Brian Hatch Timber Co (Sales) Pty Ltd v Commissioner of Taxation

Brian Hatch Timber Co (Sales) Pty Ltd v Commissioner of Taxation - [1972] HCA 73 - HCA 1971 case summary — Zoe

[9]

Thereupon discussions took place between McMullen and Brian Hatch. Mr. Hatch, through companies which he controlled, carried on a business which consisted mainly of the buying and selling of timber. That business was profitable. These discussions were followed by correspondence between solicitors acting for the parties, and resulted in the execution of a deed dated 19th December 1966. The parties to it were Berry Motors Pty. Ltd. (Berry) and Grecher Pty. Ltd. (Grecher), which was a company controlled by Mr. Hatch. A recital in the deed referred to the accumulated losses of the company, which were stated to be available to be recouped pursuant to s. 80 of the Income Tax Assessment Act 1936 Cth. A recital referred to the scheme of arrangement and to the termination of the official manager's appointment. There was another recital that Grecher wished to take up a shareholding in the company representing sixty per cent of its issued capital. There was a recital that it had been agreed that shares representing sixty per cent of the total issued capital of the company would be issued to Grecher, subject to its paying to Berry the sum of $11,251. The deed contained several warranties by Berry. In effect, although not in form, the first warranty was that there was no restriction upon the existing shareholders as to any rights of the kind described in s. 80A (1). Another warranty was that the Commissioner of Taxation had assessed the losses of the company, available to be recouped in terms of s. 80 of the Act, in the four tax years up to and including the year ending 30th June 1966, at amounts which were set out in the deed and totalled $67,506. There was a provision for a refund or a further payment, if the Commissioner reduced or increased "the losses available". Berry covenanted that it would arrange for the issue of three shares at par to Grecher or its nominee and would arrange a general meeting of the shareholders of the company, at which new directors would be appointed and the present directors would tender their resignations. It was agreed that on or before 15th July 1968, Berry would hand to Grecher a form of assignment executed by Berry whereby the debt owed to Berry by the company would be assigned to Grecher. Berry would engage Mr. McMullen to assist the company, "during the period in which the losses hereinbefore referred to are being recouped", as an accountant, without charge to the company or to Grecher. The general meeting of the company which was to be arranged by Berry would be attended by a person nominated by Grecher and upon the issue of shares representing sixty per cent of the issue capital, Grecher would pay to Berry by bank cheque the sum of $11,251.

[10]

No shareholder was a party to that agreement, nor was the company. No doubt Mr. McMullen felt it safe for his company to make the promises which the deed contained as to what would happen at a general meeting to be arranged, because proxies had been obtained from Mrs. Cleary and Mr. Scutt. Mrs. Cleary appointed McMullen as her proxy to vote for her and on her behalf at any ordinary or extraordinary general meeting of the company. At the same time she signed a request to the board of directors of the company to accept her resignation as director. Mr. Scutt appointed a Mr. Drever, who was a partner or associate of the official manager, as his proxy in similar terms. But it was not Mr. Drever who came in place of Mr. Scutt to the general meeting which was held on 19th December 1966. Drever signed a document appointing McMullen "as my proxy to vote for me and on my behalf at any Ordinary or Extra-Ordinary General Meeting of the Company". According to the minutes of the meeting of 19th December, McMullen was present as proxy for Mrs. Cleary and as proxy for Scutt. No one else was present, except Mr. Hatch and Mr. Levy (his accountant), who were present by invitation. The meeting, thus constituted solely by McMullen in his double capacity of agent for Mrs. Cleary and (as appears to have been supposed) agent for Scutt by force of his appointment as proxy made by Scutt's original agent Drever, proceeded to pass a number of resolutions. They included a resolution approving applications for the allotment of two shares to Brian Hatch and one share to Noela Hatch his wife. Mr. and Mrs. Hatch were appointed directors and it was thereafter resolved that "the present directors" of the company should continue in office for the ensuing year. Nothing was done concerning Mr. Cleary's position as governing director (as set out in the articles of association) and he does not appear ever to have formally resigned from his position. But it is evident that he did not take or seek to take any further part in the affairs of the company. Nor did Mrs. Cleary or Mr. Scutt. It should be added that at a general meeting, nearly a year later, those recorded as being present were Mr. Hatch and Mr. McMullen as proxy for Mrs. Cleary (but not as proxy for Mr. Scutt).

