. A total of 86,093,317 preference shares have been issued, and BBRC holds 53.2% of them; the balance of the preference shares are held by other investors, most of whom are independent of the parties. Thus Mr Malouf holds 69.3%, and BBRC holds 16.4% of all the issued shares.

2. The preference shares were issued on terms that stated that they would rank pari passu with all other shares for dividends. However, a shareholders agreement provided that the preference shareholders are entitled to a minimum cash distribution of 11% per annum on the amounts they subscribed, which liability ALF is permitted to accrue as a loan until it is in a position to pay a dividend. The minimum cash distributions have to date been accrued, and are recorded in ALF’s accounts as a liability to preference shareholders.

3. On 28 November 2014, Mr Malouf as sole director of ALF resolved that ALF "declare (but not pay) an interim dividend to the ordinary shareholder totaling $24,434,678" (“the impugned dividend resolution”). ALF did not, at the time of the impugned dividend resolution, have the requisite cash resources to pay such a dividend, and there was a further resolution that ALF intended to pay the dividend at the same time as it paid the amounts accrued in favour of preference shareholders and “not later than” 30 June 2017. Mr Malouf, being the sole ordinary shareholder, is the beneficiary of the impugned dividend. In these proceedings, BBRC contends that the impugned dividend resolution, in circumstances where ALF is not in a position to actually pay the dividend, where it is in favour only of Mr Malouf so that they do not participate in it pari passu, and where the amounts accrued to them on loan account have not been repaid, is contrary to the terms of issue of the preference shares, beyond the scope of the directors’ dividend powers, oppressive of the preference shareholders, and contrary to the interests of the company as a whole. Alternatively, BBRC contends that if ALF has validly declared a dividend, then the accrued entitlements to the minimum cash distributions under the Shareholders Agreement are immediately payable to the preference shareholders.

BACKGROUND

4. ALF is the holding company of Dial-A-Dump Industries Pty Ltd (“DADI”). The group, which was founded by Mr Malouf, is in the business of waste collection, transportation, and disposal, land filling and recycling. Mr Malouf was the founder and has at all material times been the sole ordinary shareholder and sole director of ALF. The assets of the group comprise its waste collection and recycling business, and several parcels of industrial land upon which it conducts its business, one of which has recently been resumed by the State Government for the WestConnex Motorway, with the consequence that ALF’s rights in respect of it have been converted into a statutory entitlement to receive compensation for that land, which is likely to generate a substantial amount of cash (potentially in excess of $70 million) in the foreseeable future.

5. In early 2009, ALF raised external funding through the issue of convertible notes, pursuant to a Deed Poll dated 5 January 2009, which included the terms of issue (Schedule 1), and a draft shareholders agreement which was to regulate the rights of Mr Malouf as the ordinary shareholder and the preference shareholders upon the convertible notes maturing and converting into preference shares on 1 January 2013 (Schedule 4). BBRC subscribed for $30 million of convertible notes between 1 December 2010 and 21 May 2011, pursuant to a deed between BBRC, Mr Malouf and ALF dated 1 December 2010. On 1 January 2013, BBRC’s convertible notes matured and converted into preference shares and, in accordance with resolutions passed at a directors’ meeting and a members’ meeting of ALF held on 31 December 2012, ALF issued BBRC with 37,857,858 preference shares. Consequently, a share certificate dated 1 January 2013 was issued to BBRC.

6. The total "subscription amount" – being the original cash amount paid for convertible notes that matured and converted to shares totalled $62,400,000. Had all the noteholders paid the same price per note, and all the notes had converted to preference shares on a 1:1 basis, there would have been 62,400,000 preference shares issued. However, some noteholders had paid $1.20 for a note having a face value of $1.00, and in such a case their “subscription amount” was 20% higher than others who had paid only $1.00 per note. And the rate at which notes converted into preference shares differed, depending on whether the noteholder accepted a compromise number offered by ALF or, as in the case of BBRC, applied the complex formula (involving a calculation of organic debt) provided by the terms of issue. Because BBRC did not accept the compromise offer and insisted on the application of the contractual formula, its notes converted into shares at a higher rate than applied in the case of those noteholders who accepted the compromise. There was a dispute as to the rate at which certain of BBRC’s notes converted to preference shares, and BBRC brought proceedings in the Commercial List. Stevenson J upheld BBRC's claim in part[1] and, in accordance with orders made on 3 October 2014, ALF issued BBRC an additional 7,970,906 preference shares. An appeal was brought by BBRC, and a cross-appeal by Mr Malouf and ALF. On 25 October 2015, the Court of Appeal allowed BBRC’s appeal, and dismissed ALF’s cross-appeal. [2] This presumably resulted in a further issue of additional shares to BBRC; but although how many additional shares were issued is not revealed in evidence or self-evident from the judgment of the Court of Appeal, it does not affect the issues which I have to resolve.

   1. BB Retail Capital Pty Limited v Alexandria Landfill Pty Limited [2014] NSWSC 1363.

   2. BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd [2015] NSWCA 319.

7. There was also a dispute in the Commercial List proceedings as to the construction and effect of the provision of the Shareholders Agreement (cl 8.2(b)) which provided for minimum cash distributions to preference shareholders. [3] ALF had not made any payment to preference shareholders since 1 January 2013, nor had it accrued any debt or liability in favour of preference shareholders for the unpaid entitlements, and BBRC sought a declaration that ALF was required to do so. Ultimately that question was not litigated at the hearing, and the parties instead asked the Court to make a declaration, by consent, to the effect that ALF was obliged to make a quarterly payment to BBRC by way of dividend, or to accrue an amount by way of loan by BBRC pending accrual of income, equal to at least 11% per annum of the subscription amount of the preference shares held by BBRC. [4] Thereafter, the preference shares were restated as a liability rather than as equity, and the unpaid minimum cash distribution entitlements of the preference shareholders for the period 1 January 2013 to 30 September 2014 were accrued, treated as an interest expense and recorded as a liability to the preference shareholders for interest. As at 30 June 2014, the unpaid entitlements of preference shareholders accrued under clause 8.2(b) of the Shareholders Agreement were recorded at $10.296 million, to which a further $1.716 million was added for the quarter to 30 September 2014. [5]

   3. Clause 8.2(b) of the Shareholders Agreement is set out below at [33].

   4. BB Retail Capital Pty Limited v Alexandria Landfill Pty Limited [2014] NSWSC 1363 at [148]. The form of the declaration is set out in full below at [35].

   5. ALF's 2014 Consolidated Accounts, notes 17 and 28.

8. On 19 November 2014, ALF’s wholly owned subsidiary DADI, by its sole director Mr Malouf, resolved that DADI declare and distribute to ALF a dividend of $34,839,235, representing the profit after tax earned by DADI in the financial years ended 30 June 2013 and 30 June 2014 and the 3 months ended 30 September 2014. DADI did not have the liquid resources to pay this dividend in cash, and it was paid by being credited against a related party loan owing from ALF to DADI. The amount of this $34,839,235 dividend was included in the revenue and therefore profit of ALF in the special purpose interim financial report of ALF for the period 1 July to 27 November 2014, which informed the impugned dividend resolution of 28 November 2014, when Mr Malouf as sole director of ALF resolved:

Resolution 5 – Declaration of Dividend Table 5 – Ian Raymond Malouf

It is resolved that the company declare (but not pay) an interim dividend to the ordinary shareholder totalling $24,434,678.00 (2013: $ Nil) – The amount declared as an interim dividend for ordinary shares represents the same rate equivalent for the 21 month period 1 January 2013 to 30 September 2014 as the annual rate per share accrual in favour of preference shareholders.

Resolution 6 – It is further resolved that the company intends to pay the amounts accrued as dividends together with the dividend declared herein contemporaneously and not later than June 30, 2017.

9. On 3 December 2014, Mr Malouf distributed a letter to the preference shareholders, entitled "Accruals pending declaration and payment of dividends", together with a Notice of Annual General Meeting of ALF to be held on 28 January 2015, and the annual report for ALF for the year ended 30 June 2014. The letter referred to the impugned dividend resolution and continued:

The ability to declare the interim dividend arises in this case because of the one off debt forgiveness shown in the annual accounts. The declaration of the dividend is distinct from the ability to pay it and it is proposed that the interim dividend will be paid when the accrued amounts are paid as dividends to the preference Shareholders, no later than 30 June 2017.

The future ability to pay a dividend is impacted by two major considerations. The first of these is the pending compulsory acquisition by the WestConnex Delivery Authority of the Alexandria Landfill site. When that compensation is going to be available and how much that might be, are presently unknown. Those factors have contributed to the decision to nominate 30 June 2017 as the date for dividend payment.

The other major factor [which has been visited on a previous occasion] is the continuing obligation of accrual or payment required by clause 8.2(b). Whilst it is anticipated that there will be almost unique circumstances arising which it is expected will give the company an ability to pay the obligation under cl 8.2(b) the truth is that an ongoing obligation at this level will be financially too much for the Company to bear. Ultimately if the accrual continued indefinitely and became too large it could lead to the company being wound up. That could prove counterproductive for preference Shareholders in particular, due to the limitations which apply on a winding up.

