Discussion of the cases
59 In Archibald Howie, the appellant company (Archibald Howie) returned capital to two of its shareholders pursuant to a resolution for reduction of capital. It did so by distributing in specie paid-up shares in other companies at the values of those shares as recorded in Archibald Howie's books. The book value of the shares, calculated together, was a little more than 70 per cent of the actual value. The central issue on the appeal to the High Court was whether the in specie transfers of shares to Archibald Howie's shareholders were made upon a "bona fide consideration in money or money's worth" and, if so, whether the consideration was less than or not less than the unencumbered value of the property. If the former, it was assessable to duty under s 66(3A) of the Stamp Duties Act 1920-1940 (NSW) and, if the latter, under 66(3B).
60 Dixon J held that there were two aspects of the transaction in which the shareholders received adequate consideration in the sense contemplated and that s 66(3B) applied. The two aspects were, his Honour observed, perhaps two sides of the same thing. In explaining the first aspect, his Honour observed at 152-3 (emphasis added):
The reduction involving the payment off of part of the paid up share capital must therefore be considered an effectuation of a provision of the contract of membership. The allotment of the share and the payment up of the liability thereon conferred upon the holder for the time being of the share a right to have the assets of the company used and applied in the various ways in which the articles expressly or impliedly require or authorize and this is one of them. It is an effectuation or realization of the rights obtained by the acquisition of the share in the same way as is the distribution of a dividend. The consideration given is the payment up of the share capital in satisfaction of the liability for the amount of the share incurred on allotment.
61 In explaining the second aspect, his Honour said at 153:
From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real. The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in a winding up. Subject to any regulation the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets.
62 Williams J reached the same conclusion as Dixon J. In his reasons, his Honour stated at 157 (emphasis added):
A company obtains capital by the issue of its shares. These shares cannot be issued at a discount but may be issued subject to the payment of their nominal amount or at a premium. The amount payable may be satisfied by the payment of money or by some other proper consideration. But all shares must be paid for in full by money or money's worth. When the person to whom the shares are allotted pays or assumes the liability to pay for the shares in money or money's worth, full consideration in money or money's worth moves from him to the company for all the rights which he acquires under the memorandum and articles of association.
63 His Honour also stated at 159:
The capital of a successful company is usually represented by assets which, after providing for the claims of creditors, exceed in value the amount of the paid up capital.
64 Williams J was using the word "capital":
(1) at 157, in the first sentence set out above (at [62]), to refer to "share capital"; and
(2) at 159, in the sentence set out immediately above (at [63]), to refer to the net value of a company's assets or, in his Honour's words, the "assets which, after providing for the claims of creditors, exceed in value the amount of the paid up capital".
65 Rich J agreed with the judgments of both Dixon and Williams JJ: at 150.
66 Contrary to Aurizon's submission, the observations of Williams J at 159 were not intended as a statement of principle that a company's share capital includes any money or property contributed to a company by a member in that capacity not made by way of loan or gift.
67 The Commissioner placed particular emphasis on the passages in the judgments of Dixon J (at 152-3) and Williams J (at 157) in submitting that "share capital" is that which is paid in exchange for the shares or, in the language of Dixon J, "in satisfaction of the liability for the amount of the share incurred on allotment". It must be accepted that such amounts are share capital, but it must also be recognised that their Honours were not addressing the question whether an amount contributed to a company, otherwise than by way of a loan or a gift, is share capital even if it is not contributed in exchange for shares. Archibald Howie was not concerned with a situation such as the present, namely the classification of an amount paid to a company by its sole shareholder, expressed to be for "nil consideration" and not in exchange for a new issue of shares, but which was to be adjusted to the contributed equity of the company, that contributed equity at the time being constituted only by share capital.
68 In Cable & Wireless trial at [17], Pagone J stated:
The capital contributed to a company is not the same as the equity in the company. In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 Williams J observed at 159:
The capital of a successful company is usually represented by assets which, after providing for the claims of creditors, exceed in value the amount of paid up capital.
