Re Molpo Energy Ltd Vs Kelerbidge Case Brief
In the matter of Re MOLOPO ENERGY LTD; MOLOPO ENERGY LTD v KEYBRIDGE
CAPITAL LTD, an analysis into the division of powers between the members of a company and its board of directors was completed as well as the protection of interests of a company’s creditors. This case touched on these two issues in the context of reduction of capital under section 256B of the Corporations Act (2001).
The Facts
In this case, the Supreme Court of New South Wales found that the power to effect a capital reduction is entrust in the board of directors, with the role of shareholders simply being to approve the decisions of the board. The Court held that the power cannot be transferred to shareholders due to an amendment to the constitution. This case also analyses …show more content…
the role of a shareholder in Australia, the interests of shareholders and the rights and powers a shareholder may have.
In October 2014, Keybridge Capital Limited (Keybridge) became a substantial shareholder in Molopo Energy Limited (Molopo). A few days after becoming a shareholder, Keybridge asked Molopo to hold a general meeting to consider a proposed resolution for the reduction of the company’s share capital by approximately $54 million. Keybridge Capital Limited (Keybridge) exercised its power under section 249D of the Corporations Act 2001 as the holder of at least 5% of the votes that may be cast at a general meeting to issue 2 requests for the holding of a general meeting of Molopo Energy Limited (Molopo).
The first requisition involved a resolution to amend the Plaintiff's constitution so that the power of the Plaintiff to reduce its share capital could be exercised by the company in general meeting and a further resolution to effect substantial reduction in the capital of the Plaintiff. The Plaintiff's board did not support the proposed reduction in capital. By the second requisition, the Defendant proposed the removal of a number of the directors of the Plaintiff and their replacement by the Defendant's nominees.
The first request (First Request) proposed intentions that:
The Molopo constitution may be amended so that the power to reduce Molopo’s capital could be exercised by Molopo shareholders in a general meeting; and
The share capital of Molopo be reduced by approximately $55 million by the repayment to all holders of fully paid shares of the amount of 21.75 cents per share.
2. The second request proposed intentions relating to the removal and appointment of directors of Molopo and stated that such intentions were only to be considered if the intentions proposed in the First Request were not passed.
Four of the Molopo directors were concerned that the proposed capital reduction might affect the ability of Molopo to pay its creditors, particularly if pending litigation was determined adversely to Molopo.
In finding that Molopo was not required to convene a meeting for shareholders to vote on the intentions proposed in the First Request, White J in the Supreme Court of New South Wales held that:
A company’s power to reduce its capital lies with the directors, with the role of the shareholders being only to “approve” such a decision by the directors;
As held in National Roads and Motorists’ Association v Parker (1986) “express an opinion as to how a power vested by the constitution of the company in some other body or person ought to be exercised by that other body or person”, therefore capital reduction must be proposed by the directors
In any case, as the proposed capital reduction could not “lawfully be effectuated” because it did not satisfy section 256B(1) of the Act, the directors were not required to call the meeting.
There was sufficient evidence that the reduction “might” materially prejudice the ability of Molopo to pay its creditors which was enough to breach section 256B(1).
However, White J held that, “The Molopo directors were required to convene a meeting to consider the resolutions in the Second Request, finding firstly that the fact that a resolution is conditional does not in itself make a requisition under section 249D invalid, and further that there was no evidence to suggest that the newly appointed directors would seek to effect a capital reduction in breach of their duties as directors.”
The …show more content…
Law
The Molopo case concerned the interpretation of 256B of the Corporations Act 2001 which came into law following the review of earlier legislation. The terms of section 256B, are as follows:
(1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:
(a) Is fair and reasonable to the company’s shareholders as a whole
(b) Does not materially prejudice the company’s ability to pay its creditors.
(c) is approved by shareholders under section 256C.
This act helps the company’s members and creditors by preventing any abuse of power from occurring. The Act was a key component in Molopo as it helped set the foundation for a company’s shareholders and directors to be on an even level when reducing shared capital.
Had the shareholders been successful in their arguments, this might also have led to a broader disclosure of information not of a public nature, than was required for the purposes of the reduction of capital decision to be approved?
While it is clear that the courts will be eager to ensure that proper steps are taken in the reduction of capital scenario, there is no good reason why shareholders cannot obtain the appropriate legal advice, professional assistance and such other help necessary to ensure the steps that need to be taken are taken properly and efficiently.
The reference to the 'company' making a reduction in section 256B(1) of the Corporations Act 2001 (Cth) should be understood as referring to 'the company by its directors'. Among other things, Justice White based this conclusion on the need to protect creditors; and where it appears that a reduction might materially prejudice the company's ability to pay its creditors — that is, it cannot affirmatively be said that the reduction does not have that effect — the reduction is prohibited under s
256B(1)(b).
