Beck v Weinstock & Ors

[2012] HCATrans 34

[2012] HCATrans 034

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S311 of 2011

B e t w e e n -

TAMAR RIVQA BECK

Applicant

and

AMIRAM DAVID WEINSTOCK

First Respondent

HELEN WEINSTOCK

Second Respondent

LW FURNITURE CONSOLIDATED (AUST) PTY LIMITED (ACN 00 894 557)

Third Respondent

Application for special leave to appeal

GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 FEBRUARY 2012, AT 12.23 PM

Copyright in the High Court of Australia

MR R.G. McHUGH, SC:   May it please the Court, I appear with my learned friend, MR D.J. BARNETT, for the applicant.  (instructed by McCabe Terrill Lawyers)

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR J.O. HMELNITSKY, for the respondents.  (instructed by Baker & McKenzie Solicitors)

GUMMOW J:   Yes, Mr McHugh.

MR McHUGH:   Your Honours, might I begin with error and move to leave.  It is uncontroversial that the C class shares at issue in this case ‑ ‑ ‑

GUMMOW J:   What are we talking about here in terms of money, to be crude?

MR McHUGH:   Millions of dollars, and I can take your Honours to a reference to that in Justice Young’s judgment.  Your Honours will see in the application book at page 24, paragraph 9, that the claim was that the true value on a winding up would be $7.2 million, and his Honour pointed out that although the claim is not admitted, there was evidence that indicated it was millions of dollars at issue.  Of course, your Honour, the shares were redeemed at $8, or purported redeemed. 

Now, it is not controversial that they are described in the Constitution as redeemable preference shares and it is also not controversial that they could only be redeemed in 2004 when that happened, or purportedly happened, if within the meaning of the Corporations Act at that point they were redeemable preference shares, that that is for the purposes of the Act.  I can take your Honours through the provisions, but it is essentially the provisions dealing with the production of capital and the way in which redeemable preference shares work.  If they were not redeemable preference shares within the meaning of the Act, then the whole proceeding miscarried.  So the question fundamentally was one about construction of the Act.

Where, I submit, Justice Handley with whom Justice Giles agreed, went wrong is in asking the wrong question and directing themselves to the question of the construction of the memorandum rather than the statute.  Could I take your Honours in the application book to page 46 and at the foot of the page, paragraph 128.  His Honour focuses here on the wrong question, this is Justice Handley:

The meaning of articles 3 and 4 cannot be affected by the state of the company’s share register.

Well, that is to be accepted, but it has got nothing to do with the construction of the term in the Act.  Then over the page at 129:

The Court can determine the proper construction of articles of association but the result contended for by the respondent involved reconstruction.

That is not correct.  That was not the way I put the case –

The submission implied that parts of articles 3 and 4 had no valid operation –

that is true –

when the C and D shares were issued –

that is also true –

because those shares did not have all the rights defined in article 3(4) and (5).

That is not right. The argument is, under the Constitution they had those rights but they could not be exercised consistently with the Corporations Act.  Then down at the foot of the page, 132:

The Court cannot hold that the directors issued C and D shares with different rights without holding that they amended article 3(4) and (5).

That again is the wrong question.  The point is simply that these were not preference shares within the meaning of the statute either at the time they were issued or when they were purportedly redeemed.  Then the same problem again at 133 on the next page:

It was suggested that the C and D shares would become redeemable preference shares if and when the company issued ordinary shares.  Until then they could not be preference shares and could not be redeemable.  I am not aware of any principle which would enable a company, without appropriate provision in its articles, to convert shares which are not convertible into other shares.

Again, that is the wrong question.  The question is in what way the statute would operate on the shares that were on issue at the time.  It is consistent throughout all of these paragraphs that the same problem comes up again and again.  Then at the foot of the page at 136:

The respondent’s arguments come to this . . . they could do these things in that order they could not achieve the same result by first issuing the C and D shares and then the other share.  I cannot accept that argument.

There does not appear to be any further reasoning supporting that.  It appears to be saying I just do not think that that could be right as far as it goes.  Then if your Honours come all the way back to page 46 and paragraph 126, this is the difficulty made acute:

The logical consequence of these arguments would be that the C and D shares were never validly issued.  If for legal reasons the directors did not have the power to issue those shares, they were never issued.  Unsurprisingly no one embraced this argument.

Your Honours, that is not the logical consequence at all.  The logical consequence is that, though validly issued, they were not at the time they were issued redeemable preference shares within the meaning of the Act at the time, relevantly the Companies Act (1961), and therefore they could not be redeemed.  So it was effectively ‑ ‑ ‑

GUMMOW J:   What were they?

