Ord Forrest Pty Ltd v Commissioner of Taxation

Ord Forrest Pty Ltd v Commissioner of Taxation - [1974] HCA 57 - HCA 1973 case summary — Zoe

[27]

In the absence of authority to the contrary I would conclude that there was here a gift by the company to each of the allottees. But it is said that there are decisions of this Court to the contrary; counsel for the company relies principally upon Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [4] . In that case the appellant company, following confirmation of a resolution for reduction of capital and distribution of surplus assets, transferred to two shareholders, who together held all but one of the issued shares in its capital, certain shares of other companies by way of a distribution in specie. The question was whether those transfers were dutiable as on a conveyance without consideration, with inadequate consideration or with a bona fide consideration of not less than unencumbered value of the property conveyed. Dixon J. was able to discern two aspects of the transaction, which he described as "perhaps two sides of the same thing", whereby an adequate consideration might be seen. First, the reduction of capital and the distribution in specie was an effectuation of a provision of the contract of membership of the company; allotment and payment up of shares conferred upon their holder a right to have the company's assets dealt with in accordance with the various ways required or authorized by the articles; the distribution in specie was one such way; it was a realization of the rights obtained by the acquisition of shares and the consideration given was "the payment up of the share capital in satisfaction of the liability for the amount of the share received on allotment" [5] . Secondly a member's contribution of the amount of his share measured his right to any return of capital which the company might make and determined the proportion in which he shared with others in a distribution of excess assets. A return of capital in cash would be a discharge pro tanto of the shareholder's claim upon the company's assets and where, instead, a shareholder took, on a reduction of capital, an aliquot part of the company's assets, in which he had had an interest consisting of a congeries of rights in personam, the consequent reduction in amount and value of his share afforded an adequate consideration in money and money's worth.

[77]

This is an appeal from a judgment of Stephen J. confirming an assessment of the appellant to gift duty under the Gift Duty Act 1941 Cth (as amended). The facts strictly relevant to the decision of the appeal could be stated in a sentence but it is perhaps convenient to recount the circumstances of the case in a little greater detail. The appellant was incorporated as a company on 17th March 1969 under the law of the Australian Capital Territory. Its situation at 11.30 a.m. on 23rd April 1969 was as follows. Its capital then was $30,000 divided into 30,000 shares of $1 each. The only two shares which had been issued were held respectively by Mrs. Palfreyman and her husband, and he held his share as trustee for her. Mrs. Palfreyman had lent the appellant a total sum of $2,500,000 at call and free of interest. At 11.35 a.m. on 23rd April 1969 the directors of the appellant held a meeting at which it was reported that Mrs. Palfreyman had called for repayment of $2,480,000 of the moneys lent and it was resolved that a cheque for that amount should be drawn in her favour in part repayment of her debt. At the same meeting there was tabled an application by Mrs. Palfreyman to be allotted 24,800 ordinary shares of $1 at a premium of $99 per share, accompanied by a cheque for $2,480,000. It was resolved that Mrs. Palfreyman be allotted 24,800 ordinary shares of $1 each at a premium of $99 per share and that a share certificate should issue forthwith. At 11.55 a.m. on the same day, at an extraordinary general meeting of the appellant called on short notice, a special resolution was passed converting each of the 24,802 shares of $1 already issued into preference shares of $1 each and amending the articles so as to provide that the capital of the company should be $30,000 divided into 25,000 preference shares of $1 each and 5,000 ordinary shares of $1 each, and that the preference shares should confer on the holders thereof the following rights and privileges and should be subject to the following conditions:

[99]

It is convenient to turn immediately to the second argument of the appellant. I would agree that it would be a striking departure from existing notions if, for example, a bonus issue of shares in a public company were held to be a gift. In my opinion, however, it does not follow from the decision of Stephen J. that every allotment of shares in a company, at a price lower than the real value of the shares, is a gift. The allotment will be a disposition of property, but whether the consideration will be fully adequate will not depend simply upon how much the allottee pays or promises to pay. Where a company makes a bonus issue, or a new issue at a price below the real value of the shares, to persons who are already shareholders, there will ordinarily be no want of full consideration. In such a case, speaking generally (for of course there may be special circumstances that make a difference), the making of the new issue of shares is no more than "a fulfilment or satisfaction of the rights of the shareholder as such" (Davis Investments Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1] ), and the payment up of the share capital when the original shareholding was allotted provided the consideration for the acquisition of the rights which the shares conveyed, and therefore for any subsequent distribution of capital or profits in satisfaction pro tanto of those rights. The relevant principles are discussed in Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [2] . The facts of that case were that a company, pursuant to a resolution for reduction of capital, returned capital to the shareholders by distributing in specie, at the values in the company's books, certain paid-up shares in other companies. The actual values of those shares were greater than the book values. It was held that the transfers to the shareholders were made upon a bona fide consideration in money or money's worth of not less than the unencumbered value of the property conveyed, within the meaning of s. 66 (3B) of the Stamp Duties Act, 1920-1940 N.S.W.. Dixon J. said [3] that there were "two aspects of the transaction in which an adequate consideration in money or money's worth may be seen". As to the first of these aspects - that the reduction and distribution was "an effectuation of a provision of the contract of membership" - Dixon J. said [4] :

