ree ag Lads Cains" fnvermets v Hf

ree ag Lads Cains" fnvermets v Hf - [1944] HCA 9 - HCA 1944 case summary — Zoe

[23]

The assets of the company appearing in the balance-sheet as at 15th July 1940 (and it is agreed that they were substantially the same on 7th August 1940) were as follows : - (1) The freehold pro- perty already mentioned, which has a frontage of seventy-one feet to Pitt Street and a total depth of two hundred and twenty feet and which is situated on the western side of Pitt Street about midway between Market Street and King Street in the heart of the retail shopping area of Sydney, the improvements consisting of a retail store building constructed of brick with wooden floors and contain- ing a basement, ground, and three upper floors. The building was erected in 1882, but in 1937 a sum of £41,000 was expended in extensive remodelling and structural alterations, internal walls being demolished, new shop fronts put in, new lifts installed, and other internal improvements effected. This work continued throughout the whole of the year 1937. Mr. Waldron said that no further substantial alterations would be required for at least another ten years. I accept his valuation of the improved value of this property of £225,000 as at 7th August 1940, and I also accept his estimate of what the net rental would have been if the property had been let on that date, namely £11,471. (2) Fittings, £9,000. (3) Australian Consolidated Bonds and Commonwealth Free Loan £31,000, investments in shares in other companies £68,500, stock on hand £94,000, debtors £15,340, family current accounts £6,600, deposits at call £8,000, cash with bankers and at hand £6,800, against which must be set off as owing to creditors a sum of £62,000 mainly comprised of amounts totalling £47,000 owing to members of the McCathie family on loan at call carrying interest at the rate of four per cent per annum. The surplus of assets over liabilities upon a winding up and distribution of assets was therefore £406,000, equivalent to £1 7s. per share on the A and C shares after allowing for one pound per share on the B shares.

[44]

site situated right in the heart of the shopping centre of Sydney well suited to the carrying on of that business, a building which has just been remodelled and modernized at a cost of £41,000, and its investments, which are more than ample to meet its liabilities, so that it not only owns the whole of its business assets free of debt, but it has ample liquid reserves to meet any emergency or to take advantage of any opportunity. He has also, in my opinion, over- emphasized the depressing effect on the company's shares of the perilous international outlook on 7th August 1940. He said that the future of the retail trade was doubtful, so that an investor would not be content to rely on the figures for the year ended 15th July 1940, but would want to rely on the average of the figures for the previous three years, although I quite fail to see what guide the state of business in the years ended 15th July 1938 and 1939 could be as to the future of the business in war-time. Fortunately it is unneces- sary to express an opinion as to the extent of the peril, or, what is more important, as to the extent to which the purchasing public realized the relation between Britain's peril and the future safety of Australia. Let me hope that it was, as Mr. Kitto contended, fully realized, although there were many indications to the contrary. But I must decide this appeal upon the basis that the shares, like any other private property, could only have a real value if Britain survived (and few of those who have read her history and knew the character of her people could have doubted that she would), and that, on that basis, however long and perilous the war, the clothes of adults would still wear out, children would still grow out of their clothes, babies would still be born, and crockery would still be broken, so that in August 1940 there was no reason that I can see why the profits from the business of a retail store should have been in greater jeopardy than the profits from most other businesses.

[47]

