Commissioner of Taxation (Cth) v Lutovi Investments Pty Ltd

High Court of Australia|1978-07-01|Before: Aickin JJ, Mason JJ, Deane JJ, Franki J

High Court of Australia Gibbs, Stephen, Mason, Murphy and Aickin JJ. Commissioner of Taxation (Cth) v Lutovi Investments Pty Ltd [1978] HCA 55

ORDER Appeal allowed. Order of the Full Court of the Federal Court (other than that part of the order which relates to the payment of costs) set aside and in lieu thereof order that the appeal to that court be allowed and that the assessment be confirmed in so far as it relates to the receipt of bonus shares capitalized out of the assets revaluation reserve. Order that the appellant pay the respondent's costs of the appeal.

This is an appeal from a majority decision of the Full Court of the Federal Court (Franki and Deane JJ., with Bowen C.J. dissenting) [19] , dismissing an appeal by the Commissioner of Taxation against a judgment of the Supreme Court of New South Wales upholding the respondent taxpayer's objections to its assessment to income tax for the year ended 30th June 1972 [20] . By that assessment the Commissioner included in the respondent's assessable income a sum of $25,915, being the value of certain bonus shares issued by I.C.D. Ltd. to the respondent as a shareholder in that company. The bonus shares included, first, bonus shares capitalized from a share premium reserve, and secondly, bonus shares capitalized from an assets revaluation reserve. It was conceded by the Commissioner that the assessment could not be sustained in so far as it related to the bonus shares which were capitalized from the share premium reserve. However, the Commissioner sought to support the assessment as to a sum of $12,693.36, being the value of the bonus shares capitalized from the assets revaluation reserve.

(1978) 20 A.L.R. 157; 8 A.T.R. 689; 78 A.T.C. 4289, 37 F.L.R. 209. 2. (1977) 14 A.L.R. 386; 7 A.T.R. 336; 77 A.T.C. 4130.

The circumstances relevant to the issue of the bonus shares by I.C.D. Ltd. are recorded in detail in the judgment of Franki J. in the Federal Court (Federal Commissioner of Taxation v. Lutovi Investments Pty. Ltd. [21] ). We need do no more than recite the principal transactions.

(1978) 20 A.L.R. 157; 8 A.T.R. 689; 78 A.T.C. 4289.

At a board meeting of directors of the company on 6th December 1971 the following resolutions were passed:

it was resolved that the recommendation of the Executive Director on the reduction of capital and repayment to shareholders be accepted, and management be instructed to convene an Extraordinary General Meeting of the Company to consider and if thought fit pass with or without amendment the resolutions necessary to effect the consolidation and reduction of capital and bonus issue recommended by the Executive Director.

Terms of the reduction in capital/bonus issue would be such that for every five 10¢ shares currently held, a shareholder would receive: -

it was resolved that the Executive Director be requested to prepare a detailed report on the reconstruction proposals.

On 23rd December 1971 a letter was sent by the secretary of the company to the Sydney Stock Exchange which read as follows:

As announced in our Annual Report to Shareholders earlier this year, the company is planning a distribution of cash to shareholders and a subsequent reconstruction of the Group. For this purpose an Extraordinary General Meeting is to be called and notices to shareholders will be forwarded early in the new year to consider and if thought fit, to approve resolutions.

To consolidate each five ten cent shares into one fifty cent share.

To reduce the capital of the company by returning forty-nine cents in cash to the shareholders for each fifty cent share held. The approval of the Supreme Court will be required for such a reduction of capital.

Upon the completion of the matters referred to in numbers 1 and 2, to make a bonus issue to increase the par value of the then one cent shares to fifty cents.

On 6th January 1972 the chairman of the company by letter informed shareholders of the proposals. The letter was accompanied by notice of an extraordinary general meeting to be held on 2nd February 1972 containing proposed resolutions for consolidating each parcel of five ten-cent shares into one fifty-cent share, for reducing capital by returning forty-nine cents in cash to the shareholders for each fifty-cent share held and for the making of a bonus issue to increase the par value of the new one-cent shares to fifty cents each.

The extraordinary general meeting was duly held and the resolutions relating to consolidation and reduction of capital were passed. They were in this form:

it was resolved that upon the said reconversion the seventeen million (17,000,000) ordinary shares of ten cents (10c) in the Capital of the Company which have been issued and are fully paid and the two million five hundred thousand (2,500,000) ordinary shares of ten cents (10c) in the Capital of the Company, which are unissued be consolidated into three million four hundred thousand (3,400,000) shares of fifty cents (50c) each and five hundred thousand (500,000) ordinary shares of fifty cents (50c) each respectively.

it was resolved that the following resolution be passed as a special resolution:

That the capital of the Company of two million dollars ($2,000,000) consisting of fifty thousand (50,000) redeemable preference shares of one dollar ($1.00) each which are unissued and three million four hundred thousand (3,400,000) ordinary shares of fifty cents (50c) each which are issued and fully paid and five hundred thousand (500,000) ordinary shares of fifty cents (50c) which are unissued be reduced to three hundred and thirty four thousand dollars ($334,000.00) divided into fifty thousand (50,000) redeemable preference shares of one dollar ($1.00) each which are unissued, three million four hundred thousand (3,400,000) ordinary shares of one cent (1c) each which are issued and fully paid and five hundred thousand (500,000) ordinary shares of fifty cents (50c) each which are unissued and that such reduction be effected by paying off forty nine cents (49c) of the share capital paid up on each of the three million four hundred thousand (3,400,000) shares of fifty cents (50c) which have been issued and are fully paid.

After these resolutions had been passed the chairman informed the meeting that on advice received from the company's tax advisers the resolutions relating to the issue of bonus shares would not be put and would be dealt with at a later extraordinary general meeting.

On 28th February 1972 the Supreme Court confirmed the reduction of capital. The following day the chairman wrote to shareholders informing them of this fact and that the registry would close on 17th March 1972 to establish those entitled to the cash repayment of forty-nine cents per fifty-cent share. At the same time notice was given of a further extraordinary general meeting on 20th March 1972 to consider a proposed resolution for the issue of the bonus shares. On 17th March 1972 cheques were despatched to shareholders repaying capital pursuant to the reduction which had been approved by the Court.

At the meeting on 20th March 1972 the following resolution was passed relating to the issue of bonus shares in satisfaction of the dividend declared out of the assets revaluation reserve:

it was resolved that upon the said increase of Capital the sum of eight hundred and sixteen thousand dollars ($816,000.00) being part of the amount standing to the credit of the assets revaluation reserve of the Company be capitalized and that the same be applied in paying up at par in full eighty one million six hundred thousand (81,600,000) ordinary shares of one cent (1c) each in the Capital of the Company such shares to be distributed as fully paid among the persons who were registered as holders of the ordinary shares of the Company as at 5.00 p.m. on the date of this Extraordinary General Meeting in the proportion of twenty four (24) fully paid ordinary shares of one cent (1c) each for every one ordinary share of one cent (1c) each in the Capital of the Company held by such holders respectively such fully paid ordinary shares to rank for dividend from the date of allotment. A similar resolution had been passed for the application of part of the amount standing to the credit of the share premium reserve in paying up shares to be distributed in the proportion of twenty-four fully paid ordinary shares of one-cent each for every ordinary share of one-cent held.

it was resolved that upon the allotment of the shares referred to in the last two preceding resolutions, the one hundred and seventy million (170,000,000) ordinary shares in the Capital of the Company of one cent (1c) each which will thereby have been issued and be fully paid be consolidated into three million four hundred thousand (3,400,000) ordinary shares of fifty cents (50c) each.

