Davis Investments Pty Ltd v Commissioner of Stamp Duties

The vendor company here is of the type contemplated in these cases, the reasoning in which was applied by this Court to s. 66 (3A) in Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1] , more particularly by Dixon J., as he then was, where his Honour speaks of the shareholders' "proportionate "interest" in the assets, an interest consisting of a congeries of rights in personam " [7] . There a division of the assets in specie among the shareholders had taken place and his Honour observed as to this that "There is an equivalence not only from a logical but from a realistic point of view. The reduction in both the amount and value of the share affords an adequate consideration in money and in money's worth." [7]

1. (1948) 77 C.L.R. 143. 2. (1948) 77 C.L.R., at p. 154. 3. (1948) 77 C.L.R., at p. 154.

That reasoning appears to me to be applicable to the facts of this case. I see no material difference between the position of shareholders who on a reduction of capital receive assets in specie and that of shareholders who purchase assets from the company. It is true that in each case the shareholders obtain thereby not only the legal interest but also the equitable interest to the same extent as would a non-shareholder who purchased the assets of the company. But from both the logical and the realistic point of view it is essential that the value of the interest of the shareholders as such in the assets of the company just before the conveyance to them takes place should be taken into the calculation of the consideration moving from them on the conveyance which terminates that interest and substitutes the legal and equitable interest in the assets themselves.

This appeal relates to the manner in which ad valorem stamp duty is to be charged on an agreement made on 30th November 1951 between a company called D. Davis & Co. Pty. Ltd. (referred to in the agreement as the vendor) and the appellant (called in the agreement the purchaser). It was an agreement whereby it was agreed that the vendor should sell and the purchaser should purchase certain parcels of shares in other companies (these shares numbering 57 in all) together with certain chattels. The agreement provided for a purchase price in respect of each parcel of shares, the total price for the shares being £57, and for a separate purchase price of £1,283 for the chattels. It added that upon completion the vendor should execute and deliver transfers of the shares (scil. to the purchaser). In fact the shares were worth £54,382.

In so far as the agreement was for the sale of the chattels, it is chargeable with a duty of £1 only: see the proviso in the second schedule as to agreements made for or relating to the sale of any goods, wares, or merchandise. But as an agreement for the sale or conveyance of the shares it is chargeable by virtue of s. 41 (1) with the same ad valorem duty, to be paid by the appellant as the purchaser, as if it were a conveyance (i.e. a transfer: see s. 65) of the shares. For convenience it will be referred to in this judgment as if it were in fact a conveyance of the shares and of nothing else. The duty chargeable upon it, considered as such a conveyance, is governed by the provisions of s. 66. That section contains in sub-s. (1), a general provision for the charging of ad valorem duty on every conveyance in respect of the unencumbered value of the property conveyed. This is qualified by a provision in sub-s. (2), the effect of which is that in the case of a conveyance on sale the duty is to be on the amount or value of the consideration for the sale, unless that is less than the unencumbered value of the property. Then follow three sub-sections, sub-ss. (3), (3A) and (3B). These were introduced into the Act by the amending Act No. 13 of 1931 to take the place of an earlier sub-s. (3) which had made special provision for the case of a conveyance "made upon any consideration other than full consideration in money or money's worth". The three sub-sections enacted in 1931 cover respectively the three possible cases of a conveyance made without consideration, a conveyance made upon a "bona fide consideration" of less than the unencumbered value of the property conveyed, and a conveyance made upon a "bona fide consideration" of not less than the unencumbered value of the property conveyed. In each case the consideration referred to is limited to consideration in money or money's worth. The purpose of providing separately for the three classes of conveyance is that, while duty at conveyance rates is to be charged on so much of the value as is balanced by consideration, duty at what may be called gift duty rates is to be charged on any amount by which the value is not balanced by consideration.

The conveyance we have to consider is clearly not a conveyance without consideration in money or money's worth, for the appellant is bound under it to pay £57. Sub-section (3) therefore cannot apply. The commissioner's contention is that sub-s. (3A) applies because the £57 is the only bona fide consideration in money or money's worth upon which the conveyance is made, and that amount is less by £54,325 than the unencumbered value of the shares. The appellant, on the other hand, contends that although the consideration expressed is only £57 there is in truth a consideration passing which is equal to the unencumbered value of the shares, and that accordingly the duty payable is to be assessed in accordance with sub-s. (3B). If the commissioner is right the duty payable is £1,902 10s. 6d. If the appellant is right it is only £135 19s. 6d.