at 15s, 5d., the total value being the amount of the amended assess- ment. Mr. Bogan, after making the same adjustment for directors' fees, reached the figure of £15,641, from which he deducted the amount received from investments, £4,829, which left the average net profits from the trading operations at £10,812. He then capital- ized these net profits at the rate of six per cent, which amounted to £180,200, and, after adding the value of the investments, he arrived at a total value of £279,373, or in other words 18s. 74d. per share, which gave the shares owned by the deceased a total value of £70,714, which was slightly higher than that reached by Mr. Nelson. I feel some difficulty in accepting the three years selected by Mr. Nelson and Mr. Bogan. I could understand them taking the years ended 15th July 1936 and 1940 and rejecting the years ended 15th July 1937, 1938 and 1939 as affected by the structural alterations. If this was done, the net profits would, of course, have been consider- ably higher. But the year ended 15th July 1936, though apparently a normal year after the depression had vanished, is perhaps too remote. If three years have to be selected I prefer the years selected by Mr. Wolfenden, due allowance being made, at least in the year ended 15th July 1938, for disturbance of business. Further, while there is a great deal to be said for the view taken by Mr. Bogan that because the Commonwealth loans and shares in other companies were earning a full return having regard to their nature the company was in part an investment company, so that a purchaser of shares in the com- pany would be willing to buy on the basis that these assets were worth 20s.; the difficulty is whether to charge the £47,000 owing to the shareholders against the investments as Mr. Wolfenden suggests, or against the trade assets as Mr. Bogan suggests. Further, so long as the company continues to carry on its present business, some part of the investments may at any time be required to be realized for the purposes of the business, so that it would appear to be safer and fairer to the appellants to treat the whole of the assets as the assets of the business of a retail store. On the whole, since the average of the gross sales for the whole eight years was approximately the same as the gross sales for the year ended 15th July 1940, and the gross profit in that year was at the normal rate of thirty-three per cent, it is safer, I think, as Mr. Bogan was obviously inclined to do, to work mainly on that year. As the expenses for that year were above the average of the expenses for the eight years both in amount and in their percentage to the percentage of gross profit, such a method cannot be unfair to the appellants.

[50]

1940 on the whole of the available materials. (2) In approaching such a problem the courts have, as I have said, applied the same test as that applied in assessing what would be reasonable compensa- tion for the compulsory purchase of property. (3) In applying this test to a hypothetical purchase of shares in a company, the distinction must not be lost sight of between the acquisition by a purchaser of property which becomes subject to his sole control and the acquisition of shares in a company, which only confer on the holder those rights to which he becomes entitled from time to time under the constitution of the company and the general law. (4) A purchaser of shares in a company which is a going concern does not usually purchase them with a view to attempting to wind up the company. (5) A prudent purchaser, therefore, while taking care to see that his purchase money is well secured by tangible assets, would look mainly to the dividends which he could reasonably expect to receive on his shares, and such a purchaser would no doubt expect to receive such dividends as were appropriate to the nature of the business in which the company was engaged. It follows, therefore, that the real value of shares which a deceased person holds in a company at the date of his death will depend more on the profits which the company has been making and should be capable of making, having regard to the nature of its business, than upon the amounts which the shares would be likely to realize upon a liquidation. (6) But, where the shares are shares in a private company which bears the character in many respects of a partner- ship trading with limited liabilities, and the net profits as disclosed by the balance-sheet available for payment of dividends are less than they should be owing to features which should not exist in a business carried on with probity, efficiency and economy, there are two grounds upon which it may be possible for a purchaser to have the company wound up. In the first place s. 208 (2) of the Companies Act 1936 (N.S.W.) authorizes the court to wind up a company if satisfied that the directors have acted in their own interests rather than in the interests of members as a whole. Secondly, the court will more readily wind up a company on the ground that it is just and equitable to do so if the circumstances are such that the court would dissolve a partnership. So in Loch v. John Blackwood Ltd. (1), in the judgment of the Privy Council delivered by Lord Shaw of Dunfermline (2), a passage is cited from the judgment of Lord Clyde, Lord President, in Baird v. Lees (3), where he pointed out

[53]

that a shareholder puts his money into a company on certain con- ditions, one of which is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute which provides some guarantee of commercial probity and efficiency, and that if shareholders find that these con- ditions or some of them are deliberately and consistently violated by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities with which compliance with the Companies Act would provide them, then a situation arises in which it may be just and equitable for the court to wind up the company. In the present case, therefore, a purchaser or purchasers of the shares owned by the deceased in the company would be entitled to complain if in certain respects the company's business was not being conducted with probity and efficiency ; and, if the other shareholders as mem- bers of the McCathie family then combined to prevent these wrongs being righted, he or they would be entitled to apply to have the company wound up. I wish to make it quite clear that there is no suggestion in the present case of any lack of probity in the conduct of the company's business. But Mr. Wolfenden has strongly criticized its efficiency in certain respects which are obviously capable of rectifi- cation. Further, I have no doubt that the company has been paying an exorbitant amount by way of directors' fees. For many years prior to 7th August 1940 the board of directors held only one regular meeting in each year, but during these years the total amount paid by way of directors' fees was £6,980. Mrs. Hepner was in receipt of £1,800 per annum. In 1940 she was seventy-eight years of age and seldom went to the shop, although she appears to have been in younger days an astute business woman, and in 1940 still to have been able to give sound advice on matters which were referred to her, but it could hardly be suggested that £1,800 per annum was not an excessive remuneration for the services which she was rendering. Mrs. Brown, then aged seventy years, who joined the board when her husband died in 1919, was in receipt of £1,450 per annum, but she does not appear to have ever taken any real part in the company's business, the representative of her family being the present joint managing director, Mr. G. H. Brown, who, during the lifetime of the deceased, was the manager of the business, and who, no doubt, received an appropriate salary for his work. Mrs. McCathie, the wife of the deceased, received £729, and Lady Manisty £291. There is no evidence that either of these ladies rendered any services to warrant such payments.