The Commissioner's case is that the bonus shares in question are deemed to be redeemable shares by virtue of the provisions of s. 44 (2D) of the Income Tax Assessment Act 1936-1972 and that as a consequence the shares did not fall within s. 44 (2) (b) (iii) but were included in the assessable income of the appellant under s. 44 (1). Subject to certain exceptions and qualifications, s. 44 (1) includes in the assessable income of a shareholder resident in Australia dividends paid to him by a company. Section 44 (2) (b) (iii) excludes from the assessable income of a shareholder dividends paid wholly and exclusively out of

profits arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit or from the issue at a premium of any instrument that is a convertible note for the purposes of Division 3a of Pt III. (not being a convertible note in relation to which sub-section (1.) of section eighty-two s of this Act has effect or has at any time had effect) if the dividends paid from such profits are satisfied by the issue of shares (other than redeemable shares) of the company declaring the dividend.

Section 6 of the Act contains an extended definition of "dividend". The relevant effect of the definition is to include in the concept of dividend any distribution in money or property made by a company to any of its shareholders and the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits.

The definition excludes certain distributions made by a company to its shareholders. One such distribution is that which is effected by a reduction of capital. It is not a dividend except to the extent that the distribution exceeds the amount to which the share was paid up before its cancellation or redemption, or to the extent that the distribution exceeds the amount by which the paid-up value of the share was reduced. The excess counts as a dividend.

Had redeemable shares not been excepted from the operation of s. 44 (2) (b) (iii) it would have been relatively simple to have circumvented the limits of the exclusion arising from that provision by issuing redeemable shares in satisfaction of a dividend declared out of an amount standing to the credit of an assets revaluation reserve and then redeeming the share by paying to the shareholder the paid-up value of the share. But for the existence of s. 44 (2D) the exception of redeemable shares in s. 44 (2) (b) (iii) would have had a very limited operation. Section 44 (2D) is designed to give it a more extensive operation. Sub-section (2D) is in these terms:

For the purposes of sub-paragraph (iii) of paragraph (b) of sub-section (2.) of this section, a share issued by a company shall be deemed to be a redeemable share if -

(a) the share is, or at the option of the company is to be, liable to be redeemed; or

(b) the share was issued in pursuance of, or as part of, an agreement or arrangement, whether oral or in writing and whether entered into before or after the commencement of this sub-section, that had the purpose, or purposes that included the purpose, of enabling the company, by means of the redemption, purchase or cancellation, or of a reduction in the paid-up value, of that share or of any other share in the company, to pay, transfer or apply to, on behalf of or at the direction of the person to whom the share was issued or any other person, whether upon the exercise of an option by the company or by any other person or not, any money or other property other than shares in the company.

The arrangement postulated by this sub-section is one to which there are two or more parties. The sub-section speaks of an "agreement or arrangement" which is "oral or in writing" and which has been "entered into". Both characteristics point to an arrangement which is bilateral or multilateral. The words are similar to those contained in s. 80B (5) though that sub-section also contains a reference to "contract" as well as to "agreement or arrangement". They are also similar to the language of s. 260, though there the words "made or entered into" appear. And it has been decided that an arrangement in order to fall within s. 260 must be between two or more persons (Newton v. Federal Commissioner of Taxation [1] ).

(1958) 98 C.L.R. 1, at p. 7; [1958] A.C. 450, at p. 465.

The words "whether oral or in writing" do not imply that an agreement or arrangement must be wholly oral or wholly written, thereby excluding an agreement or arrangement which is partly oral and partly written. No rational purpose would be served by such an exclusion. But what of an arrangement which is implied or inferred from the circumstances or the conduct of the parties? Is it excluded? We do not think so. Counsel for the respondent conceded that one can infer an agreement or arrangement so long as it is oral or written. We would go further and say that the words are words of extension, not of limitation. They were so regarded in Newton v. Federal Commissioner of Taxation [2] .

[1958] 98 C.L.R., at p. 8; [1958] A.C., at p. 465.

In the context of s. 260 an arrangement is something less than a binding contract or agreement, something in the nature of an understanding which may not be enforceable at law (Newton v. Federal Commissioner of Taxation). A similar view has been taken of an arrangement falling within s. 80B (5) (see K. Porter & Co. Pty. Ltd. v. Federal Commissioner of Taxation [3] ; Federal Commissioner of Taxation v. Students World (Australia) Pty. Ltd. [4] ). It is, however, necessary that an arrangement should be consensual, and that there should be some adoption of it. But in our view it is not essential that the parties are committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it, notwithstanding their adoption of it.

[1974] 1 N.S.W.L.R. 536, at pp. 542 544. 2. (1978) 138 C.L.R. 251.

In the Full Court of the Federal Court differing views were expressed as to the existence of an arrangement. Bowen C.J. considered that there was an arrangement between directors constituted by the passage of the resolution at the directors' meeting on 6th December 1971 when they approved the recommendation of the executive director and by the putting of the plan into effect. Franki J. held that there was an arrangement between the directors and the shareholders constituted by the decision of the directors to send the notices calling the two meetings of the shareholders and the passing of the resolutions by the appropriate majority of shareholders at those meetings. On the other hand, Deane J. found that there was no arrangement.

There is no evidence of any discussion at or preceding the directors' meeting on 6th December 1971. None the less it seems to us that when directors by resolution approve a proposal for the consolidation and reduction of a company's capital and for a bonus issue, and direct that an extraordinary general meeting be convened to consider and if thought fit pass the necessary resolutions, they enter into an arrangement. They, or a majority of them, have assented to a plan involving a series of steps. Neither the fact that the resolution is a decision of the board as an organ of the company nor the circumstance that they were then acting in their capacity as directors having a fiduciary responsibility alters the circumstance that the proposal put to the directors was adopted by them. Although it is the duty of directors to act in the interests of the company, this supplies no reason for concluding that they cannot as directors adopt an arrangement and thereby be considered as having entered into it collectively or individually. Moreover, directors very often act in their own interests, believing no doubt that there is a coincidence between their interests and those of the company. In the realm of company law it becomes important to ascertain from time to time whether directors have acted in conformity with their fiduciary responsibility or whether they have acted otherwise than bona fide in the interests of the company in order to determine the validity of transactions into which they have entered. But we can see nothing in the language of s. 44 (2D) or in its subject matter and purpose to suggest that it is directed only to arrangements entered into by directors in their personal capacities and otherwise than at a meeting of directors. The language of the provision naturally suggests that it looks to any arrangement of the kind described having a purpose described in the sub-section.

The subject matter and purpose of s. 44 (2D) indicate that arrangements entered into by directors or shareholders by means of resolutions providing for the transactions dealt with by the sub-section fall within its reach. Decisions for the issue of bonus shares, the redemption, purchase or cancellation of shares and the reduction of capital are necessarily made by meetings of directors or shareholders. It is not rational to suppose that Parliament intended to exclude from the operation of s. 44 (2D) arrangements constituted or adopted by resolutions of directors or shareholders. Certainly the language of the provision evinces no evidence of such an intention.