The appellant's case depends upon the fact that shortly before the agreement was executed, though on the same day, the appellant purchased from the persons who held them all the issued shares in the capital of the vendor company. They were 15,000 shares of £1 each, all fully paid. Being executed after this situation had come about, the instrument obviously cannot be considered as if it effectuated a transaction between strangers. The transaction to which it gives effect is in form a sale, and it may be conceded to be in substance a sale; but it is a sale at a nominal price, made between a company and its only shareholder as a means of liberating assets of the company to the shareholder. That is the plain fact of the matter, and comparisons with transactions which in truth are sales pure and simple are not helpful. If the instrument involves the passing to the shareholder of assets of the vendor company representing any portion of its paid-up capital, it is necessarily invalid and therefore not chargeable with duty as an agreement for the sale or conveyance of property at all. This is so because of the fundamental principle of company law that the whole of the subscribed capital of a company with limited liability, unless diminished by expenditure upon the company's objects (or, of course, by means sanctioned by statute) shall remain available for the discharge of its liabilities: Trevor v. Whitworth [1] ; In re Walters' Deed of Guarantee [2] . One aspect of this principle is that every transaction between a company (while it is a going concern) and any of its members, by means of which any of the money paid to the company in respect of the member's shares is returned to him, is prohibited, unless the court has sanctioned the transaction: Trevor v. Whitworth [3] . But there is nothing in the material before us to show that on 30th November 1951 the vendor company did not have assets possessing a value of at least £15,000 over and above those comprised in the agreement. The agreement is, therefore, so far as the Court knows, valid; but, proceeding, as we must, to consider the case on the footing that it is valid, the hypothesis must be kept always in view that immediately before the agreement was executed the vendor company had, wrapped up in its assets, distributable profits amounting to at least £54,325.

1. (1887) 12 App. Cas., at p. 415. 2. (1933) Ch. 321. 3. (1887) 12 App. Cas., at p. 423.

By its purchase of all the issued shares in the capital of the vendor company, the appellant became the owner of a bundle of rights against the vendor company. These were, of course, rights in personam only; the appellant acquired no proprietary right or interest in any of the shares in other companies which were later to be dealt with by the agreement. For this reason it is not open to the appellant to contend that the property comprised in the instrument is less than the entirety of those shares. The value with which the consideration must be compared is the unencumbered value of the shares: and it may be remarked that there is nothing in the Act to support a construction of the expression "unencumbered value" as denoting the value to the conveyee, in a case where that value differs from the value to purchasers generally.

But the acquisition of all the shares in the vendor company invested the appellant with power to bring into existence, certainly and without any significant delay, a right in its own favour to receive at least £54,325 out of the vendor company's assets. The hypothesis being that there was that amount available for distribution as profits, all that was necessary was the declaration of a dividend of £54,325 by the directors or by the general meeting - we have not the articles before us - and such a declaration the appellant could cause to be made at any time it wished. It is in this situation that the instrument takes effect. As from the moment of its execution (if it be considered as a conveyance), the appellant's right as the sole shareholder to take at least £54,325 out of vendor company's assets is gone. But the commissioner says that this is true in the sense only that the vendor company's assets are depleted by that amount, so that the appellant's right to take out as much as he likes of that company's distributable profits is, though intact, applicable to a reduced fund. This result, he contends, is merely consequential upon the operation of the instrument and forms no part of the consideration upon which the conveyance is made. The appellant, on the other hand, submits that it is part and parcel of the operation of the instrument that his right to take £54,325 out of the vendor company's assets generally is satisfied by his taking specific shares of that value; and that is enough, he says, to make the conveyance of the assets a conveyance upon a consideration equal to the value of the shares conveyed.