[69]

As I have said, Mr. Wolfenden, in order to determine the yield an investor would expect on the company's shares, averaged the dividend yield of the cumulative preference shares of eight companies registered on the Stock Exchange. I will venture to repeat what I said in somewhat analogous circumstances in the recent case of Daandine Pastoral Co. Pty. Ltd. v. Commissioner of Land Tax (1), where a valuer for the Crown had averaged the sales of five properties alleged to be in some respects comparable to the land to be valued in order to assist him to place a value on that land : - '' This method of averaging is to my mind unsound. The prices obtained at compar- able sales should not be aggregated and averaged, especially when the prices obtained on sales of small areas are dealt with in this way in order to obtain the value per acre of a large area. The only safe course is to compare each sale with the subject land separately. For instance, if three sales considered to be comparable of £3, £2 10s. and £2 per acre are averaged, the average value would be £2 10s. per acre. But if the subject land was closer in value to the land sold at £2 per acre than to the other lands, the average value would cause the subject land to be seriously overvalued. When such a method is applied to a large station in order to arrive at the proper value upon which to calculate a progressive land tax it can lead to a grave injustice." So in the present case the basis of eight per cent is reached by averaging yields between five per cent and twelve and a half per cent. None of the shares in fact yield eight per cent, and the yield is considerably less in some cases and consider- ably more in others. It is evident that many investors are quite satisfied to receive five to six per cent on these shares. Moreover, the yield was calculated at a date when the Stock Exchange was what I called in Murdoch's Case (2) " subject to abnormalities ", and the shares, being preference shares, are subject to the comments which appear later in that judgment (3). As the yield from five of these preference shares is less than six per cent, I fail to see why a

[72]

I have arrived at this conclusion without taking into account the result of the trading for the year ended 15th July 1941. In that year the gross sales were £325,338, and the net profit, after paying directors' fees £6,000, was £26,000. But I will venture to repeat the remarks that I made in the Daandine Case (1) on the question whether this evidence was admissible : - " Values must be calculated in the light of circumstances which existed on the material date, in this case 30th June 1939, but subsequent events can be taken into account in order to determine the proper weight to attach to such cireum- stances. Subsequent sales are just as admissible in evidence as prior sales, provided that in all the circumstances they are compar- able. If between the material date and the date of the subsequent sale supervening events occur which alter the conditions previously existing, the subsequent sales would not be comparable and would be useless. But if on the material date there was a tendency in a district to closer settlement and for prices to rise, subsequent sales of property in subdivision at rising prices would be evidence in support of the view that it was correct to value land in the district suitable for subdivision which was being applied for some other purpose in the light of this potential value. The whole tendency of the courts is to admit evidence of any events prior to the date of trial which will throw any real light on the issues : See the authorities referred to in the judgment of my brother Rich in Australian Apple and Pear Marketing Board v. Tonking (2) - see also In re Bradberry ; National Provincial Bank Ltd. v. Bradberry (3). In Federal Commis- sioner of Land Tax v. Duncan (4) the whole contention of the Commis- sioner was that sales of the subject land subsequent in date to that upon which it had been valued showed that the original valuation was too low and ought to be increased." The accounts for the year - ended 15th July 1941 would be admissible, in my opinion, on the question whether the structural alterations had affected the trade in the years ended 15th July 1938 and 1939, whether these alterations would in the future lead to improved business, and whether the grave international situation was going to interfere with the trade of a retail store. These were matters existing and to be taken into account

At a glance

Court

Decision date

Before

Source

Judgment (78 paragraphs)

Parties

Cited By (5)