In a recent decision, In the matter of Toys “R” Us ANZ Limited (subject to deed of company arrangement) [2025] FCA 1135, the Federal Court provided important clarification as to its discretionary power to permit the administrator of a deed of company arrangement to transfer share in the company.
In exercising the court’s discretion to make orders as to how certain provisions in the Corporation Act 2001 (Cth) (Act) operate in relation to a particular company, Beach J clarified that leave to transfer shares will be granted if there is no unfair prejudice to the interests of the company’s shareholders, assessed by comparing the position of the shareholders if the leave were to be granted with that in a liquidation scenario.
Case Background
Toys “R” Us ANZ Limited (Company) is an Australian public company that is listed on the ASX. It has three wholly owned subsidiaries: Toys R Us Licensee Pty Ltd; Hobby Warehouse Pty Ltd; and Mittoni Pty Ltd. On 4 June 2025, the claimants, Mr Duncan Clubb and Mr Luke Andrews of BDO Australia, were appointed as voluntary administrators of the Company and its subsidiaries. The group was insolvent, recording trading losses of $285,991 in June to July 2025. The administrators quickly advertised the business and received 25 expressions of interest, and 2 recapitalisation offers, which included a deed a company arrangement (DOCA) The transferee under the DOCA is A.C.N. 687 771 679 (A.C.N.)
The DOCA proposal provided for the transfer of all Company shares to the transferee or its nominee, together with a $2 million contribution into a deed fund to be moved into a creditors’ trust for distribution, yielding an estimated return of 1 – 6.5 cents in the dollar compared to nil upon liquidation. It also contemplated the retention of 16 of 17 employees with their claims to be paid in the ordinary course, a debt-to-equity swap for the senior secured lender owed approximately $14.3 million, and no consideration to the shareholders. Creditors approved the proposal on 10 July 2025 and executed the DOCA on 31 July 2025, subject to conditions precedent, which including obtaining by 25 September 2025 court approval of the share transfer and ASIC relief from a takeover prohibition in the Act.
The Company had 1,032 shareholders and 19 option holders among employees, executives, and investors. Directed Electronics Pty Ltd (DE) held 14.2m options (and agreed to voluntary cancellation). DE Ltd was a related entity of A.C.N.; Mercer Street Global Opportunity Fund II LP held multiple option tranches (expiring in 2027) and convertible securities. UBS Nominees Pty Ltd and Netwealth Investments Ltd also held options. The DOCA defined “Options” broadly to include vested/unvested options, warrants and convertible instruments, and contemplated their transfer to the DOCA proponent and subsequent cancellation. An independent expert, consistent with ASIC RG 111, valued the shares and options on a liquidation basis and concluded they had no residual value as at4 June 2025.
The claimant sought the following relief:
- Leave under section 444GA(1)(b) of the Act to transfer all Company shares to A.C.N. or its nominee, together with ancillary orders under section 447A of the Act and section 90-15(1) of the Insolvency Practice Schedule (Corporations) (IPS) to execute the necessary transfer documents and effect registration of the transferee.
- Modification of section 444GA of the Act pursuant to section 447A of the Act so that references to “shares” and “members” extended to options and their holders, thereby enabling the transfer of all options under the DOCA, supported by ancillary orders to register such transfers.
Notably, ASIC indicated that it would grant relief under section 655A of the Act to permit the transfer notwithstanding the takeover prohibition in section 606 of the Act, which prohibits a person from acquiring relevant interest in voting shares if that would increase their voting power above 20%, or from a level above 20% to below 90%, conditional upon the Court granting leave under section 444GA of the Act.
The Federal Court Decision
The Test for Unfair Prejudice under Section 444GA of the Act
Section 444GA(3) of the Act provides that a court may only grant leave under section 444GA(1)(b) of the Act, to allow the administrator of a deed of the company arrangement to transfer shares in the company, only if a court is satisfied that the transfer would not unfairly prejudice the interest of member of the company. If there will be no unfair prejudice, leave to transfer shares will be granted.