The choice between these contentions must depend upon the construction of the relevant provisions of s. 66. An initial question which suggests itself on a reading of sub-ss. (3A) and (3B), and one which obtrudes even more when the terms of these sub-sections are compared with the terms of sub-ss. (2) and (3), is whether the use of the expression "bona fide consideration" does not confine the application of the former provisions to cases where the instrument presented for stamping discloses a consideration genuinely regarded by the parties as a fair quid pro quo for the property conveyed. The question is important here because the instrument we are considering states as the consideration a sum which quite obviously the parties could not have considered anything like equivalent to the value of the shares sold. Sub-sections (2) and (3) both omit "bona fide". The contrast thus presented with sub-ss. (3A) and (3B) loses much of its suggestiveness, however, when one observes that in the second schedule, pars. (1) and (3) under the head "Conveyances of Any Property", which reflect and substantially repeat sub-ss. (3A) and (3B), both omit "bona fide". But, more than that, it is important to observe that sub-ss. (3A) and (3B) are speaking of conveyances and not of contracts. They are concerned with the consideration "upon" which conveyances are made, and not only consideration in the sense of that which contracting parties have arranged between themselves in the course of offer and acceptance. The language is therefore that of conveyancing rather than of contract, so that "consideration" has rather the meaning of "the money or value passing which moves the conveyance or transfer" than "the more precise meaning of the law of simple contracts": Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1] . This being recognized, it seems right to conclude that "bona fide" adds nothing to the subsections beyond emphasis upon the fact that what is to be compared with the unencumbered value of the property conveyed is the consideration which really passes, and not, if there be a distinction between them, the consideration appearing from the instrument. In other words it is the money or money's worth really moving the conveyance.

If anything is clear in this case it is that what moves the conveyance here is not £57. That is part of it, but there is much more than that. In Archibald Howie's Case [2] , a shareholder, having what Dixon J. called a "proportionate "interest" in the assets, an interest consisting of a congeries of rights in personam " [3] , took, under a reduction of capital properly carried out, an aliquot part of the assets. There being an equivalence between his rights in personam with respect to a proportion of all the assets and the severed part of the assets which he took in specie, the conveyance to him of the latter was held to be upon a consideration of not less than their unencumbered value. In the present case, having a right in personam with respect to all the assets, a right to get an amount of money thereout by appropriate steps wholly within his own unconditional power, the appellant takes specific assets of corresponding amount and by so doing exhausts the right. If it be said that the conveyance to him leaves the vendor company the poorer by £54,325, the answer is that that is true only if the appellant is regarded as not having had any claim upon the assets immediately before the agreement was entered into. It is at that point that, in my opinion, the argument for the commissioner fails. It insists, rightly, that the appellant had no proprietary interest in the assets, and no interest of any sort which it could assert as against creditors of the company. But it omits to recognise that in the situation which existed when the agreement came to be executed, namely that (on the necessary hypothesis of the case) there were no creditors whose debts exceeded in the aggregate the value of the assets which the agreement left untouched, the appellant did have a claim upon the assets, and a claim entitling him to as much as the value of the property which he now takes. In truth, to ask whether the vendor company is the poorer for having executed the instrument is to divert attention from the question to which sub-ss. (3A) and (3B) demand an answer. That question, in the circumstances of this case, is whether the conveyance of the shares comprised in the instrument to be stamped was moved by the appellant giving up a right as against the vendor company worth as much as the value of those shares. And the answer must be that it was. By the very act of executing it and thereby accepting the specific shares which it covered, the appellant destroyed his pre-existing right to a dividend of £54,325 out of the assets generally. That was no mere consequence of the operation of the instrument; it was part of the operation itself.

1. (1948) 77 C.L.R. 143. 2. (1948) 77 C.L.R., at p. 154.

For these reasons I am of opinion that the agreement is liable to be stamped under sub-s. (3B) of s. 66. The appeal is from an order of the Supreme Court of New South Wales answering in the opposite sense certain questions submitted to it by a case stated under s. 124 of the Stamp Duties Act. I would allow the appeal, set aside the Supreme Court's order, and in lieu thereof order that the first three questions in the case stated be answered: (1) No; (2) (a) No, (b) No, (c) Yes; (3) The duty chargeable is £135 19s. 6d. only.

The instrument which calls for our consideration in this case is an agreement whereby D. Davis & Co. Pty. Ltd. (hereinafter referred to as the company) undertook to sell to the appellant fifty-seven shares in three other companies, together with certain specified furniture fittings and motor vehicles. The aggregate purchase price for the shares was expressed to be £57 and, for the other items, £1,914. At the time of the agreement the appellant was the holder of the whole of the share capital in the company which had been issued, namely, 15,000 ordinary shares of £1 each. It had, in fact, acquired these shares by purchase immediately prior to the making of the agreement under consideration.