The question then is whether the purpose or purposes of the arrangement into which the directors entered on 6th December 1971 answered the description contained in par. (b) of s. 44 (2D). First, it is apparent that the paragraph speaks of the objective purpose of the agreement. It is in contrast to the subjective purpose of one of the continuing shareholders with which s. 80B (5) is concerned (see Federal Commissioner of Taxation v. Students World (Australia) Pty. Ltd. [5] : cf. s. 260 where it is "the purpose and effect" that is referred to). Secondly, there is the problem of ascertaining what is meant by the word "enabling". The question is similar to that which has arisen in connexion with s. 80B (5). In Federal Commissioner of Taxation v. Students World (Australia) Pty. Ltd. [6] , Mason J. said:

The word "enabling" is generally understood to mean "make able", "make easy" or "make possible". In an appropriate context it may mean "assist in making able or possible" or "contribute to making able or possible", more particularly where as here, the word is used in association with the prescription of qualifications or conditions of eligibility necessary to entitle a taxpayer to take into account past losses for tax purposes. Although the traditional rule has been that clear words are required to impose a tax, so that the taxpayer has the benefit of any doubts or ambiguities, a provision introduced by way of an attack on tax avoidance should be given the wide meaning evidently intended; it should not be cut down in the interest of precision (Greenberg v. Inland Revenue Commissioners [7] ; Inland Revenue Commissioners v. Joiner [8] ). It may be that "enabling" has the same meaning here. However, in order to dispose of this case it will be enough for us to reject the broadest interpretation, "facilitate", and to adopt the narrowest interpretation, "make able or possible". 1. (1978) 138 C.L.R. 251, at p. 266-267. 2. (1978) 138 C.L.R., at p. 265. 3. [1972] A.C. 109, at p. 137. 4. [1975] 1 W.L.R. 1701, at p. 1706; [1975] 3 All E.R. 1050, at p. 1055.

On this footing can it be said that the arrangement has the requisite purpose? One of the purposes of the arrangement was to bring about a reduction of capital, an element in which was the payment of money to shareholders. To that extent the purpose of the arrangement was, by means of a reduction in the paid-up value of shares other than bonus shares, to bring about a payment of money to "any other person". In our opinion it may then be said that the arrangement had the purpose of enabling the company by the means stated to pay money to any other person.

Although the company had by its articles of association power to reduce capital and pay money to its shareholders as an incident of such a reduction, a payment of money as an incident of a reduction of capital cannot be effected without a special resolution of shareholders at a general meeting and without an order of the Supreme Court approving or confirming the reduction. A purpose of the scheme was to make the company able to pay money to shareholders by making provision for the special resolution and the court order without which the reduction could not be effected. In this way the arrangement provided for steps to be taken which were essential to a reduction of capital and had a purpose of "enabling" the company, even in the narrowest sense of that word, by the means indicated to pay money to shareholders.

The scheme of Commonwealth income taxation is to include in a resident shareholder's assessable income dividends which are paid to him out of profits - Income Tax Assessment Act 1936 s. 44 (1). Because of the breadth of the definition of dividend in s. 6 of the Act it will extend to bonus shares distributed by a company to its shareholders. But s. 44 (2) (b) (iii) excludes such shares from assessability if issued in satisfaction of a dividend paid from profits arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit.

Since 1965 the exclusion has not applied if the bonus shares are redeemable shares, as defined in s. 44 (2D). The question in this appeal is whether the bonus shares issued in 1972 by I.C.D. Ltd. to its shareholder, Lutovi Investments Pty. Ltd., the taxpayer, were redeemable shares. If they were not, their issue would involve the taxpayer in no assessable income since they were paid up by recourse to an assets revaluation reserve and will fall within the exemption in s. 44 (2) (b) (iii). The Commissioner included $12,693, being the value of those bonus shares, in the taxpayer's assessable income. The taxpayer's appeal to the Supreme Court of New South Wales was successful [9] and was, by a majority, upheld on appeal to the Federal Court [10] . The Commissioner now appeals to this Court.

(1977) 14 A.L.R. 386; 7 A.T.R. 336; 77 A.T.C. 4130. 2. (1978) 20 A.L.R. 157; 8 A.T.R. 685; 78 A.T.R. 4285, 37 F.L.R. 209..

The fate of this appeal depends exclusively upon the terms of s. 44 (2D), which deems certain shares to be redeemable, and upon its application to the particular facts of this case. The relevant part of s. 44 (2D) is par. (b), which defines a redeemable share by reference to the circumstances in which it is issued. It will be deemed to be redeemable if issued in pursuance or as part of an agreement or arrangement, whether oral or in writing, having or including the purpose of enabling the company, by various specified dealings with it or other shares, to pay, transfer or apply to any person or on his behalf or at his direction any money or property other than shares in the company. Thus the badge of a redeemable share is that it is issued as a result of an arrangement having a particular purpose.

The judgment of Franki J. in the Federal Court [11] recounts in detail the circumstances in which the present shares came to be issued to the taxpayer. Such of those circumstances as are of particular relevance to the question here in issue may be stated, very much in summary form, as follows: -

On 6th December 1971 the Board of I.C.D. Ltd resolved that a recommendation of the Executive Director be accepted and that there be placed before the company in general meeting resolutions for the consolidation and reduction of capital and the issue of bonus shares, as recommended by him. The resolution concluded with these words: - "Terms of the reduction in capital/bonus issue would be such that for every five 10c shares currently held, a shareholder would receive: - (1) one fifty cent share (2) 49 cents in cash".

On 23rd December 1971 the Sydney Stock Exchange was informed of the proposal to consolidate each five ten-cent shares into one fifty-cent share, to redeem capital by returning forty-nine cents for each fifty-cent share held and then to make a bonus issue to bring the par value of each such share, thus reduced to one-cent, up to fifty cents again. It was stated that the bonus issue would not attract tax in the shareholders' hands.

By a letter of 6th January 1972 shareholders, including the taxpayer, were notified of the necessary Extraordinary General Meeting and of what it involved, including its tax consequence.

Later, as a result of a warning from a shareholder in I.C.D. Ltd. or his representative that there might be possibly adverse tax consequences, the proposed procedure was altered. Instead of all resolutions being passed at one general meeting those relating to the bonus issue were to be deferred to a later meeting.

On 2nd February 1972 the company in general meeting resolved upon consolidation of the ten-cent shares into fifty-cent shares and the reduction of issued capital and payment off of forty-nine cents on each such share but did not then and there proceed to the further business of the bonus issue referred to in the notice of meeting because, as shareholders were informed, of advice from the company's tax officers.

By a letter of 7th February 1972 I.C.D. Ltd. informed shareholders of the passing of these two resolutions and of a further general meeting, to increase capital and make the proposed bonus issue, to be held later.

On 21st February 1972 I.C.D. Ltd. informed the Sydney Stock Exchange that it had legal advice of adverse consequences to its shareholders were a general meeting to consider the proposed bonus issue to be held before 13th March 1972.

On 28th February the reduction of capital was confirmed by the Court and the next day shareholders were notified of this, of the impending cash distribution following reduction of capital (it was in fact paid soon after) and of a general meeting to be held to consider increasing capital and issuing bonus shares.

On 20th March at a general meeting capital was increased, an assets revaluation reserve fund was capitalized and applied in paying up in full the many millions of one-cent shares, twenty-four of which were to be distributed to shareholders for each one-cent share held, and the resultant issued capital, consisting of these one-cent shares, was to be consolidated into fifty-cent shares. The carrying into effect of this resolution marked the completion of the entire capital reconstruction.

It has at all stages of this litigation been an agreed fact that "as a matter of policy at the relative time the Sydney Stock Exchange would have required the one cent shares of a listed company occurring as a result of a reduction in capital to be consolidated into shares of a minimum par value of ten cents or possibly twenty cents. Failure to comply by such a company may have resulted in the invocation of the Exchange's power to delist the company".

(1978) 20 A.L.R., at pp. 168-172; 8 A.T.R., at pp. 697-701; 78 A.T.C., at pp. 4296-4299, 37 F.L.R., at pp. 220-228.