[20]

On the evidence placed before this Court the material which is known positively to have been in the possession of the respondent when he considered the claim to deduct the losses was that which was contained in the income tax return and the documents which accompanied it and the report of his officer's interview with the Clearys. The matters to be considered by him under s. 80A (1) were: who had beneficially owned shares in the company, carrying the rights of the kind described in that provision, during the years when the losses were incurred and whether at all times during the year of income, shares carrying those rights were still beneficially owned by the same persons? The return showed that the name of the company had been changed. It showed that its issued capital was five ordinary shares of $2 each fully paid. It gave a list of the shareholders as at 30th June 1967. It showed Mrs. Cleary as holding one share and Scutt as holding one share. It showed that two shares were held by Mr. Hatch and one by Mrs. Hatch. It cannot be supposed that the respondent acted so irresponsibly that when he disallowed the claim to deduct the tax losses and afterwards disallowed the objection, he did not know and had taken no steps to find out how many shares there were in the loss years and who held them. It may, therefore, be assumed that he knew that at that time the only shares were the two held by Mrs. Cleary and Scutt. The question that remained was whether the beneficial ownership of those shares had continued as it was earlier or had changed. Section 80A (1) operated to prevent the losses being taken into account, unless the company satisfied the respondent that the beneficial ownership had remained unchanged. But the respondent could not reasonably fail to be so satisfied, in relation to shares which had continued to be held by the same persons, unless there was something before him to indicate that a change in the beneficial ownership had occurred. If it be supposed that he regarded the statements, which the Clearys were reported to have made to his officer, as being such an indication, the question arises whether the respondent could have held that view except as the result of some misconception of a kind which would require that his decision be reviewed. In my opinion the statements then made by the Clearys in the interview could not support a conclusion either that there had been, or that there might have been, a disposition by Mrs. Cleary (or by Mr. Cleary if he had been thought to have any beneficial interest in either of the shares) of the beneficial ownership or of any rights attached to them. If the statements that they had "lost all interest" in the company and that they could not recall whether they had retained any interest (in a different sense of that word) in it after the sale to Berry had stood alone, it might perhaps have been reasonable to infer that she (or they) had parted with the beneficial ownership of the shares or at least to suppose that this may have happened and therefore to refuse to be satisfied that it had not. But the Clearys denied any dealings by them with Berry. They denied any knowledge of Brian Hatch. Mrs. Cleary denied having entered into any arrangement, agreement or option to sell shares in Brian Hatch Timber Co. and having signed a blank share transfer in respect of that company.

[22]

It may be suggested that the respondent did not accept the statements made by the Clearys or did not accept all of them. But upon an examination of what they were reported to have said I do not think that his decision can be explained on the basis that a part of their statements was accepted by him and was regarded as making it doubtful that Mrs. Cleary had retained her beneficial ownership. Again, it may be suggested that the respondent may have had before him material of which I do not know and that it is, therefore, impossible for me to conclude that some misconception or some extraneous considerations entered into the decision. This is a matter which requires close consideration. In many cases in which the material before the respondent had not been proved, I think that an appellant would be precluded from succeeding upon a question in which the satisfaction of the respondent was the determining factor. I was disposed to the view that this is so in this case. But I consider that I am in a position to come to the conclusion that it is extremely unlikely that from any of the parties to the transactions by which Mr. and Mrs. Hatch acquired respondent obtained information (not disclosed to me) which could have helped him to conclude or to suspect that Mrs. Cleary had parted with her beneficial interest in the other shares or had agreed or arranged not to exercise any rights in relation to them. I say that because the evidence given by Hatch and by Mrs. Cleary did not reveal, in my opinion, any facts tending to such a conclusion or suspicion, and because I think there is no reason to believe that any relevant facts have been at any time concealed or misrepresented. I think that the theoretical possibility that this may have happened ought not to be held in the circumstances of this case, in which the respondent has called no evidence, to require a conclusion that his decision cannot be reviewed. In the circumstances, I am of opinion that I can have regard to the evidence of the actual facts of the transactions which have been outlined above. This evidence is relevant, although it is not my task to decide the facts of the case for myself, because it makes known to me the nature of the additional material which could have been available to the respondent, concerning the beneficial ownership of the two shares, as a result of inquiries from the people most directly concerned. If he had before him an account of the matter given by Hatch, I have no reason to doubt that it would have agreed with the account that he has given in evidence. It would have been to the effect that he had made no agreement or arrangement relating to the two existing shares and that he would have been anxious to avoid the making of any such agreement or arrangement. There is no ground for supposing in this case that the respondent has been supplied with information which, although it could be shown later to be not in accordance with the facts, could reasonably have been accepted and acted upon by him, as occurred in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] . Whilst it is theoretically possible that he had some erroneous information upon which he acted, I think that in the circumstances of this case it would not be right to treat that possibility as being of practical significance. I think that his decision may be examined, in the absence of any evidence to the contrary, on the supposition that he acted upon the actual facts or upon so much of them as had come to his knowledge.