In September and October 2013 Shareholders were asked to consider varying the Shareholders' Agreement so as to remove the mandatory and fixed rate obligation for payment. Because of the litigation then in train that meeting was not able to be held and Shareholders were not able to express their views in the form of a resolution.

10. Thus it was apparently contemplated that the interim dividend, though presently “declared”, would not be paid to Mr Malouf until a future date, by 30 June 2017, simultaneously with a declaration and payment of a dividend in favour of the preference shareholders which would discharge the accrued liabilities in respect of the minimum cash distributions. (How a dividend could discharge an extant liability is not apparent, and it will be necessary to return to this matter). [6]

    6. See [64] below.

11. The Notice of Annual General Meeting included notice of a members' resolution endorsing the resolutions passed by the sole director on 28 November 2014, including the impugned dividend resolution. In his annual report, Mr Malouf stated that he intended to exit ALF by sale of all his shares if an appropriate offer was received. On 12 December 2014, Gilbert + Tobin, on behalf of BBRC, challenged the validity of the impugned dividend resolution, and denied the entitlement of ALF to pass any resolution ratifying that declaration of dividend. The AGM was held on 24 February 2015. Mr Malouf, as sole ordinary shareholder, carried the resolution endorsing the resolutions of the sole director, including the impugned dividend resolution.

12. According to the ALF Group consolidated accounts for the year ended 30 June 2014, there was at that date total equity of $75.463 million, and profit attributable to the owners of $21.486 million. ALF's auditors PWC have expressed the opinion that as at 28 November 2014, the group had net assets of $78.227 million, and profits for the period 1 July 2014 to 27 November 2014 of $489,000; and that DADI had on 19 November 2014 declared a dividend in favour of ALF in the sum of $34,839,235. While there are some discrepancies in this material, they do not matter for present purposes: it is not in issue that ALF's net assets were and are sufficient to provide for both the impugned dividend, and the accrued liabilities to the preference shareholders.

ISSUES

13. BBRC contends that the impugned dividend resolution is void, oppressive of the preference shareholders, and/or contrary to the interests of ALF as a whole, by reason that (1) it incurs an immediate liability which ALF is presently unable to pay; and/or (2) it is inconsistent with the preference shareholders’ rights to participate in dividends pari passu, and in related respects. Alternatively, BBRC contends that if the impugned dividend was validly declared, then the accrued liabilities in respect of unpaid minimum cash distributions are immediately due and payable to the preference shareholders.

14. ALF and Mr Malouf contend that (1) the impugned dividend resolution did not result in ALF incurring an immediate liability; (2) the preference shares are not entitled to participate pari passu; (3) as there is no intention to pay the impugned dividend until there is a dividend declared in favour of the preference shareholders to discharge the accrued liabilities, and having regard to the basis on which the amount of the impugned dividend has been calculated by reference to the entitlements of the preference shares, there is in any event no substantive inconsistency with their pari passu rights if any; and (4) as ALF has not yet authorised payment of the impugned dividend and is not yet in a position to do so, and in any event will concurrently pay a dividend to preference shareholders to discharge the accrued liabilities, those liabilities are not yet due and payable.

15. Although the Statement of Claim raised an issue as to the validity of the resolution of the AGM of ALF ratifying the impugned dividend decision, it is common ground that if the director’s resolution was invalid for any of the reasons advanced by BBRC, such invalidity could not be cured by a resolution passed by him as an ordinary shareholder. On the other hand, if the impugned directors’ resolution was not invalid, then the issue of ratification is otiose. Accordingly, it is unnecessary to address the AGM resolution.

16. The issues which require resolution are:

1. What are the rights of the preference shareholders, and in particular:

1. Are they entitled to participate pari passu in any dividend;

2. If so, how does that right relate to their rights to minimum cash distributions, including those that have been accrued as loans?

2. Does the impugned dividend resolution create an immediate enforceable liability, or a deferred liability, or is it merely a statement of intention, or a nullity?

3. Is the impugned resolution, whatever its effect, inconsistent with the rights of, or oppressive to, the preference shareholders or contrary to the interests of the company as a whole, and in particular, having regard to the manner of its calculation and the intention that it be paid only concurrently with a dividend to the preference shareholders in discharge of their accrued loans, does it in any event implement in substance a pari passu distribution;

4. If the impugned dividend resolution is valid, have the accrued loans become due and payable to the preference shareholders?

WHAT ARE THE RIGHTS OF THE PREFERENCE SHAREHOLDERS?

17. The plaintiff contends that the preference shareholders are entitled to participate pari passu in any dividend, as well as to their minimum cash distribution of 11% per annum. The defendants contend that the preference shareholders are not entitled to participate pari passu in dividends while the company remains a going concern, but only in a winding up, and that their dividend rights are limited to a dividend that provides the minimum cash distribution of 11% per annum, so that after provision for the minimum cash distributions to preference shareholders, dividend can be allocated to the ordinary shareholder to the exclusion of the preference shareholders. Thus the defendants contend that if, as at 30 June 2017, there is sufficient cash available, the preference shareholders will receive their accrued entitlements, and the ordinary shareholder can then be paid the impugned dividend without any participation in it by the preference shareholders.

The documentary framework

18. According to the share certificate issued to BBRC, the preference shares are issued “on the terms and with the rights, benefits and entitlements set out in the Deed Poll issued by the Company and others and dated 5 January 2009 and set out in the Minutes of Directors of the Company held on 31 December 2012”, and are “governed by the Constitution of the Company”.

Constitution of ALF

19. In the constitution, “Act” means the Corporations Act 2001; [7] the constitution is to be interpreted “subject to the Act”; [8] and unless the contrary intention appears, an expression in a clause which is defined by or that deals with a matter dealt with by a provision of the Act has the meaning given to it in that provision of the Act. [9] The replaceable rules are disapplied. [10]

    7. Clause 1.2(a).

    8. Clause 1.3(a).

    9. Clause 1.3(c).

    10. Clause 1.5.

20. Clause 2.1 (Power of Directors to issue shares, option and other securities) provides:

Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, but subject to this Constitution and the Act, the Directors may issue or grant shares or options over shares in and other securities of the Company with such preferred, deferred or other special rights or such restrictions, whether with regard to dividend, voting, return of capital, payment of calls or otherwise, as the Directors determine.

21. Under clause 2.2 (Preference shares), but subject to any other agreement attached to their issue, preference shares carry priority in a winding up for repayment of capital in a winding up or reduction of capital (clause 2.2(a)); a right to payment out of the profits of a preferential dividend in priority to the payment of a dividend on any other class of shares, accruing from day to day on the amount paid up at the times and the rate specified at the time of issue (clause 2.2(b)), and the right to vote only in limited circumstances, including during winding up (clause 2.2(f)):

The Company may issue preference shares from time to time. Subject to any other agreement attached to the issue of specific preference shares, preference shares have the following rights and restrictions:

(a)   repayment of capital: the right in priority to any other class of share to repayment of the amount of the share:

(i) in a winding up or reduction of capital; and

(ii) in the case of a redeemable preference share, on redemption;

(b)   dividends from profits: the right to payment out of the profits of the Company of a preferential dividend in priority to the payment of a dividend on any other class of shares, accruing from day to day and payable on the amount paid on the share at the times and at the rate, which may be fixed or variable, specified at the time of issue;

(c)   accrued dividends: the right in priority to any other class of shares to the amount of any dividend accrued but unpaid on the share:

(i) in a winding up or reduction of capital; and

(ii) in the case of a redeemable preference share, on redemption;

(d)   participation in surplus assets and profits: no rights to participate in the profits or property of the Company other than as set out in this Rule 2.2 whether on a winding up, reduction of capital or redemption in the case of a redeemable preference share;

…

(f)   voting: the right to vote in the following circumstances and in no other circumstances:

(i) on a proposal to wind up the Company or reduce the share capital of the Company or to dispose of all the property, business and undertaking of the Company;

(ii) during the period during which a dividend or part of a dividend in respect of the preference share is in arrears;

(iii) in a resolution to approve the terms of a buy-back agreement;

(iv) on a proposal that affects rights attached to the share; or

(v) during the winding up of the Company; …

22. Clause 7.1 (Powers to declare dividends and pay interest) provides the power for the directors to make dividend decisions, but subject to any preferential, special, deferred or other rights with which any shares may be issued or may from time to time be held. [11] Clause 7.2 permits the directors to authorise differential dividends: [12]

(a)   Subject to Rule [7.1(a)], except where the resolution for the payment of the dividend otherwise directs, every dividend must:

(i)   be paid in respect of all shares (if the resolution for the payment of the dividend otherwise directs, it must be paid in respect of some shares to the exclusion of others);

(ii)   …

(iii)   be apportioned and paid proportionately to the amount paid or credited as paid on the shares in respect of which the dividend is to be paid during any part or parts of the period in respect of which the dividend is paid (unless a share is issued on terms providing that it will rank for dividends as from a particular date, in which case the share ranks for dividends from that date only).