MR McHUGH:   They were simply shares issued pursuant to the general power to issue shares, which is the power now in section 124.

GUMMOW J:   They were ordinary shares.

MR McHUGH:   Well, they were shares that had certain rights attaching to them, but they were not preference shares within the meaning of the Act.  If your Honours go in the Act to section 254A ‑ ‑ ‑

GUMMOW J:   This is the present Act?

MR McHUGH:   This is the present Act and, your Honour, the provision – my argument comes down to this.  When they were purportedly redeemed in 2004, that was contrary to the Corporations Act in 2004 because the shares were not redeemable preference shares and the provisions that your Honours have before you have not changed between 2004 and today.  Section 254A(1)(b) there is a power to – referring to the general power in section 124 says that it includes the power to issue preference shares.  Now, I submit they have to be understood in the way in which we have submitted, that is, preference shares which are preferential by reference to shares on issue at the time.  Then when your Honours come down to 254A(2):

A company can issue preference shares only if the rights attached to the preference shares with respect to the following matters are set out in the company’s constitution (if any) or have been otherwise approved by special resolution of the company –

Now, what is significant about that is that it indicates that this provision is directed to protecting people who were there beforehand because they are the ones who control the memorandum and control, in particular, the special resolution that would have to come to authorise the issue of shares and because of the class rights provisions in the Act, again, that would only be possible if it was with the concurrence of the people who were the pre‑existing shareholders, but that is the ones whose rights are now going to be subjected to whatever this preference is.  That really shows that the Act is contemplating that there will be other shares on issue that need protection from the preference share rights.  So that is the concept relevantly in 254A(2) and when your Honours come through to 254J, that gives an authorisation to redeem redeemable preference shares on the terms on which they are on issue.  Then when your Honours come through to 258E: 

Any reduction in share capital involved in:

(a)the redemption of redeemable preference shares . . . 

is authorised by the section.

So it is only if they are redeemable preference shares and, in particular, obviously preference shares before that, that they come within the section and otherwise they fall foul of the provision in 256B(1) that:

a company may reduce its share capital in a way that is not otherwise authorised by law –

only, essentially, if all those ‑ ‑ ‑

GUMMOW J:   This term “company”, that is defined, is it not, to include corporations formed under earlier legislation?

MR McHUGH: It would be, yes, your Honour. So the proposition is essentially that when Justice Handley, in going through the paragraphs that I have taken your Honours to in his judgment, the reason in the way his Honour did, he was focusing on the memorandum and the articles and the Constitution and not on the construction of the Act.

GUMMOW J:   Is this company incorporated under the 1961 Act?

MR McHUGH:   Yes.

GUMMOW J:   I see.  This dispute was in the probate jurisdiction, was it not?

MR McHUGH:   It emerged out of a much bigger dispute that was all being heard in that jurisdiction by Justice Hamilton.

GUMMOW J:   The first and second respondents are the executors, are they?

MR McHUGH:   Your Honour, they are the people who were, effectively, the controllers of the company, the two people who were described – well, I will put it that way ‑ ‑ ‑

GUMMOW J:   I am just wondering how they became parties to the probate suit, that is all, and if it is a probate suit, why the executors are parties?

MR McHUGH:   Your Honour, there were a number of other parties involved in what became a much bigger dispute where there were allegations of oppressive conduct and so on in relation to the company.  All of those were settled and this was the only issue that remained for determination by Justice Hamilton at first instance, and so that is how they came to be parties at all.  Your Honour, they also had, in a practical sense, an interest because they are the ones who stand to gain economically if the decision below is correct.  Now, can I take your Honours in Justice Young’s decision ‑ ‑ ‑

HEYDON J:   Can I just ask one factual question.  You said that they have to be preference shares in the sense that they are preferential by reference to shares on issue at the time.  Mr Jackson’s written submissions on page 69 about line 34 says:

The A shares, which were issued prior to the C shares, have been on issue at all times and are not redeemable.

Is that correct?

MR McHUGH:   That is correct, but the A shares are not the ones that we are dealing with.  The C shares are the ones we are dealing with.

HEYDON J:   But if the A shares were issued prior to the C shares ‑ ‑ ‑

MR McHUGH:   But they are preferential to the Cs.  The Cs do not have a preference by reference to anything on issue and that is common ground.  The Cs are not preferential in relation to any other shares.  The As are ahead of them and there is nothing that comes after the Cs.  That, your Honour, is not in dispute.  If I can take your Honours in Justice ‑ ‑ ‑

GUMMOW J:   Were there no other shares issued?