I have said that the badge of a share deemed to be redeemable under s. 44 (2D) is its issue as a result of an arrangement having a particular purpose. The description of such a share in s. 44 (2D) begins with its issue, links that issue to an agreement or arrangement and describes one purpose of the agreement or arrangement as being that of enabling the payment of money, by specified means, to shareholders. In the present case the first and last elements of the description are satisfied in the sense that I.C.D. Ltd. both made an issue of shares and also made payments to shareholders by one of the specified means, namely, on a reduction of capital.

The remaining, and critical, element is the "agreement or arrangement", which must not only be found to exist but, if s. 44 (2D) (b) is to be satisfied, must possess two features: the shares must have been issued "in pursuance of, or as part of" it and it must have had as one of its purposes that of enabling I.C.D. Ltd., by means of a reduction of capital, to make the payments to its shareholders. Only by first identifying with precision something which answers to the description of an "agreement or arrangement" can its character be examined so as to determine whether the bonus shares were issued pursuant to it and whether it also possessed the relevant purpose of enabling.

This task of identification has been complicated in the present case because it is apparent that s. 44 (2D) (b) has in this case been sought to be applied to a situation different from that which its draftsman seems to have regarded as its main target. The sub-section appears, primarily at least, to strike at the case of the issue of bonus shares made so that, by some subsequent dealing with them, as for instance, by a reduction of capital affecting them, they may in the result be converted into cash payments made to the allottees or others. In the present case nothing like this occurred. The bonus shares did not in this case form the vehicle for cash payments to shareholders. The payments they received resulted instead from distributions upon a reduction of existing capital; the issue of bonus shares was a subsequent event and was not sought to be converted into cash for anyone's benefit, instead the bonus shares remained as share capital in the shareholders' hands. The sub-section is clearly capable of a somewhat wider application than that which I have suggested as its primary function since it is not confined to the conversion of bonus shares into cash payments but extends also to dealings in "any other shares in the company". However, when, as here, it is sought to be applied to such other circumstances its terms are found to be neither easy of application nor certain in their outcome. The variety of views to which the undisputed facts of this case have already given rise, in particular the marked diversity concerning the existence and identity of any relevant "arrangement", attest to this.

The primary judge did not much concern himself with the existence of any arrangement. He allowed the taxpayer's appeal upon the ground, as I understand it, that the bonus issue of shares played no part in enabling I.C.D. Ltd. to make the payments to its shareholders. On appeal to the Federal Court Bowen C.J., in his dissenting judgment, discerned an "arrangement" under which the bonus shares were issued, which was to be inferred from the resolutions passed by the directors. There might also, he thought, be an arrangement constituted by dealings between the directors and the shareholders but he found it unnecessary to decide this point. Since the issue and consolidation of the bonus shares formed part of the arrangement found by him and at the same time assisted I.C.D. Ltd. to retain stock exchange listing, he also found that the arrangement "enabled" the company to make the payments to its shareholders by permitting it to avoid difficulties of a practical or commercial nature which would otherwise have resulted from the reduction of capital.

Franki J. found a quite different arrangement. There may, he thought, have been more than one arrangement but that upon which he relied was constituted by the notices calling the general meetings and the resolutions passed at those meetings. These constituted an arrangement between directors and shareholders. However his Honour dismissed the Commissioner's appeal on the ground that that arrangement lacked the relevant purpose since it did not add in any way to the company's power, capacity or ability to pay moneys to its shareholders by way of a reduction of capital.

Deane J. based his dismissal of the Commissioner's appeal both upon the absence of any arrangement and upon the absence of any purpose of enabling. As to the former he concluded that neither the directors' resolutions nor the consensus underlying them were capable of constituting an arrangement, they were merely acts performed as part of their functions as directors and in accordance with their fiduciary duty. Nor were the circumstances of the general meetings, the casting of votes or the passing of resolutions, capable of constituting an arrangement and there was no other evidence from which its existence could be inferred.

In seeking an "arrangement" in the present case, and there can here be no question of an "agreement", the meaning that has been given to that term in other sections of the Act, in quite different contexts, is no sure guide. It may be accepted that it contemplates "something less than a binding contract or agreement, something in the nature of an understanding between two or more persons" (Newton v. Commissioner of Taxation [12] ). But it does not follow that, as in s. 260, it comprehends "not only the initial plan, but also all the transactions by which it is carried into effect" [13] . There were, as their Lordships were careful to point out, special reasons why in s. 260 "arrangement" must have that extended meaning, reasons which have no application to s. 44 (2D) (b).

(1958) 98 C.L.R., at pp. 7-8; [1958] A.C., at p. 465. 2. [1958] A.C., at p. 465; (1958) 98 C.L.R., at p. 8.

An "arrangement" for the purposes of s. 44 (2D) (b) can be seen, from its wording, to be something capable of being "entered into" on a particular date and also something capable of possessing a purpose. An understanding between two or more persons satisfies both these requirements but a series of acts, performed in sequence by the one group of actors, will not. The former answers the description of "arrangement" in s. 44 (2D) (b) but not the latter, although the latter may provide evidence of a pre-existing "arrangement".

It is a feature of the present case that there is no direct evidence of any informal agreement or understanding arrived at between any persons. There is, of course, evidence that the Executive Director of I.C.D. Ltd. made recommendations, that these came before a Board meeting and were adopted by the Board and that in consequence the subsequent events, which I have recounted, took place. But it is only if, from these happenings, the entry into some informal agreement or understanding can be inferred that there exists any basis for finding that there was here an "arrangement".

In my view directors of a company, or, for that matter, the members of any other executive group, meeting together to consider and decide upon future action or conduct, do not necessarily, or even usually, enter into informal agreements or understandings the one with the others when, with or without debate, they resolve upon action to be taken. What they are about is not the negotiation of and entry into some understanding as between each other. The function of each one of them is the wholly different one of expressing a view and recording it so that in the outcome effect may be given to the majority viewpoint. Of course, to the extent that individual views accord with one another agreement exists, in the sense that discord is absent. But a concurrence of viewpoint of that sort is not what s. 44 (2D) (b) speaks of. Such a concurrence involves no pact between parties, it is not "entered into" and it possesses no "purpose" of its own: it is no more than a coincidence of opinions and possesses no element, however attenuated, of promise or obligation such as I regard the sub-section as contemplating. A contrary view appears to me to confuse agreement, usually involving the active exchange of a promise or promises between parties, with a mere state of likemindedness, those sharing that state having between them nothing more than a like view on a particular question.

In the present case the evidence discloses nothing more, on the part of the directors of I.C.D. Ltd. than just such likemindedness and no reason for inferring that there existed anything more than that. If no agreement or arrangement as between the directors of I.C.D. Ltd. can properly be inferred, still less can it be said that on the evidence in this case, any arrangement is shown to have existed as between shareholders inter se, between them and the directors or between them and the company. It follows that in the absence of evidence of any "agreement or arrangement" s. 44 (2D) (b) can have no operation. It will not deem the bonus shares to be redeemable shares and s. 44 (2) (b) (iii) will have its ordinary operation of excluding from shareholders' assessable income the paid up value of those bonus shares.

In the absence of any agreement or arrangement no occasion arises to consider whether, had there been one, it might have involved the "purpose of enabling" to which s. 44 (2D) (b) refers. Since preparing these reasons for judgment I have had the opportunity of reading those prepared by Aickin J. and am in agreement both with his Honour's general observations as to the policy and reach of s. 44 (2D) and with what he has said concerning the words "purpose of enabling" when sought to be applied to the circumstances of this case.

I agree with Gibbs and Mason JJ. The appeal should be allowed.