Section 41 (1) of the Stamp Duties Act 1920-1949 provides that every agreement for the sale or conveyance of any property in New South Wales shall be charged with the same ad valorem duty to be paid by the purchaser or person to whom the property is agreed to be conveyed as if it were a conveyance of the property agreed to be sold or conveyed and shall be stamped accordingly. Pursuant to this section the respondent assessed the duty payable upon the agreement as if it were a "conveyance made upon a bona fide consideration in money or money's worth of less than the unencumbered value of the property conveyed" (s. 66 (3A)). No question arises with respect to the sale of the chattels referred to, the only question being whether, having regard to the provisions of s. 41 (1), the amount of ad valorem duty chargeable is to be determined by reference to the provisions of the later section. The critical question is, of course, whether the sale was made upon a consideration in money or money's worth of less than the unencumbered value of the subject property agreed to be sold. As already appears the respondent, for the purposes of his assessment, resolved this question adversely to the appellant and upon a subsequent appeal to the Supreme Court the same view was taken. This appeal is now brought from the order disposing of the appeal to that court.

For the purposes of the proceedings it was agreed by the parties that the fifty-seven shares in question were worth £54,382 and, if there were nothing more in the case, it might readily be concluded that this further appeal should also be dismissed. But it is contended by the appellant that the circumstances related in the case stated establish that consideration, additional to that expressed in the agreement, was provided by the appellant. The argument, which commended itself to Kitto J., is expressed and discussed in his Honour's reasons and it is unnecessary for me to do more than briefly state the various steps which appear to be involved in it. The argument assumes the existence in the hands of the company of distributable profits amounting to, or almost to, the value of the shares. Then it is said that the appellant, as the sole shareholder in the company, had a personal right or interest in those profits and that it was in a position, if it so desired, to secure to itself payment of the amount of the distributable profits by way of dividend. The next step is that by the sale the appellant's right or interest was discharged or satisfied or, perhaps, extinguished, and that, in this circumstance, is to be found full consideration in money's worth for the sale or conveyance.

The argument of the appellant was founded substantially upon observations made in Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1] in the course of considering whether certain transfers of shares made by that appellant company to its shareholders were dutiable under s. 66 (3A). But it is of importance to notice that these transfers had been made pursuant to a properly authorised scheme for the reduction of capital and in discharge or satisfaction of the rights of the shareholders thereby created in accordance with the appellant company's articles. The Court was unanimously of the opinion that the consideration for the transfers could not be said to be less, in money or money's worth, than the unencumbered value of the shares transferred and considered reasons were delivered by both Dixon J. (as he then was) and Williams J. Both sets of reasons disclose that the decision rested upon an examination of the nature of the rights created by the issue of a share in the capital of a company and upon the conclusion that a distribution of assets upon a reduction of capital is directly and expressly in satisfaction, pro tanto, of the rights of the shareholders as such. And since the distribution in that case was in partial satisfaction of rights for which full value was given at the time of their creation, that is, upon the issue of the shares themselves, there could be no ground for saying that the distribution was upon a consideration in money or money's worth of less than the unencumbered value of the property conveyed. For himself, however, Dixon J. added what might be thought to be another ground for reaching the same conclusion though his Honour observed that the two grounds might "be, perhaps, two sides of the same thing". It is upon the line of reasoning apparent in the observations concerning the second ground that the appellant primarily based its present contentions and it is as well that the relevant passage should be quoted in full. The passage is as follows: "(2) From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real. The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in winding up. Subject to any regulation the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets. Thus when the amount of the issued shares in the case of this company was reduced from £1 each to 6d. each, it meant that if any of the unissued £1 shares were afterwards issued the proportion in which the respective holders of a share of the former issue and of one of the subsequent issue would in a winding up share in any funds exceeding the share capital would be as 1 is to 40. This is but an illustration of the significance of the division of the share capital into shares, shares now of a different denomination. The truth is, however, that the return of 19s. 6d. of the amount paid up is the discharge pro tanto of a claim of the shareholder upon the assets of the company" [1] . It is, it seems to me, unnecessary to do more than read this passage to perceive a vital distinction between that case and the present case. In Howie's Case [2] the Court was dealing with a set of facts which disclosed that the transfers had been made by way of return of capital to the shareholders. Hence it is said "that the return is the discharge, pro tanto, of a claim of the shareholder upon the assets of the company" [1] . But in the present case the sale, or conveyance, was not made in discharge of any such claim or, indeed, of any claim by the appellant, as a shareholder, upon the assets of the company; on the contrary the right of the appellant to receive the shares arose under the agreement for sale and not otherwise. It is, no doubt, true that after the sale had been made the interest of the appellant, as the sole shareholder, became less valuable than previously, but this was not because it had participated in any distribution of the company's assets but because the parties had selected a transaction, both in form and substance, which resulted in the company exchanging some part of its assets for an agreed consideration of lesser value.