MR McHUGH:   No.  Well, your Honour, there were perhaps D class shares but they rank in exactly the same way as the C class shares.  So the only ones that one is dealing with are the A class shares, the Cs and perhaps Ds which are in the same position as the Cs.  No ordinary shares were ever issued, no voting shares were ever issued, and if it was what is described as a Robertson scheme, it miscarried.  If I can take your Honours quickly to Justice Young’s decision.  If I can take your Honours to page 31 in the book and paragraph 40 ‑ ‑ ‑

GUMMOW J:   The Robertson scheme was designed to diminish value, is it not, at the time of the controller’s death?

MR McHUGH:   Yes, that is, when the controller dies his or her shares are not worth anything and there is no issue of transmission and, in fact, if the scheme worked, they would be redeemed and one jumps a generation that way.  His Honour Justice Young at paragraph 40, I submit, identified what the correct question was and paragraph 40 has to be understood as a reference to the statute, that is, what the statute was referring to.  If your Honours come through to page 34 and paragraph 56, again his Honour was focusing, in the last line of paragraph 56, on “what did the legislature mean”.  Then when your Honours come through to page 39 in the application book and paragraphs 85 and 86, this is the nub of identifying the correct question.  His Honour referred to the submission that I had made couched in language of a statutory preference share, that is, a share that met the statutory description.  In paragraph 86:

I understand Mr McHugh to be submitting that the term “preference share” in s 66 of the 1961 Act –

and equally in the current Act –

was used in the sense I have described, that is, a share which had prior rights to some other issued share.  Thus, even though a company’s constitution might call a share a “preference share”, it would not be a preference share within the meaning of that term in s 61 of the 1961 Act –

That, I submit, was the correct question.  The way in which his Honour went on to answer the question, if I can take your Honours back to page 37, paragraph 75, his Honour after quite a lengthy review of what authority there is came down on the side that:

a preference share is one which has preferred rights over another class of share.  It logically follows that, if there is no other class of share, there cannot be any preference shares.

Then back over the page on 39 at paragraphs 82 and 83 his Honour, I submit, plainly correctly, concluded that:

Unissued shares have no existence.  The authorised capital of a ‑ ‑ ‑

GUMMOW J:   It depends what one means by existence.

MR McHUGH:   That they are entirely notional. There is no preference by reference to them, they just do not exist. They are just sitting in the Constitution, in a sense, in provisions which, your Honour, were repealed about 10 years ago – provisions in the Constitution that were repealed, in any event, by statute. Then at paragraph 83, that something else must actually exist and that brings his Honour through to the conclusion on page 41 where his Honour says he came to the same view as the primary judge:

It seems to me that, unless there is some other type of share with which one can compare the type of share under review –

then there is not a preference share.  Now, I should take your Honours very quickly to Justice Hamilton to show that exactly the same process was followed by his Honour.  At page 8 in the book, paragraph 23, this is the conclusion of his Honour’s judgment:

The second argument is that the shares fail to be preference shares within the meaning of the legislation –

So that was the way in which his Honour framed the question.  Then coming through to page 10 and page 11 in the book at paragraph 29 his Honour formed the view:

preference shares cannot be created unless there are [some] on issue –

Then at 30 he accepted the argument and again expressed it in terms of:

within the meaning of the [Corporations Act] and their purported redemption –

So my submission is that there is a clear error in the approach taken by the majority to what the question before them actually was, that if the question

were answered correctly in the way in which Justice Young indicated and Justice Hamilton had at first instance, then I must succeed.  That leaves only the question of leave.  Now, the submission is essentially that the concept of a preference share is a fundamental one.  It is a basic concept.  Justice Young, at paragraph 2 of the decision, way back at page 23, described the question correctly as a significant one.  His Honour put it as “a short, though difficult and significant, point” and his Honour, I submit, was correct.  The concept has been in all the corporation legislation for many years.  This Court has never addressed the question. 

The majority’s conclusion opens up all sorts of highly artificial structures and, ultimately, as your Honour Justice Gummow identified at the outset, there is a very substantial miscarriage here because my client’s interest in the shares that were redeemed has been reduced from many millions of dollars to only $8.  So I submit, on all of those reasons, it is an appropriate case and it is an entirely appropriate vehicle because there are no disputed questions of fact.  May it please the Court.

