Re Yanollee Pty Ltd

[2006] NSWSC 705

Reported Decision: (2006) 24 ACLC 1087

New South Wales

Supreme Court

CITATION:	Yanollee Pty Limited (In Liq) [2006] NSWSC 705
HEARING DATE(S):	10/07/06
JUDGMENT DATE :	11 July 2006
JURISDICTION:	Equity DIvision Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Direction to liquidator as to distribution of surplus
CATCHWORDS:	CORPORATIONS - winding up - members' voluntary winding up - surplus after debts, claims and expenses - "A" class shares only on issue - such shares expressed to have limited rights on winding up - whether holders of "A" class shares in any event entitled to whole surplus rateably
LEGISLATION CITED:	Companies Act 1862 (Eng), s.133(1) Companies Ordinance 1962 (ACT), s.18(1)(b) Company Law Review Act 1998 (Cth) Corporations Act 2001 (Cth), ss.488(2), 493(2), 501, 511 Corporations Law, ss.1445, 1427(1)
CASES CITED:	Alleyn v Thurecht [1983] 2 Qd R 706 Birch v Cropper (1889) 14 App Cas 525 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 Re Driffield Gas Light Company [1898] 1 Ch 451 at p.455 Re Isle of Thanet Electricity Supply Co Ltd [1950] Ch 161 Re National Telephone Company [1914] 1 Ch 755 Re Plashett Pastoral Co Pty Ltd [1969] NSWR 243 Re William Bedford Ltd [1967] VR 490 Rees v Dominion Insurance Company of Australia Limited (1981) 6 ACLR 71 Seaton v Federal Hotels Ltd (1981) 29 SASR 290
PARTIES:	John Spencer Thomas Curley as Liquidator of Yanollee Pty Limited - Applicant
FILE NUMBER(S):	SC 3180/05
COUNSEL:	Mr A.J. Grant - Applicant
SOLICITORS:	JMA Legal - Applicant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

TUESDAY, 11 JULY 2006

3180/05 APPLICATION OF JOHN SPENCER THOMAS CURLEY (AS LIQUIDATOR OF YANOLLEE PTY LIMITED)

JUDGMENT

1 The plaintiff is the liquidator of Yanollee Pty Limited under a members’ voluntary winding up resulting from a special resolution passed at a general meeting held on 15 February 2006.

2 Following his appointment, the liquidator sold the company’s principal asset, which was a rural property near Trangie. He has now completed his administration to a point where all creditors have been paid and, after allowing for estimated expenses of the winding up still to be met, a surplus of something more than $680,000 remains in his hands. It is with a view to determining the correct application of that surplus that the liquidator has approached the court.

3 The jurisdiction the liquidator invokes is that created by s.511 of the Corporations Act 2001 (Cth). This is clearly a case in which it will be “just and beneficial” for the liquidator to have an answer to the question he poses. And, there being no extant dispute, the case is suitable for the kind of ex parte application the liquidator has made: see Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at pp.212-213.

4 The company was incorporated in 1965 under the Companies Ordinance 1962 of the Australian Capital Territory. Six fully paid shares were deemed allotted on incorporation to the subscribers to the memorandum of association. A further six shares were allotted shortly afterwards. These twelve shares, which have been on issue for more than forty years, are now held as to six by Mr Sidney McCutcheon and as to six by Mr Allan McCutcheon who are also the only directors. No shares other than these twelve have ever been issued.

5 Each of the twelve issued shares is an “A” class share. Clause 3 of the memorandum of association not only stated the amount of the share capital and its division into shares of fixed amount (as required by s.18(1)(b) of the Companies Ordinance) but also (and unnecessarily, from the point of view of the Ordinance) classified the unissued shares as “A” class, “B” class , “C” class and ordinary. These classifications were then reflected in article 5(1) of the articles of association:

“5. (1) The capital of the Company is £30,000 divided into
100 ‘A’ class shares of £1 each 5,000 ‘B’ class shares
of £1 each 5,000 ‘C’ class shares of £1 each and
19,900 ordinary shares of £1 each.”