11. Clause 7.1 is set out and further discussed in the context of the effect of the impugned dividend resolution, at [70] below.

12. It was common ground that in “Subject to rule 8.1(a)” the reference to “8.1(a)” was erroneous and should be construed as a reference to 7.1(a).

The Deed Poll

23. The Deed Poll was made on 5 January 2009, relevantly by ALF and Mr Malouf. Clause 1.1 defines “Terms of Issue” as meaning the terms and conditions in Schedule 1, and the “Proposed Shareholders Agreement” as the draft shareholders agreement attached to the Deed Poll as Schedule 4.

24. Clause 2(b) provides that each convertible note is issued on and subject to the provisions of the Deed Poll, including the Terms of Issue. By clause 3, Mr Malouf was obliged, in the event that notes were to convert into shares pursuant to the Terms of Issue, to execute the proposed Shareholders Agreement on his own behalf, on behalf of ALF, and as attorney for the converting note holders.

The Terms of Issue

25. Under clause 1.1 (Definitions) of the Terms of Issue, “conversion” means the conversion of a convertible note in accordance with clause 7; “maturity date” means 1 January 2013; and “Shares” means either or both fully paid ordinary shares and fully [paid] preference shares in ALF. By clause 1.2, headings are for convenience only and do not affect interpretation; below, I use them in this summary for convenience to provide a description of the general subject matter of the relevant term.

26. Each convertible note must have a face value, and is issued in denominations of $1 million or more (clause 2.2). Subject to the Terms of Issue, each convertible note bears interest from the issue date at 6% per annum of its face value until redemption or conversion (clause 3.1), payable quarterly in arrears (clause 3.2) until redemption, conversion or repayment (clause 3.3). However, if a convertible note is redeemed at the maturity date and a valid “bonus interest election” has been made in respect of it, a bonus interest payment of 4% per annum from the issue date until the maturity date is also payable (clause 4.3), so that the effective interest rate in those circumstances is 10%.

27. Clause 7 (Conversion) makes provision in respect of conversion of the convertible notes into shares in ALF, but clause 7.1 (General) contemplates that ALF and a note holder may agree on different terms:

Unless Alexandria Landfill and a Note Holder otherwise agree, a Convertible Note may not be converted other than in accordance with this clause 7.

28. Clause 7.2 (Maximum Limit on Capital of the Company) limits the issue of Convertible Notes to a maximum aggregate face value of up to $70 million (out of a total of $280 million issued capital). Clause 7.3 (Entitlements on Conversion) provides that the ordinary shareholder will be entitled to the ordinary profits up to the conversion date:

(a)   Malouf will be entitled to profits of the group from the ordinary conduct of the Enterprise derived on or prior to the Maturity date or such other date as Conversion occurs. …

(b)    Profits derived other than from the ordinary conduct of the Enterprise (for example, the sale of part of the assets, new projects, the capital growth of the assets of the Group) will be retained by the Group and form part of the assets owned by the Group at the time of Conversion and will form part of the assets owned by the Note Holders pursuant to their Shares.

29. Clause 7.4 (Issue of “Shares” on Conversion of Convertible Notes), which is central to this issue, provides as follows (emphasis added):

Convertible Notes which are to Convert pursuant to these Terms of Issue will Convert into fully paid preference Shares in Alexandria Landfill. These preference Shares will rank in priority to all other Shares on winding up, but will rank pari passu with all other Shares for dividends and other entitlements.

30. Clause 7.5 (Conversion) provides the formula for calculating the number of preference shares a converting note holder is to receive. Its operation was the subject of the litigation before Stevenson J and the Court of Appeal. Clause 7.7 (Becoming a shareholder) gives operation to the Shareholders Agreement:

If Conversion occurs, each Note Holder whose Convertible Notes are to be Converted:

(a)   agrees it will become a member of the Company and agrees to have its name entered in the applicable Share register; and

(b)   accepts the preference Shares issued upon Conversion on the terms and conditions of the constitution of [the] Company and the Proposed Shareholders Agreement, and agrees to be bound by the constitution of the Company and the Proposed Shareholders Agreement without the need for any further act by them.

31. By clause 7.8 (Entering the Proposed Shareholders Agreement), each converting note holder must upon conversion and through Mr Malouf as attorney enter into the proposed Shareholders Agreement.

The Shareholders Agreement

32. In the Shareholders Agreement, “Shares” means any or all of the shares in ALF. Clause 1.2 provides that clause headings are for convenience only and must not be used when interpreting the document. Clause 2(b) provides that in the event of any conflict or inconsistency, the Shareholders Agreement is to prevail over the constitution. [13]

    13. While I doubt the validity of such a provision generally, in this case, insofar as the constitution makes provision (in clause 2.2) that it is “subject to any other agreement attached to their issue”, that problem does not arise: see [21] above.

33. Clause 8.2, which is also central to the present dispute, is as follows (emphasis added):

8.2 Minimum Cash Reserves to be Maintained

(a)   The Shareholders agree that it is intended that at all times the Company will need to retain sufficient funds in the Company’s account to meet anticipated expenses and such reserves as would be prudent having regard to the proposed activities of the Company.

(b)   The Company will make payments to the preference Shareholders at least equal to a return of 11% per annum on the subscription amount for the Shares owned by the preference Shareholders. These payments may be made by way of loan pending accrual of income by the Company so that a dividend can be declared. If the payment is by dividend, the franking credits must be in addition to the 11% per annum minimum cash distribution. These payments will be made quarterly in arrears from the date the preference Shares are issued.

34. The amount paid per share has varied between different preference shareholders. However, the 11% relates not to the amount paid per share, but to the entirety of amount subscribed by a shareholder, and so creates a fixed entitlement for each preference shareholder to payments equivalent to 11% per annum on its investment in the convertible notes. However, provision is made that those payments can be made “by way of loan pending accrual of income by the company so that a dividend can be declared”.

35. As has been mentioned, the interpretation of some aspects of this clause was the subject of a declaration, made by Stevenson J by consent. That declaration was in the following terms:[14]

A declaration that the first defendant is obliged under clause 8.2(b) of the Shareholders Agreement made on or about 1 January 2013 between the plaintiff, the first defendant and the second defendant (amongst others) to make a quarterly payment to the plaintiff by way of dividend or to accrue an amount by way of loan by the plaintiff pending accrual of income, on each 1 April, 1 July, 1 October and 1 January after 1 January 2013, in an amount equal to at least 11% per annum of the subscription amount of preference shares in the first defendant held by the plaintiff.

14. BB Retail Capital Pty Ltd v Alexandria Landfill Pty Ltd [2014] NSWSC 1363 at [148].

36. Thus subclause (b) provides for a minimum return to preference shareholders of 11% per annum on the subscribed amount of their shares. The use of the words “at least” and “minimum cash distribution” indicate that this is a minimum, and not exhaustive of the preference shareholders’ entitlement to a return on their investment – and thus that the 11% is a “floor” but not a “ceiling”. Moreover, that minimum cash distribution is not – at least necessarily – a dividend: it is characterised as a payment which must be made quarterly and may be made by way of loan pending accrual of income by the Company so that a dividend can be declared, and in respect of which if the payment is by dividend, the franking credits must be in addition to the 11% per annum.

The Issue Resolution

37. The Minutes of a meeting of directors of ALF on 31 December 2012 record the following (emphasis added):

Allotment of Preference Shares:

The Company issued Convertible Notes in accordance with Deed Polls dated 5 January 2009 and 22 July 2011. Some of the holders of the Convertible Notes wish to convert their Convertible Notes into fully paid “A” Class preference shares in the Company in accordance with the Deed Poll. In accordance with Clause 7.4 of the Convertible Note Terms of Issue contained in Schedule 12 to the Deed Poll the preference shares to be issued on conversion of the Convertible Notes were to rank in priority to all other shares in the Company on issue upon a winding up of the Company and otherwise were to rank pari passu with all other shares on issue in the Company for dividends and all other entitlements.

RESOLVED THAT the number of fully paid preference shares set out in Annexure “A” to the Minutes shall be and are hereby issued and allotted to the persons or entities whose names and addresses are set out in Annexure “A” which fully paid preference shares shall:

(a)   rank in priority to all other shares in the Company on issue upon a winding up of the Company; and

(b)   otherwise rank pari passu with all other shares on issue in the Company for dividends and all other entitlements.

38. As has been observed, the share certificate that was subsequently issued referred to the “rights, benefits and entitlements” set out in the Deed Poll and the Minutes of 31 December 2012.

Do the preference shares participate pari passu in any dividend?

