Willem Bertus Reuter v Commissioner of Taxation [1993] FCA 576;

Willem Bertus Reuter v Commissioner of Taxation [1993] FCA 576; - FCA 1993 case summary — Zoe

[19]

"...in late April 1987, Mr Reuter met with Mr Laurie

Connell, a Western Australian entrepreneur, who

was, at that time, Chairman of Directors of

Rothwells Limited ("Rothwells"), a merchant bank

operating out of Perth. At that meeting Mr Connell

told Mr Reuter that he had been approached by a Mr

Martin Dougherty and a Mr Carnie Fieldhouse

representing Mr Warwick Fairfax, proposing Mr

Connell's involvement on a joint venture basis in a

proposed takeover of Fairfax by Mr Warwick Fairfax.

Mr Dougherty had been a journalist and editor of

various Australian newspapers and worked in the

public relations field. Mr Fieldhouse was a

solicitor practising in Sydney.

Mr Connell secured Mr Reuter's agreement to the

proposal that Mr Reuter should work for one month

on the project for a fee of $50,000. At that time

the proposal was that Mr Fairfax and Mr Connell

would each have a fifty percent equity position,

should the proposed takeover be successful. Mr

Reuter prepared a discussion paper on the proposal

and was later duly paid the $50,000 fee.

Some time in July 1987, Mr Connell informed Mr

Reuter that Mr Fairfax did not wish to proceed with

a joint venture takeover, but wished to pursue the

takeover alone, albeit still with the assistance of

Mr Connell. Mr Connell said that Mr Fairfax was

prepared to pay Mr Connell $100,000,000 if the

takeover was successful. Mr Connell asked Mr

Reuter if he would be prepared to assist. Mr

Connell told Mr Reuter that Mr Dougherty would be

paid a ten percent fee to compensate him for the

work he had done and that the balance of the

$100,000,000 fee, after expenses, would be split

equally between Mr Connell and Mr Reuter.

The matter of a fee being paid by Mr Fairfax was

discussed at two meetings on 12 and 14 August 1987,

between Mr Fieldhouse, Mr Warwick Fairfax, Mr

Connell and Mr Dougherty. At these meetings it was

made clear that the fee to be paid to Mr Connell

was a success fee only and that Mr Fairfax was to

have no financial exposure in the event that the

bid was unsuccessful. Mr Fairfax made it clear

that he wanted Mr Connell and Mr Reuter to work

exclusively on the deal. At a lunch around this

same time, at which Mr Dougherty, Mr Connell and Mr

Reuter were present, Mr Connell told Mr Dougherty

that Mr Connell would be prepared to assist in the

takeover exercise in consideration of the fee of

$100,000,000 and that Mr Reuter and Mr Dougherty

would each have ten percent of the fee.

Notwithstanding that conversation, it was always

agreed between Mr Connell and Mr Reuter that, in

fact, Mr Reuter's share would be approximately

forty-five percent of the $100,000,000 fee. The

matter of the fee payable to Mr Reuter was to be

kept confidential and as will be seen Mr Dougherty

did not become aware of the extent of the fee to be

paid to Mr Reuter until much later.

Up to that time, the discussions with Mr Connell

had been in Mr Connell's capacity as a partner in a

firm trading as L R Connell and partners. However,

on or about 18 August 1987, Mr Connell, at a

meeting with Mr Reuter, advised Mr Reuter that a

decision had been made to "put the deal into Rothwells".

...

Mr Connell's explanation to Mr Reuter for the

involvement of Rothwells was that that company had

the necessary security licences and the Rothwells

name was important to the transaction.

Following this meeting, Mr Reuter took steps to

have prepared a written contract with Mr Connell.

Despite repeated requests of Mr Connell, no such

agreement was ever prepared. There was, however,

executed on 28 August 1987, an agreement between

Rockwood Pastoral Co Pty Ltd, Tryart and Rothwells;

this agreement is hereafter referred to as 'the

Tryart agreement'. Under it, Tryart agreed to

engage Rothwells and Rothwells agreed to accept

appointment to act as consultants and financial

advisers...

For its part, Rothwells undertook to do everything

necessary to ensure the proper performance of the

services it agreed to perform, it being agreed that

those services would be furnished through L R

Connell and Mr Reuter, or such other consultants as

Rothwells should deem necessary."

[29]

"A. On or about 28 August, 1987 Tryart Pty Limited

and Rockwood Pastoral Co. Ltd entered into an

Agreement with Rothwells Ltd (hereinafter

called 'the August Agreement') relating to a

proposed takeover of John Fairfax Limited by

Tryart Pty Limited.

B. The August Agreement provides that in the event

of the takeover of John Fairfax Limited being

completed certain payments are to be made to

Rothwells Ltd ('Rothwells').

C. The Advisers have alleged they each have an

interest in the August Agreement to the extent

of certain proportions of the net sums payable

thereunder ostensibly to Rothwells, namely 45%

as to Reuter and 10% as to Dougherty and that

any payments received by Rothwells pursuant to

the August Agreement should be held by it to

the extent of their said proportionate

interests for each of them in their own

beneficial right absolutely.

