Mendes v Commissioner of Probate Duties

Mendes v Commissioner of Probate Duties - [1967] HCA 23 - HCA 1967 case summary — Zoe

[24]

In the first place, it is a case in which an issue of shares by a company otherwise than for full consideration in money or money's worth, and therefore wholly or partly in the nature of a gift to the person who takes them up, may be assimilated to a gift inter vivos by the deceased for the reason that the deceased held shares in the company at the time of the issue, so that the issue for less than full value necessarily reduced the value of the deceased's property at that time. What proportion of the deficiency of consideration was reflected in a diminution in the value of the deceased's shares necessarily depended upon the proportion which the deceased's shares bore to the total of the issued share capital in the company as it stood before the new issue was made; but sub-s. (2) (b) is the kind of enactment which notoriously and almost of necessity lays down a more or less arbitrary rule in order to produce what the legislature considers a proper result, however anomalous its operation in some individual cases may turn out to be. Accordingly sub-s. (2) (b) deems shares that were issued otherwise than for full consideration to be the subject matter of a gift by the deceased, not only if he held all or nearly all of the previously-issued shares, but if "the company was controlled by the deceased". (The definition of "gift inter vivos" was presumably relied upon to impose a proportionate limitation upon the value to be brought into account in the calculation of duty where the person to whom the new shares were issued gave some, though inadequate, consideration for them.) Then the second element in the general conception of sub-s. (1) (d) (ii) had to be allowed for, that is to say the notion of the non-exclusion of the deceased during the three years before his death from possession and enjoyment of the deemed subject matter of the "gift". To this end the person to whom the shares were issued is deemed not to have assumed bona fide possession and enjoyment of them so long as "the company was controlled by the deceased".

[30]

Not only has this proposition never been denied but it has received the specific endorsement of the House of Lords, and has been qualified in only one respect, namely that a company A, which by virtue of its voting power in a general meeting of company B controls that company, has a controlling interest in company C if company B holds the majority of votes in the general meeting of company C. In British American Tobacco Co v Inland Revenue Commissioners [1] , Viscount Simon, with whom the other members of the House agreed, quoted the words of Rowlatt J. with approval. When he turned to the facts of the case before him he used expressions that have seemed to some to cause difficulty, but they must be understood in the light of his unequivocal adoption of Rowlatt J.'s proposition. He spoke of the "owners of the majority of the voting power" in the subject company as being the persons who were "in effective control of its affairs and fortunes"; but what he was answering by that observation was not an argument based upon the width of the topics to which the powers of the general meeting extended but an argument that the appellant company had not a controlling interest in the subject company because its control of the general meeting was only indirect, the majority voting power being held by a third company which the appellant company controlled. The emphasis was on the word "effective". Then his Lordship referred to a contention that the appellant company had not a controlling interest because it held less than seventy-five per cent of the voting power and for some purposes, of which the removal of directors was one, a seventy-five per cent majority was required by the articles of association. (Required "under some company regulations" was the expression he used, but this seems to have meant under the regulations of some of the companies there being considered: see the report of the argument in the Court of Appeal [2] .) His Lordship gave one answer to this contention so far as it related to the removal of directors in a company the articles of which make the election of directors a matter for the general meeting, but he did not give a general answer to it. He pointed out only that in such a company the holders of a bare majority of votes can get their own way in the long run by refusing to re-elect recalcitrant directors. This passage in Viscount Simon's speech was relied upon in the argument for the appellant in the present case, being interpreted as implying that control of the board of directors is essential, or at least relevant, to control of the company; and reliance was placed upon the fact that by the articles of the company now in question the appointment and removal of directors were matters for decision not by the general meeting at all, but by the holders of a majority of the issued shares: arts. 85 and 87. Accordingly, it was said, after the 20,000 "B" shares had been issued to the son it was he, and not the deceased, who controlled the composition of the board. But Viscount Simon could not have been intending to contradict the statement of Rowlatt J. which he had just approved without suggesting even a qualification upon it. That statement as applied to a company in which neither the appointment nor the removal of directors is a function of the general meeting necessarily means that for the purpose of deciding who controls the company it is irrelevant to consider whose will determines the composition of the board.

[47]

However this may be Menhennitt J. solved the problem in favour of the respondent, in effect, by disregarding the voting power attached to the "B" shares in respect of the four topics referred to in art. 3 and by having regard only to the majority voting power which the deceased's holding of five of the nine ordinary shares gave him in respect of all other topics within the scope of a general meeting of the company. These four topics his Honour thought were "exceptional matters not likely to arise and, therefore, would only in unusual circumstances give occasion for the exercise of voting rights by the "B" shareholders". He added, "in considering where control lay, it appears to me from the authorities, to which I am about to refer, that the normal position which is likely to arise at any time is to be looked at, and this is what I have done". But the cases to which his Honour thereafter referred, whilst of value in determining what is meant by expressions such as "having a controlling interest in a company" or "having control of a company" and other like expressions do not, in my view, throw any light on the unusual problem which arises in this case where the holder of shares of a particular class has control of the company in relation to some matters but not in relation to others. Nor, it seems to me, does s. 7 (2) (b) make any provision with respect to such circumstances. For the deeming provisions of that subsection to operate it must appear that the company making the issue of shares was controlled by the deceased at the time of the issue and, further, if the deemed gift was made more than three years before his death, that he continued to control the company until less than three years before his death. These criteria, it seems to me, do not contemplate and have nothing to say to a situation where a company's articles operate to divide the control of the company between two different classes of shareholders, or, where, as here, control of the company in relation to some matters rests with the general body of shareholders and control in relation to other matters rests with one class only of the company's shareholders.

[49]

For the purposes of the revenue laws a member of a company who holds enough shares to give a majority of votes at a general meeting has "control" of the company. That is the general rule. Control in that sense means the capacity to carry an ordinary resolution at a general meeting. This I take it is derived from the old common law concept of a corporation aggregate. Its corporate acts were and are acts done pursuant to the decision of its members assembled in a general meeting. They, the general body of the corporators assembled together for corporate purposes, were the corporation. Consistently with this, the constitution of a common law corporation could always provide for a select body of its members to do acts on its behalf which would be binding upon the corporate body. I need not cite the numerous authorities in the old reports; one will suffice: Conservators of the River Tone v Ash [1] . Modern company law reflects these ideas, more obviously perhaps in its earlier stage than today. The members collectively assembled are the company. Anyone who by the exercise of voting power can control the decisions of a general meeting can thus be said to control the company. Directors are the agents of the company. The management of the company's affairs may be committed to them; but in carrying out their duties they act on behalf of the company. However, some or all of the powers of the corporation may by the articles be made exercisable only by the directors. And it is now well established that in such a case a general meeting cannot dictate to them how they shall exercise their powers: see the judgment of Jordan C.J. in Clifton v Mount Morgan Ltd [2] and the cases referred to there. I appreciate that in some of the cases and by some commentators the relationship between the authority of directors and a general meeting has been stated in terms which make it not easy to reconcile in any realistic way the simple proposition that control of a company depends upon the capacity to carry an ordinary resolution at a general meeting with provisions in articles which put directors, or a governing director, in complete control of the business of the company. Perhaps the reconciliation depends upon viewing control as a capacity to control the appointment of directors when vacancies on the board have to be filled. Perhaps the question itself involves a more fundamental matter, one's concept of corporate existence, of what is the company. For present purposes however, and in particular having regard to s. 7 of the Probate Duty Act 1962 Vict, no reason was shown for doubting the application of the ordinary rule.

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Judgment (52 paragraphs)

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