In reaching its decision in Molopo the Court placed weight on the statutory requirement that capital reductions must be approved by shareholders and that the directors must provide all information to shareholders material to the decision on how to vote. In Molopo, the Court was concerned that, if a capital reduction could be effected by the company in general meeting, protections for creditors would be reduced.
The Court held that, on a proper construction of the provisions of the Corporations Act relating to capital reductions, the company in general meeting only has the function of approving a proposed reduction of share capital, and a company's members cannot actually effect a capital reduction themselves under section 256B(1) or require the board to reduce the company's share capital.
The Impact
The Plaintiff challenged the first requisition on the grounds that the resolutions could not lawfully be effected by shareholders because a company's power to undertake a capital reduction is vested in the board. The Plaintiff also argued that the second resolution was invalid because the capital reduction would or might materially prejudice the Plaintiff's ability to pay its creditors. The Plaintiff also opposed the second requisition on the basis that the sole purpose for appointing the new directors would be to effect the capital reduction and that it was not a proper purpose to appoint directors to seek to effect a capital reduction that may be unlawful.
In connection with the first requisition, his Honour, White J found for the Plaintiff stating that the shareholders in general meeting can only have the function of approving and not effecting a reduction in capital. His Honour noted that if the decision to effect a reduction in capital was placed solely in the hands of members, it would lessen the protection provided to creditors under section 256A(a) of the Corporations Act as the interests of shareholders are likely to be antithetical to the interests of creditors.
His Honour also found that where the decision to effect a reduction lies with the directors, creditors are protected by the sanctions that could be available against the directors under section 256D(3) and section 588G of the Corporations Act in the event that the reduction was found to have materially prejudiced the Plaintiff's ability to pay its creditors. White J also found that the Plaintiff, whether acting by its directors or shareholders, could not lawfully reduce its capital as such a reduction might prejudice the Plaintiff's ability to pay its creditors in light of the litigation to which the Plaintiff was party at the time the requisition was made.
On the second requisition, his Honour found for the Defendant, noting that the Plaintiff's contention assumed that the newly appointed directors would not act in accordance with their duties as directors and that there was no substance to this challenge to the second notice nor was there any material that would justify the Court's interference on that basis.
White J used the Corporations Act to its fullest extent when reaching his decision, highlighting the protection the Corporations Act 2001 provides to the creditors in the context of protecting their interests when reducing capital.
CAPITAL LTD, an analysis into the division of powers between the members of a company and its board of directors was completed as well as the protection of interests of a company’s creditors. This case touched on these two issues in the context of reduction of capital under section 256B of the Corporations Act (2001).
The Facts
In this case, the Supreme Court of New South Wales found that the power to effect a capital reduction is entrust in the board of directors, with the role of shareholders simply being to approve the decisions of the board. The Court held that the power cannot be transferred to shareholders due to an amendment to the constitution. This case also analyses …show more content…
the role of a shareholder in Australia, the interests of shareholders and the rights and powers a shareholder may have.
In October 2014, Keybridge Capital Limited (Keybridge) became a substantial shareholder in Molopo Energy Limited (Molopo). A few days after becoming a shareholder, Keybridge asked Molopo to hold a general meeting to consider a proposed resolution for the reduction of the company’s share capital by approximately $54 million. Keybridge Capital Limited (Keybridge) exercised its power under section 249D of the Corporations Act 2001 as the holder of at least 5% of the votes that may be cast at a general meeting to issue 2 requests for the holding of a general meeting of Molopo Energy Limited (Molopo).
The first requisition involved a resolution to amend the Plaintiff's constitution so that the power of the Plaintiff to reduce its share capital could be exercised by the company in general meeting and a further resolution to effect substantial reduction in the capital of the Plaintiff. The Plaintiff's board did not support the proposed reduction in capital. By the second requisition, the Defendant proposed the removal of a number of the directors of the Plaintiff and their replacement by the Defendant's nominees.
The first request (First Request) proposed intentions that:
The Molopo constitution may be amended so that the power to reduce Molopo’s capital could be exercised by Molopo shareholders in a general meeting; and
The share capital of Molopo be reduced by approximately $55 million by the repayment to all holders of fully paid shares of the amount of 21.75 cents per share.
2. The second request proposed intentions relating to the removal and appointment of directors of Molopo and stated that such intentions were only to be considered if the intentions proposed in the First Request were not passed.
Four of the Molopo directors were concerned that the proposed capital reduction might affect the ability of Molopo to pay its creditors, particularly if pending litigation was determined adversely to Molopo.
