Can you transfer what doesn’t exist? Section 444GA and charities explained

Operation and application to charities and not‑for‑profits

What does s 444GA allow?

Section 444GA of the Corporations Act 2001 (Cth) permits the administrator of a deed of company arrangement (DOCA) to transfer shares in a company where the transfer is necessary to give effect to the DOCA. Such a transfer may occur:

·         with the written consent of the share owner; or

·         with leave of the Court.

The provision is designed to facilitate corporate restructures where shareholder consent cannot be obtained but where the transfer of shares is critical to achieving the DOCA’s purpose.

Who can oppose an application?

An application for leave under s 444GA may be opposed only by the following persons:

·         a member of the company;

·         a creditor of the company;

·         any other person whose interests are affected by the transfer; or

·         ASIC.

When will the Court grant leave?

The Court may only grant leave under s 444GA if it is satisfied that the proposed transfer would not unfairly prejudice the interests of members of the company.

This statutory test has been considered in numerous authorities, including: Weaver v Noble Resources Ltd (2010) 41 WAR 301; [2010] WASC 182 at [72] (Martin CJ); In the matter of Nexus Energy Ltd (Subject to Deed of Company Arrangement) [2014] NSWSC 1910; (2014) 105 ACSR 246 at [30] (Black J).

Meaning of “unfair prejudice”

In determining whether a proposed transfer would unfairly prejudice members, the Court undertakes a comparative assessment. The inquiry focuses on whether shareholders are losing something of real value, rather than merely their formal status as shareholders.

As explained in Re Boart Longyear Ltd (Subject to Deed of Company Arrangement) [2017] NSWSC 567; (2017) 121 ACSR 1, the relevant question is whether there is any residual value available to shareholders.

This requires a comparison between:

·         the position of members if the shares are transferred under the DOCA; and

·         the position of members if the company were instead placed into liquidation.

·         If, on liquidation, shareholders would receive no distribution, the loss of shares under a DOCA will generally not amount to unfair prejudice.

Principles emerging from the case law

While there is no exhaustive test, the following principles have emerged from Court decisions:

·       Residual value: If the company has no residual value, it is unlikely that members will suffer unfair prejudice
(Weaver v Noble Resources at [79]; Diverse Barrel Solutions at [19], [22]).

·       Comparative analysis: The Court must compare the position of members if leave is granted with their position if leave is refused, including the likely outcome on liquidation (Diverse Barrel Solutions at [19]; Nexus Energy at [23]). The Courts will also look at the whole effect of the DOCA and assess its unfairness, if any, to the plaintiff creditor bearing in mind the scheme of Part 5.3A, the interests of the other creditors, the company and the public general: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (supra) at [98].

·       Disclosure and procedural fairness: Shareholders must be given a full and accurate description of the proposal and a proper opportunity to appear and oppose the application
(In the matter of Centennial Mining Ltd (Subject to Deed of Company Arrangement) [2019] WASC 441).

·         Meaning of prejudice: “Unfairly prejudicial” is used in the sense of a real disadvantage
(Gjergja & Atco Controls Pty Ltd v Cooper [1987] VR 167 at 173 per McGarvie J).

·         No entitlement to compensation: The mere transfer of shares without compensation does not, of itself, establish unfair prejudice
(Weaver v Noble Resources at [80]; Diverse Barrel Solutions at [22]–[23]).

Application of s 444GA to charities and not‑for‑profits

This raises the question: how does s 444GA operate where the company subject to a DOCA is a charity or not‑for‑profit (NFP)?

The starting point is that s 444GA applies only to “shares”. Most charities and NFPs are companies limited by guarantee, not companies limited by shares. Such entities do not issue shares and do not have equity capital.

Accordingly, in the typical case:

·         there are no shares capable of transfer; and

·         there is no residual or equitable value capable of being assessed in the manner required by s 444GA.

·         In those circumstances, s 444GA will have no practical operation, because the statutory precondition - the existence of shares - is absent.

Possible exceptions

An exception may arise where:

·       a charity or NFP holds shares in a subsidiary company limited by shares; and

·       that subsidiary company enters administration and proposes a DOCA involving a transfer of its shares.

·       In that case, the administrator of the subsidiary would likely be required to seek leave under s 444GA to affect the transfer of those shares.

Unsettled issues and likely approach of the Court

There appears to be no reported authority directly considering the application of s 444GA to charities or NFPs. However, existing principles suggest that:

·       where an entity is structured in a manner analogous to a company limited by shares, the Court would still find no residual value, as charities and NFPs do not have distributable equity;

·       the Court’s focus would likely shift from economic value to the objects, purposes and governance framework of the charity or NFP, including whether a proposed transaction undermines those purposes;

·       where a charity or NFP is limited by guarantee, the absence of shares means that any application under s 444GA would necessarily fail at a threshold level.

Conclusion

Section 444GA plays an important role in facilitating corporate restructures under DOCAs, but its application is inherently limited to companies with share capital. In the charity and NFP context where entities are typically limited by guarantee and lack equity, the provision will rarely, if ever, be engaged. Where it is engaged indirectly, the Court is likely to adapt established principles to reflect the non‑commercial and purpose‑driven nature of such entities.

Directors and management of charities/NFPs: if financial distress is emerging, early planning can preserve mission and services. Speak with us about restructuring pathways, governance constraints, and stakeholder strategy.

Authors: Adam Cutri & Haya Kaiyum

 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.