6 Article 5(2) follows:

“(2) The ‘A’ class shares shall confer on the holders thereof for the time being:-
(i) The right collectively to the management of the business and the control of the Company and they alone respectively shall be capable of being directors of the Company.
(ii) The right to receive a fixed preferential non-cumulative dividend at the rate of Six pounds (£6/-/-) per centum per annum on the capital paid up thereon payable as regards each year out of the profits for that year without any right in the case of deficiency to resort to profits of prior or subsequent years.
(iii) The right in the event of the Company being wound up to have the surplus assets of the Company applied in the first place in paying to them the amount paid up on the said ‘A’ class shares but they shall not be entitled to any further participation in such surplus assets and such surplus assets remaining after repayment of the capital paid up on the ‘A’ class shares shall belong exclusively to the holder or holders of the ‘B’ class shares ‘C’ class shares and ordinary shares.

7 It is relevant to quote also article 141:

“If the Company shall be wound up and the assets available for distribution among the members as such shall be insufficient to repay the whole of the paid up capital such assets shall be distributed so that as nearly as may be the losses shall be borne by the members in proportion to the capital paid up or which ought to have been paid up at the commencement of the winding up on the shares held by them respectively. And if in a winding up the assets available for distribution among the members shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up the excess shall be distributed among the members in proportion to the capital at the commencement of the winding up paid up or which ought to have been paid up on the shares held by them respectively. But this clause is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions.”

8 Given article 5(2)(iii), the liquidator apprehends that Mr S. McCutcheon and Mr A. McCutcheon, being the only members and therefore the only persons conceivably entitled to participate in the surplus, may be entitled to participate only to the extent of $12.00 each, assuming that that is properly regarded as the amount paid up on six “A” class shares of $2.00 (originally £1/-/-) each. The liquidator seeks the guidance of the court on that question and, more generally, as to the correct application of the surplus.

9 So far as the Corporations Act is concerned, the question of distribution of surplus in a voluntary winding up is dealt with by s.501. Section 488(2), requiring the special leave of the court to distribute surplus, is confined in its operation to a court-ordered winding up and therefore does not apply in this case. Section 501 is in the following terms:

“ Distribution of property of company
Subject to the provisions of this Act as to preferential payments, the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company’s constitution otherwise provides, be distributed among the members according to their rights and interests in the company.”

10 Section 501 is a direct descendant of s.133(1) of the Companies Act 1862 (Eng):

“The property of the company shall be applied in satisfaction of its liabilities pari passu , and, subject thereto, shall, unless it be otherwise provided by the regulations of the company, be distributed amongst the members, according to their rights and interests in the company.”

11 This statutory scheme was summarised as follows by Wright J in Re Driffield Gas Light Company [1898] 1 Ch 451 at p.455:

“The winding-up sections (s.109 and s.133) of the Companies Act, 1862, do not of themselves supply any rule for the mode of adjusting loss of capital or of distributing surplus, but only supply the necessary powers for giving effect to the rights and interests of the parties. Those rights in the case of a company constituted under the Companies Act must, in the absence of any provision in the memorandum or articles of association, be ascertained, in the view of one of the noble and learned Lords who took part in the decision of Birch v Cropper (1889) 14 App Cas 525, by recourse to general principles of equity; in the view of another of them, by reference to the principles and provisions of the Companies Acts. But in either view the result is the same, namely, that the capital account must first be equalized, and then there remains no ground for appropriating the balance in any other way than according to the nominal amount of the shares in the capital.”

12 The general principle is thus that a surplus upon a winding up belongs to the members according to their proportionate interests in the share capital, measured according to nominal amount - subject, however, to recognition of any preferred or superior claims created by the company’s constitution. The principle was stated by Lord Macnaghten in Birch v Cropper (1889) 14 App Cas 525 at p.543 in these terms:

“Every person who becomes a member of a company limited by shares of equal amount becomes entitled to a proportionate part in the capital of the company, and, unless it be otherwise provided by the regulations of the company, entitled, as a necessary consequence, to the same proportionate part in all the property of the company, including its uncalled capital. He is liable in respect of all moneys unpaid on his shares to pay up every call that is duly made upon him. But he does not by such payment acquire any further or other interest in the capital of the company. His share in the capital is just what it was before. His liability to the company is diminished by the amount paid. His contribution is merged in the common fund. And that is all.”