Assets and liabilities of a company will affect its value and, therefore, will affect the equity which a shareholder has in a company. Its share capital, in contrast, is the amount contributed by shareholders in respect of their shares: see Trevor v Whitworth (1887) 12 App Cas 409, 423; Guinness v Land Corporation of Ireland (1882) 22 Ch D 349, 375; and Re The Swan Brewery Co Ltd (1976) 3 ACLR 164, 166; see also Gower and Davies' Principles of Modern Company Law (2012) 9th edition, Sweet & Maxwell, 272. In Archibald Howie Pty Ltd Dixon J (with whom Rich J agreed) explained the significance of share capital as follows at 153:
From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real. The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in a winding up. Subject to any regulation the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets.
The accounting by Optus of the share buy-back transaction reflected the distinction between its capital and the equity of its shareholders …
69 Aurizon placed particular emphasis on the following sentence contained in that passage and, in particular, the phrase "in respect of":
Its share capital, in contrast, is the amount contributed by shareholders in respect of their shares.
70 Senior Counsel for the applicant submitted that this was a deliberate choice of words, intended to reflect that share capital is not limited to that which is paid in exchange for shares, but extended to any money or property contributed by a shareholder as shareholder that was not a loan or a gift.
71 It is unlikely that the words were deliberately chosen for the reason the applicant suggests. First, that question was not one which was raised in Cable & Wireless trial. Secondly, that question was not raised in any of the cases to which Pagone J referred. Thirdly, the expression of the principle in Swan Brewery to which Pagone J referred is more narrowly stated, yet his Honour apparently accepted that case as accurately stating the relevant test. In Swan Brewery at 166, Gillard J considered "share capital" was the "capital raised by the company from the issue of its shares"; the expression "issued share capital [means] the money or money's worth derived from the issue by directors of shares in order to raise capital". The issue in the present case was not raised Swan Brewery.
72 In St George Bank Ltd v Federal Commissioner of Taxation [2009] FCAFC 62; (2009) 176 FCR 424 at [90], Perram J (with whom Emmett and Stone JJ agreed) cited Swan Brewery for the proposition that the "capital of [a] company is the money or money's worth derived by the company from the issue of shares". The issue in the present case was not raised.
73 The Commissioner emphasised that, in Cable & Wireless appeal at [78], the Full Court affirmed Pagone J's distinction at [17] between the "[a]ssets and liabilities of a company [which] will affect its value and, therefore, will affect the equity which a shareholder has in a company" and "[i]ts share capital … [being] the amount contributed by shareholders in respect of their shares". The parties referred also to what the Full Court stated at [94] and [95]:
… [B]efore proceeding further it is necessary to be clear about what is meant by "capital" or "shareholders' capital". In the present context, we are concerned with share capital rather than other commercial contexts such as working capital. As explained by Gower and Davies' Principles of Modern Company Law (9th edition by Paul Davies and Sarah Worthington) at [11-1], in the present context, "capital" connotes the value of the assets contributed to the company by those who subscribe for its shares; we are not, of course, here dealing with the market value of shares. We have emphasised the "value" of what is contributed, as it is this concept rather than the assets themselves (say subscription money) that is being referred to; it may also be appropriate to describe this in terms of the "amount of the share(s)" so contributed (see for example, Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 153 per Dixon J). The assets will change their form, indeed may be disposed of or lost. But this is not a reduction of capital as such. Likewise, the company may create or acquire new or enhanced assets through, for example, trading profitably, borrowing money from a third party or asset revaluation. But this is not share capital as such in that form. Moreover, a share capital account is not as such an asset account.
The concept of "capital" as used in the present context is also to be distinguished from "equity". The concept of "equity" usually describes a surplus of assets over liabilities. It is not the same as capital. So, in the present case, for Optus in the year ending 31 March 2002, total equity equalled net assets. Total equity itself can be divided into components. So, for Optus for the year in question, it was divided into "contributed equity", "reserves" and "retained profits (accumulated losses)". But the only component of total equity referable to "capital" or "shareholders' capital" was "contributed equity". And, as we have indicated earlier, the debit on the buy-back reserve account was not in form or in substance a charge on contributed equity. It was never seen as such commercially or economically by any of the (highly sophisticated) relevant participants (the complete opposite to the scenario in Consolidated Media).