[104]

A company obtains capital by the issue of its shares. These shares cannot be issued at a discount but may be issued subject to the payment of their nominal amount or at a premium. The amount payable may be satisfied by the payment of money or by some other proper consideration. But all shares must be paid for in full by money or money's worth. When the person to whom the shares are allotted pays or assumes the liability to pay for the shares in money or money's worth, full consideration in money or money's worth moves from him to the company for all the rights which he acquires under the memorandum and articles of association. Later, his Honour went on [3] : The capital of a successful company is usually represented by assets which, after providing for the claims of creditors, exceed in value the amount of the paid up capital. But as I have said the amount payable to a company for a share is limited. Unless the share is issued at a premium it is the nominal amount of the share. The payment of that amount or the assumption of liability to pay it must therefore provide, in the absence of some special provision like that in the English Finance Act, full consideration for the right to receive any distributions of money or assets which the shareholder subsequently receives from the company. To understand these passages it is of course necessary to remember the context in which they were spoken. I have already referred to the circumstances of that case and to the reasons by which the decision was supported. Williams J. was not there concerned with the adequacy of the consideration for the issue of the shares, but with the question whether there was consideration for the distribution to the shareholders. He probably intended to say no more than that the consideration for the issue of the share (which it may be assumed was then adequate) also provided full consideration for any subsequent distribution of money or assets which the shareholder might receive in satisfaction of the rights which he obtained when the share was issued to him. He did not in my opinion intend to say that the payment of the nominal value of a share is necessarily fully adequate consideration for its allotment, and I could not in any case accept such a proposition. 1. (1948) 77 C.L.R. 143. 2. (1948) 77 C.L.R., at p. 157. 3. (1948) 77 C.L.R., at p. 159.

[105]

The further submission of the appellant was that since any premium paid on the issue of a share becomes an addition to the assets of the company, it would never be possible for a person to whom shares are issued to pay full value for them. Any increase in the amount of the premium would simply increase the value of the assets of the company, and therefore the value of the share, so that an attempted calculation of the amount of full consideration would result in infinity. This submission, if correct, would support the view that notwithstanding the apparently clear words of par. (a) of the definition of "disposition of property", the legislature could not have intended that an allotment of shares could amount to a gift by the company making the allotment. The submission proceeds on the assumption that the shares should be valued by reference to the amount which the assets of the company would realize upon a liquidation, and on that assumption has some plausibility when directed to a case in which, under the articles of the company, the shareholder who has paid the premium is in a specially favourable position when assets are distributed. However, this argument would obviously be untenable when applied to the case of a public company whose shares are listed on a stock exchange. In such a case the value of a share in the company is normally its market value, which is readily ascertainable. The problem of determining the value of a gift of such a share seems to me no different in principle from that which arose in Salmon v. Weight (Inspector of Taxes) [1] . In that case, a director was, by reason of services rendered to his company, authorized to purchase a number of the company's shares at par, and, on his application, shares were allotted accordingly. It was held by the House of Lords that the difference between the amount paid for the shares and the amount for which they could have been sold on the market was a taxable profit. In a similar case arising under the Act, that difference would also represent the value of a gift made by the company to the director (although the gift might be exempt under s. 14 (f)). However, it hardly requires a reference to authority to establish that in the case of an allotment of a share which is listed on the stock exchange, full consideration will be provided if the market value is paid. It is therefore not right to say that it is never possible for an allottee to pay full consideration for the shares allotted - that statement is plainly not true where the shares are listed on the stock exchange. The provisions of the Act can apply sensibly to such an allotment at least.

At a glance

Court

Decision date

Before

Source

Judgment (125 paragraphs)

Parties

Cited By (1)