39. The relevant rights of the preference shareholders turn on the construction of clause 7.4 of the Terms of Issue, clause 8.2 of the Shareholders Agreement, and their relationship with each other and with other provisions relating to the preference shares. Although the Shareholders Agreement was not executed until 31 December 2012, it was provided for in and annexed in draft to the Deed Poll, so that it was conceived and drafted contemporaneously with the Deed Poll and the Terms of Issue, all of which existed when the convertible notes were applied for and issued. Thus the Shareholder Agreement should, so far as practicable, be construed consistently with the Deed Poll and Terms of Issue, rather than as superceding them.

40. The second sentence of clause 7.4 of the Terms of Issue provides that the preference shares (1) will rank in priority to all other shares on winding up, but (2) will rank pari passu with all other shares for dividends and other entitlements. While the right of preference shares to participate pari passu with all other shares for dividends is repeated in the issue resolution of 31 December 2012, the defendants fairly observe that the resolution simply picks up the terms of clause 7.4, and was not intended to produce an outcome other than that required by clause 7.4. Accordingly, the argument turns on the construction of clause 7.4, not of the resolution.

41. The defendants submitted that, firstly, the second sentence, in referring to ranking pari passu, should not be construed as meaning that dividends declared on ordinary shares may only be declared where the same dividend is declared in favour of all other shareholders, but was concerned only with the position on winding up. The defendants’ position was that the second sentence of clause 7.4 is a single sentence, the whole of which refers to winding up, its effect being to exclude “dividends and other entitlements” from the priority to which preference shares are otherwise entitled in a winding up. However, once one excludes “dividends and other entitlements” from priority, there are no remaining entitlements which would have priority, even if limited to winding up. The defendants’ response was that the first phrase should be construed as implicitly referring to capital; but the need to insert “in relation to capital” in the first phrase to sustain the defendants’ construction presents an immediate difficulty with it. The more natural reading is that the provision has two distinct parts – the first identifying a priority in a winding up (and effectively picking up in that respect the provisions of clauses 2.2(a)(i) and 2.2(c)(i) of the constitution), and the second being of general application in the context of the company as an operating entity, quite apart from any winding up. So read, it deals comprehensively with the rights of preference shares, both in a going concern and upon winding up.

42. Secondly, it was said that if clause 7.4 were construed as dealing with dividend rights while the company was a going concern, then it provided no preferential dividend for the preference shareholders, in respect of their rights under clause 8.2(b) or otherwise. However, as has been seen,[15] the rights of the preference shareholders under clause 8.2(b) of the Shareholders Agreement are not rights to dividend, let alone preferential dividend, but to “payments” – which may, but need not necessarily – be satisfied by dividend. And as will be seen, the absence of any other provision in respect of dividend in respect of these shares is a reason for favouring the view that clause 7.4 deals with dividend generally, not just in a winding up.

    15. See [36] above.

43. Thirdly, it was submitted that one should hesitate before concluding that the second sentence of clause 7.4 sets at nought the detailed constitutional provisions regarding preferential dividends and directors’ powers. However the constitutional provisions in clause 2.2 – which are expressly subject to any other agreement attached to the issue of specific preference shares – provide that preference shares are entitled in priority to any other class of shares to repayment of the amount of the share in a winding up or reduction of capital; to payment out of the profits of a preferential dividend in priority to the payment of a dividend on any other class of shares (if a rate has been specified at the time of issue); in priority to any other class of shares to the amount of any dividend accrued but unpaid on the share; no other rights to participate in the profits or property of the company on a winding up or reduction of capital; and the right to vote during the winding up of the Company. The effect of the defendants’ submission would be that clause 7.4: (1) confirms the constitutional priority in regard to return of capital in a winding up; (2) overrides the constitutional priority in regard to accrued and unpaid dividends in a winding up; (3) gives a right to participate in the profits or property of the company on a winding up, which the constitution would have denied; (4) confirms the constitutional right to vote during a winding up; yet (5) is silent as to the rights of preference shares while the company is a going concern. That analysis demonstrates that on the defendants’ construction, clause 7.4 would work a considerable impact on the constitutional provisions. Moreover, it is improbable that where the constitution gives preference shareholders priority for accrued but unpaid dividends, it would provide that they rank only pari passu in a winding up, yet confer additional rights, denied by the constitution, to participate in surplus assets or profits. In circumstances where the constitution explicitly provides that it is subject to any other agreement attached to the issue of specific preference shares, and where on the defendants’ construction also there would be radical changes to the effect of the constitutional provisions in respect of rights attached to preference shares, the fact that the second sentence of clause 7.4 would impact on the constitutional provisions provides no ground for hesitating in concluding that the constitutional position has been displaced.

39. A related argument was that while clause 7.4 on any view derogated from the priority that preference shares would otherwise enjoy to a preferential dividend under clause 2.2 of the constitution, the defendants’ construction has less drastic consequences than the plaintiff’s, because it limits that derogation to a winding up. However, that overlooks that a preference share is entitled to a preferential dividend while the company is a going concern under clause 2.2(b) only if at the time of issue a rate of preferential dividend is specified. As none was – cl 8.2(b) of the Shareholders Agreement does not provide a preferential dividend, but a minimum cash distribution, which need not necessarily be by dividend – there is no right to a preferential dividend from which clause 7.4 would derogate.

40. Fourthly, the defendants referred to cases in which similar provisions have been construed to refer only to the position on winding up. In Re F de Jong & Co Ltd, [16] the question was whether the preference shares were entitled to priority in the winding up for arrears of dividend which were accrued but unpaid. [17] The relevant article provided (emphasis added):

The … preference shares shall carry the right to a fixed cumulative preferential dividend at the rate of six per cent per annum on the capital for the time being paid up thereon respectively, and shall have priority as to dividend and capital over the other shares in the capital for the time being, but shall not carry any further right to participate in the profits or assets …

16. [1946] Ch 211.

17. Which is a different question from that under consideration here, namely whether the preference shares are entitled to participate pari passu in dividends while the company is a going concern.

46. Morton LJ, with whom Lord Greene MR and Somervell LJ agreed, held that the phrase “and shall have priority as to dividend and capital over the other shares in the capital for the time being” referred to the rights in a winding up, for three reasons. The first was that the word “preferential” in the first part of the article had already established the priority of the preference shareholders as to dividend while the company was a going concern, so the priority in the second phrase must refer to something else – namely, winding up. In the present case, there is no equivalent provision in clause 7.4; nor is there any provision anywhere else which specifies, for the purposes of clause 2.2(b) of the constitution, the rate of a preferential dividend. The defendants submitted that clause 8.2(b) of the Shareholders Agreement makes provision in respect of the entitlement of preference shareholders to an income stream and provides for rights in respect of income, so that it would make sense that clause 7.4 is concerned only with rights on winding up. However, clause 8.2(b) makes no provision in respect of dividend rights, only rights to a “payment”; and if clause 7.4 does not deal with those dividend rights, then there is no provision that does so. In the absence of any other provision dealing with the dividend rights of these preference shares, there is no such need, as there was in F de Jong, to treat the reference to dividends in clause 7.4 as one to accrued and unpaid dividends in the context of a winding up.

47. The second matter relied on by Morton LJ was that the words “priority … as to capital” naturally refer to a distribution of assets in the winding up. There is no such contextual reference in clause 7.4. And the third was that one would expect to find, somewhere, provisions dealing not only with rights of preference shareholders while the company was a going concern, but also with their rights on winding up, and unless the passage “shall have priority as to dividend and capital over the other shares in the capital” dealt with the position in a winding up, there was no such provision; moreover, the passage “but shall not carry any further right to participate in the profits or assets” rounded of the description of the rights of preference shareholders, preventing them from having any more than their fixed cumulative preferential dividend while the company was a going concern, and the arrears of dividend and return of capital in a winding up, and showed that the article dealt comprehensively with those rights. In the present case, the absence of any other provision dealing with dividend rights of these preference shares while the company is a going concern points in the opposite direction, and favours the view that the second phrase of clause 7.4 is concerned with the position while the company is a going concern.

48. His Lordship referred to two earlier cases on similar provisions in which the same question (the right of preference shares to priority for arrears of dividend in a winding up) arose. In Re Walter Symons Ltd, [18] the relevant clause of the memorandum of association provided that the preference shares (emphasis added):

… shall confer the right to a fixed cumulative preferential dividend at the rate of twelve per cent. per annum on the capital for the time being paid up thereon, and to half the distributable surplus profits which in respect of each year shall remain after paying or providing for the payment of a dividend for such year at the rate of ten per cent per annum on the capital for the time being paid up on the ordinary shares, and shall rank both as regards dividends and capital in priority to the ordinary shares, but shall not confer the right to any further participation in profits or assets.

18. [1934] Ch 308.

49. Maugham J held that in the phrase “and shall rank both as regards dividends and capital in priority to the ordinary shares”, the reference to “dividends” was to the arrears of dividend in a winding up. While some reliance was placed on the word “rank” as indicating a winding up was contemplated, it is notable that, as in F de Jong, the earlier part of the clause already conferred a right to a preferential dividend while the company was a going concern, so the priority referred to in the later phrase must have been additional.

