A recent Supreme Court of Victoria decision has considered an infrequently used section of the Corporations Act 2001 (Cth) (Act) which empowers the Court to transfer shares in a company subject to a deed of company arrangement, notwithstanding objections from shareholders and for no consideration.
In BCD Resources (Operations) NL  VSC 259 (BCD Decision) the Court granted the deed administrators of BCD Resources (Operations) NL (subject to a deed of company arrangement) (Company) leave under section 444GA(1) of the Act to transfer all of the shares in the Company not already owned by the Company's parent entity, BCD Resources NL (BCD), to BCD.
Section 444GA of the Act
Section 444GA of the Act provides that the administrator of a deed of company arrangement may transfer shares in a company only if the administrator has obtained the written consent of the owner of the shares or the leave of the Court. The Court may only give leave if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.
There are three previous reported cases in which Section 444GA has been applied.
- In Weaver v Noble Resources Ltd (2010) 41 WAR 301 Martin CJ gave leave to deed administrators to transfer shares in the company as part of the recapitalisation proposal. His Honour stated that 'if there was no residual equity or value in the company, it is difficult to see how shareholders could be prejudiced either unfairly or fairly'.
- In Lindholm, Re Munday Group Pty Limited v Tsourlinis Distributors Pty Ltd  FCA 1488 Finkelstein J gave leave to deed administrators to transfer shares in the company in order to effect a sale transaction under a sale agreement and to produce the benefits to creditors under the deed of company arrangement.
- In Lewis, Re Diverse Barrel Solutions Pty Ltd  FCA 53 (Re Diverse Decision) White J gave leave to deed administrators to transfer shares in the company in order to achieve a return to creditors under a deed of company arrangement. His Honour considered that section 444GA(3) contemplated some prejudice to shareholders in the loss of their shares. Relevant matters in assessing whether that prejudice was unfair involved a comparison of shareholder's position having regard to matters such as:
- whether the shares have any residual value which may be lost to the existing shareholders
- whether there is a prospect of the shares obtaining some value within a reasonable time (in the absence of the proposed transfer)
- the steps or measures necessary before the prospect of the shares attaining some value may be realised
- the attitude of the existing shareholders to providing the means by which the shares may obtain some value or by which the company may continue in existence.
Section 444GA has subsequently been considered in In the matter of Mirabela Nickel Ltd (subject to deed of company arrangement)  NSWSC 836, where Black J gave leave to deed administrators of a publicly listed company to transfer 98.2 percent of each shareholders' shares to unsecured noteholders as part of a recapitalisation plan. In that case shareholders retained a residual 1.8 percent of their shareholdings and, despite raising concerns prior to the hearing, did not appear to contest the application. In contrast, in the BCD Decision, the application sought to transfer all of minority shareholders' shares and was met with opposition from some shareholders prior to, and at, the hearing.
The BCD Decision
The Company is an unlisted public company and carried on the business as the manager of the Beaconsfield Mine Joint Venture, which formerly operated an underground mining operation known as the Beaconsfield Gold Mine in northern Tasmania (Mine). The Mine was the site of a mining disaster that resulted in a fatality and much publicity in 2006.
Underground mining ceased at the Mine on 30 June 2012, at which time the Mine was closed and all access sealed. The Mine and the Mine site are now no longer operational and are in a rehabilitation phase.
The Company entered into a deed of company arrangement (DOCA) which provided for, amongst other things, BCD to pay a cash contribution to be distributed among participating creditors of the Company (which excludes BCD), so as to guarantee a return of 10 cents in the dollar. One of the conditions precedent to payment was that all the fully paid shares in the Company not already held by BCD would be transferred to BCD. BCD held approximately 93 percent of the shares on issue and supported the application to transfer the remainder.
Consent was sought from shareholders to the transfer of their shares, and for the most part they either provided that consent or did not respond. Some shareholders appeared at the hearing to argue that leave should not be granted.
Importantly, the evidence before the Court demonstrated that:
- the Company was insolvent both on a cashflow test (it is unable to pay its debts as and when they become due and payable, as set out in section 95A of the Act) and a balance sheet test (its liabilities exceed its assets)
- shareholders of the Company would receive nothing in either a winding up of the Company or under the DOCA
- on the other hand, the grant of leave under section 444GA would be beneficial to creditors because it was essential to the success of the DOCA that the transfer of shares proceed
- if the DOCA was completed creditors would receive a 10 cents in the dollar distribution, in contrast to receiving nothing if the DOCA was not completed and the Company was placed into liquidation
- shares in the Company had no value, and would likely have no value in the future. It was most unlikely that any of the minority shareholders would be willing to contribute funds to the operation of the Company.
The Court granted the administrators leave to transfer the shares. In doing so, the Court noted that the transfer of shares was a transfer of the type that section 444GA of the Act contemplates and has been enacted to facilitate.
Section 444GA is a valuable tool for proponents of deeds of company arrangement, particularly where recapitalisation proposals are contemplated. The BCD Decision confirms that leave is likely to be granted where a transfer of shares is necessary to produce benefits to creditors under a deed of company arrangement, subject to balancing any unfair prejudice to shareholders. Leave can and will be granted in the face of shareholders' objections.
The critical consideration is that the shareholder will suffer no unfair prejudice in the event of the transfer of their shares. In most cases the simple answer is that shareholders cannot complain about any prejudice, let alone unfair prejudice, if there is no residual value in the company.
Section 444GA contemplates that shares will be divested for no consideration, which may seem a drastic measure. However, by considering factors such as those in the Re Diverse Decision, the Court ensures that a balance is struck between shareholders' rights and the object of the administration process, which is to obtain the best possible return for creditors and shareholders.