Navigating share transfers in a deed of company arrangement: crucial insights for administrators
By Mark Petrucco and Anna Cao
The Supreme Court of New South Wales granted leave under section 444GA of the Corporations Act 2001 (Corporations Act) to transfer the existing shares in Hills Limited (subject to deed of company arrangement) to one of its creditors pursuant to a deed of company arrangement. The Court’s decision highlights the key considerations when determining whether a transfer of shares will be held to be unfairly prejudicial to the interests of shareholders.
Background
Hills Limited (subject to deed of company arrangement) (Company) was a publicly listed company and ultimate holding company of an Australian based technology supplier and distributor, Hills Group. The Company and Hills Health Solutions Pty Ltd (Hills Health), were the two main operating entities within Hills Group. Subject to several exceptions, the companies within Hills Group were parties to a deed of cross guarantee, under which entities of the group guaranteed payment of the debts of the other entities.
Hills Health was the subject of Supreme Court proceedings brought by Stellar Vision Operations Pty Ltd (Stellar) for breach of contract and breach of fiduciary duty. Although Hills Health was successful at first instance, Stellar successfully appealed and Hills Health was ordered to pay damages to Stellar. Read our summary of that judgment and key takeaways.
Administrators were appointed to the Company after Hills Health and Stellar were unable to negotiate a settlement of the judgment amount arising from the Court of Appeal’s decision. On 23 August 2023, the Company entered a deed of company arrangement (DOCA) with its creditors. A key condition of the DOCA was that all issued shares in the Company were to be transferred to Starplex International Pty Ltd (Starplex) (a related entity of Stellar), a creditor of the Company and 11 of its subsidiaries.
The DOCA effectively extinguished all claims by creditors and shareholders of the Company unless otherwise preserved by its terms. The DOCA also established a creditors’ trust to meet the claims of creditors, which would return substantially more to unsecured creditors than the likely return in liquidation. The table below has been extracted from Part 2 of the Administrators’ Section 75-225 Report to Creditors (as corrected by Mr Arnautovic’s second affidavit in the proceedings dated 23 October 2023).
Table of estimated returns
Estimated return to secured creditors (cents in the dollar) | Estimated return to unsecured creditors (cents in the dollar) | |
---|---|---|
DOCA | 100 | 54.2 |
Liquidation | 75 to 100 | 16.9 to 26.5 |
Neither Stellar nor the Company’s shareholders had any rights to the proceeds from the creditors’ trust, and the shareholders would not receive any other payment in return for the transfer of their shares.
Application for leave to transfer shares
The administrators brought an application under section 444GA of the Corporations Act for leave to transfer all the Company’s issued shares to Starplex in accordance with the terms of the DOCA.
It was necessary for the administrators to convince the Court to exercise its discretion to allow the share transfer to be exercised in their favour. Had any shareholders appeared to oppose the application, they would have borne the evidentiary onus of establishing facts relevant to prejudice.
Justice Black noted that the key test for deciding whether to allow the transfer of shares in a company under section 444GA is whether the Court believes the transfer would be unfairly prejudicial to the interests of the company’s members.[1] This required the Court to consider:[2]
the circumstances of the case; and
the policy of the legislation as summarised in section 435A of the Corporations Act. Namely, to provide for the affairs of an insolvent company to be administered in a way that maximises the chances of the company continuing in existence, or results in a better return for the company’s creditors than would otherwise result from an immediate winding up.
In considering these matters, Justice Black noted that the transfer of shares without payment of compensation does not in itself establish unfair prejudice,[3] and that ordinarily there will be no unfair prejudice where shares have no value as no distributions would be made to shareholders in the event of liquidation.[4]
The Court’s decision
Leave was ultimately granted to transfer all the existing shares in the Company to Starplex or its nominee in accordance with the DOCA.
Justice Black was satisfied that there was no prejudice to shareholders of the Company in the proposed share transfer, and that (if wrong on that point) the interests of shareholders would not be unfairly prejudiced by the transfer of shares, as the residual equity in the Company had no value.[5] In reaching that conclusion, his Honour agreed that the evidence showed if the transfer wasn't approved by the Court, the DOCA would likely end, the company would be liquidated and unsecured creditors would probably receive less money than what was expected under the DOCA. Justice Black also noted that although shareholders would receive nothing under either the winding up or the DOCA, none of the shareholders had objected to the proposed transfer or sought to be heard in relation to the application.[6]
Key takeaways
The relevant test under section 444GA is whether there is any unfair prejudice, rather than any prejudice to the interests of shareholders.
When determining whether there is any unfair prejudice, the Court will consider the residual value in any shares in the event the company was to proceed in liquidation in cases where this is the likely consequence of the transfer not being approved.
Applicants bear the onus of convincing the Court to exercise its discretion to allow the transfer to be exercised in their favour.
Shareholders bear the evidentiary onus to establish any unfair prejudice to their interests if they seek to object to the proposed transfer.
Should you wish to discuss any of the points above please reach out to a member of our team.
Written with the assistance of Amy Simpson and Laurice Aziz.
[1] In the matter of Hills Limited [2023] NSWSC 1308 at [19] citing Cussen, Re Big Un Ltd [2019] FCA 1162 at [5].
[2] Ibid at [19] citing Lewis, Re Diverse Barrel Solutions Pty Ltd (subject to deed of company arrangement) (recs and mgrs apptd) [2016] NSWSC 1985 at [14].
[3] Ibid at [19] citing Weaver v Noble Resources Ltd [201] WASC 182.
[4] Ibid.
[5] Ibid at [24].
[6] Ibid at [23].