50. The other case referred to in F de Jong was Re Wood, Skinner & Co, [19] in which the relevant clause of the memorandum provided (emphasis added):

Such preference shares shall confer the right to a fixed cumulative dividend of 6 per cent per annum on the capital paid up thereon and shall rank both as regards dividends and capital in priority to the ordinary shares with power to increase the capital.

19. [1944] Ch 323.

51. In that instance, Cohen J held that the preference shareholders were not entitled to priority as to arrears of dividends in a winding up – and thus that the phrase “and shall rank both as regards dividends and capital in priority to the ordinary shares” was not concerned with the position on winding up. In F de Jong, Morton LJ distinguished but did not differ from Re Wood, Skinner & Co. The point of distinction was that it was not necessary for Cohen J to treat the words “and shall rank both as regards dividends and capital in priority to the ordinary shares” as conferring rights in respect of arrears of a cumulative preferential dividend in a winding up, because there had been no earlier statement that the preference shareholders were to have a preference dividend – unlike the other cases, the earlier part of the clause referred only to a “fixed cumulative dividend”, not a “preferential” dividend.

52. In the present case, as in Re Wood, Skinner & Co, it is not necessary to treat the words “but will rank pari passu with all other Shares for dividends and other entitlements” as dealing with rights in respect of arrears of dividend in a winding up, because there is no other provision dealing with dividend rights in respect of these preference shares while the company is a going concern.

53. Fifthly, the defendants submitted that the use of the word “rank” in clause 7.4 favoured the view that the provision was concerned solely with the position on winding up. Use of the word “rank” was a matter which had apparently influenced Maugham J in Re Walter Symons. However, in clause 7.2 of the constitution,[20] sub-clause (a)(iii) uses the terminology of shares “ranking” for dividend, in a context which is plainly intended to apply while the company is a going concern and not only upon winding up. And, as Mr Hutley SC for the plaintiff pointed out, that provision reflects a longstanding precedent, which can be found in Article 102 of the Table A articles referred to in the (NSW) Companies Act 1961 (emphasis added):

102. Subject to the rights of persons, if any, entitled to shares with special rights as to dividend, all dividends shall be declared and paid according to the amounts paid or credited as paid on the shares in respect whereof the dividend is paid, but no amount paid or credited as paid on a share in advance of calls shall be treated for the purposes of this regulation as paid on the share. All dividends shall be apportioned and paid proportionately to the amounts paid or credited as paid on the shares during any portion or portions of the period in respect of which the dividend is paid; but if any share is issued on terms providing that it shall rank for dividend as from a particular date that share shall rank for dividend accordingly.

20. See [22] above.

54. Accordingly, use of the terminology of ranking is no indication that the provision is concerned only with the position on winding up.

55. The defendants also submitted that the notion of ranking “pari passu” with the other shares did not sit comfortably with different classes of shares and dividends. However, there is no practical difficulty in this respect when only one class of ordinary shares has been issued: at all material times, the only “other” shares have been the A Class Ordinary shares issued to and held by Mr Malouf.

56. The defendants submitted that the construction which made the clearest sense of the documents, read together, was one by which the liability under clause 8.2(b) could be resolved by declaring and paying preferential dividends in due course, and to the extent that the company had resources left over after meeting the entitlement of the preference shareholders, to declare dividends in favour of the ordinary shareholder. However, such a construction encounters the obstacles, first, that it proceeds on the misconceived basis, discussed below, that the accrued liabilities can be discharged by a dividend; [21] and secondly, that it gives no sense to the words “pari passu” in clause 7.4 of the terms, or “at least” and “minimum” in clause 8.2(b) of the agreement. The defendants also submitted that on the plaintiff’s construction, the ordinary shareholder would not be able to enjoy benefits in respect of any surplus available after payment of the 11% minimum cash distribution, unless the surplus was sufficient to enable a dividend to be declared for all shareholders. However, even if correct, it is not apparent why that consequence was not necessarily intended; it is no more or less commercially rational than the alternative. And in any event, the aggregate quantum of a dividend is unaffected by whether it is on all or only some of the shares; it is only the divisor and the amount attributable to each share that is affected. Thus the adequacy of assets or profits to justify a dividend is unaffected by whether the dividend is to be in respect of all or only some of the shares.

    21. See at [64] below.

57. On the other hand, the natural reading of the second sentence of clause 7.4 is that the first phrase is addressed to the rights of the preference shares in a winding up, and the second to their rights in other respects – that is to say, while the company is a going concern. That natural reading is contextually reinforced by the first sentence, stating that “Convertible Notes which are to Convert pursuant to these Terms of Issue will Convert into fully paid preference Shares in Alexandria Landfill”: it would be very strange indeed if the second sentence dealt only with dividend rights on winding up, and there was no provision dealing with dividend rights otherwise. It is further reinforced by the necessity to insert “as to capital” in the first phrase of the second sentence, before the defendants’ construction can be even arguable. The cases to which reference has been made, as analysed above, favour the view that the second phrase is addressed to the position while the company is a going concern. Moreover, as clause 8.2(b) does not exhaustively state the preference shareholders’ rights in respect of income, but only the minimum, that is suggestive of there being some other source of distributions, which may exceed the minimum. [22] A construction that denied the preference shares a right to participate pari passu in dividends would effectively limit their entitlement to the 11% “minimum cash distribution” under clause 8.2(b) of the shareholders agreement. Such a result would be inconsistent with the words “at least” and “minimum cash distribution” in clause 8.2(b), and treat what is plainly intended to set a minimum only, as a complete statement of the income rights of preference shares. That would defeat the whole point of converting the notes into equity, which was to add to their rights to interest and repayment (which they already enjoyed as convertible notes) a right to participate in profits.

    22. Any suggestion that clause 8.2(b) simply means that there is a discretion to pay more than 11% is implausible: there would be no reason for the sole director/ordinary shareholder to agree to do so, which would leave the words “at least” and “minimum” devoid of practical content.

58. For those reasons, the preference shares are entitled to participate pari passu with the other shares in any dividend. [23]

How do the pari passu rights relate to rights to minimum cash distributions?

23. Because the power of the directors to issue shares with preferred or special rights in clause 2.1 of the constitution is expressed to be “without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares”, and the power to declare dividends including differential dividends in clauses 7.1(a) and 7.2(a) is expressed to be “subject to any preferential, special … or other rights with which any shares may be issued or may from time to time be held”, those powers cannot be deployed to derogate from the rights attached to the subject preference shares under the Terms of Issue.

59. The plaintiff submitted that the preference shareholders were entitled to a preferential dividend of 11%, plus the right to share pari passu in any further dividends above that; while the defendants submitted that the preference shareholders were entitled only to the 11% “dividend” referred to in clause 8.2(b) of the Shareholders Agreement. My above conclusion that the preference shares participate pari passu in any dividend requires that the defendants’ position be rejected; but it does not follow that the plaintiff’s position, which would see the preference shareholders receive 11% plus their aliquot share of any dividend, is correct.

60. As has already been observed, the rights of the preference shareholders under clause 8.2(b) of the Shareholders Agreement are to “payments” constituting a “minimum cash distribution”, not to dividend; and they set a floor, and not a ceiling, on their rights. However, they can – though they need not necessarily – be satisfied by dividend. The choice of whether to pay by dividend or otherwise is that of the company. Clause 8.2(b) does not require that the preference shares receive an 11% return in addition to any ordinary dividend in which they might participate, but that in all they receive at least 11% per annum.

61. In my view, the entitlement of the preference shareholders is to share pari passu with other shares in any dividend, and, to the extent that such dividend is insufficient to provide an 11% return, to have it topped up to 11%. First, they are entitled to share pari passu with the other shareholders in any dividend. If that produces (or exceeds) an 11% return, that would exhaust their rights under clause 8.2(b) for the relevant period. But if it does not, then they are entitled to payments – by dividend or otherwise – which “top up” their distributions to 11%. Thus, any dividend satisfies the clause 8.2(b) obligation pro tanto, and the company has to find some other means of paying the difference, if any, between the dividend and 11%.

62. By reason of clause 8.2(b) of the Shareholders Agreement,[24] the heading “Minimum Cash Reserves to be Maintained” is to be disregarded in interpreting the clause. Nonetheless, subclause (a) makes clear that the shareholders intended that the company would retain sufficient funds to meet anticipated expenses and prudent reserves before distributing cash to shareholders. In the light of the underlying intent reflected in subclause (a), and the consent declaration made by Stevenson J, the rationale of clause 8.2(b) is that while the preference shareholders are to be entitled to a minimum 11% per annum return from conversion – even while ALF is unable to declare a dividend – nonetheless, until there are sufficient funds to permit a dividend to be paid, taking into account ALF’s need to retain sufficient funds to meet expenses and provide reserves, actual payment of each required minimum payment can be deferred, and instead credited to the loan account of each preference shareholder. [25]

    24. See [33] above.

    25. This is in any event the preferable construction from a commercial perspective, in light of the apparent intent to maintain sufficient cash reserves in ALF. There may have been an alternative interpretation, that ALF even in the absence of dividend had to make cash payments to the preference shareholders, which would be treated as loans to (rather than by) the shareholders until a dividend was declared (which in that context would reduce and ultimately extinguish the loan). However, that construction does not sit well with the intention of maintaining minimum cash reserves in ALF, and is not now open in light of the consent declaration made by Stevenson J.

