Key Takeaways
- A compulsory transfer of minority shareholders’ shares is likely to be approved where members hold no residual equity and would receive nothing in a liquidation scenario.
- The statutory test for approving a share transfer proceeds in two steps: determining first whether the transfer causes unfair prejudice to members, and then, if not, whether discretionary factors support granting leave.
- A proprietary company’s failure to maintain the required number of directors does not automatically invalidate the appointment of an administrator where the constitution permits a sole director to act.
- Share acquisitions increasing voting power beyond statutory thresholds may proceed where a Crowd-sourced funding (CSF) based exception applies and eligibility conditions are satisfied at the time of acquisition.
- Administrators and restructuring practitioners should ensure that constitutional authority, CSF eligibility and clear evidence of zero residual value are firmly established when proposing Deed of company arrangement (DOCA) structures involving compulsory share transfers.
Introduction
A recent Supreme Court case provides guidance on how courts assess applications for compulsory share transfers when a CSF-funded company collapses and the deed administrator, under a DOCA, is required to transfer the minority shareholders’ shares to the founder. The judgment clarifies the key considerations informing the Court’s discretion under s 444GA, namely, whether members would suffer unfair prejudice in circumstances where the company has no residual equity. It further explains how the compliance with the two-director requirement in s 201A may not affect the validity of the administrator’s appointment and undermine the legal foundation for allowing the transfer. Finally, the decision examines whether the acquisition-prohibition in s 606 would ordinarily block the resulting increase in voting power, and how the CSF-specific exception operates to permit the transfer where eligibility criteria are met.
Background
The company was a proprietary entity with a large crowd-sourced funding (CSF) shareholder base. Of its 1,631 shareholders, almost all acquired their interests through CSF offers made in 2021. The founder, Ms Ross, held approximately 86.66% of the shares, with the remaining shareholders, including Mr Sully, collectively holding the balance.
On 9 July 2024, the company entered voluntary administration when Mr Sully, then the sole director, appointed Mr Dixon under s 436A. Although the Corporations Act requires CSF proprietary companies to maintain at least two directors, the administrator proceeded on the basis that the company was insolvent or likely to become insolvent.
The business and assets were subsequently sold to a related entity, New New New Pty Ltd, for $146,220, reflecting the administrator’s finding that the business relied heavily on Ms Ross’ personal commercial expertise and would be difficult to sell on the open market. After the sale, the company had no trading operations, no meaningful assets, and only a modest potential preference claim of $62,125, which was outweighed by Ms Ross’ $222,197 related-party loan. The administrator concluded there was no prospect of any return to shareholders in any scenario.
Under the DOCA approved by creditors, the administrator was required, upon request, to take all reasonable steps, including court applications, to transfer all minority shareholdings to Ms Ross. Shareholders were notified, and while over 560 consented to the transfer, a number objected on various grounds including valuation, related-party concerns, and procedural fairness.
Issues Before the Court
Three issues framed the Court’s analysis, each bearing directly on whether the compulsory transfer of minority shareholders’ shares could lawfully proceed under the DOCA.
First, whether the transfer would unfairly prejudice members for the purposes of s 444GA. Second, whether the company’s breach of the two-director requirement in s 201A affected the validity of the administrator’s appointment that underpins the DOCA. Third, whether the transfer would otherwise contravene the takeover prohibition in s 606, or whether a CSF exception allowed the resulting increase in voting power.
s 444GA: Unfair Prejudice
The statutory test proceeds in two steps. The Court must first determine whether the proposed transfer would unfairly prejudice members’ interests. Only if that threshold is met may the Court move to the second question, whether, as a matter of residual discretion, leave should be granted in light of the objectives of Pt 5.3A.
On the first step, the evidence demonstrated that the company had no residual value. Its business had been sold, it held no meaningful assets, and its only potential recovery, a modest $62,125 preference claim, was outweighed by the founder’s related-party loan of $222,197. The company had no trading operations, no revenue source, and a significant net deficiency. On liquidation, shareholders would receive nothing. The Court emphasised that unfair prejudice arises only where a transfer removes something of real value. Here, there was no equity for members to lose. The compulsory transfer therefore did not prejudice, let alone unfairly prejudice, their interests.
Proceeding to the second step, the Court considered whether discretionary factors supported granting leave. Shareholders received notice and an opportunity to object after documents were redistributed. Over 560 consented, and while some objected, raising issues including valuation, related-party dealings, and allegations of phoenix activity, none identified any basis for concluding that the shares held any residual value or that refusing the transfer would result in a better outcome. ASIC was informed and did not oppose the application.
Given the company’s financial position and the DOCA’s structure, the Court found that both statutory steps favoured granting leave. The transfer was therefore permitted.
s 201A: Validity pf Administrator's Appointment
The second issue concerned whether the administrator’s appointment under s 436A was invalid because, at the time of appointment, the company, being a CSF proprietary company, had only one director, contrary to the requirement in s 201A that such companies must have at least two.
The Court held that the breach did not invalidate the appointment. Nothing in s 201A stipulates that non-compliance renders subsequent corporate acts void or ineffective. The Corporations Act does impose invalidity consequences in other provisions, and the absence of such language was treated as deliberate. Further, the company’s constitution expressly permitted a sole director to pass resolutions and exercise the board’s powers, confirming the company remained capable of functioning notwithstanding the breach. Authorities addressing similar director-composition defects likewise support the view that such breaches do not paralyse a company’s capacity to appoint an administrator.
Accordingly, the administrator’s appointment was valid, and the s 201A breach did not affect the Court’s ability to consider the s 444GA application.
s 606: CSF Expectation and Share Acquisition
The final issue concerned whether transferring all minority shareholders’ shares to Ms Ross, thereby increasing her voting power from approximately 86% to 100%, was prohibited under the general takeover restrictions in s 606. Those provisions ordinarily prevent a person from acquiring voting power above the 20% threshold (or increasing an existing stake between 20% and 90%) unless an exception applies.
The Court found that the transfer was permitted because a specific exception applies to proprietary companies with crowd-sourced funding (CSF) shareholders. Under item 19A of s 611 and reg 6.2.01A, a company may rely on this exception if it is an “eligible CSF company” at the time of the acquisition. Eligibility requires, among other things, at least two Australian-resident directors and consolidated assets and revenue below prescribed thresholds.
Following Ms Ross’ reappointment as director on 7 July 2025, the company satisfied all eligibility criteria. Its asset and revenue levels were well below the statutory limits. On that basis, the s 606 prohibition did not apply, and the transfer could lawfully proceed.
Conclusion
In summary, the decision clarifies how ss 444GA, 201A and 606 operate together when a CSF-funded company collapses and a DOCA requires a compulsory transfer of minority shares. First, a compulsory transfer of minority shareholders’ shares is likely to be approved where members hold no residual equity and would receive nothing in a liquidation scenario. Second, a proprietary company’s failure to maintain the required number of directors does not automatically invalidate the appointment of an administrator where the constitution permits a sole director to act. Third, share acquisitions increasing voting power beyond statutory thresholds may proceed where a CSF-based exception applies and eligibility conditions are satisfied at the time of acquisition. These principles together explain when a compulsory transfer may lawfully proceed in DOCA restructures involving CSF-funded companies.
Further Information
For further information on compulsory share transfers under DOCAs, crowd-sourced funding (CSF) structures, and restructuring options for distressed growth and start-up companies, please contact the author of this article:
Blake Shaw
PARTNER