1. (1948) 77 C.L.R. 143. 2. (1948) 77 C.L.R., at p. 153. 3. (1948) 77 C.L.R. 143. 4. (1948) 77 C.L.R., at p. 153.

Against this view, it is said, the expression "consideration", as used in s. 66 (3A), "should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts" but as Dixon J. pointed out after making this observation, "The difference is perhaps not very material because the consideration must be in money or money's worth" [3] . But if there be a distinction of any significance in cases such as the present it is, according to the appellant's argument, necessary to have regard to "the money or value passing which moves the conveyance or transfer". Of course in Howie's Case [2] the Court had before it instruments which were, in fact, conveyances (see s. 65). In the present case, however, the application of these observations involves the notional transmutation of the agreement into a conveyance and then requires us to attribute to the dealing a consideration which is foreign to that discoverable in the actual transaction. I doubt whether s. 41 (1) requires us to invoke such processes but I am content to deal with this appeal on the assumption that the agreement should be regarded as a conveyance, that is to say, a conveyance in effectuation of the contractual rights created by the agreement.

1. (1948) 77 C.L.R., at p. 152. 2. (1948) 77 C.L.R. 143.

On this assumption the argument then asserts that it is not only perceivable but obvious that the consideration expressed in the agreement was but nominal, that the sale was merely made as a means of "liberating" assets of the company to the shareholder and that upon such "liberation" the interests of the appellant, as shareholder, in the assets of the company were pro tanto discharged or extinguished. Therefore, it is said, the consideration which moved the sale, or conveyance, must be taken to be the surrender of some portion of the appellant's rights or interests as shareholder.

The first thing that may be said about this argument is that although, immediately before the sale, the appellant may have been, by virtue of its shareholding, in a position to secure a distribution of the company's assets, it had no enforceable right to the fifty-seven shares in question. They were in fact and in law the property of the company which was a distinct and separate entity and, subject to intervention by the appellant as the sole shareholder, entitled to make such legitimate use of its assets for the purposes of its business as it pleased. In the second place, it is impossible to say that the transaction evidenced by the agreement was a mere step in the effectuation of the rights in personam with which the appellant, as such shareholder, was invested. On the contrary, it created in the appellant a new and independent right to the shares in question. The case is, of course, before us on the assumption that if the appellant desired to secure the fifty-seven shares in question it was in a position to determine the manner of their acquisition. That is to say, it might have ensured that it should receive them either by way of dividend or in satisfaction of some new and independent obligation deliberately created. But it seems clear that it chose the latter course. And, indeed, on the assumption that the company held valuable assets representing distributable profits, it may have had good reason for preferring the acquisition to be by a purchase at an undervalue rather than by way of dividend since, if the assets were no longer required for the purposes of the company's business, it made little difference, except as regards the incidence of income tax, whether the company distributed its assets or sold them to the appellant for what may be regarded as a nominal sum. But to say this is far from saying that the consideration for the sale was the extinction of any of the appellant's rights as shareholder, or, the satisfaction or discharge of any of those rights. It is, in my view, erroneous to regard the sale as a conveyance in satisfaction or discharge of any of the rights of the appellant as shareholder or as a dealing which extinguished any of those rights. As I have already said, the agreement created an independent right to the shares and if it is to be regarded as a conveyance it must be taken to be a conveyance upon the consideration expressed for the creation of that right. Further, as a conveyance, it must be taken to be in satisfaction and discharge of the right created by the agreement itself. No doubt the appellant's interest, as shareholder suffered a diminution in value, but this was just as much a consequence of the sale at an undervalue as if the sale had been made to a third party with a consequent reduction in the balance of the company's assets over its liabilities.

In my view, the respondent correctly assessed the duty payable upon the agreement under s. 66 (3A) and the appeal should be dismissed.