63. The loans that so arise could not be immediately repayable, as if they were the purpose of permitting the obligation to be satisfied by way of loan – namely, to ensure that ALF retained sufficient funds to provide for expenses and reserves – would be defeated. For the same reason, the loans could not be repayable on demand. However, the permission to make the payments by way of loan comes to an end upon accrual of income … so that a dividend can be declared.

64. Once there has been an accrual to a preference shareholders’ loan account in respect of such a payment, such a loan is a separate and additional entitlement to any entitlement to dividend, and a declaration of dividend could and would not extinguish the existing loan account liability, but would create an additional liability to the shareholder. A declaration of dividend creates a liability owed by the company to the shareholders, not the reverse. While a dividend could be set off against a liability owed by a shareholder to the company (as was the case, for example, with the dividend declared by DADI in favour of ALF), it cannot be set off against a liability owed by the company to a shareholder; to the contrary, it increases the liability. Accordingly, the notion which is apparently entertained by Mr Malouf, that by declaring a dividend in favour of preference shareholders the accrued liabilities can be paid or extinguished, is misconceived: while in the future their current entitlements can be satisfied by dividend, the accrued liabilities cannot. Moreover, as the company’s entitlement to accrue the minimum cash distributions by way of loan ceases when there has been accrual of income … so that a dividend can be declared, no dividend can be paid, consistently with the rights of the preference shareholders, unless the amounts accrued on loan account in respect of the 11% minimum cash distribution are first repaid to them.

WHAT IS THE EFFECT OF THE IMPUGNED DIVIDEND RESOLUTION?

65. The plaintiff submitted that the impugned dividend resolution gave rise to an immediately enforceable debt. The defendants submitted that it was in effect a statement of intent or policy. The plaintiff replied that if it was not an effective decision to pay a dividend, it was a nullity.

Does the resolution give rise to an immediately enforceable debt?

66. The first question is whether the impugned dividend resolution creates an immediately enforceable liability, or a deferred liability, or is merely a policy statement, or a nullity. The plaintiff submits that the impugned dividend resolution “declares” a dividend, albeit an interim dividend; that although the resolution specifies no time for payment, Corporations Act, s 254V(2), means that a debt is created and incurred and payable forthwith; and that there is no justification for incurring that obligation, a fortiori when Mr Malouf intends to exit, and the company is unable to pay it; that could not be bona fide in the interests of the company, and is oppressive. The defendants contend that the true effect of the resolution is not to declare a dividend so as to create an enforceable debt in favour of Mr Malouf, and that liability to pay the dividend is not incurred unless and until a date is fixed for payment; that there is no intention to afford Mr Malouf any priority in any practical sense; and that even if the resolution was a declaration of a dividend in the strict sense, although not immediately payable, it is a preference only in a formal and not in a practical sense; and that in substance the resolution was a statement of policy or intent. The plaintiff responded to the effect that if it were merely a statement of policy or intent, then it was a nullity, and/or it expressed a policy or intent which was declaration of a dividend such as to create an immediately enforceable right and liability inconsistent with the rights of the preference shareholders.

67. Whether the impugned dividend resolution creates an immediately enforceable right and liability depends upon whether it is a declaration of a dividend for the purposes of Corporations Act 2001, s 254V(2), which turns on the construction and interaction of Corporations Act 2001, s 254V, the corporate constitution, and the resolution.

The Corporations Act

68. (CTH) Corporations Act 2001 relevantly provides:

Other provisions about paying dividends (replaceable rule — see section 135)

254U

(1) [Amount, time and method of payment] The directors may determine that a dividend is payable and fix:

(a) the amount; and

(b) the time for payment; and

(c) the method of payment.

The methods of payment may include the payment of cash, the issue of shares, the grant of options and the transfer of assets.

(2) [Interest not payable on dividend] Interest is not payable on a dividend.

When does the company incur a debt?

254V

(1) [When debt incurred in relation to time fixed for payment of dividend] A company does not incur a debt merely by fixing the amount or time for payment of a dividend. The debt arises only when the time fixed for payment arrives and the decision to pay the dividend may be revoked at any time before then.

(2) [When debt incurred on declaration of dividends] However, if the company has a constitution and it provides for the declaration of dividends, the company incurs a debt when the dividend is declared.

69. Corporations Act, s 588G(1A), confirms that a company which has a constitution that provides for the declaration of dividends incurs a debt “when the dividend is declared”.

The corporate constitution

70. For the purposes of s 254V, ALF has a constitution. As has been noted, the replaceable rules were disapplied; accordingly, s 254U, set out above, does not apply. Clause 7.1 (Powers to declare dividends and pay interest) relevantly provides:

(a)    Subject to any preferential, special, deferred or other rights with which any shares may be issued or may from time to time be held, the Directors may from time to time declare such dividends to be paid to members as appear to the Directors to be justified by the profits of the Company.

(b)   The Directors may declare and authorise the payment by the Company to members of such interim dividends as appear to the Directors to be justified by the financial position of the Company.

(c)   No dividend bears interest against the Company.

…

(f) A transfer of shares does not pass the right to any dividend declared on the shares unless the transfer is registered or left with the Company for registration in accordance with this Constitution on or before:

(i)   where the Directors have fixed a record date in respect of that dividend, that date; or

(ii)   where the Directors have not fixed a record date in respect of that dividend, the date the dividend was declared.

The resolution

71. The impugned dividend resolution of 28 November 2014 has been set out above. [26] Relevantly, resolution 5 was to declare (but not pay) an interim dividend to the ordinary shareholder. Resolution 6 was that the company intends to pay the dividend not later than June 30 2017.

    26. See [8] above.

72. The plaintiff submits that regardless of the terms of the resolution, its legal effect was to create an immediately enforceable debt: the company has a constitution that provides (by clause 7.1) for the declaration of dividends, and the impugned dividend resolution was an exercise of that power. The plaintiff submitted that s 254V has the consequence that, whereas at common law an interim dividend could be revoked at any time prior to payment where the relevant power under the corporate constitution was "to pay" an interim dividend, even if the resolution used the word "declare", after the introduction on s 254V (with effect from 1 July 1998) the declaration of an interim dividend (if a company's constitution authorised the declaration of dividends) creates a debt at the time the interim dividend is declared. [27] The impugned dividend resolution did not (merely) fix the amount or time for payment of a dividend, but in terms “declared” a dividend. Accordingly, the legal effect of the impugned dividend resolution was to create an unconditional debt payable to Mr Malouf immediately. [28]

    27. Citing Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 at 609 [20], 613-5 [37]-[40].

    28. Citing Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 at 572 per Mason J; Bluebottle at 609 [20]; Potel v Inland Revenue Commissioners [1971] 2 All ER 504 at 511g-h per Brightman J; Re Severn and Wye and Severn Bridge Ry Co [1896] 1 Ch 559 at 564-5 per Romer J.

73. As to this, it must be accepted that, for the purposes of s 254V(2), ALF has a constitution, which provides for the declaration of dividends, at least in clause 7.1(a). The power in clause 7.1(a) is undoubtedly a provision for the declaration of a (final) dividend, the exercise of which would plainly engage s 254V(2). But the impugned dividend resolution is referable to clause 7.1(b), not 7.1(a). The critical questions are (1) whether clause 7.1(b) provides for the declaration of dividends, for the purposes of, and having the consequences provided for by, s 254V(2); and if so (2) whether the impugned resolution was a declaration of dividend for the purposes of clause 7.1(b) and s 254V(2).

Does clause 7.1(b) provide for the declaration of dividends?

74. Clause 7.1 of the constitution distinguishes between (a) a dividend which may be “declared”, and (b) an interim dividend, which though referred to as something that may be declared, adds “and authorise the payment by the company to members of such interim dividends”. The distinction between a final dividend and an interim dividend reflects not rules of law, but commonly encountered provisions of corporate constitutions. [29] In Bluebottle UK Ltd v Deputy Commissioner of Taxation, [30] the High Court observed that historically there had been a distinction between a power given in the constituent documents of a company to declare a final dividend, and a power to pay an interim dividend. [31] While a final dividend reflected the results of a completed year of trading, an interim dividend reflected what was anticipated to be the position at the end of the relevant year; and a decision to pay an interim dividend – even if described as a “declaration” – was revocable until the dividend was paid,[32] while the declaration of a final dividend gave rise to a debt payable by the company immediately or from the date stipulated for payment. [33] The High Court then said that the (CTH) Company Law Review Act 1998, which had introduced Part 2H.5 in which s 254V is contained, had made “radical” changes to company law. [34]

    29. See Wambo Coal Pty Limited v Sumiseki Materials Co. Limited [2014] NSWCA 326; (2014) 101 ACSR 657 at [78] (Barrett JA).

