FEDERAL COURT OF AUSTRALIA

Royal Victorian Institute for the Blind Limited v RBS.RVIB.VAF Limited, in the matter of Royal Victorian Institute for the Blind Limited [2004] FCA 735

CORPORATIONS – scheme of arrangement – guarantee company – voting of members – reconstruction – transfer of assets and liabilities – whether scheme required for transferee – whether transferee should be party to application

Charities Act 1978 (Vic)

Companies Act 1929 (UK) s 154

Corporations Act 2001 (Cth) ss 411, 413(1)(a)

A and C Constructions Pty Limited, In re [1970] SASR 565 referred to

Buka Minerals NL, Re (1983) 8 ACLR 507 distinguished

Carter Holt Harvey Ltd v McKernan [1998] 3 NZLR 403 followed

Credit Reference Association of Australia Ltd, Re (1998) 16 ACLC 491 cited

Guild Finance & Credit Co Ltd, In the matter of the (unreported, Supreme Court of Victoria, 23 August 1984) not followed

“L” Hotel Co, Ltd & Langham Hotel Co, Ltd [1946] 1 All ER 319 distinguished

Laurie v Carroll (1958) 98 CLR 310 cited

NFU Development Trust Ltd, In re  [1972] 1 WLR 1548 cited

Nokes v Doncaster Amalgamated Collieries Limited [1940] AC 1014 distinguished

The Clydesdale Bank, Limited [1950] SC 30 applied

PF Simonson, The Law Relating to Reconstruction and Amalgamation of Joint Stock Companies, (4^th ed, 1931)

Weinberg and Blank on Takeovers and Mergers, (5^th edn, 2003)

In the matter of Royal Victorian Institute for the Blind Limited ACN 053 864 841, Royal Blind Society of New South Wales ACN 107 867 961 and Vision Australia Foundation ACN 007 428 284

ROYAL VICTORIAN INSTITUTE FOR THE BLIND LIMITED,

ROYAL BLIND SOCIETY OF NEW SOUTH WALES and

VISION AUSTRALIA FOUNDATION v RBS.RVIB.VAF LIMITED

V 575 of 2004

FINKELSTEIN J

9 JUNE 2004

MELBOURNE

In the matter of Royal Victorian Institute for the Blind Limited ACN 053 864 841, Royal Blind Society of New South Wales ACN 107 867 961 and Vision Australia Foundation ACN 007 428 284

REASONS FOR JUDGMENT

1                     Mr Oakes SC has satisfied me on all points that there should be orders convening meetings of the members of the plaintiffs to consider and, if thought fit, approve several schemes of arrangement.  The orders were made two weeks ago.  Then I said I would provide reasons in due course.  This was because some difficult issues were raised which involved more than the application of well known principles.  In any event, if there is agreement to the schemes, it will not be possible for me to hear the applications for approval and the judge who hears them should have my views on the points which have come up. 

2                     There are three plaintiffs, Royal Victorian Institute for the Blind Limited, Royal Blind Society of New South Wales and Vision Australia Foundation.  Each plaintiff is a company limited by guarantee.  None has a share capital.  The members of the first plaintiff, the Victorian Institute, comprise subscribers to the Memorandum of Association and annual subscribers (called Ordinary Members), as well as Life Governors and those appointed as life members by the Board (called Life Members).  Life Members enjoy the same rights and obligations as Ordinary Members excepting the obligation to pay an annual subscription.  All members have one vote each, and votes are taken by a show of hands unless a ballot is demanded, with the Chairman having a casting vote.  In the event of winding up, the members and those who were members in the previous year are obliged to contribute up to $25 for the payment of debts and liabilities contracted before he or she ceased to be a member, and also for the costs of winding up and the adjustment of the rights of the contributories.  Any property left over is given or transferred to like charitable institutions as determined by the members or, in default, by the Supreme Court.