74 Although lengthy, it is useful to set out the whole of [11-1] of Gower (9th ed) referred to by both Pagone J at [17] and the Full Court at [94] (for present purposes it is not necessary to refer to the more recent edition). The paragraph is the first in Chapter 11 - Meaning of Capital (emphasis added):
In the previous two chapters we saw how the law applies sanctions to the controllers of companies who abuse the facility of limited liability. In particular, personal liability for the company's obligations and disqualification from being involved in the management of a company in the future are techniques used by the law in these cases. Both are ex post techniques, i.e. the sanctions are applied after the company has fallen into insolvency. Both sanctions are applied on the basis that the court has concluded that the controllers have infringed some broad and general standard laid down for the assessment of their conduct, for example, engaging in "wrongful" trading or dis playing "unfit" conduct. In this chapter and the next two, by contrast, we consider ex ante approaches to the abuse of limited liability, i.e. setting rules which apply before the company is in insolvency or even in the region of insolvency. The legal mechanisms discussed in these chapters take as their starting point the fact that, where limited liability operates, the creditors' claims are confined to the assets of the company, but also that, in relation to the company's assets, the claims of creditors have priority over the expectations of share-holders. Consequently, the techniques now discussed seek to ensure that the shareholders contribute to or maintain in the company an appropriate level of assets. By virtue of the creditors' priority over shareholders, these shareholder-contributed assets will be the first t bear losses if the company trades unsuccessfully. A good level of shareholder-contributed assets, it can be argued, will both reduce the chances of the company falling into insolvency on the grounds that it is unable to pay its debts as they fall due and increase the chances of the creditors' being repaid if insolvency does occur. This idea can be given expression in a number of ways, which will be explored in these chapters. It will be seen, as well, that this policy is given effect mainly through detailed rules rather than through broad standards.
The traditional protective mechanism of company law in this area which is as old as limited liability itself, involves laying down rule about the raising and maintenance of "capital". "Capital" is a word of many meanings, but in company law it is used in a very restricted sense. It connotes the value of the assets contributed to the company by those who subscribe for its shares. By and large, the value of what the company receives from investors in exchange for its shares constitutes its capital.2 One talks about the value of what is received, rather than the assets themselves, because those assets will change form in the course of the business activities of the company. If the company receives cash in exchange for its shares, the directors will turn that cash into other types of asset in order to promote its business: indeed, if they did not, they would probably be in breach of duty.
2 In Kellar v Williams [2000] 2 B.C.L.C. 390, the Privy Council accepted that it was possible for an investor to make a capital contribution to a company, other than in exchange for the purchase of shares, in which case the contribution is to be treated in the same way as a share premium (see below, para.11-8). Such a procedure is very unusual, of course, since the contributor is left substantially in the dark as to what he or she is getting in exchange for the contribution. However, one can see that an existing shareholder in a company wholly controlled by him might act in this way. The difficulty is to distinguish between such a capital contribution and a loan to the company.
The value of the assets which the company receives in exchange for its shares (its legal capital) will normally be less than the total value of the company's assets. Even where the company has not yet begun to trade, it may have raised money in ways other than share issues. For example, it may have borrowed money from a bank or a group of banks, which loan contributes to the company's cash assets. The value of such loans does not count towards its legal capital, however. This is because the aim of the capital rules is to protect creditors as a class and only assets contributed by shareholders do this effectively. The cash provided by the lender will be exactly counterbalanced by an increase on the liabilities side of the company's balance sheet, so that the creditors as a whole are no better off. Once a company has begun trading and if it has done so profitably, it will have assets which represent the profits made (assuming these have not been distributed to the shareholders). These, too, do not count as part of the company's legal capital: they may have been earned, at least in part, by deploying the shareholders' contributions to the business but the profits were not contributed by the shareholders. Nevertheless, in business parlance the surplus of the assets over the liabilities is often referred to as "the shareholders' equity", on the ground that it could be distributed to them. By contrast, if the company trades unsuccessfully, it may run through any profits made in previous years and begin to eat up the assets contributed by long-term lenders and its shareholders. In this situation its net asset value (assets less liabilities) may fall below the value of its legal capital. In short, the value of the assets contributed by the shareholders (its legal capital) is a figure which may deployed as the basis of certain corporate law rules; it is not a measure of the company's net worth, which may be higher or lower and only rarely and by chance will it have the same value as the company's legal capital.