[23]

The question, then, is whether there was anything to suggest that the beneficial ownership of the two shares had changed. In my opinion there was not. I think that a conclusion that it had changed or a belief that it might have changed could not reasonably have been formed, unless it had been based upon the circumstances that during the relevant period Mrs. Cleary (or her husband) had not exercised or sought to exercise any rights as shareholder and had not taken any actual interest in the affairs of the company and had no intention of doing so and that (probably) no notices of meetings or other correspondence had been sent to her by the company. But in my opinion those circumstances could not be found to have divested from her a proprietary right and could not have operated by way of estoppel or otherwise to preclude her from asserting that right if she had wished to do so at any time. If it be supposed that her right was divested, in my opinion the consequence must have been that it passed to somebody else. In Wood Preservation Ltd. v. Prior [2] , Lord Donovan said that it "is possible for property to lack any beneficial owner for a time". But although there may be special circumstances in which that is so, I have the same difficulty in thinking that it could be so in this case as Widgery L.J. had in the case cited [3] . To whom could the property have passed? Surely not to Berry, although the Clearys are said to have stated that "the company was sold" to it. It seems plain that Berry did not acquire any beneficial interest in the shares and it should be recalled that the Clearys said they had had no discussion with Berry. It seems equally clear that Mr. Hatch did not acquire, at the relevant time, any beneficial interest in the two shares in question. The Clearys knew nothing of him and had no dealing with him or his other companies, either directly or through agents. The signing of the proxies could not amount to a transfer or a surrender of any rights to the shares. So long as they remained unrevoked, they authorized the appointees to vote at any general meeting. It may be assumed that the authority given by the proxies enabled the appointees to vote in a way which would have an effect upon the existing shares, inasmuch as an issue of further shares would reduce them to a minority holding. But the proxies could not have conferred authority to deal with the rights which remained attached to the two shares themselves and the proxies were not used in a way which suggested that anybody thought they had conferred that authority.

[28]

It was the Commissioner whom the company had to satisfy as to the existence of the facts set out in s. 80A (1). The task of an appellant, who must show that his decision should be reviewed, is not an easy one. It has been suggested by counsel for the company that an attempt to produce evidence of the actual material upon which the respondent acted would probably have been frustrated by a successful claim of privilege against its production. I am not convinced that that is so, although it is true that the decision in O'Flaherty v. McBride [1] presents an obstacle to an appellant who wishes to take that course. So far as I am aware, that case has not been reconsidered by this Court in the light of the modern decisions in England on this type of privilege. Counsel for the respondent contended that the matter was one which could have been examined more satisfactorily by a Board of Review. But the company was entitled to come to this Court, if it chose to do that. The respondent called no evidence. That was within his rights. But it cannot prevent the Court from examining his decision and it leaves the Court without the benefit of evidence which might have provided an acceptable explanation of that decision. Upon the view I take of the case, I am not able to perceive a satisfactory explanation of it, other than that some mistake of law was made, or some extraneous factor was taken into account. I am disposed to think it likely that the respondent regarded the cessation of any actual connexion with or interest in the company's affairs on the part of the Clearys and their vagueness as to what had occurred as being sufficient grounds for failing to be satisfied that the beneficial ownership of the two shares had not been changed. If that was the basis of the decision I think that it was based upon a mistake of law. It may have had a different basis. But, if so, the fact that I do not know exactly what that basis was does not preclude me from holding that the decision ought not to stand. Dixon J. said in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] :

