May 2013... A recent High Court case in Wellington provides some useful reminders in relation to company law and the treatment of major transactions under the Companies Act 1993.
The case of Jakomb v Wikeley concerned two former friends and a failed mining operation in Chile. Mr Wikeley induced Mr Jakomb (via his family trust) to advance moneys to a company that had plans to mine molybdenum, copper and other minerals in Chile. There were various transactions which involved Mr Jakomb advancing a total of US$1.5 million to the company. Although not formally documented, there was e-mail correspondence between the parties in relation to the transactions and in the course of that correspondence Mr Wikeley had agreed to provide personal guarantees for 50% of the advances to the company. When the mining venture failed and the company was unable to repay the money to Mr Jakomb, he looked to enforce the personal guarantee against Mr Wikeley.
Mr Wikeley’s first defence was that the advances to the company were not actually loans at all, but were instead subscriptions for share capital in the company. If that was the case, then Mr Jakomb would not be able to call for repayment of the moneys. Alternatively, Mr Wikeley said that if the transactions were loans to the company then they were unlawful and unenforceable because they were “major transactions” under the Companies Act and the requisite special resolution of shareholders had not been obtained.
The Judge was convinced by the documentary evidence at the hearing that the four payments by Mr Jakomb’s trust totalling US$1.5 million were in fact loans to the company which were guaranteed by Mr Wikeley as to 50%. He came to that conclusion on the basis of the various emails between the parties which specifically referred to shareholder loans to the company, including the loan period and interest. The Judge was not at all impressed with Mr Wikeley’s first defence and dismissed it as “opportunistic nonsense”. The second defence required more analysis.
Under section 129 of the Companies Act a company cannot enter into a “major transaction” unless it is approved by a special resolution or is contingent on approval by special resolution (a special resolution normally requires approval by 75% of shareholders). In the context of this case, a “major transaction” means a transaction where the company incurs liabilities the value of which is more than half the value of the company’s assets. Mr Wikeley submitted that the first two instalments totalling US$1 million were major transactions without the necessary special resolution approval.
The first issue was therefore to ascertain the extent of the company’s assets. An accountant gave evidence that the company was a holding company only, did not trade, did not have a bank account and therefore did not have any assets. However, the company structure was unusual in that the issued share capital was 100,000,000 shares having a value of $1.00 each. The shares had been issued in full but on an entirely unpaid basis and therefore the “uncalled capital” of the company was $100,000,000 and that was an asset of the company. The Judge decided that for the purposes of section 129 “Assets” means the gross assets of the company and therefore the gross assets were at least $100,000,000. On that basis it followed that a loan arrangement for US$1.5 million was not a major transaction and did not require shareholder approval. Furthermore, the judge held that two shareholder resolutions that were signed on the last two instalments of the loan for US$500,000 were an endorsement of the original borrowing and therefore the shareholders of the company had ratified the loan anyway.
The advances to the company were therefore upheld as legitimate loans and Mr Wikeley’s endeavours to avoid liability under his personal guarantee were unsuccessful. The case is a useful reminder of the requirements under the Companies Act for shareholder approval of major transactions and confirmation that it is the gross assets of the company that need to be considered when assessing transactions.
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