13 These judicial approaches, as well as the provisions of the constitution of the company with which I am here concerned, were formulated at a time when shares had a par value or nominal amount and the extent to which a share was paid up was measured by reference to that par value or nominal amount. Radical changes were made by the Company Law Review Act 1998 (Cth) with effect from 1 July 1998. Par value was abolished and consequential changes were made. Of particular relevance for present purposes are two of the transitional provisions that that Act inserted into the Corporations Law. Section 1445, which applied for the purposes of the operation of the Corporations Law itself after 1 July 1998, stated that the amount paid on a share was to be taken to be the sum of all amounts paid to the company at any time for the share (but not including any premium). Section 1427(1) was in these terms:

“Any provisions in a company’s constitution stating the amount of the company’s share capital, and dividing that share capital into shares of a fixed amount, are repealed on commencement.”

(The reference to “commencement” is a reference to 1 July 1998.)

14 Having regard to the changes which took effect on 1 July 1998 (and to the fact that, according to the evidence, each of the twelve “A” class shares having a par value of £1/-/-, or $2.00, was fully paid and was not issued at a premium), the present situation must be approached on the footing that parts of the constitution were repealed by s.1427(1) of the Corporations Law as of 1 July 1998 and that the sum of $2.00 is to be regarded as paid on each of the twelve shares.

15 The repeal effected by s.1427(1) caused to become inoperative the provisions in the company’s constitution stating its capital and dividing that capital into shares of a fixed amount. Clause 3 of the memorandum and article 5(1) of the articles of association are both provisions of this kind. But each provision, as well as stating the capital and dividing it into shares of £1/-/-, specified the numbers of shares that were to be “A” class shares, “B” class shares, “C” class shares and ordinary shares. To the extent that the provisions thus classified shares, they went beyond the matters specified in s.1427(1) of the Corporations Law and it seems to me that those additional aspects must be taken to have survived the repeal effected by that section. It follows that the twelve shares issued as “A” class shares continued to be “A” class shares after 1 July 1998. In addition and as I have already said, each must today be regarded as a share on which the sum of $2.00 has been paid.

16 Returning to the general principle of proportional participation recognised in the case law, it seems clear that the rule now pays attention to interests in the share capital measured by numbers of shares held – subject, however, to the provisions of the constitution. The general principle is always subject to modification by the constitution. It is therefore necessary to construe the particular provisions that apply in this case, being articles 5(2)(iii) and 141. The scheme of distribution of surplus those provisions create will be the scheme that s.501 requires to be adopted; and the general principle to which I have referred will be relevant only to the extent that the provisions of the constitution do not cover the field.

17 Mr A J Grant of counsel, who appeared for the liquidator, referred to a number of decided cases. Included among them are cases in which holders of shares of a particular class have been held to have no right to participate upon a winding up beyond a fixed amount representing return of the capital paid up on their shares. Examples are Re National Telephone Company [1914] 1 Ch 755 and Re Isle of Thanet Electricity Supply Co Ltd [1950] Ch 161 in England and Re William Bedford Ltd [1967] VR 490, Re Plashett Pastoral Co Pty Ltd [1969] NSWR 243 and Seaton v Federal Hotels Ltd (1981) 29 SASR 290 in Australia.

18 But all these cases involved a contest between holders of issued shares having different attributes under the company’s constitution. By recognising and giving effect to a limitation upon the rights of holders of shares of one class, the court was upholding and vindicating a right of the holders of shares of another class, that is, a right not to suffer curtailment of participation though unauthorised augmentation in favour of the members of the first class.

19 The situation here is quite different. There is no question of contest or competition among the holders of shares or classes of shares. Although the constitution purports to differentiate among members according to the classes of shares held by them, each of the two members occupies exactly the same position as the other, holding six “A” class shares in circumstances where no further shares have been or can now be issued, where the rights of the members cannot now be changed (see s.493(2) of the Corporations Act) and where the process of winding up provided for in the Act is about to be completed.

20 In these circumstances, the question is not one of resolving competing claims upon surplus advanced by different segments of the membership. It is, rather, whether the constitution shows an intention that the members as a whole, both of whom hold “A” class shares only, are to be denied altogether participation beyond the amounts paid up on their shares. If the answer is in the affirmative, a further question arises by way of corollary: how must the liquidator apply so much of the surplus as remains after the entitlements to the amounts paid up on the twelve “A” class shares have been satisfied?

21 There can be no real doubt, in my view, that if “B” class, “C” class or ordinary shares were on issue in addition to “A” class shares, those other shares would entitle their holders to the balance of the surplus beyond $24.00. Under article 5(2)(iii), that balance would “belong exclusively” to the holders of those other shares. But, of course, there are, in the circumstances actually prevailing, no such holders and therefore no persons to whom that provision causes the balance to “belong exclusively”.

22 Attention must then be focussed on the second and third sentences of article 141. The second sentence deals with the situation where, in a winding up, the assets for distribution among members are more than sufficient to repay the paid up capital. As things stand, the paid up capital is $24.00 and the second sentence applies. It says that the balance of the surplus over and above the paid up capital of $24.00 is to be distributed among the members in proportion to the capital that had been or ought to have been paid on their shares at the commencement of the winding up. That general rule is then qualified by the final sentence, which says that it operates “without prejudice to the rights of the holders of shares issued upon special terms and conditions”.

23 The words “without prejudice to” indicate that the rights in question are not to be curtailed or detracted from so as to be less advantageous or attractive to the persons enjoying the rights. Adopting the approach taken by McPherson J to the words “without prejudice to our client’s rights” in Alleyn v Thurecht [1983] 2 Qd R 706, the rights are to remain available in an undiminished way. The general specification in the second sentence of article 141 must therefore yield to and accommodate “the rights of the holders of shares issued upon special terms and conditions”.

24 If “B” class, “C” class or ordinary shares were on issue, those shares would be shares “issued upon special terms and conditions”. This is because article 5(2)(iii) would be the source of an entitlement of the holders of those shares to so much of the surplus on winding up as remained after repayment of the amounts paid on the “A” class shares. That entitlement would be part of the “rights of the holders of ” the “B” class, “C” class and ordinary shares. The last sentence of article 141 would then cause the entitlements of those shareholders created by the “shall belong exclusively” specification in article 5(2)(iii) to prevail over any residual right of participation in excess that the second sentence of article 141 might otherwise leave with the holders of the “A” class shares.

25 But in the circumstances actually prevailing, there are no “shares issued upon special terms and conditions” which are the source of any “rights of the holders” of those shares with respect to surplus, being rights that would be prejudiced by the unfettered operation of the second sentence of article 141. The “A” class shares are also “shares issued upon special terms and conditions”. The special terms and conditions include those in article 5(2)(iii). But application of the second sentence of article 141, so as to benefit the holders of the “A” class shares in a way that would not have occurred if “B” class, “C” class or ordinary shares had also been on issue, will not detract from or diminish the rights of the holders of the “A” class shares. It will put those holders into a position that is more favourable to them than is contemplated by their “special terms and conditions”. There do not exist any shares to which are attached rights of the kind intended to be preserved and protected by the third sentence of article 141. The second sentence accordingly operates in an unqualified way.