3                     The constitutions of the other plaintiffs are to the same effect, except for the following matters.  The New South Wales Society is comprised only of subscribers to the Constitution and annual subscribers, and Vision Australia is comprised both of those whom the Board believe have conferred a significant benefit on the Foundation and those who have made a donation of at least fifty dollars.  The maximum obligation upon winding up for the members of the New South Wales Society is $10, while the maximum for the members of Vision Australia is $1.  The determination of which like charitable institutions are to receive leftover assets upon a winding up is made, in the case of the New South Wales Society, by the members, and in the case of Vision Australia, by the Board or, in default, by an appropriate court.

4                     All plaintiffs provide a range of rehabilitation, education, training, employment and assistance services for those who are blind or vision impaired.  These include the provision of libraries and alternative sources of information, assistance with daily living and employment, and access to various forms of support.  To provide these services, the plaintiffs undertake a range of fundraising activities.  The plaintiffs consider that they will be able to attract more funding, as well as provide better services with greater efficiency and at less expense, if their respective undertakings are amalgamated into one.  They hope to achieve this result through schemes of arrangement. 

5                     The proposed schemes are simple.  There is to be a reconstruction.  The undertaking of each plaintiff is to be taken over by a new entity, RBS.RVIB.VAF Limited (which, to borrow from the language of section 413 of the Corporations Act 2001 (Cth), I will refer to as the “transferee company”).  If the schemes go ahead this is the way it will work.  The members of each plaintiff will have their memberships cancelled.  They will then become members of the transferee company.  Under the operative terms of each scheme, the members agree to the cancellation of their memberships of their plaintiff and agree to become members of the transferee company.  Membership of the transferee company will come about not by reason of the schemes themselves but because a promise to that effect has been given by the transferee company in a deed poll in favour of the plaintiffs and their members.  The transfer of the undertakings and liabilities to the transferee company will be effected by orders under s 413(1)(a).  This is a facultative provision.  It was first enacted as s 154 of the Companies Act 1929 (UK) following the reports of the Wrenbury Committee (Cmnd 9138) and the Greene Committee (Cmnd 2657) which recommended the provision to reduce the cost (in particular ad valorem duty) of a reconstruction. 

6                     The first thing to be noticed with reference to the schemes is that they are being propounded by guarantee companies.  This is no bar to a scheme between a company and its members:  In re NFU Development Trust Ltd [1972] 1 WLR 1548; Re Credit Reference Association of Australia Ltd (1998) 16 ACLC 491.  As all the members have equal rights and their economic interest in their respective organisations is minimal, for the purpose of the meetings each member will have one vote.

7                     The next thing to be observed is the fact that the transferee company is not a party to any of the schemes.  Implementing a reconstruction which involves a third party is not unusual.  A scheme is often part of a wider arrangement, part of which may depend upon a contract with another.  As Bray CJ explained in In re A and C Constructions Pty Limited [1970] SASR 565 at 568: 

“An order of the court under s 181(2) [the equivalent to s 411 of the Act] is necessary so that a dissentient, non-voting or absentee minority of creditors or members may be bound by the scheme.  Otherwise everything could be done contractually.  The order of the court in the terms of the sub-section is made binding only on the creditors or members, or particular class of creditors or members, and on the company, or, if the company is being wound up, also on its liquidator and contributories.  It is, however, in my view, a fallacy to assume that therefore no other person can be a party to the scheme.  In my view, so long as the scheme can properly be described as a compromise or arrangement between a company and its members or creditors or any class of them within the meaning of s 181(1), it is immaterial that other persons are parties to it, but its binding force on such other parties will derive from the scheme as a contract, or from some other contract, and not from the order of the court.”

While it is possible to sanction a scheme which involves third parties whose rights will only be effected by contract, I was still troubled by the fact that the transferee company was not a party to any of the schemes.  Not only was the transferee company not a party to any scheme, it was not even a defendant to applications in which the court will be moved for orders transferring the plaintiffs’ undertakings and liabilities to the transferee company. 

8                     My concern arose out of the fact that for as long as I can remember the practice in Victoria in relation to reconstructions of this kind has been to propound schemes for both the transferor and transferee companies, or at least have the transferee company as a party to the scheme.  Not only has this been the position, in In the matter of the Guild Finance & Credit Co Ltd (unreported, Supreme Court of Victoria, 23 August 1984) Brooking J said in relation to such reconstructions:  “I doubt whether the assets and liabilities of the applicant can be transferred to [the transferee company] so as to bind the transferee company except by a scheme to which the transferee company is a party.”

