John Langley Webb v The CMR of Taxation
30 CLR 450BC2200023
(Judgment by: Isaacs) Court:
Judges:
Knox CJ
IsaacsHiggins
Gavan Duffy
Starke JJ
Judgment date: 22 June 1922
Judgment by:
Isaacs
The essential facts of the present case may be reduced to a small compass. We have, however been told that the law involved may govern several other cases of magnitude, more or less similar, and involving considerable amounts of revenue. To avert further litigation, if possible, by affording a sufficient guide, it seems to me desirable to deal with the various important points, so fully and ably argued by learned Counsel on both sides. A no-liability Company was formed in 1893, under Part II. of the "Companies Act 1890" (corresponding to Part II. of the Act of 1915), and had a capital of £ 200,000, divided into 200,000 shares of £ 1 each, partly paid up. In 1918 it reconstructed. It had assets which, after providing sufficient to pay off all liabilities and to return all capital paid up, left accumulated profits amounting to the value of £ 705,000. I say "profits," because, although there is "no formula which can discriminate in all circumstances what are and what are not profits of a trade" -- per Lord Loreburn, in Liverpool and London and Globe Insurance Company v Bennett , (1913) AC at p 620 -- yet that after certain specific provisions represented what Lord Wrenbury described in a phrase adopted as an apt expression by Lord Loreburn in the case referred to at p 619, as "the fruit derived from a fund employed and risked in a business," and therefore profits. The process of reconstruction was to promote a limited mining Company under Part I. of the "Companies Act 1915" (Trading), having a capital of £ 800,000, divided into 800,000 shares of £ 1 each, and then to sell to the new Company all its assets, with exceptions and upon terms which, apart from one special term to be presently mentioned, need not be stated, since they have been taken into account in arriving at the sum of £ 705,000 of residual profits. The one special term referred to was that part of the consideration for the property purchased was the allotment and issue to the old Company or its nominees of the 800,000 shares in the new Company of one pound each, "credited as fully paid up."
So it is stated in cl 5 of the agreement of sale. That agreement was made on August 31st, 1918, between the two Companies. No question is raised as to the validity of this transaction. On September 27th, 1918, the old Company passed a resolution to wind up voluntarily, and to distribute its assets amongst its shareholders in specie, so that each fully paid-up shareholder should receive 10s. 6d. for each fully paid-up share, and each shareholder, whether paid up or contributing, should receive four fully paid-up one pound shares in the new Company, in respect of each share he held in the old Company.
Now, what was the position of the old Company at the moment the winding up resolution was passed? It had already parted with its mine and all its other assets (with specified exceptions), which, prior to the sale of August 31st, 1918, had belonged to it. In those assets it had not, nor had its shareholders, at the date of the winding up resolution, any interest whatever. Its only property (apart from the 10s. 6d. share) consisted of the 800,000 shares, which actually or potentially belonged to it as the consideration referred to. We must assume that, in accordance with the requirements of s 408 of the Act, all its liabilities were at an end, and therefore no outsiders had any interest in, or claim upon the assets, by which I mean, of course, the 800,000 shares and the money for the 10s. 6d. per share return of capital.
The facts raise no question as to s 45A of the "Income Tax Assessment Act 1915-1918." The repayment of 10s. 6d. in respect of fully paid-up shares was out of excepted property, and to adjust the position with relation to shares on which only 9s. 6d. was paid, and is here immaterial. The receipt by every shareholder of four shares in the new Company was the receipt of his share of the £ 800,000 worth of assets previously mentioned. Those four shares had been procured at the price of £ 4 paid to the new Company, paid, it is true, "in kind," as any sales may be paid for "in kind" -- South Australian Insurance Co v Randell , LR 3 P C. 101. Unless that were so, the issue would have been illegal -- per Lord Macnaghten, in Stamp Duties Commissioner v Broken Hill South Extended Ltd ., (1911) AC 439 at pp 445-446. Consequently in law it is undeniable that each shareholder received his proportion of shares in another company, which shares as a whole represented, not in forma specifica , but in trasmuted form partly (that is as to £ 95,000) capital of the old Company, and partly (that is as to £ 705,000) profits of the old Company. Each shareholder of the old Company, therefore, as such, received a proportionate share of that property in transmuted form, namely, 9s. 6d. per share, representing his paid contribution to capital, and £ 3 10s. 6d. per share, representing his proportion of the old Company's profits, some of which were accumulated before and some since July 1st, 1914.
The appellant became entitled to 2000 of these distributed shares. The Crown contends that, within the meaning of s 14 ( b ) of the "Income Tax Assessment Act," there was thereby "credited or paid" to the appellant, "profits" of the old Company accumulated since July 1st, 1914, and that consequently income tax is chargeable against him in respect of those profits.
This is the only question of law reserved, and whether or not the facts would establish taxable income in any other aspect of the Act is not involved in this case. As between the old Company and the appellant, I regard the distribution of the shares in point of law as if they were money, that is, as if the old Company, in passing its winding-up resolution, had determined, instead of providing for a distribution in specie, to sell the shares and distribute the proceeds. It had the legal right to do so. It had the legal obligation, under s 408 of the "Companies Act," to decide
- (1)
- as to "the course to be pursued by the directors for the purpose" (that is for the purpose of winding up the Company without resort to the court); and
- (2)
- "the mode of disposal of any surplus of the Company's property which may remain after the completion of the winding up."