[31]

The primary judge rightly regarded the Commissioner's lack of satisfaction as examinable by the Court but only for the limited purposes which are summarized by Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] . As others have observed the respondent taxpayer did not take the course of seeking from the appellant Commissioner an account of the material upon which he acted in rejecting the claim to the deduction. All that seems to have been known of the material that was before the Commissioner would suggest that he had the respondent's return and a record of interview, the text of which appears in the reasons for judgment prepared by my brother Menzies. However evidence was led by the respondent before the primary judge as to the circumstances in which further shares were issued in J. Cleary (N.S.W.) Pty. Ltd. and its name changed to the present name of the respondent. This evidence was subject to an objection by counsel for the appellant Commissioner on the ground that the evidence was irrelevant unless it was shown to have come to the knowledge of the Commissioner before his disallowance of the claim to the deduction. The objection was not upheld. Although this objection was made, it seems to me somewhat unsatisfactory that the Commissioner did not call any evidence of any matter which he had before him at the time he disallowed the claim. In the light of that circumstance I would myself be very loathe to think that the Commissioner had any substantial material at that time other than the return and the record of interview. As I read his Honour's judgment, he did not decide that the Commissioner ought not to have been dissatisfied as to the continued identity of the beneficial ownership of the shares in question because of the evidence produced before him and not shown to have been before the Commissioner when he rejected the claim to the deduction. His Honour held that, having no more than the return which showed the continued identity of the ownership of the two shares and the record of interview, a reasonable mind ought not to have been dissatisfied as to the continued identity of the beneficial ownership, therefore the Commissioner's dissatisfaction must have sprung from some undisclosed error. The case thus fell within the terms of Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [2] .

[100]

When the operation of a law is made conditional upon the opinion, as to certain matters, of some person named or described, or on proof of certain matters to his satisfaction, the question whether his opinion is justified, or whether he should have been satisfied on the materials before him, is not examinable by the courts. The only question which can be examined is whether, acting bona fide, he formed the opinion or was satisfied with the proof. This passage was quoted by Fullagar J. in Australian Communist Party v. The Commonwealth [4] . It is presently pertinent, although as a general statement it is now too far-reaching. It must be qualified in relation to a determination of the Commissioner of Taxation by what Dixon J. said in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [5] . His Honour, after pointing out that in a case such as the present one it was for the Commissioner, not for this Court on an appeal from him, to be satisfied of the relevant facts, went on: His decision, it is true, is not unexaminable. If he does not address himself to the question which the sub-section formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review. Moreover, the fact that he has not made known the reasons why he was not satisfied will not prevent the review of his decision. The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some such misconception. I add to these references the remarks of Starke J. in Boucaut Bay Co. Ltd. (in liquidation) v. The Commonwealth [6] - observing, however, that that was a case where a "belief" founded a discretion, whereas here a "satisfaction" is a condition of a right. I would emphasize that the passage from the judgment of Dixon J. that I have quoted seems to me to show that it is the material that was before the Commissioner that this Court has to consider, to see whether it can be said that in failing to be satisfied by that material he must have been moved by some misconception of it or by some extraneous consideration. It is not easy to see how that could be established without evidence from the Commissioner himself of what material was before him or perhaps from some one of his officers who had advised him in the particular matter. 1. (1925) 37 C.L.R. 36, at p. 67. 2. (1951) 83 C.L.R. 1, at p. 257. 3. (1949) 78 C.L.R. 353, at p. 360. 4. (1927) 40 C.L.R. 98, at p. 101.

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Before

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Judgment (122 paragraphs)

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