This is an appeal by special leave from a decision of the Full Court of the Federal Court of Australia [14] (save as to the order for costs therein) which upheld a decision of Woodward J. in the Supreme Court of New South Wales [15] . Woodward J. upheld an appeal by Lutovi Investments Pty. Ltd. ("the taxpayer") against an assessment for income tax in respect of the year of income ended 30th June 1972, which included in the assessable income of the taxpayer a sum of $25,915.00 described as "amounts involved in transactions relating to bonus shares". That amount was made up of two items, namely, $13,222.25 described as "bonus shares capitalized out of premium share reserve," and $12,693.36 described as "bonus shares capitalized out of assets revaluation reserve". The taxpayer objected to the inclusion of each of these items in its assessable income and to the assessment made on that basis. The objection was disallowed by the Commissioner and the taxpayer on 8th April 1974 requested the Commissioner to treat the objection as an appeal and to forward it to the Supreme Court of New South Wales. On 15th October 1974 the taxpayer gave to the Commissioner a notice under s. 189 of the Income Tax Assessment Act 1936-1972 ("the Act") which recited that the Commissioner had not within sixty days after receiving the previous request forwarded the objection to the Supreme Court of New South Wales, and required him to forward the objection to that Court. On 11th March 1975 the Commissioner forwarded the objection to the Supreme Court. On 11th March 1977 the Commissioner informed the taxpayer by letter that he sought to uphold the assessment only in relation to the bonus shares which were paid up by the application of the assets revaluation reserve and it was that point which was argued in the Supreme Court when the matter came on for hearing before Woodward J. on 14th March 1977. No amended assessment was issued to give effect to the abandonment of the assessment in respect of the bonus shares paid up out of the share premium reserve. Woodward J. held that the assessment was excessive and that the taxable income should have been reduced by the sum of $25,916.00. The Commissioner's appeal to the Federal Court and to this Court was confined to bonus shares paid up out of the assets revaluation reserve.

(1978) 20 A.L.R. 157; 8 A.T.R. 689; 78 A.T.C. 4285, 37 F.L.R. 209. 2. (1977) 14 A.L.R. 386; 7 A.T.R. 336; 77 A.T.C. 4130.

The question which arose was whether bonus shares issued to the taxpayer by a company called I.C.D. Ltd. were deemed to be "redeemable shares" within the meaning of s. 44 (2D) (b) of the Act and thus excluded from the operation of s. 44 (2) (b) (iii). By s. 6 the term dividend is defined (so far as relevant) as follows:

(a) any distribution made by a company to any of its shareholders, whether in money or other property;

(b) any amount credited by a company to any of its shareholders as shareholders; and

(c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits,

and s. 44 (2) provides that: Subject to the succeeding provisions of this section, the assessable income of a shareholder shall not include dividends -

(b) paid wholly and exclusively out of one or more of the following: -

(iii) profits arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit or from the issue at a premium of any instrument that is a convertible note if the dividends paid from such profits are satisfied by the issue of shares (other than redeemable shares) of the company declaring the dividend.

Sub-section (2D) then provides as follows: For the purposes of sub-paragraph (iii) of paragraph (b) of sub-section (2.) of this section, a share issued by a company shall be deemed to be a redeemable share if -

(a) the share is, or at the option of the company is to be, liable to be redeemed; or

(b) the share was issued in pursuance of, or as part of, an agreement or arrangement, whether oral or in writing and whether entered into before or after the commencement of this subsection, that had the purpose, or purposes that included the purpose, of enabling the company, by means of the redemption, purchase or cancellation, or of a reduction in the paid-up value, of that share or of any other share in the company, to pay, transfer or apply to, on behalf of or at the direction of the person to whom the share was issued or any other person, whether upon the exercise of an option by the company or by any other person or not, any money or other property other than shares in the company.

The expression "redeemable share" is not defined by the Act, but it is clear that it is used in the sense in which it is used in s. 61 of the Companies Act, 1961 N.S.W. and in corresponding Companies Acts adopted in that year by all States.

The relevant facts concerning the issue of shares which the Commissioner treated as being deemed to be of redeemable shares may be stated as follows.

The taxpayer held shares in I.C.D. Ltd. which was a company listed on the Sydney Stock Exchange. Prior to March 1972 it had a balance in its share premium reserve account of some $870,000.00. At some earlier time it had acquired shares in two companies which became subsidiary companies and on 30th August 1971 it revalued the shares in those companies and credited the amounts of such revaluation to an assets revaluation reserve in its accounts.

On 6th December 1971 at a meeting of the Board of Directors of I.C.D. Ltd. the directors resolved that a recommendation by the executive director "on the reduction of capital and repayment to shareholders" be accepted. The resolution was as follows:

Terms of the reduction in capital/bonus issue would be such that for every five 10c shares currently held, a shareholder would receive: -

it was resolved that the Executive Director be requested to prepare a detailed report on the reconstruction proposals.

That resolution is expressed in somewhat general terms and in a non-technical manner. It appears that in the annual report of I.C.D. Ltd. a somewhat similar general statement was made and on 23rd December 1971 a letter was sent by the secretary of the company to the Sydney Stock Exchange in the following terms: As announced in our Annual report to Shareholders earlier this year, the company is planning a distribution of cash to shareholders and a subsequent reconstruction of the Group. For this purpose an Extraordinary General Meeting is to be called and notices to shareholders will be forwarded early in the new year to consider and if thought fit, to approve resolutions.

To consolidate each five ten cent shares into one fifty cent share.

To reduce the capital of the company by returning forty-nine cents in cash to the shareholders for each fifty cent share held. The approval of the Supreme Court will be required for such a reduction of capital.

Upon the completion of the matters referred to in numbers 1 and 2, to make a bonus issue to increase the par value of the then one cent shares to fifty cents.

Thus for every five ten cent ICD shares currently held, a Shareholder will receive forty-nine cents in cash and after the bonus issue will have one fifty cent share in the company.

As the bonus issue will be made partly out of share premium reserve account and partly out of asset revaluation reserve account, it will not be subject to tax in the hands of shareholders.

Your board is still considering further action in respect of the proposed reconstruction and shareholders will be informed of this in due course.

On 6th January 1972 the Chairman of I.C.D. Ltd. sent a letter to each shareholder enclosing a formal notice of an extraordinary general meeting of that company to be held on 2nd February 1972. The letter indicated that the business was to consider and, if thought fit, to approve resolutions in the same terms as in the letter to the Stock Exchange and repeated the two paragraphs which follow the numbered resolutions. The letter also stated that a "further explanatory circular will be issued following the holding of the meeting". The formal notice set out the text of the proposed resolutions which were expressed in the customary formal language appropriate to their purpose.

At some stage after the letter of 6th January 1972 and the notice of the meeting to be held on 2nd February 1972 had been sent to shareholders, a shareholder or his adviser telephoned the chairman of directors of I.C.D. Ltd. and said that he thought there was some risk from the taxation point of view if the resolutions for reduction of capital and for the bonus issue were both passed at the same meeting. The chairman said in evidence that although he did not agree he was prepared to hold separate meetings. The minutes of the general meeting of I.C.D. Ltd. held on 2nd February 1972 record that resolutions were passed to re-convert stock units of ten cents each into shares of the same value, and to consolidate the existing ten-cent shares into fifty-cent shares and to reduce the capital of the company by paying off forty-nine cents of the capital paid up on each of the fifty-cent issued shares. The Minutes further record that, after those resolutions were passed, the chairman "advised the meeting that a further Extraordinary General Meeting would be called once Court Approval for the capital reduction was obtained."

On 7th February 1972 letters were sent from the chairman to each shareholder which stated that the resolutions dealing with the reduction of capital had been passed at the extraordinary general meeting on 2nd February 1972 and set out the resolutions in full. The letters added:

The effect of resolutions 1 and 2 is that from 5.00 p.m. on 11th February, 1972 each five 10c shares held by you will become one share of 50 cents, and all Stock Exchange dealings will be in 50 cent shares as from Monday, 14th February, 1972.