In finding that Molopo was not required to convene a meeting for shareholders to vote on the intentions proposed in the First Request, White J in the Supreme Court of New South Wales held that:
A company’s power to reduce its capital lies with the directors, with the role of the shareholders being only to “approve” such a decision by the directors;
As held in National Roads and Motorists’ Association v Parker (1986) “express an opinion as to how a power vested by the constitution of the company in some other body or person ought to be exercised by that other body or person”, therefore capital reduction must be proposed by the directors
In any case, as the proposed capital reduction could not “lawfully be effectuated” because it did not satisfy section 256B(1) of the Act, the directors were not required to call the meeting.
There was sufficient evidence that the reduction “might” materially prejudice the ability of Molopo to pay its creditors which was enough to breach section 256B(1).
However, White J held that, “The Molopo directors were required to convene a meeting to consider the resolutions in the Second Request, finding firstly that the fact that a resolution is conditional does not in itself make a requisition under section 249D invalid, and further that there was no evidence to suggest that the newly appointed directors would seek to effect a capital reduction in breach of their duties as directors.”
The …show more content…
Law
The Molopo case concerned the interpretation of 256B of the Corporations Act 2001 which came into law following the review of earlier legislation. The terms of section 256B, are as follows:
(1) A company may reduce its share capital in a way that is not otherwise authorised by law if the reduction:
(a) Is fair and reasonable to the company’s shareholders as a whole
(b) Does not materially prejudice the company’s ability to pay its creditors.
(c) is approved by shareholders under section 256C.
This act helps the company’s members and creditors by preventing any abuse of power from occurring. The Act was a key component in Molopo as it helped set the foundation for a company’s shareholders and directors to be on an even level when reducing shared capital.
Had the shareholders been successful in their arguments, this might also have led to a broader disclosure of information not of a public nature, than was required for the purposes of the reduction of capital decision to be approved?
While it is clear that the courts will be eager to ensure that proper steps are taken in the reduction of capital scenario, there is no good reason why shareholders cannot obtain the appropriate legal advice, professional assistance and such other help necessary to ensure the steps that need to be taken are taken properly and efficiently.
The reference to the 'company' making a reduction in section 256B(1) of the Corporations Act 2001 (Cth) should be understood as referring to 'the company by its directors'. Among other things, Justice White based this conclusion on the need to protect creditors; and where it appears that a reduction might materially prejudice the company's ability to pay its creditors — that is, it cannot affirmatively be said that the reduction does not have that effect — the reduction is prohibited under s
256B(1)(b).
In reaching its decision in Molopo the Court placed weight on the statutory requirement that capital reductions must be approved by shareholders and that the directors must provide all information to shareholders material to the decision on how to vote. In Molopo, the Court was concerned that, if a capital reduction could be effected by the company in general meeting, protections for creditors would be reduced.
The Court held that, on a proper construction of the provisions of the Corporations Act relating to capital reductions, the company in general meeting only has the function of approving a proposed reduction of share capital, and a company's members cannot actually effect a capital reduction themselves under section 256B(1) or require the board to reduce the company's share capital.
The Impact
The Plaintiff challenged the first requisition on the grounds that the resolutions could not lawfully be effected by shareholders because a company's power to undertake a capital reduction is vested in the board. The Plaintiff also argued that the second resolution was invalid because the capital reduction would or might materially prejudice the Plaintiff's ability to pay its creditors. The Plaintiff also opposed the second requisition on the basis that the sole purpose for appointing the new directors would be to effect the capital reduction and that it was not a proper purpose to appoint directors to seek to effect a capital reduction that may be unlawful.
In connection with the first requisition, his Honour, White J found for the Plaintiff stating that the shareholders in general meeting can only have the function of approving and not effecting a reduction in capital. His Honour noted that if the decision to effect a reduction in capital was placed solely in the hands of members, it would lessen the protection provided to creditors under section 256A(a) of the Corporations Act as the interests of shareholders are likely to be antithetical to the interests of creditors.
His Honour also found that where the decision to effect a reduction lies with the directors, creditors are protected by the sanctions that could be available against the directors under section 256D(3) and section 588G of the Corporations Act in the event that the reduction was found to have materially prejudiced the Plaintiff's ability to pay its creditors. White J also found that the Plaintiff, whether acting by its directors or shareholders, could not lawfully reduce its capital as such a reduction might prejudice the Plaintiff's ability to pay its creditors in light of the litigation to which the Plaintiff was party at the time the requisition was made.
On the second requisition, his Honour found for the Defendant, noting that the Plaintiff's contention assumed that the newly appointed directors would not act in accordance with their duties as directors and that there was no substance to this challenge to the second notice nor was there any material that would justify the Court's interference on that basis.
White J used the Corporations Act to its fullest extent when reaching his decision, highlighting the protection the Corporations Act 2001 provides to the creditors in the context of protecting their interests when reducing capital.