Re IXLA Ltd

[2007] VSC 573

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST

No. 9737 of 2007

IN THE MATTER OF

IXLA LIMITED
(ACN 006 501 168)

Plaintiff

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	13 December 2007
DATE OF JUDGMENT:	13 December 2007
CASE MAY BE CITED AS:	Re IXLA Ltd
MEDIUM NEUTRAL CITATION:	[2007] VSC 573

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CORPORATIONS – Scheme of arrangement – Crystallisation of Capital Loss – Separate class meetings to be convened - Section 411(1) Corporations Act 2001 (Cth)

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr G J McEwen	Home Wilkinson Lowry

Re Gazelle Construction Pty Ltd (1984) 10 ACLR 140
FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69
Re Sonodyne International Ltd (1994) 15 ACSR 494
Re NRMA Insurance Ltd(No 1) (2000) 156 FLR 349

HIS HONOUR:

1. I have before me an application by IXLA Limited for orders that separate meetings of two classes of members of the plaintiff be convened and held for the purpose of considering a scheme of arrangement proposed by the plaintiff.

1. In particular the plaintiff seeks the following orders. That pursuant to s 411(1) of the Corporations Act 2001, the plaintiff convene meetings of –

(a)     that class of members of the plaintiff comprising each person registered as the holder of not less of 50,000 ordinary shares issued by the plaintiff for the purpose of considering and if thought fit, agreeing with or without modification to a scheme or arrangement proposed to be made between the plaintiff and that class of its members, that is referred to as the first meeting; and

(b)    that class of members of the plaintiff comprising each person registered as the holder of less than 50,000 ordinary shares issued by the plaintiff for the purpose of considering and if thought fit agreeing with or without modification the scheme or arrangement to be made between the plaintiff and that class of its members, that is referred to as the second scheme meeting.

1. IXLA is a company, listed on the ASX.  Its shares have been suspended from trading since 2002. They are of no value.  In essence, the scheme of arrangement,  provides that members of the company transfer their shares to the covenanter (Brian Francis Dunkley a director of IXLA) on the basis that if Westan Limited is admitted to the official list of the ASX, the members will be issued Westan shares and all of Westan’s options.

1. IXLA shares are worthless and as such IXLA has a nil value.  Westan will not acquire IXLA or any shareholding in IXLA.  The proposed letter by the chairman of IXLA to the members details the substance of the scheme.

1. Dr Teh says that IXLA Limited was suspended from trading on the ASX on 16 September 2002.  He says IXLA's financial statements have not been audited for the years ending 30 June 2002 through to 30 June 2007 and there is no prospect that those accounts be audited primarily because of the costs of doing so and because IXLA has effectively no assets of any value.

1. He says:

At this stage, there are minimal prospects for IXLA or its members and, in the opinion of the Directors, the alternative to the present proposal would be to allow IXLA to be delisted from the ASX and be liquidated or, possibly, be struck off the register of companies maintained by ASIC.

1. He further writes:

The directors perceive that the present proposal provides benefits to the members. However, this is a matter on which each member must form his own view.  To appreciate the nature of those perceived benefits requires an understanding of the value, or lack thereof of the IXLA “shell” which can only be obtained by reading this Explanatory Statement in full and carefully.

1. In the next paragraph he writes:

Section Four of this Explanatory Statement contains a letter from DMR Corporate Pty Ltd (“DMR”) which comments on the value of public company shells such as IXLA and also comments on the value of IXLA and shares based on the information contained herein.  It is a common view that the value of a “clean” public company shell is in the vicinity of $250,000 - $350,000: that is not the case with IXLA.  Because of the specific circumstance of IXLA including:

IXLA' failure to maintain audited accounts and the costs of rectification thereof;

IXLA’ failure to be compliant with the Act and the costs of rectification thereof;

that IXLA has a contingent liability arising out of its commercialisation programs in the USA, which had ultimately been unsuccessful; 

the fact that IXLA’ securities are suspended from trading on the ASX.

1. He goes on to say:

The contingent liability arises out of an agreement that the company entered into to assist in the commercialisation of its marketing operations in the US and an associated deed of Cross Guarantee between IXLA and its then subsidiaries IXLA Australia Pty Ltd, IXLA Research Pty Ltd, IXLA CM Pty Ltd and IXLA Export Pty Ltd. The agreement involved the granting of a licence to use IXLA technology in exploiting the US market for a period of three years, which expired on 1 July 2001. No liability is admitted under the terms of the cross guarantees and IXLA has maintained at all times that the circumstances under which the contingent liability could crystallise have not occurred. 