75 The Commissioner emphasised the use of the phrase "in exchange for its shares" in the first sentence of the last paragraph of [11-1]. That sentence must, however, be read in the context of what the authors had previously stated, namely that the assets received by a company in exchange for its shares was "by and large" that which constituted the company's share capital (or legal capital). Footnote 2, at the end of that sentence, states that "the Privy Council [in Kellar] accepted that it was possible for an investor to make a capital contribution to a company, other than in exchange for the purchase of shares, in which case the contribution is to be treated in the same way as a share premium". The authors used the words "by and large" to indicate their view that some contributions might be share capital even if those contributions were not made in exchange for shares.
76 The critical facts in Kellar were as follows. Mr Kellar and Mr Williams decided to establish a company, Sunrise. It was agreed that Mr Williams would be the major shareholder. It was also agreed that Mr Kellar would provide the funds for Sunrise, but there was no clear agreement as to whether the funds so provided were to be made by way of a loan or as a contribution of capital.
77 Sunrise went into administration. Mr Kellar commenced proceedings in the Supreme Court of the Turks and Caicos Islands (TCI) seeking directions as to the proper treatment to be accorded by the Official Liquidator to the funds paid to Sunrise. The Chief Justice of the Supreme Court ruled against Mr Kellar at first instance and Mr Kellar appealed to the Court of Appeal of the TCI. The effect of the decisions of both the Supreme Court and the Court of Appeal was to reject Mr Kellar's claim that the monies paid to Sunrise comprised loans repayable to him and to accept Mr William's contention that the amounts were paid to Sunrise as "capital contributions".
78 At the hearing, Mr Kellar contended that the primary facts found by the Chief Justice and the Court of Appeal should have led to the conclusion that the monies provided to Sunrise were repayable to him on demand, to the extent that they were not necessary for preserving the solvency of Sunrise and enabling it to meet the company's debts to its creditors. The Privy Council rejected that argument, holding that it was bound by the factual findings made by the Chief Justice and the Court of the Appeal of the TCI that the monies paid to Sunrise by Mr Kellar were not by way of a loan: [2000] 2 BCLC 390 at 395; [2000] UKPC 4 at [11]-[14].
79 That conclusion was sufficient to dispose of the appeal. Nevertheless, their Lordships briefly addressed an argument which had been advanced in Mr Kellar's written submissions. That argument was that the Supreme Court and Court of Appeal had erred in holding that the funds paid to Sunrise were "equity or capital contributions", because the company law of the TCI did not recognise the concept of a payment made to enhance the capital of a company, being neither a subscription for shares nor a gift to the company, and which did not create any obligation on the company to repay the money or entitle the payor to recover the funds as a debt or in some other way: [2000] 2 BCLC 390 at 394; [2000] UKPC 4 at [10].
80 Lord Mackay of Clashfern, giving the judgment of the Committee (which included Lord Browne-Wilkinson and Lord Millett) said at [2000] 2 BCLC 390 at 395, [2000] UKPC 4 at [15]:
The contention of the appellant in his written case, which as their Lordships have noted was not pressed at the oral hearing, cannot be given effect. If the shareholders of a company agree to increase its capital without a formal allocation of shares that capital will become like share premium part of the owner's equity and there is nothing in the company law of the Turks and Caicos Islands or in the company law of England on which that law is based to render their agreement ineffective.
81 The applicant submitted that this passage should be understood as concluding that the contribution should be treated in the same way as share premium and that share premium was treated as being share capital. Contrary to the applicant's submission, I read that passage as meaning that the contribution in that case formed a part of owner's equity, just as share premium is a part of owner's equity. The amount was not considered to be share capital.