Once the approval of the Supreme Court for the reduction of capital is obtained you will be informed of the date when shareholders will be paid the amount due to them. Notices of further Extraordinary General Meeting to increase capital and authorize a bonus issue will be forwarded in due course.

On 21st February 1972 the executive director wrote to the chairman of the Sydney Stock Exchange as follows:

I refer to the capital reduction and subsequent bonus issue which our Company is currently undertaking. The Register of Members of the Company will close at 5.00 p.m. on Friday, 10th March 1972 for the purpose of establishing entitlement to the capital repayment. We have been advised by senior counsel that it could be severely detrimental to the interests of shareholders to hold the meeting to consider the subsequent bonus issue before Monday, 13th March 1972.

In these circumstances we hereby apply for permission to suspend the listing of our shares for the day Monday, 13th March to allow the meeting to be held. Your early attention to this matter is requested.

The chairman of directors said in evidence that he was not aware of the sending of that letter and also was not aware of any advice to that effect having been received, and that the only advice received by the company of which he was aware was precisely to the contrary.

It appears that the dates in the letter of 21st February 1972 were subsequently changed because of some delay in obtaining the confirmation of the reduction of capital by the Supreme Court of New South Wales. By an order dated 28th February 1972 that Court, pursuant to s. 64 of the Companies Act, duly confirmed the reduction of capital, which would under that Act take effect upon registration by the Commissioner of Corporate Affairs of an office copy of the order.

On 29th February 1972 the Chairman of Directors of the company sent a letter to the shareholders in the following terms:

We have now obtained Supreme Court approval for the reduction in capital of the Company, and the Register of Members will close on Friday, 17th March, 1972 at 5.00 p.m. to establish those entitled to the cash repayment of 49 cents per 50c share. Cheques will be forwarded immediately after closure of the Register.

Attached to this advice is the formal notice of a further Extraordinary General Meeting to consider and if thought fit, to approve resolutions authorizing the increase in capital of the company and the subsequent bonus issue to make the par value of the shares 50 cents.

We have arranged with the Sydney Stock Exchange for dealings in I.C.D. Limited shares to be suspended on Monday 20th March, 1972, the day of the meeting. No bonus scrip will be issued, but new certificates for 50 cent shares will be issued as and when dealings occur. Trading in reconstructed 50 cent shares will commence on Tuesday, 21st March, 1972.

On 17th March 1972 cheques were sent by I.C.D. Ltd. to shareholders in repayment of the amount by which the capital had been reduced.

Pursuant to the notice referred to in the letter of 29th February 1972 a general meeting of I.C.D. Ltd. was held on 20th March 1972 at which a resolution was passed pursuant to s. 60 of the Companies Act to increase the nominal capital of the company to a figure which was the same as that before the reduction. In addition a resolution to capitalize part of the share premium reserve and part of the assets revaluation reserve was passed. The resolution provided that the sum of $816,000.00 from the assets revaluation reserve be capitalized and applied in paying up at par in full 81.6 million one-cent shares, such shares to be distributed to the shareholders as fully paid ordinary shares of one-cent each.

There was then passed a resolution dealing with the consolidation of the one-cent shares to be allotted pursuant to the capitalization both of the share premium account and of the assets revaluation reserve into fifty-cent shares.

At some time which does not expressly appear the directors of I.C.D. Ltd. duly allotted bonus shares to the taxpayer company and all other shareholders.

The end result was that, subject to intervening transfers, each shareholder finished up with the same number of fully paid fifty-cent shares as he had held in the previous December.

At the hearing before Woodward J. it was agreed between the parties that "as a matter of policy, at the relevant time, the Sydney Stock Exchange would have required the one cent shares of a listed company occurring as a result of a reduction of capital to be consolidated into shares of a minimum par value of ten cents or possibly twenty cents." The Chairman of Directors was asked some questions in cross-examination about this matter as follows:

Mr. Burchett: Q. It was a listed company on the Stock Exchange, I.C.D.? A. Yes.

Q. Was there some policy in relation to listed companies on the Stock Exchange which would have had any bearing on a reduction of the shares of this company to one cent? A. Not to my knowledge.

Q. Was there any limit on the amount of share capital - lower limit - for the purpose of Stock Exchange listing? A. Yes, to obtain listing one needs to have a certain amount of paid-up capital and one needs to have a reasonable spread. There is a series of rules.

Q. In the case of this company having regard to its capital position at this stage, if you had merely left the shares at one cent each you would have had problems? A. Not to my knowledge. You may be right, but I do not think so. We were listed. I think those were new listing rules.

Q. I suggest to you the precise rules are new listing rules but I suggest to you also if you simply left the situation in that position you would be requested to do something about it? A. That could well happen, but I don't know.

I have set out above the terms of s. 44 (2D) (b) and it is upon that sub-section that the question depends. Prior to the hearing the Commissioner was asked to provide particulars of the basis of the assessment, and on 14th March 1977 supplied particulars as follows:

The Commissioner will be alleging an arrangement between:

The Company acted by the Directors and the officers who sent out notices relating to the meetings to reduce capital and make a bonus issue. These details answer your request No. 2.

As regards your requests numbered 1 and 3, the Commissioner relies on the letters and notices relating to the above meetings and the minutes of meetings of Directors and of the Company relating to the reduction of capital and bonus issue as indicating an arrangement between the persons specified in the previous paragraph to enable the Company by reduction of capital to pay money to shareholders while restoring the face value of the shares by means of the issue of bonus shares, thus returning the shareholders 49c per share and leaving them with shares of the same value. The "means" was the reduction in the paid up value of shares achieved by the reduction of capital resolution and its confirmation by the Court and the "money or other property than (sic) shares in the Company" was the money paid pursuant to the reduction of capital. It will be alleged that the notices of meeting and accompanying letter and the resolution of Directors in relation to each of the meetings of the Company in respect of reduction of capital and bonus share issues intentionally aroused in shareholders and Directors an expectation that the bonus issue would follow the reduction of capital and that this intention is to be imputed to the Company, the Directors and the shareholders who voted for the reduction of capital.

Woodward J. took the view that, as the reduction of capital was effected before the issue of the bonus shares, it must have been effected in relation to the shares which existed at the time of the reduction and said [16] : It cannot be said that the bonus issue enabled the company by means of a reduction in the paid up value of the earlier share to pay money to the shareholder. That money was paid before and because of a situation that existed before the issue of the bonus share. Therefore, the issue of that bonus share did not enable the company to achieve an object of reducing the paid up value of the share already in existence. Nor could it be said to enable the company to reduce the paid up value of any other share in the company because at the time of the reduction there was no other paid up share and as the payment had been made before the issue of the bonus share it could not be said that what transpired enabled the company to make any payment of money. The company's ability to repay money arose from the facts that existed at the time of the reduction of capital which was before any subsequent issue of shares. From that decision the Commissioner appealed to the Full Court of the Federal Court of Australia, which by majority, Franki and Deane JJ., Bowen C.J. dissenting, dismissed the Commissioner's appeal. This Court granted to the Commissioner special leave to appeal from that decision, upon terms as to costs. 1. (1977) 14 A.L.R., at pp. 395-396; 7 A.T.R., at pp. 343-344; 77 A.T.C., at p. 4136.

Sub-section (2D) (b) provides in effect that a share issued by a company shall be deemed to be a "redeemable share" if certain conditions are satisfied. Those conditions may be expressed as follows: that the share was issued "in pursuance of, or as part of, an agreement or arrangement": (a) whether oral or in writing and whether entered into before or after the commencement of this sub-section; (b) that had the purpose or purposes that included the purpose; (c) of enabling the company, by means of a reduction in the paid-up value of that share or of any other share in the company; (d) to pay, transfer or apply to, on behalf of or at the direction of the person to whom the share was issued or any other person; (e) any money or other property other than shares in the company.

