Case: Federal Commissioner of Taxation v Coppleson [1981] FCA 166 ; (1981) 39 ALR 30
Outcome: followed
J referred to certain cases as authority for the proposition that a company was or could be subject to an absolute obligation to redeem notwithstanding a provision similar to s 254K of the Act ( UOB Venture Investments Ltd v Tong Garden Holdings Pte Ltd [2001] 1 SLR 362 at [20]; Mutual Life and Citizens Assurance Co Ltd v Mosgiel Ltd [1994] 1 NZLR 146 ; Re Dividend Fund Incorporated (In Liquidation) [1974] VR 451 at 454-6; TNT Australia Pty Ltd v Normandy Resources NL (1989) 53 SASR 156 at 206; and Re Marra Developments Ltd and the Companies Act (No 2) (1978) 3 ACLR 798. His Honour stated (at [58]-[59]): [58] What these cases really show, in my view, is that the question is ultimately one of construction. It cannot be doubted that, upon and by virtue of subscription for and allotment of redeemable preference shares, a contract comes into existence between the company and the shareholder. The contract may or may not impose what the Singapore court found to be an absolute obligation to redeem (or, for that matter, to pay specified dividends at specified times). If the obligation is absolute, a breach of contract occurs when the company fails to perform; and this is so even if the failure is because of unavailability of a fund from which payment may lawfully be made. There are then questions about remedies, a matter to which I shall return. [59] In the present case, the contract between York and each holder of CPRPS shares includes not only the provisions of the constitution given contractual force by s 140 of the Corporations Act but also the terms of issue set out in the prospectus. When regard is had to the content of each, the contract is seen to be of the kind described in Coppleson above [discussed below], both as to default in the payment of dividends and as to default in redemption. The contract requires only such performance as is consistent with the statutory constraints. There are no absolute obligations. In Federal Commissioner of Taxation v Coppleson (1981) 39 ALR 30 ( Coppleson ), the relevant contractual provision for redemption contained the words "Subject to the provisions of the Companies Ordinance, ...". Bowen CJ, Franki and Fisher JJ said that they thought that those words added nothing. In their joint judgment their Honours stated (ALR 36): That condition exists, even if not expressly stated. Both parties contracted on the basis of the law and part of that law is s 61 of the Companies Ordinance [comparable to s 254K of the Act]. The parties cannot be presumed to have assumed obligations which it is unlawful for one of the parties to fulfil. It is not a case where supervening legislation operates to make the fulfilment of its obligations by one party unlawful. Rather, the parties are contracting on the basis of a given law. In these circumstances, failing the availability of one or both of the funds specified in s 61(3), the company is not in default under its contract with the holders of redeemable preference shares if it fails to redeem after receipt of the requisite notice. I respectfully agree with Barrett J that the question whether the company has undertaken an absolute obligation to redeem or only an obligation to do so once the conditions stipulated in s 254K are satisfied is one of construction. I do not understand Coppleson, which is binding on me for what it decided, to be inconsistent with that limited proposition. I treat Coppleson as warning, however, that a conclusion that a company has undertaken an absolute obligation to redeem should not be lightly reached. Difficult questions would arise if the construction arrived at was that there was an unqualified obligation to redeem. Clearly, the remedy of specific performance of such an obligation would not be available if its effect was to require a contravention of s 254K. Nor would a judgment in debt or for damages in those circumstances. A winding up on the "just and equitable ground" may be the only appropriate remedy available to the holder of the redeemable preference shares. I need not discuss all of the issues that would or might arise, in view of the conclusion that I reach below that, as a matter of construction, Pisces did not assume an absolute obligation to redeem. I now turn to the question of construction of the Share Sale Agreement and the Loan Agreements. For convenience I will number the points to be made. (1) Clause 5.3 of the Share Sale Agreement, which has reference to Sch 7 of that Agreement, acknowledged that upon completion, Pisces would not pay the price for the shares in MDS then transferred to it, and instead, that Kandelka and Pilmood would have, relevantly, two inconsistent securities: the CRP Shares and the Loan Agreements. The elimination of the inconsistency would have to be looked for elsewhere. (2) The waivers provided for in cll 3.1-3.4 and Schedule 6 are problematical. By waiving the provision for the issue of the CRP Shares, the vendors and Messrs Kraa and Troughton would forego the consideration that Pisces had agreed to give for the transfer of the shares in MDS. Likewise if Pisces waived the benefit of the Loan Agreement, apparently it would be notionally excised from the Share Sale Agreement and there would be no deferral favouring Pisces. But deferral of what? It is difficult to see, putting to one side the Loan Agreement, what obligation to pay burdened Pisces apart from any that might by found in an undertaking to redeem by a certain date (see below). (3) The third paragraph in Sch 7 (set out at [37] above) states unequivocally that the loan from Kandelka and Pilmood to Pisces was to be made from the proceeds of the redemption of the CRP Shares. That is to say, there was to be a redemption followed by a "loan back" of the proceeds of the redemption. Absent a redemption, the Loan Agreement would not become operative. (4) The first sentence in the terms and conditions document annexed to the Share Sale Agreement (set out at [40] above) speaks in mandatory terms of conversion or redemption at a fixed time (three times are stated and the parties treated the earliest, 1 January 2009, as the relevant one I will say nothing of the second bullet point or the date 25 January 2009 to which it impliedly refers). Standing alone, this provision seems to mean that failing conversion on 1 January 2009, Pisces must redeem the CRP Shares on that date no matter what. (5) The statement in that document that the CRP Shares "shall be redeemed at the Company's option or converted at the Shareholders' option" is problematical. The "Shareholders' option" is a true option. It may be that "the Company's option" is also, and reflects s 254A(3)(b) of the Act. The expression "at the Company's option" could be read down as meaning simply "by the Company". I do not find the reference to "option" alone determinative, but in the light of other indicia think it refers to a true option. (6) The statement in the same document that the CRP Shares "may only be redeemed out of profits or out of the proceeds of a new issue of shares made for the purpose of redemption" expresses an agreement that there is to be no redemption in fact if there are not profits or the proceeds of the new issue of shares made for the purpose of redemption, available to enable the redemption to take place lawfully. This is a clear acknowledgment that Pisces is not to be obliged to redeem unless and until it can do so lawfully under s 254K. Pisces led evidence of a lack of profits available to fund the redemption and asserted that it was difficult in the current economic climate to raise funds for that purpose by an issue of shares. There was no attempt by Kandelka and Pilmood to prove that the lack of profits or the proceeds of a new issue of shares made for the purpose of a redemption, by the date of the second meeting of creditors on 10 July 2009, was in some way attributable to the fault of Pisces. A possible construction of the statement consistent with an absolute obligation to redeem is that while Pisces will not actually redeem (in contravention of s 254K of the Act), Kandelka and Pilmood are allowed to resort to the remedies they would enjoy for a failure to redeem other than of recovering the redemption money of $2,500,000, however described. This construction would not, however, make Kandelka and Pilmood creditors of Pisces. (7) In the first paragraph of the terms and conditions document commencing "In the event that ...", it is stated that absent an election to convert into ordinary shares, "the sum of $1.67 per share shall be payable on or after 1 January 2009" (my emphasis). This suggests that redemption on 1 January 2009 is not an absolute obligation of Pisces and is consistent with the idea that the obligation to redeem becomes absolute only once a fund of either kind mentioned is available. (8) The second paragraph commencing "In the event that ..." also accepts that redemption will not necessarily take place on 1 January 2009. The expression "or part thereof" suggests that there may be a partial redemption on 1 January 2009. This is consistent with the expression in that paragraph "on any sums outstanding until Fusion is able to redeem all the preferential shares with the issue of shares made for the purpose of redemption or out of profits". Accordingly, both the opening and closing elements of the paragraph accept that there is not an absolute obligation on Pisces to redeem on 1 January 2009. Counsel for Pisces points to the reference to "interest", which is problematical. Interest suggests a loan, not the holding of shares. Yet the paragraph is directed to the holding of CRP shares "until redemption." I think "interest" is to be read as a slip or error and as if it were "a dividend". There is to be a dividend of 10% per annum on the amounts of any CRP Shares that remain unredeemed for as long as they remain unredeemed after 1 January 2009. (9) In my opinion, in the light of (3), (5), (6), (7) and (8) above, the Loan Agreements are to be read on the assumption that there has been a lawful redemption on or by 1 January 2009 by Pisces. On that assumption, a loan by each of Kandelka and Pilmood to Pisces of $1,250,000 or part thereof for the purpose of conducting the business of Pisces makes sense. The reference to "or part thereof" allows for two possibilities: first, that there has been no conversion but there has been a partial redemption (see above); second, that somehow prior to 1 January 2009, some of the shares have been converted to ordinary shares and the remainder have been redeemed (see the second note ** set out at [40] above). (10) As noted earlier, the expression "this day advanced" in cl 2 of the Loan Agreement (set out at [45] above) is problematical. The expression "the Principal Sum" is defined in recital D as being "$1.25 million or part thereof". It may be that "this day" was intended to mean 1 January 2009 on the basis that a total redemption and "loan back" occurred on that date. On the other hand, the expression may have a distributive meaning, as was suggested by counsel for Pisces. According to this meaning, the expression would refer to any date when, from time to time, the amount of the Principal Sum altered as a result of a partial redemption and "loan back". Because of the view I take otherwise, I favour the latter construction.