82 Kellar was considered in The Commissioners for HM Revenue and Customs v Alan Blackburn Sports Limited [2008] EWCA Civ 1454. Blackburn concerned the availability of relief under the Enterprise Investment Scheme ("EIS relief") and the operation of the Taxation of Chargeable Gains Act 1992 (UK). In summary, the question was whether charges arising on capital gains could be deferred in respect of shares allotted by the Company to Mr Blackburn between September 1998 and January 2001. Mr Blackburn had a long history of paying cash to the company and receiving shares in return. Sometimes, however, the shares were allotted after payment at a time when there was no application to, resolution by, or agreement with, the Company that shares would be allotted in return for the money or at all. The Special Commissioner rejected an argument, in relation to an amount of £96,000 contributed by Mr Blackburn, that he was informally applying for shares and concluded that the payment of money at a time when there was no application or agreement for the allotment of shares must have amounted to the making of a loan, and that the subsequent allotment of shares could not therefore attract EIS relief: at [11].
83 At first instance, Peter Smith J allowed Mr Blackburn's appeal against the decision of the Special Commissioner on the ground that the Special Commissioner had been wrong to accept the contention that, in the cases where the money had been paid before there was a resolution or agreement to allot shares, the money had been advanced as a loan. Peter Smith J followed the decision of the Privy Council in Kellar and concluded that, in such cases, the payment should be characterised as a contribution to the capital of the Company and not as a loan: Blackburn v The Commissioners for HM Revenue and Customs [2008] EWHC 266 (Ch) at [44].
84 The Court of Appeal dismissed the Revenue's appeal from this decision. Lord Neuberger of Abbotsbury (with whom Sedley and Wilson LLJ agreed) concluded that, when Mr Blackburn paid the amount of £96,000, he intended that the payments would be reflected by the allotment of 96,000 shares in the Company and that the money was a payment into the capital account of the Company, conditionally on 96,000 shares being allotted to Mr Blackburn: at [23], [26]. Lord Neuberger stated:
[23] … Accordingly, as I see it, the payments totalling £96,000 were made and accepted in circumstances in which it is right to infer that Mr Blackburn was "agreeing to take [96,000] shares" to quote Wynn-Parry J in Governments Stock [1956] 1 WLR 237, 242, and the Company was agreeing to allot him 96,000 shares.
85 Lord Neuberger continued (emphasis added):
[26] … [U]nless precluded by some legal principle, I consider that the proper characterisation of the arrangement was that the £96,000 was paid by Mr Blackburn to the Company, and accepted (and spent) by the Company on the clear mutual understanding, indeed implied agreement, that the Company would allot 96,000 shares to him …
[27] Two possible problems with this conclusion have to be considered. The first is that it may be said that the Company could not be compelled to issue shares; the second is that there is no basis as a matter of principle for treating the payments as anything other than loans.
[28] It is unnecessary to decide whether the Company could have been compelled to allot 96,000 shares to Mr Blackburn once it had accepted the £96,000. Unless there was a technical company law reason why it could not have been so compelled, it seems to me that it could have been. However, assuming that it could not have been so compelled, then, if it had refused to allot any shares to him, the £96,000 would, I think, have been recoverable by Mr Blackburn. But this would not be because the money had been a debt throughout; it would be because the money would have been paid for a consideration which, as it transpired, had failed, or because it had been paid in anticipation of an event which had not occurred. Once the Company had refused to allot the shares, the £96,000 would become repayable, and, at that point, I would have thought that it could well be characterised as a debt, but not until that point.
[29] If that is right, I can see no reason why the payments totalling £96,000, when they were made, should nonetheless have to be characterised as loans or debts, as a matter of law, simply because they were paid to a limited company. It was suggested that a limited company cannot effectively accept capital contributions other than in the form of loan capital or share capital. Even if that suggestion was, in general, correct, I cannot accept that it would extend so as to prevent a company from accepting and holding money on the basis that it is bound (or at least entitled) as against the payer, to allot shares to him in return for the payment (with the possibility of having to repay the money if the shares are not then allotted).
[30] In any event, I severely doubt that there is any reason in terms of principle, authority or practice for accepting that suggestion. In practical terms, I find it impossible to see, for instance, why a company should not be able to treat a gift as a contribution to its capital. As to authority, far from there being any case which confirms the suggestion, the Privy Council in Kellar [2000] 2 BCLC 390, 395 indicated precisely the opposite. Lord Mackay of Clashfern, giving the judgment of the Committee (which included Lord Browne-Wilkinson and Lord Millett) said that "there was nothing in the law of the Turks and Caicos Islands or in the company law of England" which prevented giving effect to an agreement between "the shareholders of a company … to increase its capital without a formal allocation of shares". In such an event, he said, such capital would "become like share premium part of the owner's equity". So far as principle is concerned, I do not see why the fact that accountancy convention may make it difficult to decide how to record a particular type of payment in the Company's accounts means that, as a matter of law, the payment cannot be characterised as being of that type. While accountancy convention has an important part to play in some areas of tax law and company law, this would, I think, be a case of the tail wagging the dog.