9                     When I raised this with Mr Oakes he told me that the New South Wales practice was different.  He referred me to Re Buka Minerals NL (1983) 8 ACLR 507, by way of example.  That case involved a reconstruction where the transferee company was not a party to the scheme.  McLelland J, who heard the application for meetings, raised two issues.  First, he queried whether there was in fact an “arrangement” between the transferee company and its members which could only be effected by a scheme.  Second, he queried whether an order could properly be made under s 317(1)(a) [the then equivalent of s 413(1)(a)] in the absence of an agreement to which the transferor companies and the transferee company were parties.  Unfortunately the judge did not resolve these issues, although it seems that in due course the scheme was approved.

10                  After giving the matter a good deal of thought I have come to the view that it is not in all cases necessary for there to be a scheme for the transferee company or that it should be party to the transferor’s scheme.  What now follows are my reasons for this conclusion. 

11                  The reconstruction which the plaintiffs propose could be effected by agreement, provided each plaintiff has power to enter into the required agreements.  There are many instances of a company, say company A, executing an agreement for the sale of its undertaking to company B in consideration of shares in the purchasing company.  Pursuant to the agreement all creditors of the transferring company could be taken over by the purchaser.  Those creditors who are not willing to accept the liability of the purchasing company in place of the liability of the transferor would have to be paid out.  Following an allotment of the shares in the purchasing company, the transferring company would go into liquidation for the purpose of distributing the shares allotted in the purchasing company to its own shareholders. 

12                  There are, however, various objections to this procedure.  First, it is very expensive.  Second, the winding up always creates a certain amount of prejudice.  Third, dissenting creditors must be paid off.  In any event, in the case of guarantee companies a reconstruction by agreement may not be possible, because memberships, unlike shares, are not transferable. 

13                  A scheme of reconstruction or amalgamation under s 411 almost always involves an arrangement between a company and its members.  For example, such a scheme will usually contain provision for the distribution among the company’s members of the shares to be distributed by the new company who takes over the business of the old.  But it is only necessary for there to be a scheme because the scheme’s provisions are the means by which the majority can bind the minority.  That is to say, scheme of arrangement provisions are no more than machinery provisions which allow a statutory agreement to bind a company and its members or creditors, notwithstanding that a minority of members or creditors do not agree. 

14                  Not all aspects of a reconstruction or amalgamation involve an arrangement between a company and its members or creditors.  I can illustrate what I mean by reference to The Clydesdale Bank, Limited [1950] SC 30.  The Midland Bank owned all the shares of the North of Scotland Bank and the Clydesdale Bank.  A scheme was proposed by which the Clydesdale and the North Banks would be amalgamated by North Bank transferring its undertaking to Clydesdale, which would then become responsible for North’s liabilities.  Clydesdale would thereupon increase its capital and allot the shares to Midland in consideration for the transfer by Midland to Clydesdale of all of its shares in North.  The scheme did not propose a meeting for the creditors of North, the view being that while there was an arrangement between North and its members, there was no arrangement with its creditors.  The Court of Sessions accepted the petitioner’s argument that there was no scheme between the company and its creditors within the meaning of s 206 of the Companies Act 1948 (UK), the equivalent provision to s 411 of the Corporations Act.  There was no arrangement between North and its creditors as their agreement to the transaction was not required and their rights were not affected. 

15                  I think that the same position holds true in this case as regards the transferee company.  Neither the creditors of the transferee company nor its members are bound by the schemes.  None of their legal rights are affected by the schemes.  Their consent is not required at any stage of the implementation of the arrangements.  It follows, in my opinion, that this is not an occasion upon which it is necessary for there to be a scheme between the transferee company and its members or creditors.  Moreover, as the transferee company’s involvement can be secured by contract there is no need for the transferee company to be a party to the transferor’s schemes, though it might be more efficient if it were. 