    30. (2007) 232 CLR 598.

    31. Citing Industrial Equity Ltd v Blackburn (1977) 137 CLR 567 at 572.

    32. Citing Brookton Co-operative Society Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 at 455; Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616 at 622

    33. 232 CLR 598 at 609 [19]-[20].

    34. 232 CLR 598 at 609 [21].

75. In Bluebottle, the directors’ resolution spoke of “declaring” a final dividend, but the only relevant power given by the constitution was (emphasis added):

(a) The Directors may from time to time determine that a dividend is payable. The Directors may fix the amount, the time for payment and the method of payment. …

76. There was no separate power in respect of interim dividends. In the context of other provisions in the constitution that spoke of “declaration” of a dividend – while others used the terminology of “determination” – the Court concluded that “determine” was not used in a way that distinguished a “determination” from a “declaration”, but simply to mean “decide”, and so understood, the above rule empowered the directors to declare a dividend or to determine that one is to be paid. [35]

    35. 232 CLR 598 at 612-613 [31]-[35].

77. The Court then explained that the rationale of the amendments was first, to provide that a determination to pay a final dividend would not result in the incurring of a debt until the time fixed for payment arrived – unless the company had a constitution providing for the declaration of a dividend; and secondly, to enable directors to revoke a decision to pay a dividend until the time for payment arrives. [36] In other words, it was intended to provide, in respect of final dividends, some of the flexibility that had always obtained in respect of interim dividends. It was not intended to erode the flexibility that had always been associated with interim dividends, even when expressed in terms of a “declaration”. Thus Corporations Act, s 254V, was not intended to sweep away the flexibility that had historically been associated with an interim dividend, but rather to extend that flexibility to a final dividend (except where “declared” in conformity with the corporate constitution).

    36. 232 CLR 598 at 614 [39].

78. While clause 7.1(b) of the ALF constitution uses the language of “declaration” of interim dividends, the power in (b) is not merely “to declare”, but “to declare and authorise payment of”, an interim dividend. The use of the word “interim” together with “authorise payment” in clause 7.1(b) indicates that it is not the concept of “declaring” in s 254V(2). The phrase "and authorise the payment by the company" would be otiose if the declaration of an interim dividend gave rise to an immediately enforceable debt. It is noteworthy that those words are not included in regard to the declaration of final dividends in clause 7.1(a). While where the same word is used repeatedly in the same context it is usually to be given the same meaning, and while the constitution was prepared against the background of the Corporations Act and, as has already been noted, provides that, unless the contrary intention appears, an expression in a clause which is defined by or that deals with a matter dealt with by a provision of the Corporations Act has the meaning given to it in that provision of the Act, [37] here a contrary intention appears – from the use in clause 7.1(b), but not in (a), of the words “and authorise the payment by the company to members of such interim dividends”, which would be superfluous if “declare” had the same meaning as in clause 7.1(a) and in s 254V(2), and indicates that it was not intended that making a declaration under clause (b) would result without more in an immediately enforceable liability – because authority to pay was also required. The fact that it is found in clause 7.1(b) confirms that it is concerned with the conventional power to decide to pay an interim dividend, which remains revocable until paid. The circumstance that clauses 7.3 (Reserves), 7.4 (Distribution in specie) and 7.5 (Election to reinvest or forgo dividend) each contains a reference to “declaring” a dividend, and may be capable of application to an interim as well as a final dividend, does not detract from the conclusion that an interim dividend under clause 7.1(b) requires authorisation as well as “declaration”, and that “declare” must have been used in clause 7.1(b) in a sense that did not, without more – namely, authorisation – give rise to an obligation of the kind referred to in s 254V(2).

    37. Clause 1.3(c).

79. Thus in sub-clause (b), the word “declare” is not used in the s 254V sense. While clause 7.1(a) provides for the declaration of dividends within the meaning of s 254V(2), clause 7.1(b) – conformably with the traditional understanding of an interim dividend – does not. While clause 7.1(b) uses the language of “declaration”, the power given to declare interim dividends by ALF's constitution is not a power to declare a dividend in the s 254V(2) sense, but – consistently with conventional practice in respect of interim dividends – to make a decision (of the kind contemplated by s 254V(1)) to pay an interim dividend, which is revocable until the dividend is paid. No debt arises until the time for payment arrives.

Was the impugned resolution a declaration of dividend?

80. Resolution 5 was to “declare (but not pay) an interim dividend”. Thus not only was the “dividend” characterised as an “interim” dividend, but the resolution expressly excluded authority to pay it. Clause 7.1(b) of the constitution, which makes provision in respect of interim dividends, requires a resolution that declares and authorises the payment. It is clear from the terms of the impugned resolution that while it was referable to clause 7.1(b), it was not intended to be a complete and perfect exercise of that power – as there was no authorisation to pay the dividend. Clause 7.1(b) requires a resolution that declares and authorises the payment. One that declares but does not authorise the payment does not engage clause 7.1(b). There has been no effective or perfected invocation of the power under clause 7.1(b).

81. The terminology “declare but not pay” indicates that a “declaration” in the s 254V(2) sense was not intended. For the purposes of Corporations Act, s 254V(2), “declare but not pay” is not equivalent to “declare”. While Resolution 6 stated an intention to pay the dividend no later than 30 June 2017, that was couched as an expression of current intention rather than as a binding legal act. It at least, however, confirmed that Resolution 5 was not intended to give rise to any immediately enforceable debt. Thus the clear intent of the impugned resolution was that the dividend not be payable forthwith, but that a further decision would be required to pay the dividend, before the ordinary shareholder would be entitled to demand payment. Plainly, it was not intended to create a liability in respect of the dividend that was immediately enforceable. To treat the impugned resolution as having engaged s 254V(2) would be contrary to the terms and intent of the resolution.

82. Accordingly, the impugned resolution was not an exercise of a power to “declare” a dividend within s 254V(2), and did not create an enforceable right to immediate payment.

Deferred liability?

83. The next possibility is that the impugned resolution (in particular, Resolution 6) fixed the amount and time for payment of a dividend, within s 254V(1). If so, it would (subject to the issue of whether it infringed the rights of the preference shareholders) have been a valid but revocable decision, under which no debt would have been incurred until 30 June 2017.

84. However, Resolution 6 did not fix 30 June 2017 as the date for payment, but merely stated a present intention that the dividend be paid not later than that date. As already discussed, a further decision was contemplated before the date for payment would be fixed – which even within the scope of Resolution 6 might be earlier than 30 June 2017. In the absence of “authorisation” within clause 7.1(b), the date for payment could not be regarded as fixed. Accordingly, the impugned resolution did not fix the amount and time for payment of a dividend, within s 254V(1).

Policy statement?

85. The plaintiff contends that if the impugned dividend resolution was not a valid and effective exercise of clause 7.1 of the constitution, it is a nullity. The defendants contend that the resolution is in substance and effect a statement of dividend policy: it announces the intention of the company to apply a specified portion of the available profits to a dividend on ordinary shares, but that the time for such payment is to be determined at a future date when the company is able to make the payment.

86. A resolution that there be a dividend, which neither itself fixes a date for payment nor becomes payable by operation of s 254V(2), is devoid of legal effect. The requirement that a payment date be provided, implicitly or explicitly, by the resolution, is reflected in the following passage in American Jurisprudence, vol 19, 2d, s 826, which was cited by Mason J (as he then was) in Industrial Equity Ltd v Blackburn (at 579):

The theory of a dividend is that it shall be payable only from ... earnings which are or will be ready for actual distribution at a definite date provided for in the resolution declaring the dividend. Generally, the earnings or profits from which dividends are properly payable must be present when the dividend is declared; it cannot ordinarily be declared in anticipation of earnings or on a mere hope or expectation of profits.

87. The defendants’ submission would treat the impugned resolution as having no legal consequence, and as no more than an indication of an intention to pay a dividend on ordinary shares at some future unspecified time, by a separate and independent future decision to authorise and fix a date for payment. On that approach, a resolution that in terms purports to “declare” a dividend, and is reflected in the company’s accounts as having done so, means no more than that the company intends, at some future time, to pay the dividend if it is able to do so. However, while Resolution 6 is expressed as a statement of intent, Resolution 5 is not expressed as a statement of policy or intent to do something in the future. It does not purport to deal with dividend policy generally, but only with a single instance. It purports to be a present determination of a dividend, without authorising payment. That that is its purported effect is confirmed by the references to the dividend as an “event occurring after the reporting period” in the financial statements as at 30 June 2014. [38] The impugned resolution purports to be a partial exercise only of the power given by clause 7.1(b) to “declare” and authorise payment of an interim dividend. However clause 7.1(b), which requires that the directors both “declare” and “authorise payment” of the interim dividend, is not effectively engaged unless payment is authorised (which implicitly involves fixing a date).