GUMMOW J:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, may I deal first with a couple of factual matters.  An independent person is now the executor of the relevant estate.  The second thing is that the C class shares are ones to which the applicant and the first respondent each received an equal number under the will and, your Honours, the actual value of them would be very dependant upon the relative relationships with the remaining ‑ ‑ ‑

GUMMOW J:   The executor is not a party.

MR JACKSON:   No, your Honour.  Well, not to this part of the case because other parts were settled and, your Honour, I cannot give your Honour a better reason than that really.  Could I just say this.  Our submission is that special leave should not be granted for fundamentally two reasons.  The first is that the case does involve a relatively narrow issue on which, in our submission, and I will come to this in a moment, the view of the majority in the Court of Appeal is the better view and, secondly, despite the claims made for it, the case is in reality just a one off, if I can put it that way.  May I deal with those issues in this way, your Honours.

The requirements for the allotment of preference shares at the time when the preference shares were allotted were contained in section 66(1) of the Companies Act 1961.  Your Honours can see it in two places.  Could I go to the shorter more quickly.  It is referred to by Justice Young at page 27 of the application book in a paragraph also numbered 27.  Your Honours will see at that paragraph that what it provides is that preference shares may not be allotted “unless there is set out in its memorandum or articles” the matters referred to in section 66(1).  Now, your Honours, what the provision does not require is that the shares over which the preference shares are to have priority, or any of them, are these shares which are issued at the time when the preference share is allotted, nor was there any other statutory provision imposing such a requirement or anything like it.  The articles, in fact, complied with the terms of that provision and the C class shares were issued. 

Now, your Honours, if one pauses at that point of the case, the applicant’s argument means that if a company in which there are to be two classes of shares, preference and ordinary, if one assumes a company of that category, the preference shares, if allotted the day before the ordinary shares, would not be preference shares, but if they were issued the day after the allotment of the ordinary shares, they would be preference shares.  That is part of the argument.  I will come to the other part in a moment. 

Your Honours, that is referred to by Justice Handley and, your Honours, that is fundamentally what the case comes down to, in our submission, at page 48 in paragraph 136. I say it comes down to that, your Honours, because the alternative is to say, as our learned friends would say, well, you have to have redeemable preference shares to redeem and ex hypothesi they have to be preference shares, but the argument otherwise that they advance is that whether they are or are not preference shares will vary not by any alteration to the Constitution, not by any apparent means of alteration of the share itself, but because of the existence or non‑existence of the class of shares over which they would have a preference, and that is what Justice Handley is dealing with in much of his reasons, and I will come to that in just a moment; the unacceptability of that proposition, with respect.

The essence of Justice Handley’s reasons commences really, if I could start at the end at paragraph 136 on page 48, where he summarised the respondent’s arguments as coming to, in effect, what I said a few moments ago and the essence of his reasons on that issue, or for arriving at that conclusion and for rejecting it can be seen in a passage which commences at page 45, paragraph 123.  He sets out article 4.  He then refers to the provisions of section 33(1) of the 1961 Act.  He said in paragraph 125 that the powers were exercised to issue the C shares:

It was not suggested that they could not issue them but it was submitted that they could not be redeemable preference shares when there were no ordinary shares on issue which would give practical content –

Your Honours, one notes what he said in paragraph 126 and then goes on to say in paragraph 127:

Article 3(1) designated 15 $1 –

maybe one pound –

shares in the nominal capital as C and D shares.  At that stage they did not exist as shares, but were shares which the directors could –

issue.  He went on to say, your Honours, in 128:

The meaning of articles 3 and 4 cannot be affected by the state of the company’s share register.

In paragraph 129:

The Court can determine the proper construction of articles of association but the result contended for by the respondent involved reconstruction.

Your Honours will see the reasons set out in the second sentence there.  Your Honours, he went on to say in paragraph 130 you “cannot rectify a company’s articles of association” and in 131 really posed, in a sense, the question:

If articles 3(4), (5) and 4 were in force, in accordance with their terms, when the directors purported to issue the C and D shares, their decision to do so must have had legal effect.

Then posed the question, what prevented that from happening?  Your Honours will see the reasons he says in paragraphs 132 and 133 why those contentions should not be accepted.  Then your Honours will see in paragraph 134, quoted from White v Bristol Aeroplane Co Ltd, the passage which indicates there can be a difference between the existence of a preference and the question whether it is capable of being exercised at a particular time.

GUMMOW J:   Mr Jackson, section 66 of the 1961 Act talks about preference shares.  They need not be redeemable.

MR JACKSON:   No, your Honour.

GUMMOW J:   What is it that dealt with the concept of redeeming?