16                  I am confirmed in this conclusion by what I understand to be the practice in England.  There the approach is that a scheme bringing about a reconstruction need not bind the transferee company:  Simonson, The Law Relating to Reconstruction and Amalgamation of Joint Stock Companies, (4^th edn, 1931) at 92 and the precedent of order (Form 24) at 147-148.  See also Morris et al (eds), Weinberg and Blank on Takeovers and Mergers, (5^th edn, 2003) at [2-3036]–[2-3038] and [2-3050].  Re “L” Hotel Co, Ltd & Langham Hotel Co, Ltd [1946] 1 All ER 319 is an example of a case in which an order was made under the English equivalent of s 413(1)(a) without the transferee company being party to a scheme.

17                  On the other hand, I am in no doubt that the transferee company should be joined as a defendant for the purposes of an order under s 413(1)(a).  This accords with the English position, as to which see Practice Note [1939] WN 121.  There the steps are first to obtain an order sanctioning the scheme followed by an application to transfer the undertakings and liabilities in which the transferee company is a party.  It is the presence of the transferee company as a party that gives the court jurisdiction to make the order.  As to the court’s jurisdiction in in personam proceedings, see Laurie v Carroll (1958) 98 CLR 310. 

18                  Turning to the effect of an order under s 413(1)(a), it has been said that the order does not transfer the rights and obligations under contracts of service with employees:  Nokes v Doncaster Amalgamated Collieries Limited [1940] AC 1014.  That case, however, was decided under a differently worded provision and, in my view, its reasoning is not applicable to the section in its present form.  According to s 413(1)(a) the court may by order transfer “the whole or part of the undertaking and of the property or liabilities of the transferor”.  The definitions of “liabilities” and “property” in s 413(4), which are new, are broad enough to include contracts for services.  This approach is supported by the reasoning in Carter Holt Harvey Ltd v McKernan [1998] 3 NZLR 403, a decision of the Full Bench of the New Zealand Court of Appeal. In England, the effect of Nokes has been reversed by the Transfer of Undertakings (Protection of Employment) Regulations 1981/1794.

19                  I turn now to other matters.  My decision to convene the requisite meetings was made following two changes which I suggested should be made to the scheme documents.  One change concerned the schemes and the other related to the explanatory statement.  In their original form the schemes provided for all existing members of the plaintiffs to become members of the transferee company.  If one were dealing with an entity with a share capital and the arrangement involved the transfer of the members’ existing shares in exchange for shares in the transferee company, this would be unexceptional.  In this case, however, we are dealing with what are in substance voluntary societies.  In that circumstance I thought the element of compulsion should be removed.  There may be members who have had a long association with a particular plaintiff and who have no wish to see its character altered or, if it be altered, have no wish to be connected with the new organisation.  They will be given the option of refusing membership in the transferee company. 

20                  The second change (concerning the information in the explanatory statements) concerns benefits which have been conferred on the plaintiffs.  Each plaintiff is a charity.  Each plaintiff receives substantial gifts through bequests and inter vivos trusts.  There is a possibility, indeed a likelihood, that one consequence of the restructure is that many bequests and trusts will fail.  There is passing reference to this in the explanatory statements, but not much detail.  It is suggested that attempts will be made to have the problem overcome by legislation.  That it is impossible to predict whether the relevant State Parliaments will be persuaded to pass legislation to overcome the problem.  And the members have not been told how serious the problem might be and how much might be lost.  The lack of information in the explanatory statement has to some extent been overcome.  I say to some extent because the statement still gives no indication of the quantum of the bequests and trusts that might fail.  This omission could on one view be significant because some members might take the view that the amounts involved are so high that it would be best for the reconstruction not to go ahead. 

21                  The lack of information has troubled me greatly.  In the end, however, I was persuaded to let the matter go to scheme meetings without requiring further information because the view that I have taken (rightly or wrongly) is that if legislation to deal with the situation is not enacted it is likely that the cy-près doctrine (including its less stringent statutory operation in legislation such as the Charities Act 1978 (Vic)) should cover most cases. 

22                  All in all, the difficulties raised by this application were not insurmountable.

Associate:

Dated:              9 June 2004