Armco (Australia) Pty. Ltd. v Federal Commissioner of Taxation

Armco (Australia) Pty. Ltd. v Federal Commissioner of Taxation - [1948] HCA 49 - HCA 1947 case summary — Zoe

[16]

It may be that the appellant could even now appropriate the whole of the indebtedness under the first heading to the amount secured by the promissory note and treat the indebtedness of $67,201.75 as part of the indebtedness under the second and third headings. But I need not pursue this inquiry because, in my opinion, the facts of the present case are altogether different to the facts in the Texas Case [1] . It is true that in that case the Australian company purchased goods from an American company, the purchase money being payable in dollars in the U.S.A., and that the American company allowed the Australian company to postpone the payment of part of its current indebtedness so that the Australian company could accumulate capital for use in its business. It is also true that at a later date part of this indebtedness was funded and allowed to remain outstanding while the remaining part and any subsequent indebtedness for future purchases had to be repaid in the ordinary course of business. It is also true that the indebtedness of the Australian company to the American company on current account included items of a capital nature which led the Court to declare that only so much of the amount of the exchange as was found to be referable to expenditure incurred in or for the purpose of discharging or providing for liabilities on revenue or income account ought to be allowed as a deduction in ascertaining the taxable income of the company in the year in which the payments were made. But there the resemblance ends because in the Texas Case [1] nothing was done to alter the character of the funded debt. It still remained the same debt for the unpaid purchase money for goods which were or had been part of the stock in trade of the Australian company and for expenditure of a capital nature, whereas in the present case, on 15th September 1938, a radical alteration was made in the character of the indebtedness of the appellant to the parent company. This indebtedness was then wholly on current account and consisted roughly as to one half of expenditure to purchase stock in trade, and as to the other half of expenditure of a capital nature. But no distinction was made on 15th September 1938 between the component parts of the debt. The debt as a whole was subdivided into two portions. The portion of $1,000,000 the subject matter of the promissory note was to remain outstanding until demand but subject to a promise that no demand would be made for an indefinite period, while the balance of $67,201.75 was to be repaid in the ordinary course of business. In Allen v. Royal Bank of Canada [1] , Lord Atkinson, in delivering the judgment of the Privy Council, said: "Of course, a creditor may accept from his debtor a negotiable instrument either in absolute satisfaction of the debt due to him, or he may accept it as a conditional payment only. In the first case the creditor takes the instrument at the risk of its being dishonoured; which, if it be, he cannot sue the debtor on the original cause of action. The result in the latter case is only this, that the remedies of the creditor to recover his original debt are suspended during the currency of the negotiable instrument" [2] . It is a question of fact in each case whether the negotiable instrument is taken in complete satisfaction of the original debt, or merely as a conditional payment, the onus lying on the party alleging that the negotiable instrument operated as a complete satisfaction of the original debt ( Byles on Bills, 20th ed. (1939), p. 311; Halsbury, Laws of England, 2nd ed., vol. 7, p. 241).

[38]

The principal question in this case is whether the promissory note was accepted as in discharge of the antecedent three classes of liabilities so that there was an accord and satisfaction or whether it was accepted only as conditional payment. Was it the intention of the parties that those liabilities should be regarded as satisfied for once and for all by the making and delivery of the promissory note? Generally, when a negotiable instrument is accepted on account of a debt, it is taken as conditional payment only. Then remedies for the recovery of the debt are suspended until the negotiable instrument falls due and has been dishonoured (Mackenzie v. Rees [1] ). In Sayer v. Wagstaff [2] , a debtor delivered to his creditor a promissory note for the amount of the debt. It was held that the debts could be considered as actually paid if the creditor at the time of receiving the note agreed to take it in payment of the debts and to take upon himself the risk of the note being paid or if, from the conduct of the creditor in the circumstances of the case, such an agreement was legally to be implied. In the absence, however, of such an agreement or of such special circumstances, the delivery and receipt of the promissory note did not amount to a discharge of the debts but was merely an extension of credit. In Price v. Price [3] , Parke B., dealing with a similar case, referred to the suspension of the rights of action of the creditor during the currency of the negotiable instrument. The law was laid down in the same terms in La Neuville v. Nourse [4] , in Maxwell v. Deare [5] in the Privy Council, and in Re the London, Birmingham and South Staffordshire Bank [6] - "the remedy is suspended till the instrument has attained to maturity." In Ford v. Beech [7] , Parke B. said that it was "a very old and well established principle of law, that the right to bring a personal action, once existing and by act of the party suspended for ever so short a time, is extinguished and discharged, and can never revive" [8] . But in that case itself he recognized that a party accepting a negotiable security payable in the future for and on account of an antecedent demand could not, until after such negotiable security had become due and been disowned, sue for such antecedent demand [1] . The law applicable to such a case was "grounded upon the peculiar nature of the negotiable instruments" which were deemed "to be necessary exceptions to the general rules of law in favour of the law merchant" [2] .