86 At the time Kellar was decided, so far as the company law of England was concerned, a distribution by a company of share premium was, absent legislative intervention, regarded as profit available for distribution rather than share capital which would have been subject to the maintenance of capital rules: Drown v Gaumont-British Picture Corporation Ltd [1937] Ch 402. The effect of the decision in Drown was that, when companies issued shares at a premium (above their nominal value), the share capital was the nominal par value of the shares and, if issued at a price above par, the excess was not "capital" and constituted part of the distributable surplus which the company could return to the shareholders by way of dividend. Section 56 of the Companies Act 1948 (UK) was enacted to remedy this situation. Its operation was described in In re Duff's Settlements; National Provincial Bank Ld v Gregson [1951] Ch 923 at 926 -928. Jenkins LJ, reading the judgment of the Court, referred to Drown in terms which accepted it was correctly decided: at 926. His Lordship described s 56 of the Companies Act 1948 (UK) as not converting share premium into share capital, but requiring that share premium to be treated as share capital (for most purposes): at 928. Section 56 of the Companies Act 1948 was the predecessor to s 130 of the Companies Act 1985 (UK) which was the provision applicable when Kellar was decided.
87 It is not necessary to decide whether it is correct, but the weight of Australian authority is to the effect that share premium (when it existed) was a component of share capital, even absent legislation deeming it to be such: Coca-Cola Amatil Ltd; Ex parte Coca-Cola Amatil (1998) 44 NSWLR 343 at 344F, 347B, 347E-F (Santow J); Quatro Ltd v Argo Investments Ltd [1999] VSC 171; (1999) 32 ACSR 239 at [28] (Hansen J). Santow J in Coca-Cola referred to Drown (at 345B, in terms which indicate that his Honour considered it to be incorrectly decided) and to the legislative response, including legislation which treated share premium "as if" it were share capital, and stated at 347E:
Normally, it is true, the expression "as if", as Kitto J pointed out, in Union Fidelity Trustee Co of Australia Ltd v Commissioner of Taxation (Cth) (1969) 119 CLR 177 at 187, connotes a "hypothesis different from the actual fact". But that is not necessarily so where what is thus assimilated to paid up share capital is already of that nature.
88 Earlier in his reasons at 345, Santow J extracted a passage from Gower's Principles of Modern Company Law (1997) Sweet & Maxwell, London at 243:
Section 56 [of the Companies Act 1948 (UK) (repeated in s 130 of the Companies Act 1985 (UK))] was introduced to overcome the practice of utilising the share premium as a distributable surplus; this it did by requiring the share premium account to be treated "as if the share premium account were paid up capital of the company". Such distribution had been allowed - dubiously I suggest - in Drown v Gaumont-British Picture Corporation Ltd [1937] Ch 402. Gower's Principles of Modern Company Law (1997) Sweet & Maxwell, London at 243 recounts that history. It expresses justified ridicule at the arbitrary division between par and premium subscription amounts which underlay that early decision:
"Prior to 1948, when companies issued shares at a premium (that is, at above their nominal value), the premiums were treated totally differently from share capital. Share capital was regarded as determined by the nominal par value of the shares; if they had been issued at a price above par the excess was not 'capital' and, indeed, constituted part of the distributable surplus which the company, if it wished, could return to the shareholders by way of dividend. (Drown v Gaumont-British Corporation [1937] Ch 402.) This was ridiculous. If the price paid for the shares was £100,000, the true capital of the company was £100,000 and it should have made no difference to the company or to the shareholders whether the £100,000 was obtained by issuing 100,000 £1 shares at par or by issuing 10,000 £1 at £10. This absurdity, however, was mitigated by section 56 of the 1948 Act, now replaced by section 130 of the 1985 Act. This provides that a sum equal to the aggregate amount or value of the premiums shall be transferred to a 'share premium account' which, in general, has to be treated as if it were part of the paid-up share capital (s 130(1) and (3)). But, anomalously, it is still necessary to refer expressly to both, and for the company, in its annual accounts and reports, to distinguish between them. What, if it were not for arbitrary par values, would be a single item - capital - has to be treated as two distinct items, albeit for most purposes treated identically."
