Vol 8 (2011) - Issue 6

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An Administrator’s Power to Compulsorily Transfer Shares

Introduction

The compulsive power of the Court to transfer shares upon a deed administrator’s application has the potential to interfere considerably with shareholders’ proprietary rights. In light of its significance, there is surprisingly little discussion regarding the scope and ambit, or limitations upon, the exercise of the power and only one (unreported) decision of the Supreme Court of Western Australia providing any guidance as to when such applications will succeed.

Presumably this is because the power will mostly be exercised in circumstances where no value remains in shares if the value of debts exceed asset values. This is known as the Debt Residual Value, or 'DRV' in the shares.

This article discusses another formulation of the relevant test, that is considering whether, on the guidance offered by section 444GA(3), there are circumstances where the proper test is to consider the inferred value of the shares, having regard to both to the DRV and to the company’s growth prospects post project (Contingent Residual Value, or 'CRV'). The question is of relevance because in many circumstances of near-insolvency, parties may propose a project or restructure aiming to revive the company. Sometimes, the circumstances that have led the company into administration are not terminal in the sense that a capital raising or other program might have been available to cure liquidity concerns, but the directors were either not confident of the success of the capital raising or were not prepared, on the present state of our insolvent trading laws, to expose themselves to personal liability for trade debts if the capital raising failed. Whatever the reason for the appointment of administrators, if a rehabilitation can be successfully undertaken, existing equity in the business (shares) will retain some value.

The capital raising will have some dilutive impact on the value of shares, but the essential point is that whereas a DRV would have yielded a nil value on day one of the administration, the CRV would yield something more, and would be assessed having regard to the contingencies attending the capital raising program. Distilled to its essence then, our question is whether the potential value to shareholders of the company’s projects should be a relevant consideration?

Potentially 'yes', though in most cases the DRV and CRV analysis will yield much the same outcome unless the shareholder is prepared to fund any required capital raising to satisfy existing unfunded obligations (ie: to bring what remains of the company out of administration using an appropriately structured debt management program incorporated in a deed of company arrangement).

However, there are circumstances where the CRV will, in circumstances where shareholders hold other economic interests in a project dependent on the shareholding interest or in the company itself, be the applicable test. In those circumstances, emphasis on the meaning of 'unfair prejudice' to members’ interests within s444GA(3) may lead to a result where the CRV has some inferred value above nil, requiring the Court to value the economic interests of the member before deciding whether to grant leave to confiscate their property under s444GA.

A Power of Transfer – section 444GA

Section 444GA provides that a deed administrator may transfer shares in a company with consent of the owner or with leave of the court.