[74]

It was said that $1,000,000 were lent to the appellant by the American Corporation for the purpose of acquiring shares in the Rolling Mills. Accordingly, the appellant acquired 250,000 shares and subsequently sold them to the American Corporation. Such a transaction, it was said, was independent and apart from the dollar obligation in connection with the supply of goods to the appellant. Officers of the appellant stated that the moneys represented by the promissory note for $1,000,000 were allowed to stand over for an indefinite period and were lent to the appellant to enable it to invest £250,000 in the Rolling Mills which was fifty per cent of the authorized share capital of the Mills. But when the facts are examined the statements amount to no more than that payment of the dollar indebtedness was postponed so that the appellant might have sufficient funds to purchase Rolling Mill shares. Apart from the remittance of $450,000 by way of loan, already mentioned, no moneys were paid by the American Corporation to the appellant. The note was given on 15th September 1938. The liability of the appellant on current account was reduced by $1,000,000 but the same amount was transferred to the credit of the American Corporation in the "Inter-Company Notes Payable" Account. It does not appear when the Rolling Mills shares were acquired, certainly after February 1938; but the sale to the American Corporation was not effected until October 1944. Clause 12 of the statement of facts sets forth: "The liability of the appellant for principal under the said note remained unchanged until October 1944 when the same was satisfied and discharged in manner following: - (a) The appellant sold to the American Corporation 250,000 £1 shares owned by the appellant in the Commonwealth Rolling Mills Pty. Ltd. (which said shares had been acquired by the appellant for the sum of £1 per share) at and for the price of £1 per share, the agreed rate of exchange being $3.1983 to the Australian pound (the then current rate of exchange being $3.1982 to the Australian pound); the indebtedness of the American Corporation to the appellant under and by virtue of the said transaction amounting to $799,575 was set off against the liability of the appellant to the American Corporation under the said note. (b) The balance of the liability of the appellant under the said note amounting to $200,425 was satisfied and discharged by a cash payment made by the appellant to the American Corporation. Such cash payment was effected at the then current rate of exchange $3.1982 to the Australian pound and involved the appellant in the expenditure in Australian currency of £62,668 13s."

[79]

The taxpayer's claim is to deduct from its assessable income derived during the year ended 31st October 1944 a loss said to have been incurred during that year by reason of the discharge of a dollar indebtedness of some six or more years' standing. The loss consists in the increased number of £A required to obtain the necessary dollars, compared with the amount of £A represented by the dollars at the time when the indebtedness arose. The exchange rate applicable as at that time to the indebtedness in question may be taken to be $3.8117 to the £A. The movement of the rate against Australia had brought it in the meantime to $3.1982 to the £A. The taxpayer is a company incorporated in Australia, but its shares are held, except for the necessary nominees, by Armco International Corporation of Middletown, Ohio, United States of America, of which it is the Australian subsidiary. From the American Corporation the Australian company buys large quantities of steel sheets. The price is expressed in, and is payable in, dollars. The indebtedness in question represents, so it is claimed, the cost in dollars of steel sheets bought in this manner during the years 1937 and in 1938 before 15th September of that year. There is a difficulty, which I shall pass by, of attributing the payments ultimately made to specific items. But ignoring that, it may be taken that, though perhaps transformed in character, the debt or its equivalent stood over until the year of income under assessment, when an amount to which it was traceable was satisfied by payment or accord and satisfaction. If there were no further facts there would be enough to afford a prima facie foundation for the claim that the increased amount required to purchase the exchange formed a trading loss or outgoing, which would be an allowable deduction from the assessable income of the accounting period in which it was incurred. But it is important to see how that result would be reached. It would arise from the fact that it is a continuing business, depending upon the purchase or manufacture of goods and their resale. The accounts are, of course, made up, not on a basis of receipts and disbursements, but upon the commercial basis of valuation and credit. Nevertheless in such a case actual expenditure in a later accounting period arising from a fortuitous increase in the amount of the liabilities taken into it from the prior period may form a proper debit in the later period, notwithstanding that the item relates to purchases or costs of manufacture included in an earlier accounting period.

[83]

The American Corporation made the advances necessary. By 15th September 1938 the indebtedness of the taxpayer company to the American Corporation on account of advances, steel sheets and other items amounted to $1,067,201. It was determined that of this sum a million dollars should stand over indefinitely. At the rates of exchange adopted, which were approximately those prevailing at that date, a million dollars were equivalent to £A252,720, very little over the £250,000 to be applied by the taxpayer in acquiring the shares. A promissory note for $1,000,000 payable on demand and bearing interest at 4½ per cent per annum was given to the American Corporation by the taxpayer company. The interest was paid. In 1944 it was decided that the shares should be transferred to the American Corporation and the note should be retired. Transfers were executed by the taxpayer company, three in number, comprising the whole 250,000 shares. The manner in which the consideration was expressed was the same in each and may be illustrated by a transfer for 150,000 shares, in which the statement of the consideration ran, "in consideration of the sum of $3.1983 per share U.S. of A. Currency (£150,000) paid by Armco International Corporation." The current rate of exchange was $3.1983 to the £A. In a prepared statement of facts put in evidence on behalf of the taxpayer without objection the transaction is described as a sale of the shares "at and for the price of £1 per share, the agreed rate of exchange being $3.1983 to the Australian pound." The oral evidence of the secretary of the company put it, as the transfers do, as a sale at $3.1983 a share. But the difference is, I think, of little importance. The consideration in American currency amounted to $799,575, leaving a balance of $200,425 to make up the amount of the note for $1,000,000. That balance was remitted at the current rate of exchange of $3.1983 to the £A. The amount required to obtain the necessary dollars was £62,668. Of this sum it is said that a portion, namely, £31,156, can be traced to the liability allowed to accumulate up to 15th September 1938 for the purchase of steel sheets.

At a glance

Court

Decision date

Before

Source

Judgment (92 paragraphs)

Parties

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