D. The Advisers believe that Rothwells is

endeavouring to discount or otherwise deal with

the fees payable pursuant to the terms of the

August Agreement or the contractual entitlement

thereof to the exclusion of one or both of them.

E. As a result of this belief Reuter has

threatened to commence legal proceedings to

prevent Rothwells dealing with the August

Agreement and its benefits thereunder in the

manner referred to in Recital D hereof.

F. BML wishes to enter certain arrangements with

Rothwells under which it proposes to provide

certain facilities to Rothwells secured by a

charge over Rothwells (sic) rights and

interests in the August Agreement and thereby

to receive certain benefits and the required

security in relation thereto.

G. BML and Rothwells have acknowledged to the

Advisers that the arrangements referred to in

Recital F must be completed with the utmost expedition.

H. BML acknowledges that if the Advisers or either

of them commence legal proceedings in relation

to the proposed transaction between BML and

Rothwells as Reuter has threatened to do, BML

could be prevented from concluding its proposed

transaction with Rothwells and as a consequence

could suffer loss.

I. BML has requested the Advisers jointly and

severally to enter into this Deed of Covenant

on the terms and conditions hereinafter

appearing in order to avoid the threatened

legal proceedings being commenced and in order

to have any threats in relation thereto withdrawn."

[42]

22. Counsel suggested that Federal Coke provided support for that submission. In that case, the taxpayer corporation was a producer of coke and the subsidiary of a corporation carrying on business as a producer of coal. The subsidiary, in return for the payment of a fee, produced coke as required by the parent corporation from coal supplied by the latter. The parent corporation agreed with a customer to supply coke to the customer. A dispute arose between the customer and the parent corporation in respect of the customer's failure to perform its part of the agreement. The dispute was settled by an agreement that, inter alia, the customer, pay the parent corporation a sum of money by way of compensation. Subsequent to that accord another agreement was formed in which the customer agreed to pay that sum, or a like amount, to the subsidiary as compensation for a diminution in the value of the subsidiary's land and assets. The subsidiary was not a party to the agreement and received the sum concerned as a volunteer. No submission of sham or of the application of s.260 of the Act was raised. The Court held that the question to be determined was not what would have been the character of the payment if it had been received by the parent corporation but what was the character of the sum received by the subsidiary, and in determining that issue the Court was entitled to look at the whole of the circumstances in which the amount had been paid and was not restricted to the terms of the Deed pursuant to which the amount in question became a voluntary payment to the subsidiary. Those were the principles applied by his Honour. Federal Coke involved an arrangement in which a payment, described as compensation, was paid to a party which may have incurred a detriment in the form of diminution of the worth of its business if the agreement made between the parent corporation and its customer was not performed by the customer. The payment was not related to the provision of any services by the subsidiary. In Reuter's case, Reuter had provided services that had earned the payment of a fee and Reuter had been the recipient of the payment.

[45]

25. It is clear from the foregoing that events outside the Deed bore upon the character of the payment received by Reuter from BML. Such events relevant to characterization of the payment were the willingness of Reuter and Dougherty respectively to accept a fee of $8m and $2m from Rothwells and the agreement between BML and Rothwells that BML would use a fee payable by Rothwells to BML to pay $8m and $2m to Reuter and Dougherty respectively to obtain covenants from them sufficient to encourage BML to perform the Facility Agreement and put Rothwells in funds by the delivery of the loan from BML. If the anticipated covenants in the Deed provided the sole foundation for the payment of $8m to Reuter by BML, Rothwells had no interest in securing from BML a contractual obligation to make that payment from a fee to be paid to BML by Rothwells. The tripartite nature of the arrangements provided a nexus between the services rendered by Reuter to Rothwells which had earned a fee of $8m, the obligation of Rothwells to pay $8m for those services and the sum of $8m received by Reuter from BML. It may be noted that the Deed of Covenant between BML and Reuter did not effect an assignment or relinquishment by Reuter of any rights or of any property. BML paid $8m for Reuter's agreement not to claim any part of the Tryart fee without the prior approval of BML and for Reuter's agreement to indemnify BML to the extent of $8m if Reuter did claim, presumably against BML as assignee of the Tryart fee, any part of that fee. The connection between Reuter's entitlement to a fee for the provision of his services to Rothwells and the sum paid by BML is patent. As long as Reuter continued to acquiesce in the Rothwells proposal that he be paid a fee of $8m for his services, the sum of $8m paid by BML replaced the need for Reuter to make any claim on the Tryart fee. Whether the sum received by Reuter effected a compromise of Reuter's claim against Rothwells for the payment of the agreed percentage of the Tryart fee is unnecessary to decide and is irrelevant to a conclusion that the sum received by Reuter from BML was so connected with the services provided by Reuter to Rothwells as to be a product of those services.

At a glance

Court

Decision date

Before

Source

Judgment (48 paragraphs)

Willem Bertus Reuter v Commissioner of Taxation [1993] FCA 576; (1993) 27 Atr 256 (2 December 1993)

Parties

Legislation Cited (1)

Cases Cited (3)