Are Redeemable Preference Shareholders Creditors?

In Heesh v Baker [2008] NSWSC 711, the New South Wales Supreme Court considered whether the holders of redeemable preference shares could be “creditors” for the purposes of Part 5.3A of the Corporations Act 2001 (the Act).

The Facts

In July 2006, York Capital Limited (York) lodged a prospectus inviting prescription for redeemable preference shares. Various types of preference shares were issued pursuant to the prospectus.

On 5 June 2008, York was placed into voluntary administration in accordance with section 436A of the Act.  The Administrators then applied to the court for a declaration as to whether any of the holders of the preference shares were creditors of York, solely for the reason of their rights against the company.

The shareholders argued that even though York was not required to redeem their shares at the time its administration began, there was an implied term of their contract of membership with York, that required the company to do all things necessary to enable the shareholders to have the benefit of their shares.  It was argued that the shareholders held accruing rights against York to the redemption value of their shares and on that basis the shareholders were contingent creditors of York.

The Decision

When determining the issue, the court focused upon the terms of York’s constitution and the terms of the issue of the preferential shares as set out in the prospectus. The court concluded that the members’ contracts with York were consistent with the statutory constraints contained in the Act including, in particular, the various sections which require payments of dividends and payments for the redemption of redeemable preference shares to be derived from the profits of a company.

As such, the court rejected the shareholders argument and found that, on its true construction, the shareholders’ contracts with York did not impose an obligation on York and the rights attaching to the shares would only be triggered if the company had made a profit.  As York had not made a profit, the court determined that the preferential shareholders were not creditors of York for the purposes of Part 5.3A of the Act.

What it all Means

Whilst, in this case, the holders of redeemable preferential shares were not held to be creditors for the purposes of Part 5.3A, each case will turn on its own facts.  This case is instructive as it serves as a reminder that consideration must be had to the precise terms of a company’s constitution, any relevant prospectus and the Act when giving advice to shareholders regarding their rights against a company.