89 This diversion has only been necessary because the applicant submitted that the decisions in Kellar and Blackburn supported its formulation of the relevant principle (set out at [53] above) and, it was accordingly desirable to understand how share premium was treated at the time of those decisions. Neither judgment confirms the applicant's broad statement of principle. Rather, the judgments in Kellar and Blackburn both accept, by way of obiter dictum, that a shareholder of a company may make a non-loan capital contribution to a company without issuing shares:
In Kellar at 395, the obiter dictum was that, "[i]f the shareholders of a company agree to increase its capital without a formal allocation of shares that capital will become like share premium part of the owner's equity". The capital contribution in Kellar was found to be neither a loan nor a gift.
In Blackburn at [29] and [30], Lord Neuberger concluded that a capital contribution could be made by a shareholder to a company which was neither loan capital nor share capital. His Lordship gave the example of a gift. If a gift were made it would "become like share premium part of the owner's equity". Contrary to the submissions advanced by counsel for the applicant, this is not a statement that the gift would be share capital; it is a statement that the gift would be part of "owner's equity". It is implicit in the reasoning, if not express, that a gift of capital would not be share capital. Such a conclusion is unsurprising. Lord Neuberger was doubting the proposition that a capital contribution by a shareholder could only be one of loan capital or share capital. His Lordship was not concluding that a gift would be share capital.
90 Contrary to the applicant's submission, neither case states that a capital contribution by a shareholder, as a shareholder, which is neither a loan nor a gift, is share capital. Both cases conclude that a capital contribution, not made in exchange for shares, would form part of "owner's equity" (or shareholders' equity). In Kellar, the capital contribution was neither a gift nor a loan, nor share capital. The capital contribution formed a part of owner's equity. The hypothetical gift of capital referred to in Blackburn was not share capital, but would form part of "owner's equity".
91 The issue which the present case raises was not the issue raised in either Kellar or Blackburn. Whilst, contrary to the applicant's submission, neither of those cases endorse the applicant's statement of principle, neither of those cases necessarily deny that a contribution from a shareholder not made in exchange for shares can, in particular circumstances, constitute share capital. For reasons indicated earlier and also below, the State Contribution in the present case is not a gift. The proper characterisation of a non-loan capital contribution, not being a gift, necessarily depends on precisely what occurred. Such a contribution forms part of shareholders' equity, but whether it does so as share capital is a different question.
92 As noted earlier, the applicant contended that its statement of principle (set out at [53] above) was supported by the decision of Finn and Sundberg JJ in National Mutual Life at [49]. That case also does not support the principle for which the applicant contends. The facts may be simplified for present purposes as follows. National Mutual's wholly owned UK resident subsidiary, NMUK, acquired NMSLAL: at [4]. The businesses of NMUK and NMSLAL were merged. Under a scheme of arrangement, National Mutual agreed to contribute surplus funds from its No 6 statutory fund (a UK fund owned by National Mutual). This capital contribution was to the shareholders' funds of NMSLAL: at [4], [5(b)], [7]). The amount of the contribution was not credited to NMSLAL's share capital account: at [8]. The amount of the capital contribution was found by Finn and Sundberg JJ to be "reflected in the embedded value of NMSLAL and that of NMUK and in the value of shares and the shareholders' equity in NMUK": at [11]. Contrary to the applicant's submission, none of this involves a conclusion that the contribution was share capital.