1. He says that against the above background, DMR considers that the shares in IXLA have no value whatsoever.  Dr Teh goes on to say:

Under the scheme the members of the company will receive shares in the capital of Westan Australia Ltd (“Westan”) if ASX approves the listing of Westan on ASX on the basis set out herein. 

On that having being achieved and the scheme coming into effect, the Westan shares issued to the Scheme Members will represent between approximately 5.407 per cent and 4.762 per cent of the issued capital of Westan depending on whether Westan raise $3 million or $5 million pursuant to the issue made by the Westan Prospectus.

1. Not all members of the company will receive or may receive shares in the capital of Westan.  The scheme provides that the holders of less than 50,000 shares in IXLA will receive options.  The passage I have just read should be amended accordingly.

1. The plaintiff relies on the affidavit of Brian Francis Dunkley of 12 December 2007 and 13 December 2007.  The plaintiff has received a letter from ASIC dated 13 December 2007 and I propose to read it in its entirety.  I do so primarily because of the unusual nature of this scheme and the fact that the scheme does discriminate between those members who hold 50,000 or more shares and those that hold less than 50,000 shares.

1. I also believe it is important to ascertain the attitude of ASIC towards such a proposal particularly where pursuant to ASIC's Regulatory Guide No. 60 and Regulatory Guide No. 142, ASIC pays careful attention to whether the members receive full information and whether the effect of the takeover is fair as between members.

1. This, as indicated already, is not technically a takeover as Westan will not acquire any shares in IXLA Limited but, on the contrary, will issue shares for the purpose of broadening its shareholder base to assist it in obtaining an ASX listing, a detail of which I will come to in a moment.

1. Returning now to the letter of 13 December 2007 addressed to the plaintiff’s solicitor Mr Nigel Vise, an associate at Home Wilkinson Lowry. It is headed, “Re your client IXLA Limited” and “Proposed Scheme of Arrangement under section 411 of the Corporations Act 2001 (“The Act”)”.

1. The letter says: “I refer to documentation you have lodged in relation to the above scheme of arrangement and our various telephone conversations.” This is followed by a further heading: "ASIC's position regarding the first court hearing.”  It then states:

I refer to your letter of 30 November 2007 giving notice of the court's hearing of Coles' application under s 411(1) of the Act on 13 December 2007.

1. I think in view of the heading, that is a mistaken reference to IXLA’s Limited application and I treat it as such. It goes on to say:

For the purpose of s 411(2)(a) of the Act, the Australian Securities and Investments Commission (ASIC) permits a period of less than 14 days notice of that hearing.

1. The Act requires 14 days notice to be given unless ASIC or the court permit a lesser period. In this case ASIC has accepted or permitted a period less than 14 days. The communication goes on to state:

ASIC wishes to advise you that its policy in relation to statements under s 411(17)(b) of the Act is that it will not provide such a statement until the second, or confirmation, court hearing in relation to a scheme of arrangement. This is because ASIC will not be in a position to advise the court properly until it has had an opportunity to observe the entire scheme process. It is also consistent with the wording of the section that relates to the statement to the court's approval of the scheme.

However, ASIC recognises that proponents of the scheme may reasonably wish for an indication of ASIC's views before committing to the expense of calling a meeting and printing the scheme documentation. 

Therefore, I advise you that ASIC does not currently propose to intervene to oppose the scheme at the first hearing scheduled for on or about Thursday, 13 December 2007.  This current intention is based on information provided by the applicant to date in relation to whether the scheme has been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Act.  ASIC’s position may change if ASIC considers it appropriate to do so. 

For further explanation of ASIC's policy in relation to schemes of arrangement, see ASIC Regulatory Guide 60 - Schemes of Arrangement, - s 411(17) and ASIC Regulatory Guide 142 - Schemes of Arrangement and ASIC review.

1. Both of those policies are relevant in that under them, ASIC looks at the schemes and whether they are consistent with the policy and principles underlying Chapter 6 - the takeover provisions.