The first question is therefore whether there was any "agreement or arrangement" entered into. It was argued on behalf of the Commissioner that there was either an agreement or arrangement entered into between the directors which had the relevant purpose, or one between the directors and the shareholders, or one between the shareholders or an arrangement between the company and its shareholders. It was not made explicit whether the words "the shareholders" are intended to bear their natural meaning, i.e. all the shareholders. The evidence showed that on 6th December 1971 the executive director of I.C.D. Ltd. produced to the board a proposal for a reduction of capital and an issue of bonus shares, and further shows that the board approved that proposal. There is no evidence and no suggestion that the proposal was the subject of any prior discussion between the executive director and any or all of the directors or any other person. The evidence does not reveal any discussion between the directors at the meeting or before it. The chairman of directors of I.C.D. Ltd. gave evidence in the proceedings, by way of an affidavit and oral evidence in chief, on which he was cross-examined by counsel for the Commissioner. He gave no evidence as to any prior discussion or agreement as to the proposal and was not asked any questions at all with respect to that topic, save that he was asked in chief whether there had been any discussion between members of the board as to whether the proposed reduction of capital and the bonus issue were dependent upon one another and answered that there was not, and was also asked why it had been proposed to deal with both matters at one meeting and replied that it was a matter of convenience because it meant only one meeting and less cost.

One may no doubt infer that each of the directors present had read the proposal either before or at the meeting and that when the chairman put the resolution to the board it was approved by each director. I can see nothing in that process which could be described as an agreement entered into. It stands simply as a proposal put forward by the executive director and approved by a resolution of the board. A resolution approved by each member of the board of a company does not, in my opinion, constitute an agreement entered into by anyone, though it may no doubt be said that each member approved of (and in that sense "agreed to") each proposal and was in favour of its implementation. I do not think any significance is to be attached in this context to the fact that a director cannot in advance validly bind himself to vote in favour of a particular proposal. The significant fact is that there was no evidence whatever that any director did make any agreement or was invited to do so and indeed the clear inference from the chairman's evidence is that there was no such agreement. The trial judge did not find that there was any such agreement. It is necessary then to consider whether there was any agreement entered into between the directors and the shareholders. By direction of the board the secretary summoned a general meeting of the company to consider resolutions in accordance with the recommendation of the Executive Director. These provided for the reduction of capital, and the subsequent issue of bonus shares, subsequent in that according to the notice of meeting the reduction of capital was to be voted upon first and that the resolution with respect to the bonus issue was expressed to take effect after the confirmation by the Supreme Court of New South Wales of the reduction of capital.

The general meeting was held and the resolutions relating to the reduction of capital were approved by those present, the other resolutions not being put to the meeting. There is no evidence and no finding that there was any prior discussion or agreement between the directors and shareholders about the matter, save for the conversation between the chairman and a shareholder or his adviser referred to above. There is nothing from which the entering into of any agreement could be inferred, although it may properly be said that all who voted in favour of the resolutions approved of them and in that sense were "in agreement" with them. The approval of a resolution at the meeting did not of itself constitute an agreement entered into between any two or more persons. It constituted a decision by the company in general meeting to do something the doing of which is committed by the Companies Act to the general meeting alone: see s. 64.

Similarly there is no evidence and no finding of any agreement between shareholders, and no basis for any such finding. Again approval by the shareholders present does not constitute an agreement entered into between such shareholders and a fortiori does not constitute an agreement entered into by or with the absent shareholders.

The notion that what is done at meetings of directors or general meetings of companies can constitute an agreement entered into by those present or some of them, or evidence thereof, seems to me to be based upon a misconception as to the nature of a company and its governing bodies.

It is necessary to bear in mind that a resolution of a board of directors is an act done for a company by those who are, amongst other things, its statutory agents acting as one of its governing bodies performing functions allocated to it by the Act, instruments under the Act and the original corporators. A resolution adopted by a duly convened general meeting is an act of the company itself, not of the shareholders present. That is not to say that individual directors or shareholders present at such meetings may not in fact have earlier entered into, or then enter into, agreements amongst themselves, and perhaps also as agents for others, but that has nothing to do with this case.

I am satisfied that there was in the present case no agreement within the meaning of the section.

Different considerations apply to the question whether there was an arrangement entered into. The word "arrangement" has several meanings and each reflects a broad and imprecise conception. At least one may be put aside immediately. The word may in some circumstances mean no more than a plan drawn up by and to be implemented by one person alone. In the present context it cannot have that meaning, because of the presence of the words "entered into". The most appropriate meaning for the present context would seem to be an agreed "disposition of measures for a particular purpose", or an "arranged condition or order of things". If, as the context requires, the arrangement must be "entered into" it is hard to see how it can be distinguished from an agreement, and, in the present section, it seems likely that it does no more than widen the content of the word "agreement" so as to include dealings which are less precise than the word agreement alone might suggest, and perhaps to emphasize that it is not to be confined to binding or enforceable agreements.

The alleged "arrangement" between the company and its shareholders is presumably intended to refer to an arrangement by the company as a corporate entity and all its shareholders. It is by no means easy to see by what organ or agent the company could in the present circumstances have entered into any such arrangement, quite apart from the fact that there is no material to show, or to support an inference that any such arrangement was ever entered into. I do not see how, in the present circumstances, such an alleged arrangement can differ from an arrangement between the directors and the shareholders, a possibility with which I have already dealt.

I find great difficulty in seeing how there can be said to have been an arrangement entered into between any of the suggested persons or groups, and this is for the same reasons as I have endeavoured to indicate in dealing with the alleged agreement. However I am prepared for present purposes to assume, but not to decide, that there was an arrangement within the meaning of the word as here used.

It was argued for the taxpayer that the words "whether oral or in writing" limited the meaning of the words "agreement or arrangement" so as to confine them to that which was exclusively oral or exclusively in writing, or perhaps including that which was partly one and partly the other. For the Commissioner it was argued that they were words of extension, not limitation. In my opinion, they are neither. In this context they appear to me to be otiose. The ordinary meaning of the word "agreement" is not confined to that which is implied and requires nothing to be added so as to make it applicable to agreements which are exclusively or partly oral or exclusively or partly in writing. So also in the case of the word "arrangement" whatever its precise content. In truth the words "whether oral or in writing" are more apt to limit than to extend, for the ordinary meaning of agreement involves no limitation on how it is made. If one had to choose between attributing an extending or a limiting operation I would be forced to choose a limiting operation. I do not, however, consider that in this context those words either limit or extend the meaning or operation of the preceding words. If the words were "an oral or written agreement or arrangement" they would in the absence of some additional context have a limiting operation, but, when used in this context and in the phrase "whether oral or in writing", I do not regard them as more than a pointless reminder that there is more than one way in which an agreement may be entered into. If the words are to be dignified as having been inserted for more abundant caution they fail dismally in their allotted task.

In my opinion the word "enabling" means, as its etymology suggests, making (a person) able to do something, or giving power (to some person) to do something. There are a number of shades of this meaning which appear in the Oxford English Dictionary and the Shorter Oxford English Dictionary (1977) in respect of the verb "to enable", including "to make possible", which is wider than merely to give power. The Oxford English Dictionary gives as the sixth meaning "to make possible or easy" and notes that it is obsolete; the Supplement however, deletes that note and gives some examples of its use in the sense of "to make possible", but not in the sense of "to make easy". No other available dictionary gives the meaning "to make easy". In my opinion it is not in accordance with ordinary usage to regard the verb "to enable" as meaning "to make easy" or, for those who prefer a latin root, as meaning "to facilitate".