93 The case concerned the question whether the capital contribution to shareholders' funds formed part of the reduced cost base of National Mutual's shares in NMUK which it had sold for a loss. Section 160ZH(3) of the Income Tax Assessment Act 1936 (Cth) provided that the reduced cost base to a taxpayer of an asset was the sum of various things, including:
(c) the reduced amount of any expenditure of a capital nature incurred by the taxpayer to the extent to which it was incurred for the purpose of enhancing the value of the asset and is reflected in the state or nature of the asset at the time of disposal of the asset;
94 Finn and Sundberg JJ stated:
[46] Section 160ZH(3)(c) applied to intangible as well as tangible property: see [12]. The shares in question here are intangibles. In Archibald Howie 77 CLR at 152-153 Dixon J said:
While a shareholder has not a proprietary right or interest in the assets of an incorporated company, his "share" is after all an aliquot proportion of the company's share capital with reference to which he has certain rights …
The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in a winding up. Subject to any regulation the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets.
[47] His Honour then referred to the facts of the case, which involved a reduction of capital by way of a distribution in specie, and continued (at 153-154):
The direct allocation of assets for distribution in reduction of the amount of the shares is doubtless within [the relevant section of the Companies Act]. But that means that the shareholder in satisfaction of his proportionate "interest" in the assets, an interest consisting of a congeries of rights in personam, takes an aliquot part of the assets.
[48] In Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at [19] the High Court pointed out that the abolition of the concept of par value and of authorised capital effected by the Company Law Review Act 1998 (Cth) requires some modification to Farwell J's well-known and much approved description of a share in Borland's Trustee v Steel Brothers & Company Ltd [1901] 1 Ch 279 at 288. Justice Dixon's description of a share is unaffected by the legislative change, though that of Williams J in Archibald Howie 77 CLR at 156, describing a share as the interest of a shareholder measured by a sum of money, is no longer apt.
[49] It is clear from the passages quoted at [46] that a shareholder's rights derived from the shares extend to a proportionate share of capital contributions in excess of what used to be called the par value of the shares on the distribution of that excess.
[50] The taxpayer contends that given the character of a share as a bundle of contractual rights, the question under s 160ZH(3)(c) is whether the capital contribution was at the time of the sale of the shares reflected in the state of the contractual rights represented by the shares. The answer, according to the taxpayer, is that the expenditure was a contribution to shareholders' funds. The rights embodied in the shares reflected the quantum of those funds from time to time. At the time of disposal of the shares the capital contribution was still available for distribution to the shareholder of NMUK pursuant to the rights which comprised the shares. Accordingly the state of the contractual rights was at the time of the expenditure, and remained until the disposal of the shares, enhanced and improved by the expenditure. Thus the expenditure was reflected in the state or nature of the shares at disposal.
[51] This alternative argument should also be accepted. Having regard to the legal nature of a share as described in the authorities, the inevitable consequence of the finding that at the time of the sale the expenditure was reflected in the shareholder's equity in NMUK is that it was reflected in the state or nature of the shares in NMUK. We accept the taxpayer's submission that if the expenditure was reflected in the shareholder's equity, it must also be reflected in the state or nature of the very rights which are the source of that equity. The shares themselves and the rights inhering in them (including the shareholder's equity) were not separate rights or interests. The authorities show that the rights derived from a share are embodied within the share. A share is incapable of legal description save by reference to what it represents: the rights and interests its holder derives from it. If, as the primary judge found, the expenditure was reflected in the shareholder's equity, it is reflected in the state or nature of the rights which are the source of the equity.
95 Contrary to the submissions advanced by counsel for the applicant, none of this can be read as concluding that the capital contribution was share capital. The conclusion was the opposite: the capital contribution was not share capital: at [8]. Finn and Sundberg JJ clearly distinguished between shareholders' equity and share capital. Their Honour concluded that the amount remained available for distribution: at [50]. Contrary to the submissions advanced by the applicant this finding cannot sensibly be read as having been intended to mean that the amount was available to be returned to shareholders as share capital under a share buyback.
96 National Mutual recognises that a capital contribution can be made without it being made in exchange for shares. Contrary to the applicant's submission, the reasoning in National Mutual does not contain a conclusion, or assume, that such a contribution is share capital. On the facts in National Mutual, the amount was not credited to the share capital account; and, as a contribution to shareholders' funds, it formed part of shareholders' equity. Nevertheless, National Mutual does not deny that a capital contribution, not made in exchange for shares, might be share capital in particular circumstances.