MR JACKSON:   I do not think it is in the materials your Honours have, but it is not significantly different from the present provision.  So one could have non‑redeemable preference shares.

GUMMOW J:   Yes.

MR JACKSON:   But the question is really – and there would be no question that these were redeemable if they were preference shares.  Section 61(1), your Honour, behind tab 7.  You will see from its terms they have to be preference shares and the question was simply whether these were preference shares.  The redeemable aspect of it is something that is not really in dispute in these proceedings.  The question was whether they were preference shares and in saying that, the provision of section 66 is the relevant one.  Your Honours, could I go onto say this, that if one goes to the reasons to the contrary of Justice Young, they do not, with respect, provide a substantial basis for that opposing view.  May I take your Honours to them briefly.  If one goes to page 37, paragraph 75, you will see that he says:

what little there is on the subject points in the one direction, that is, that a preference share is one which has preferred rights –

Could I emphasise the word “rights”, your Honours –

over another class of share.  It logically follows –

et cetera.  Could we just say this, your Honours, that conclusion, we would submit, just does not follow.  The first part of that paragraph speaks of preferred rights of shares and the second thing we would say is that what might follow logically is that if the memorandum and articles of a company, using the somewhat dated terms, made no provision for any other class of shares, then perhaps there could not be preference shares, but that was not the case.  Your Honours, if one goes to the passage at paragraphs 77 to 79 on page 38, his Honour expressed a view in favour of the applicant’s case, but, your Honours, if one is looking to see what is the reasoning for that view, it is, with respect, a little difficult to find it. 

Then, your Honours, if one goes to page 40 in paragraph 93, your Honours will see that he relies on an analogy with elections and says, “In some situations, A must precede B.”  Well, your Honours, analogies can be good or bad, but could we just say this.  Why is that so in this type of case?  What reason is there for saying that there have to be at the time of creation or at any time during the life of a preference share or at a time when the preference share is being put to death, why does there have to be some other share over which the preference exists?  There is not, in our submission, your Honours, any good reason. 

Could I come to the second aspect, your Honours, that this case is a one off, I think I used the expression, your Honours.  As Justice Handley said at page 42, paragraphs 106 to 107:

This appeal concerns an incomplete Robertson scheme which has gone badly wrong.

Your Honours, hardly a promising position from which to start when contending that the case is of sufficient general application to merit the grant of special leave.  Secondly, the question whether preference shares can only be issued in the way our learned friend issued and be preference shares, as our learned friends would contend in those circumstances, it does not appear either to be or to have been a pressing issue in our jurisprudence.  Could I, in that regard, take your Honours very briefly to the extensive consideration by Justice Young of the law in that regard.  One commences, your Honours, at page 31, paragraphs 43 and following.  You will see in paragraph 43 that he says the concept is not well entrenched.  Then if one goes to paragraph 49, and, your Honours, I am going to the summary paragraphs on the way through, if one goes to paragraph 49 he says:

There is very little in the authorities which is of great assistance.

If you go to paragraph 63, a couple of pages over, namely, page 35, you will see he says that the absence of definition of an ordinary share is no help.  If one goes to paragraph 65, there is nothing much in the textbooks and if one goes to paragraph 68, you will see that he says, “The decided cases are of little help.”  That takes one then to paragraph 75 at the bottom of page 37 to which I took your Honours earlier.  Your Honours, putting it more generally, we would submit there is nothing to suggest that this issue, which is really a narrow issue arising in very particular circumstances, should not be treated as resolved by the decision in the majority in the Court of Appeal.

Your Honours, one notes Justice Young’s observation at page 23, paragraph 2, that this is “a short, though difficult and significant, point of corporations law”.  What we would say about it, your Honours, is that it may be a difficult and significant point of corporations law in one sense, but whatever interest it may arouse in corporations lawyers should not be regarded as making the case of sufficient importance when one looks at its true nature to interest the Court.

GUMMOW J:   We do not need to hear you in reply, Mr McHugh.  There will be a grant of special leave in this matter.  How long will it take?

MR McHUGH:   Your Honour, it is a one‑day matter.  I do not know whether my friend has any sort of notice of contention in mind which might have any effect on that.  I got into trouble last week ‑ ‑ ‑

GUMMOW J:   Tell us now.

MR JACKSON:   Not at the moment, your Honour.

GUMMOW J:   If counsel will attend on the Registrar on the way out, you will get some specific directions as to the timetable that is necessary.  We will now adjourn until 2.15 pm.

AT 12.55 PM THE MATTER WAS CONCLUDED