If one gives to "enabling" the meanings to empower or to make possible there is, in my opinion, no way in which it can be said that this "arrangement" had a purpose of "enabling" the company by a reduction of capital to pay money. It had the power to do that by special resolution by reason of s. 64 of the Companies Act and the provisions of its articles of association subject to confirmation by the court. To obtain that confirmation it would have to satisfy the court that (inter alia) there was "paid-up share capital in excess of the needs of the company", not that there were surplus funds available as was suggested in the course of argument. The alleged arrangement did not supply any power, nor did it make possible compliance with any requirements of the Companies Act or of the court. The reduction involved the repayment of the surplus paid-up capital, but the arrangement did not make possible such payment, for the funds were already available.

I am satisfied therefore that, if the word "enabling" is given its ordinary meaning, the circumstances of the present case do not fall within s. 44 (2D) (b) and therefore the appeal should be dismissed.

Even if it were correct, contrary to my view, that the word "enabling" may mean "making easy" or "facilitating", that is not sufficient to dispose of this case. What the section speaks of is shares issued in pursuance of an arrangement that had the purpose of enabling the company, by means of a reduction in the paid-up value of that share, or any other share, to pay money to the person to whom the share was issued or any other person. That is expressed by the selection of such words in sub-s. (2D) (b) as are appropriate to the facts of the present case. We know that the company did, by means of a reduction in the paid-up value of "any other share" (i.e. shares held at the effective date of the reduction of capital), pay money to "any other person" (i.e. the persons who then held the shares, the paid-up value of which was reduced). Those persons would not necessarily be identical with those who received the bonus shares and at that time there were no holders of bonus shares. What the provision requires is that the bonus shares should be issued pursuant to an agreement or arrangement "enabling" that payment to be made. It was argued for the Commissioner that the making of that payment was made easier by the arrangement for the bonus issue because the bonus issue made it possible to dispense with a further consolidation of the issued shares if the Stock Exchange in accordance with its policy should require it.

This involves, in my opinion, a number of misconceptions, quite apart from the meaning of the word "enabling". However, assuming that the word "enabling" may mean "facilitating" or "making easy", it is plain that the making of the payment was not made easy or facilitated by the arrangement. It is clear that this "policy" of the Stock Exchange was not present to the minds of those concerned. Accordingly, the avoidance of that possible problem was not a purpose of any individual person involved.

It was said that in this section the word "purpose" meant or included "effect" and reliance was placed upon the passage from the judgment of Williams J. in Federal Commissioner of Taxation v. Newton [17] :

The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. These terms may be oral or written or may have to be inferred from the circumstances. That passage is preceded by the statement that "these words (i.e. purpose or effect) are in the alternative but they do not appear to me to have any real difference in meaning". The former passage was quoted with approval by the Privy Council in the same case [18] , but the latter sentence was not included in the quotation or referred to. Indeed their Lordships did not treat the words "purpose" and "effect" as synonymous. They said on the same page "the word "purpose" means, not motive, but the effect which it is sought to achieve - the end in view. The word "effect" means the end accomplished or achieved." Whatever the word "purpose" may mean in the context of s. 260 in the phrase "the purpose or effect", in the present context, the word "purpose" appears to me to mean the end in view, i.e. the end which those who were parties to the arrangement had in view. In that sense it requires consideration, not of the motive, but of the object sought to be achieved by those who entered into the arrangement. If the legislature had intended to refer only to the objective result it would have used the familiar word "effect" which has this precise meaning. 1. (1957) 96 C.L.R., at p. 630. 2. (1958) 98 C.L.R., at p. 8; [1958] A.C., at p. 465.

In the present case this would be enough to require that the appeal should be dismissed. However, I think that in the circumstances it is desirable that I should deal with the position upon the footing, which I regard as erroneous, that the word "purpose" means or includes "effect".

It may be that the arrangement which included the bonus issue had the effect of making easier the future activities of I.C.D. Ltd. in so far as it would have avoided the possible difficulty with the Stock Exchange. I am, however, unable to accept the proposition that the making of the payment to the shareholders was made easier. This provision is not concerned with the future operations or status of a company; what the "arrangement" must have as a purpose is enabling the company to pay, or, on the assumed meaning of "enabling", making it easier for the company by a reduction of capital to pay money to its shareholders. In my opinion it is not possible to say that either the reduction of capital or the making of the payment was made easy or facilitated by the bonus issue.

The company was empowered by the Companies Act and its articles of association to make a reduction of its capital by a special resolution of a general meeting of the company and this it did. The confirmation of that resolution by the court required that it should demonstrate to the court that the proposed reduction fell within the terms of s. 64, i.e. that the paid-up capital of the company was in excess of its needs and that the reduction did not prejudice creditors, and that the company was in a position to make the payment which the reduction required. These were all pre-existing facts not brought into being by any arrangement. The obtaining of the Supreme Court's confirmation was neither enabled nor facilitated by any arrangement.

In those circumstances it does not appear to me to be possible to say, whatever meaning is given to the word "purpose" and to the word "enabling", that what was done fell within the terms of this provision.

There was some argument directed to the possible circumstances in which the provision might apply, but I do not think that that throws any light upon whether what was done in the present case falls within its scope. It is possible to postulate a variety of sets of circumstances in which an agreement or arrangement involving an issue of bonus shares might enable the company to make a payment by way of reduction of capital. The first is one which would involve or include a reduction of capital on the bonus shares themselves. It was said, however, that the words "any other share" could not be satisfied except by an arrangement such as that said to exist in the present case. I cannot agree with that argument. The words "or any other share" are presumably inserted, along with all the other alternative formulations which are included in the paragraph, in an endeavour to widen its application so as to embrace all cases falling within the object or policy indicated by the words and their context. For example, bonus shares might be subdivided into shares of a smaller nominal value and a reduction of capital made by return of part or all of the paid-up capital on one half of the subdivided shares. Such a reduction would not be a reduction in the paid-up value of "that (bonus) share" and would not be within the words of the provision. One can well imagine that the policy of the section would fit that situation as aptly as it would fit the repayment of capital on the original bonus share.

It seems to me that the policy of the provision is clear enough if one considers the context provided by the provisions of the Act concerning dividends and reductions of capital. The Act shows that, with immaterial exceptions, the policy is to tax dividends paid in cash or kind, whether paid out of income or capital profits, and to permit distribution of capital profits, other than in the course of a winding up, only on the basis that such distributions are taxable as a dividend, unless the profit arises from the sale or revaluation of a capital asset and is distributed by way of the issue of bonus shares paid up out of the relevant capital account, i.e. the profit arising from sale or revaluation of capital assets. Such policy would be ineffective if a reduction of the capital paid-up on bonus shares by use of one or other of the relevant capital reserve accounts could be made in cash to the holders of those shares. The omission of bonus shares paid-up out of a share premium account from these provisions is entirely consistent with this policy. Equally it is entirely consistent with this policy that the provisions do not apply to a reduction of capital on shares which are not bonus shares paid-up out of the relevant accounts and which are not derived from such shares by subdivision or consolidation. The exclusion of redeemable shares properly so called from the exemption accorded to "bonus" shares paid-up from the relevant reserve accounts demonstrates that the objective is to prevent moneys in those reserve accounts from reaching the shareholders in cash without bearing tax, while the company is a going concern.

The payments by way of reduction of capital in the present case therefore fall outside both the words and the policy of these provisions.

At a glance

Court

Decision date

Before

Source

Judgment (158 paragraphs)

Parties

Cited By (1)