26 In approaching the matter in that way, I am mindful of the following passage in the judgment of Street J in Re Plashett Pastoral Co Pty Ltd (above) at p.246 regarding an article relevantly indistinguishable from the article 141 with which I am now concerned:

“Mr. Handley has contended that this second sentence of art. 158 should be given its full meaning and effect as entitling all members in proportion to the capital paid up to share in the distribution of any excess. He contends that the qualification in the last sentence of art. 158, specifying that that Article ‘is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions’, does not prevent the rights of shareholders being augmented by the earlier provisions of art. 158. The article, so his argument runs, prevents diminution of rights conferred elsewhere in the articles upon the holders of shares issued upon the special terms and conditions; but it does not prevent augmentation of their rights. In point of terminology there is force in Mr. Handley’s argument: the phrase ‘without prejudice to’ commonly means ‘without derogating from’. But in determining whether art. 158 enlarges the rights conferred by art. 9, weight must be given to the clear principle that the rights of preference shareholders are prima facie to be considered to be exhaustively stated unless the contrary can be demonstrated. If, of course, the preference shareholders’ rights can be seen to be stated as being in some respects exclusive or particular and in other respects rights in common with all other shareholders, then full effect will be given thereto. Rights given in terms to the general body of shareholders may or may not form part of the specification of the preference shareholders’ rights. Mere physical remoteness in the numerical sequence of the setting out of the articles is little to the point. But in determining whether a generally expressed article such as art. 158 does form part of the specification of the rights of preference shareholders this basic principle of construction necessitates a cautious approach. Where, as here, the particular statement of rights deals with return of capital on winding up (art. 9), that is prima facie an exhaustive statement of the rights on that topic. The generally expressed terms of art. 158 are to be considered with this proposition well to the fore.”

27 But, as I have said, Plashett Pastoral Co was a case in which the rights attaching to shares of a particular class arose for consideration in a context where shares other than shares of that class were also on issue, so that it became necessary to address questions of competition and relativity. It was that circumstance that caused the court to reject the notion that the equivalent of the present article 141 enlarged the limited rights analogous to those emerging from the present article 5(2)(iii), even though the submission of Mr K R Handley of counsel as to the effect of the “without prejudice” terminology was acknowledged to have “force”. In the circumstances now before me, no such inhibition operates to preclude the construction for which Mr Handley there contended.

28 It follows that, as a matter of construction, the constitution provides that the surplus in the plaintiff’s hands as liquidator is to be applied, first, in repaying the capital of $24.00 paid up on the twelve outstanding shares and, second, by division among the members in proportion to the capital paid up on their shares at the commencement of the winding up (there being no capital that, at that point, ought to have been paid up but was not). Section 501 of the Corporations Act requires that effect be given to the constitution in this respect, so that, with each of the two members holding six fully paid shares of $2.00 each, the net result is that the surplus remaining after debts, claims and expenses have been paid in full must be divided equally between those two members.

29 I add by way of postscript a brief observation on the possibility that a surplus in a liquidator’s hands might pass to the Crown as bona vacantia. That possibility was adverted to in the course of submissions and is referred to at paragraph 14.200 of the fifth edition (2006) of “McPherson’s Law of Company Liquidation” by M G R Gronow. The decision of Waddell J in Rees v Dominion Insurance Company of Australia Limited (1981) 6 ACLR 71 is mentioned in that connection. That case involved a superannuation fund in circumstances where no person was any longer entitled to benefits out of the trust fund. It seems to me that any analogous possibility would arise in the context of company winding up only where the constitution made it perfectly clear that no member was to have the surplus and made no other provision as to its disposal (such as, under the kind of regime commonly adopted by certain community and charitable companies, by payment to a named institution or to bodies having objects similar to those of the company). In the case of a commercial company, the intention to exclude all members from enjoyment would have to be clear, as a matter of construction. If all members were not clearly and unambiguously excluded, the principles in Birch v Cropper (above) and Re Driffield Gas Light Company (above), as adjusted for the abolition of par value, would apply by default to recognise members’ right to participate in proportion to the numbers of shares held.

30 In the present case, the liquidator should be given a direction by the court that he is justified in proceeding on the footing that the surplus after all debts, claims and expenses cognisable in the winding up have been paid in full is to be divided equally between Mr Sidney McCutcheon and Mr Allan McCutcheon as the only members of the company.

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