1. The fact that ASIC has not objected to this scheme is of relevance to my consideration of whether to order meetings.

1. Section 2 of the proposed explanatory statement under the heading, “4. Nature of the Scheme” is as follows:

The primary object of the Scheme is to provide that Scheme Members transfer their shares to the Covenantor on the basis that, if Westan is admitted to the official list of ASX on the basis of the ASX Indicative Ruling, they will be issued Westan shares and/or Westan options on ASX approving the admission of Westan to the Official List of the ASX.  Westan will not acquire IXLA or any shareholding in IXLA.

The terms of the Westan Options that will comprise part of the Scheme Consideration in that circumstance are referred to in clause 5 below.  The Scheme will come into effect on an office copy of the order of the Supreme Court of Victoria approving the Scheme being lodged with ASIC.  However, the operative provisions of the Scheme that will create the effective exchange of shares for marketable securities of Westan will not become operative until the Westan Listing Approval Date. 

On the implementation date all members of IXLA will transfer their shares to the Covenantor. 

On the Westan Listing Approval Date, assuming Westan is approved by ASX for admission to its Official List and on the basis of having lodged the Westan prospectus and on the basis of the ASX Indicative Ruling the 266 members holding 50,000 or more shares will receive the 4,000,000 Westan Shares and the 8331 members holding less than 50,000 shares will receive the 4,000,000 Westan Options. 

More specifically, and based on an issue price of shares and the Westan prospectus being $0.20, then,

4.1 Members of IXLA holding 50,000 or more shares will be issued and allotted 10,000 Westan Shares together with 0.0363056 of a Westan Share for every share in excess of 50,000 Shares held by a Member.

4.2 Members of IXLA holding less than 50,000 shares will be issued Westan Options on the basis that they will be granted one (1) Westan option for each 8.358269 shares which they hold.

1. In summary then, under the scheme the shareholders in IXLA will transfer their shares in that company to the covenantor.  That will crystallise the losses they have suffered on their shares in circumstances where the losses would not otherwise have been crystallised.  If the ASX agrees to admit Westan Australia Ltd to its official list, in accordance with its indicative ruling, Westan will issue the shares in the way I mentioned previously to the holders, it will issue shares to the holders of 50,000 or more shares in IXL, and will issue options to those holding less than 50,000 shares.

1. I refer to the submissions that were relied on by the plaintiff.  According to the independent taxation report, which is in the explanatory statement, a capital revenue gain or loss is only likely to crystallise where a member disposes of their shareholdings, or if the company is placed in liquidation, only when the liquidator declares the shares worthless or returns capital to members.  The submission says,

There is no prospect that the 8,900 IXLA members can dispose of their shareholding in a suspended company of no value, absent the Scheme or liquidation.

I accept that.

1. The submission further states:

Even if the Scheme were not to proceed by reason of Westan failing to obtain admission to the Official List of the ASX in accordance with the ASX Indicative Ruling, the members of IXLA will have disposed of their shareholding to the Covenantor with a consequent crystallisation of a tax benefit by way of a claimable tax loss. 

1. The submission says that as the shares are worthless, there is no benefit to the Covenantor, Brian Francis Dunkley, who is a director of IXLA.

1. The submission goes on to say,

Upon the implementation of the scheme, and following admission of Westan to the Official List of the ASX, the Covenantor will seek to cause IXLA to be struck off the ASIC register. 

Westan benefits from the scheme, by reason of the assistance it derives in satisfying the spread requirements for public listing by obtaining a “maximum of 200 former IXLA Ltd members, who hold parcels of shares…with a market value of $2,000 or more”.  

The listing rules of ASX require that a company seeking public listing have either 400 or 500 members holding marketable parcels of shares in order to satisfy what may be called the “spread requirement” for listing on the ASX.

The Indicative Ruling follows ASX policy. Apparently, pending Westan's conversion to a public company and application for public listing to ASX, only an Indicative Ruling can be obtained”. 

On the “Westan Listing Approval Date”, the 266 members of IXLA, holding 50,000 or more shares will receive 4 million Westan Shares and the 8,331 members holding less than 50,000 shares will receive 4 million Westan options. 

1. The submission continues:

According to the indicative ruling, 200 of these 266 members will be included by the ASX for the purpose of assessing Westan’s compliance with the spread requirements.  It is for this reason the discriminatory threshold of 50,000 shares has been adopted.  If the IXLA shareholdings were reconstructed on an equal basis, the “spread” would not be achieved, and thus would not be agreed to by Westan. 

More specifically, IXLA members holding 50,000 or more shares will be issued an allotment of 10,000 Westan shares together with 0.0363056 of a Westan share for every share in excess of 50,000 shares held by a member.

I have already read what the members with less than 50,000 shares will be granted.

1. The submission goes on:

As the Scheme treats members in a discriminatory manner, depending on whether they hold more or less than 50,000 shares, separate class meetings are to be convened.  The First Scheme Meeting proposed is a meeting of the members holding 50,000 or more shares. The Second Scheme Meeting proposed is a meeting for members holding less than 50,000 shares.

1. As the explanatory statement confirms; only if both the First Scheme Meeting and the Second Scheme Meeting passes the resolution to approve the scheme by statutory majorities will the scheme come into effect.

1. The scheme is conditional on both meetings approving it.  If it is conceived that the shareholders having less than 50,000 shares are being discriminated against they will be able to decline to proceed with the scheme if they so wish and that will be the end of the whole scheme.  The explanatory statement makes quite clear the discriminatory treatment between the two classes of shareholders.  Moreover, the fact that there are separate meetings being held will bring home to all members the discriminatory nature of the proposal.

1. The plaintiff submits that s 411 contemplates arrangements between the company members or class of members. The plaintiff submits class is not defined and relies on several authorities. The plaintiff submits:

Accordingly it is necessary to consider the existing rights of members, and the rights to be conferred by the compromise.  Generally, where a scheme treats members of creditors differently, they must be placed into separate classes.

The plaintiff cites Re Gazelle Construction Pty Ltd[1] in support of this proposition.

[1](1984) 10 ACLR 140.

1. The plaintiff’s written submission goes on to say:  

As by the proposed Scheme a distinction is drawn between Scheme members according to whether they hold 50,000 or more shares or less than 50,000 shares, they are thus treated differently. So far as members of IXLA are being treated differently under the Scheme, they belong to a separate classes within the meaning of s 411.

I accept those submissions.

1. Under s 411(1) of the Act the court may order a meeting of a class of members or creditors. Under s 411(2) the court must not make such an order unless certain specified notice has been given to ASIC and the court is satisfied that ASIC has had a reasonable opportunity to examine the scheme to make submissions in relation to the proposed scheme and the draft explanatory statement. I am satisfied that ASIC has had a reasonable opportunity to examine the scheme and to make submissions in relation to the proposed arrangement and the draft explanatory statement. ASIC has accepted the service of the material for a period less than 14 days.

1. Should the scheme meetings be ordered?  The court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that if it achieves a statutory majority at the relevant meetings the court would be likely to approve it on the hearing of an application which is unopposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd[2]  As to the test of whether the court would be likely to approve the scheme, the relevant question to ask is as follows; could it reasonably be supposed that sensible business people will consider the arrangement to be for the benefit of the class concerned: Re Sonodyne International Ltd.[3]

   [2](1977) 3 ACLR 69 at 72 per Street CJ.

   [3](1994) 15 ACSR 494 at 499 per Hayne J.

1. There appears to be only one further relevant matter I need to refer to. In Re NRMA Limited (No 1)[4],  Santow J expressed reservations in approving a scheme where further steps had to be taken after the scheme was approved for the scheme to come into effect.  In that case he took into account that if the subsequent matters did not come into effect the status quo could be fully restored without adverse consequences.

   [4](2000) 156 FLR 349.

1. In this case, as the plaintiff points out, the status quo cannot be fully restored because, whether Westan is able to list or not, the shares will be transferred to the company.  The plaintiff points out; and I accept, that is one of the benefits proposed under the scheme.  The Westan listing is merely a further benefit.  The plaintiff contends that although the members’ position cannot be fully restored there is no adverse consequence.  I accept that submission.

1. Taking all those matters into account, and to paraphrase Hayne J in the Sonodyne case, I have concluded the proposal is such that it could reasonably be supposed by sensible business people to be for the benefit of the respective classes concerned for this scheme to proceed.

1. I will therefore make the orders sought for meetings. An order was also sought for me to approve the explanatory statement under s 411(1) of the Act. In view of the circumstances that the explanatory statement has to be registered with ASIC and ASIC are required to satisfy itself that the statement complies with the Act and the regulations and it is not misleading, I think it is more appropriate that the explanatory statement be dealt with in that fashion and the plaintiff has so agreed.