The mere fact that shares are transferred without consideration is not sufficient in and of itself to establish unfair prejudice. In determining whether there is any unfair prejudice, the central inquiry requires a comparison of the position of the shareholders if the leave to transfer shares were to be granted versus the position of the shareholders if the transfer does not proceed. In the application of the section 444GA(3) of the Act, the likely or necessary consequence if the relevant proposal or arrangement did not proceed is that the relevant company will be wound up or placed into liquidation. Therefore, it is necessary to consider a valuation of the assets and liabilities of the company by reference to a liquidation scenario to determine whether shareholders hold any residual equity of value if the leave to transfer shares is not granted.
Beach J concluded that shareholders would not suffer unfair prejudice if the leave to transfer shares were granted because there was no residual value in the Company that could be distributed to shareholders according to an independent expert opinion regarding the value of the shares in the Company on a liquidation basis. As the Company’s shares had no economic value, granting leave to transfer them would not cause any unfair prejudice.
The Use of Section 447A of the Act to Address Options
Section 447A of the Act confers a broad discretionary power on the court to determine how Part 5.3A of the Act is to operate in relation to a particular company. This power should not be read down as confined to, for example, curing a procedural irregularity, but be interpreted such that a court can alter the operation of the specific provisions under Part 5.3A of the Act if a court thinks it is appropriate and such alteration can achieve the objects of the Part 5.3A.
Beach J found it was appropriate to use section 447A of the Act to modify section 444GA to extend section 444GA’s operation to options and analogous instruments – not just shares. It was appropriate because this modification could facilitate the effectuation of a DOCA in the interest of the creditors, which meets the objects of the Part 5.3A of the Act.
Beach J also observed that the DOCA treated the option holders as creditors and extinguished their claims. Even if the DOCA had not contained provisions recognising them as creditors, section 447A of the Act could be invoked indirectly to modify the DOCA or directly to modify section 444GA of the Act to include options within its scope. In either approach, no unfair prejudice arose.
In liquidation, the only alternative to the DOCA, the Company’s shares were valueless, and the options were “out of the money”, incapable of exercise and without a market. The transfer and cancellation of options therefore carried no economic detriment to holders and served the same purpose as the transfer of shares: to secure the transferee’s control of the company so that the DOCA could be implemented. The Court concluded that the exercise of section 447A of the Act to extend section 444GA in this way was both appropriate and consonant with the policy of section 435A of the Act.
Outcome
Beach J granted leave under section 444GA(1)(b) of the Act for the transfer of all Company shares to A.C.N. or its nominee, together with ancillary orders under section 447A of the Act and section 90-15(1) of IPS to enable execution and registration of transfers. The Court exercised its discretion under section 447A of the Act to modify section 444GA(1) and (3) of the Act so that references to “shares” and “members” extended to options and their holders, permitting the transfer and cancellation of options in accordance with the DOCA. The Court found no unfair prejudice to shareholders or option holders, as both shares and options were valueless in liquidation.
Key Takeaways
- Liquidators and Deed Administrators: a court is likely to grant leave for a share transfer under section 444GA of the Act where a company’s shares are demonstrably worthless in a liquidation scenario. It also sets a clear example for how the broad discretionary power under section 447A of the Act will be exercised by a court to facilitate the transfer of options and other analogous instruments to enable the recapitalisation of the company.
- Accountants and Creditors: a DOCA is a viable mechanism to achieve a better return for creditors than would be possible in a winding-up. In facilitating the execution of a DOCA involving a consideration of residual shareholder value, it is important to secure an independent expert valuation on a liquidation scenario.
- Directors: this case is another reminder that as a company moves towards insolvency, the interests of creditors becomes paramount and close consideration to voluntary administration and potential DOCA scenarios takes priority.
Further Information
For more information about insolvency and restructuring, including the appointment of a voluntary administrator, and compulsory share transfers, please contact the author of this article:
