Directors
of cash-strapped Activedocs Ltd could not strip out unpaid dividends of nearly
two million dollars owed preference shareholders by unilaterally converting
their shares to ordinary shares.
Activedocs started life in software
development as Keylogix Ltd. In 2002 it
was critically short of cash, having burned through $5.5 million in shareholder
funding. ABN AMRO Craigs was approached
for advice on a public share issue.
Plans were derailed by Keylogix getting a qualified audit report
questioning whether it was a going concern.
The board then raised $1.27 million offering existing shareholders
preference shares paying 15 per cent with conversion in two years time. Offer
documents said conversion would be delayed if preference dividends were in
arrears.
The High Court was told Keylogix
continued to struggle financially. Any
financial surplus was insufficient in most years to pay any preference
dividend. By 2014, accruals for unpaid
preference dividends had reached $1.9 million.
But prior to that, in 2007 and 2008,
directors paid preference shareholders their 15 per cent dividends
unpaid for the first two years since issue and called it quits saying
preference shareholders had all they were entitled to. Their preference shares were converted to
ordinary shares. Preference shareholders
sued.
Justice Courtney ruled as invalid the
directors’ decision to convert preference shares to ordinaries. The terms of issue delayed conversion until
all arrears of dividend were paid and dividends continued to accrue annually if
unpaid. Nothing in the terms of issue
stated the preference share dividends were non-cumulative. Dividends payable on preference shares are
presumed to be cumulative.
Cadre
Investments v. Activedocs – High Court (1.07.16)
16.103