Beck v Weinstock [2013] HCA 15

What the court decided

LW Furniture Consolidated (Aust) Pty Ltd was incorporated on 30 April 1971 [4].

Every share the company issued was described as a preference share, and it never issued ordinary shares [6], [47]. The "C" class shares ranked ahead of ordinary shares as to return of capital but had no other preferential rights [53].

On the death of Hedy Weinstock, the company purported to redeem her eight "C" class shares, called the disputed shares in the joint reasons, at $1 each [54]. Her daughter, Mrs Beck, alleged that the disputed shares were not redeemable because they were not preference shares [54].

Hamilton AJ accepted that contention under the Companies Act 1961 (NSW) (the 1961 Act) and under the Corporations Act 2001 (Cth) (the 2001 Act) [10].

The New South Wales Court of Appeal allowed an appeal by the company, Amiram Weinstock and his wife, Helen, by majority (Handley AJA and Giles JA; Young JA dissenting) and declared that the shares had been validly redeemed [7], [11]. Mrs Beck appealed to the High Court by special leave [12], [55].

The High Court dismissed the appeal with costs [46], [76], [77]. French CJ and Gageler J each wrote separate concurring reasons [46], [77]. The joint reasons of Hayne, Crennan and Kiefel JJ, three of the five Justices, are the majority reasons [47].

As French CJ described it, Mrs Beck's historical argument was that preference shares were originally used to raise additional capital, a use that assumed ordinary shares already on issue [2], [27]. French CJ rejected it: preference shares could be issued to raise part of a company's original capital long before the 1961 Act [31].

French CJ found nothing in the 1961 Act that excluded from the concept of a preference share a share issued when no ordinary shares had been issued [36]. His Honour found the same under the 2001 Act, which also does not proscribe redemption in that situation [42].

French CJ also declined to infer from the policy of maintaining capital an unstated limitation on the issue and redemption of redeemable preference shares [44].

The joint reasons held that the disputed shares were preference shares and that the redemption was valid [49]. Argument proceeded on the basis that the shares were issued to Hedy Weinstock in 1971 [52].

Their Honours recorded that the 2001 Act's redemption provisions undisputedly applied, and that Mrs Beck did not argue that validly issued redeemable preference shares had ceased to be such when the company purported to redeem them [59]. As no later legislation was said to bear on the shares' character when issued, the joint reasons decided that question under the 1961 Act [59]–[60].

What was a preference share under the 1961 Act was determined by the memorandum and articles, not by the state of the company's issued capital at any time [67]. Agreeing with Handley AJA, their Honours distinguished between the rights attached to a share and the enjoyment of those rights [69].

They found no basis for implying into section 61(1) of that Act a further requirement that shares with inferior rights already be on issue [70]. They held that the commercial history of preference shares was not to the point [74].

Under the 1961 Act, a share was a preference share if its rights preferred its holder over the holder of any other class of share which the company could issue [74]. The disputed shares had that preference over any ordinary share as to return of capital, so they were preference shares although no ordinary shares were ever issued [53], [75]. Because the articles also made them liable to be redeemed, they were redeemable preference shares [75].

Mrs Beck argued that a company issuing only redeemable preference shares might be left without members if they were all redeemed [71]. The joint reasons answered that this point was met by the winding up provisions of both Acts [72]–[73].

Gageler J decided the appeal under the 2001 Act as at the purported redemption on or about 29 July 2004 [78]. His Honour agreed with French CJ that the historical argument lacked foundation [79].

Gageler J held that shares of a class carrying additional or preferential rights set out in the constitution as to the matters listed in section 254A(2) of the 2001 Act are preference shares at the time of their issue, whether or not ordinary shares are on issue [92]. Those rights take effect in contract with holders of ordinary shares if and when such shares are issued [92].

Gageler J answered the members point by the winding up ground [93]. He also held that, under section 254K of the 2001 Act, redemption cannot reduce the company's net capital [94].

Why it matters

The joint reasons did not decide whether a share is a preference share under the 2001 Act when no ordinary shares are on issue; they decided the shares' character when issued under the 1961 Act [59]–[60]. Under the 2001 Act, the view that a share may be a preference share although no ordinary shares are on issue is that of French CJ and Gageler J [42], [91]–[92]. The rights must be set out in the constitution or otherwise approved by special resolution of the company, as section 254A(2) of that Act requires [85].

Solicitors advising an estate or a family company about shares redeemable on a holder's death should start with the constitution, any special resolution and the terms of issue [64], [67], [85], [92].

A company may redeem such shares only on their terms of issue, only if they are fully paid and only out of profits or the proceeds of a new issue made for the purpose, under sections 254J and 254K [41], [87]. Readers should check the current text of those provisions before relying on the decision.

In my view, the absence of issued ordinary shares will not of itself defeat such a redemption, although the authority for the redemption and the directors' duties may still be in issue [8], [72].

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.