    38. The note reads: “Post year end dividend. On 28 November 2014, it was resolved that the company declare (but not pay) an interim dividend to the ordinary shareholder totalling $24,434,678 (2013: $nil). The amount declared as an interim dividend for ordinary shares represents the rate equivalent to the annual rate per share accrual in favour of preference shareholders for the 21 month period 1 January 2013 to 30 September 2014. It was further resolved that the Company intends to pay the amounts accrued as dividends together with the dividend declared herein contemporaneously and not later than 30 June 2017”. This does not have the appearance of a mere statement of policy. Moreover, in ALF’s Business Update and Financial Review for shareholders for the nine months to 31 March 2015, the unaudited group balance sheet as at 31 March 2015 contains a note: “Balance sheet includes a provision for an interim dividend to ordinary class shares of $24,434,678.”

87. Accordingly, the impugned resolution was not a mere statement of intent or policy, but a purported partial and incomplete exercise of power under clause 7.1(b). As such, it was a nullity.

INCONSISTENT WITH PREFERENCE SHAREHOLDERS’ RIGHTS?

89. The plaintiff contends that if (as I have found) the impugned dividend resolution did not give rise to an immediately enforceable debt, it is nonetheless still contrary to the rights of the preference shareholders, oppressive of them, and/or contrary to the interests of the company as a whole, chiefly because it expresses an intention to act contrary to their rights.

90. The resolution on its face proposes a dividend in favour only of the ordinary shareholder. It makes no provision for participation by the preference shareholders. As I have held that they are entitled to participate pari passu in any dividend, it is prima facie inconsistent with their rights in that respect. Even if it does not create an immediate debt, it indicates an intention to act contrary to the rights of the preference shareholders to participate in any dividend.

91. However, the defendants submit that the impugned resolution is not inconsistent with pari passu treatment of the preference shareholders, having regard to the basis on which it was calculated, and to the circumstance that it is not proposed that the ordinary shareholder be paid until the preference shareholders are paid. The defendants contend that if, as at 30 June 2017, there is cash available to make payments, the preference shareholders will receive a dividend satisfying their entitlement, and the ordinary shareholder will receive a dividend which mathematically results in the preference shareholders receiving treatment which is not less favourable than pari passu.

92. The impugned resolution referred to the basis upon which the amount of the dividend was calculated, and records that it represented the same rate per share as the accrued entitlements of preference shareholders under clause 8.2(b) of the Shareholders Agreement. Because shares had been issued to preference shareholders at different rates, the return to preference shareholders pursuant to the payments under clause 8.2(b) of the Shareholders Agreement varied from one tranche of shareholders to another, but in calculating the amount of the ordinary dividend, the lowest rate of return (being that for the second tranche of preference shares) [39] was applied to the ordinary shares, to derive the amount of $24,443,678 for the period 1 January 2013 to 30 September 2014. This was the approach least favourable to the ordinary shareholder.

    39. That is, 7.2 cents per annum per share on $12.60 per share for the period 1 January 2013 to 30 September 2014.

93. It may well be that that approach substantially produces pari passu treatment of the shares for the period 1 January 2013 to 30 September 2014. But it does not reflect the rights of the preference shareholders. It overlooks that the plaintiff (and the other preference shareholders) are entitled to be paid, prior to declaration of any dividend, the amounts credited to their loan accounts in respect of their minimum cash distributions to date. That right is not satisfied by the declaration of a dividend, which creates an additional obligation of the company to its shareholders, rather than extinguishing an existing one. As has been explained, in those circumstances, they are entitled to repayment of the loan, plus participation in any divide nd.

94. The resolution (and Mr Malouf’s 3 December letter) evinces the intention that there will be a dividend in favour of preference shareholders which will effectively discharge their accrued loans. As explained above, this is a misconception, and is inconsistent with the preference shareholders’ rights, which include repayment of their accrued loans prior to payment of any dividend. Once a dividend is declared, the preference shares are entitled to share in it pari passu. As the impugned dividend resolution at the least evinces an intention to declare a dividend in which the preference shareholders will not share pari passu, and without first repaying the preference shareholders’ accrued loans, it is inconsistent with the rights of the preference shareholders. For the same reasons, it is oppressive of the preference shareholders.

95. If (contrary to my above conclusion) the resolution had the effect of creating an enforceable debt, then – having regard to ALF’s admitted inability to pay it – it was not on any reasonable view justified by the financial position of ALF (for the purposes of clause 7.1(b)) so as to authorise the declaration of the dividend under that clause. The creation of an immediately enforceable debt, in circumstances where ALF could not pay it, would place ALF in the position that it could not pay its debts as and when they fell due. No dividend can validly be declared if it would cause the company to be unable to pay its debts as and when they fall due. [40] Declaration of a dividend in such circumstances would be a contravention of Corporations Act, s 588G. To place ALF in a position where it was unable to pay its debts would be contrary to the interests of the company as a whole. As the preference shareholders would not participate in it, it would be contrary to their pari passu rights, and oppressive of them. Such a dividend would not be fair and reasonable to ALF's shareholders as a whole, and thus would be contrary to Corporations Act, s 254T(1)(b).

    40. QBE Insurance Group Ltd v Australian Securities Commission (1992) 38 FCR 270 at 288 (Lockhart J).

ALTERNATIVELY, ARE THE LOANS REPAYABLE NOW?

96. As to the alternative argument that the loans are now repayable, there is no dispute that the cash is not presently available to make the payment. Although the clause speaks of “accrual of income”, and although sufficient income has been accrued to enable a dividend to be declared (but not to be paid), in my view the preferable construction is that the phrase “accrual of income so that a dividend can be declared” is a composite phrase which describes the state of affairs in which a dividend is declared and payable. It would be contrary to the purpose of maintaining cash reserves that, if the company had accrued in its accounts profit sufficient to enable a dividend to be declared at a date to be fixed, it is immediately obligated under clause 8.2(b) to declare the dividend, giving rise to an immediate obligation to pay the dividend (and/or repay the loans), when it does not have the available cash to do so.

97. On the conclusions I have reached, that state of affairs has not arisen. “Declared” in the resolution does not mean “declared for the purposes of clause 8.2(b)” any more than it means “declared” for the purposes of s 254V(2). However, if there was a valid and effective decision to pay a dividend, then it would necessarily follow that there had been an “accrual of income” by ALF such that “a dividend can be declared”. The existence of that state of affairs would bring to an end ALF’s permission to accrue the minimum cash distributions on loan account, which would thereupon become repayable. Thus if there were a valid decision that made a dividend payable, the outstanding accrued loans would be immediately repayable.

CONCLUSION

98. My conclusions may be summarised as follows:

99. The preference shares are entitled to participate pari passu with the other shares in any dividend. The entitlement of the preference shareholders is to participate pari passu with other shares in any dividend, and, to the extent that such dividend is insufficient to provide an 11% return, to have it topped up to 11%. While if the payment cannot be made by dividend it can be accrued as a loan, once there has been an accrual to a preference shareholders’ loan account in respect of such a payment, that loan is a separate and additional entitlement to any dividend, and could not be extinguished by a dividend. No dividend can be paid, consistently with the rights of the preference shareholders, unless the amounts accrued on loan account in respect of the 11% minimum cash distribution are first repaid to them.

100. While clause 7.1(b) of ALF's constitution uses the language of “declaration”, the power is not one to declare a dividend in the s 254V(2) sense, but – consistently with conventional practice in respect of interim dividends – to make a decision to pay an interim dividend, which is revocable until the dividend is paid, and in respect of which no debt arises until the time for payment arrives. The impugned resolution was not an exercise of a power to “declare” a dividend within s 254V(2), and did not create an enforceable right to payment, let alone to immediate payment. Nor did the impugned resolution fix the amount and time for payment of a dividend, within s 254V(1). However, the impugned resolution was not a mere statement of intent or policy, but a purported partial and incomplete exercise of power under clause 7.1(b). As such, it was a nullity.

101. Were it not a nullity, the impugned dividend resolution at least evinces an intention to pay a dividend in which the preference shareholders will not share pari passu, and without first repaying their accrued loans, but to purport to do so by declaring a dividend in their favour. In each of those respects, it would be inconsistent with the rights of the preference shareholders. For the same reasons, it is oppressive of the preference shareholders.

102. Alternatively, if there were a valid decision that made a dividend payable, the outstanding accrued loans would be immediately repayable.

103. For the foregoing reasons, the plaintiff is entitled to a declaration to the effect that the impugned resolution is void. Prima facie, the second defendant should pay the plaintiff’s costs. However, I will if desired afford an opportunity for argument on that issue. In addition, it may be that as a result of these reasons additional declarations may be appropriate to quell further potential disputes. Accordingly, the Court orders that:

1. The plaintiff bring in short minutes on a date to be fixed to give effect to this judgment.

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Endnotes

Amendments

08 February 2017 - Para 15: insert "resolution" after "the director's"

Decision last updated: 08 February 2017