Mark McKillop Barrister

Dark economic clouds are on the horizon and insolvency appointments on the rise, and with them the number of DOCAs will trend upward. One of the most useful tools available to a deed administrator is compulsory share transfer under s444GA of the Corporations Act 2001 (Cth), which has been the subject of two recent cases.

When a business is sold by a deed of company arrangement, it is sometimes key that the shares of the insolvent entity be transferred to different shareholders. This can be crucial to making the deal work. A common reason is to allow tax advantages that have accrued to the company to be used by the acquirer. Other reasons may include allowing existing creditors to swap debt for equity, or avoiding problems caused by a straight asset sale.

Section 444GA(1) allows a deed administrator to transfer shares in a distressed company either with the written consent of the shareholders, or with the leave of the Court. An application may be opposed by a shareholder, creditor, other interested parties or ASIC (s444GA(2)). Section 444GA(3) requires the Court to give leave if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.

The cases illustrate the application of the section and highlight some of the issues when leave is contested by a shareholder or a creditor with a security interest in the shares, and what is meant by unfair prejudice to the members of the company.

The most recent case is Anderson, in the matter of NT Port and Marine Pty Ltd (Subject to Deed of Company Arrangement) (No 3) [2024] FCA 905, (NT Port) a decision of Charlesworth J of the South Australian division of the Federal Court.

In NT Port the company in administration operated the deep water port facilities on the north west coast of Melville Island. The court noted in an earlier judgment that the port included fuel storage facilities, an accomodation village and 10 hectares of port ancillary services which supported major industries for the Tiwi islands of oil and gas, marine transport and forestry. The port was the only export outlet for woodchips from the Tiwis, as well as its general cargo handling facility.

Picture: Port Melville Deep Water Port – Loading Logs for Export

So there was an immediate and fairly urgent public interest in assuring a restructure of the business, which no doubt influenced the consideration of the leave application under s444GA.

In NT Port the application for leave was opposed by the existing 100% shareholder, and a secured party who had a security interest over those shares.

In reviewing the law on the exercise of the discretion, Charlesworth J noted key points at para 26 to 33 of the judgment.

First, that the transfer of shares not “unfairly prejudice” shareholders directs attention to the impact of a compulsory sale on shareholders where there may be some residual value in the company. If the shares have no value, there can be no prejudice.

Second, even if the shares have some residual value, the members will be prejudiced only if there is a prospect of the shares obtaining some value within a reasonable time, the steps or measures necessary before the prospect of the shares attaining some value may be realised in that time and the willingness and ability of the existing shareholders to provide the means by which the shares may obtain some value or by which the company may continue in existence.

In other words, it is incumbent on the objecting parties to show there is value which they are willing and can unlock within a reasonable time.

If the objecting parties can’t show that, and it is the case that shareholders are unlikely to receive any distribution in liquidation on their equity, and if liquidation is the only alternative to the transfer proposed, in those circumstances members would have real difficulty demonstrating any prejudice, let alone unfair prejudice.

Third, s444GA implicitly permits transfers that affect interested persons, not just members, so that an order for transfer can be made free of a security interest over the shares. Section 444F(2) can also be utilised in that respect (power to restrain a secured creditor utilising its security).

On the facts of NT Port, leave was granted and orders made transferring the shares largely because the Court was satisfied the shares were worthless. Nor was there evidence of residual value that could be unlocked in the required timeframe. Neither the shareholder nor the secured creditor appeared, nevertheless given that they had each indicated they did not consent, an order reserving liberty to apply was made.

The other case is In the matter of Hills Limited [2023] NSWSC 1308 (Hills), a decision of Black J in equity in the NSW Supreme Court. Black J’s survey of the authorities is similar (at paras 19 to 22), and are helpful in making these points.

First, the injunction in 444GA(3) is against “unfair” prejudice, not any prejudice. It follows that if the affected shares have no residual value, or none that can be relevantly unlocked, there is no unfair prejudice in circumstances where if leave is not granted, there will be no return to shareholders in liquidation.

Second, the onus is on the applicant to show the discretion should be exercised, but the onus of demonstrating unfair prejudice is on the objector.

In Hills, which was an administration of the holding company of a health technology services group employing 130 people, again the evidence was that there was no residual value and that if the transfer were not made, the DOCA would fail and the shareholders would get nothing in liquidation.

Both cases are worth reviewing for administrators or their lawyers considering a share transfer as part of a DOCA.

Key takeaways:

• If the shares are worthless, there is no prejudice and an order should be obtainable
• If the shares have some value, it is on the shareholder/objectors to show the value can be unlocked in a reasonable time frame and that they have capacity and willingness to do so
• Claims of secured creditors can be overcome by demonstrating no value or no relevant residual value

Regards

Mark