So that the Act cast on the Company, if it desired to wind up without resort to the court, the duty of providing the necessary directions, instead of leaving it to the process followed in winding up under the court -- see Westralia Proprietary Gold Mining Company v Long , 23 VLR 36 . If the Company had chosen to determine on a sale of the shares before distribution, that would have been binding -- see Great Central Freehold Company v Brandon , 11 ALR 69 . The fact that the profits, having been invested in shares of another company, whether a banking company or a trading company, cannot alter their essential nature in relation to the old Company.
At this point it is necessary to observe, in order to keep the exact problem before us, that it is admitted there was an actual distribution to shareholders of the whole property of the Company, whatever that property was. The Company ceased to own it, and each shareholder became the legal owner in possession of an aliquot part of it. So that no question arises, as has arisen in some other cases, as to whether the particular assets pass to the shareholders or not by a so-called distribution. But before dealing directly with the question of whether this distribution, supposing it to have been in the form of actual cash, the proceeds of the sale of the shares, would have fallen within s 14 ( b ), I should stop to notice one argument that was put forward to support the appellant's case. One is that the reconstruction scheme is one transaction, and that when so regarded the intention of the old Company was that its profits should not be turned into money, but distributed solely in the form of shares of the new Company, that is as capital of the new Company. This, it was said, brought the case within the decision of Knowles v Ballarat Trustees, Executors and Agency Company , 22 ALR 431 . In that case there was simply a distribution of cash, called "distribution of assets, 10s. per share," by a company while a going concern. The trustees of a will which gave income to a life tenant and capital to remaindermen, accepted the money as given. There was no issue of shares, actual or referred to, nor was there any reduction of capital expressed or implied. It was simply a division of profits, styled "distribution of assets." True, the Company contemplated at a later date winding up, but the fact was that the Company, while a going concern, assumed the power of changing its profits into capital de facto , without converting them into capital de jure . Therefore, it was held, the trustees having received the money without objection, the money was, for the purposes of the will, turned into "capital" of the Company, and belonged to the remaindermen.
As the recent case of Commissioners of Inland Revenue v Blott , (1921) 2 AC 171, which was relied on, determines that when a company converts profits into capital, that is an effectual conversion for the purposes of an Income Tax Act, it is evident that the doctrine of Knowles's Case (above ) and of Fisher v Fisher , 23 ALR p 318 (which followed it, and went even further, because it carried the doctrine into another company very much as here), is highly important, not merely to trustees and beneficiaries throughout Australia, but also to every public Treasury, Commonwealth and State. Lord Sumner put the question relevant here very succinctly in Blott's Case (at pp 215-216), in these words --
"Could a company declare and pay a dividend in the ordinary way, and yet by first calling it 'capital,' and saying it was not 'income,' prevent the cash from being taxable as income in the shareholders' hands?"
As I read Blott's Case , that question is answered in this way: Lord Sumner answers "No," even if done in the only way profits can be converted into capital, namely, under powers given directly by the Statute or under articles intra vires , and in the course of applying the money to the creation of share capital of the company. So does Lord Dunedin. The majority, however, answer "Yes," if lawfully converted into share capital of the company, under powers statutory, as given by articles intra vires .
If I were judicially compelled, notwithstanding what seems to be the line of reasoning adopted by every member of the House of Lords in 1921, up to the point where the minority distinguished the Crown, to regard as binding the reasoning in Knowles's Case , decided in 1916, and the decision in Fisher's Case , in 1917, I should necessarily, in obedience to those cases, feel constrained to say the shares received by the appellant were "capital," and not "profits." Those cases are, on the admitted facts of this case, decisive on that point, and, if they stand unqualified, then, in conformity with what I said in Fisher's Case , I have no right, judicially, to consider it even possible to assume for a moment that what the appellant received was "profits." Lord Wrenbury, in Re South African Supply and Cold Storage Company , (1904) 2 Ch 268 at p 285, shows that, in reconstruction, the commercial intention is not to realise or distribute the assets in the ordinary way, and that would in itself attract Knowles's Case ; and then as the appellant was intended to take and actually received the shares in the new Company, that attracts Fisher's Case , and this controversy is at an end, because it is entirely outside s 14 (b) of the "Income Tax Assessment Act." In other words, unless some good judicial reason exists for holding Knowles's Case and Fisher's Case in suspense for further consideration, I should be acting inconsistently in passing on further upon the assumption that the shares received could possibly be "profits."
The original "intention" being once ascertained by the terms of the combined scheme of reconstruction resolved upon on August 30th, 1918, when the Company was a completely going concern, a scheme of which the winding-up process was a mere mechanical method of carrying out the intention, it is obvious the winding up itself is otherwise immaterial, and cannot change the nature of the property which the scheme as a whole had impressed upon it. The "surplus" to be distributed under s 416 among the parties entitled would, therefore, necessarily retain its conventional character of "capital," and not "profit." Consequently, I should, as it appears to me, have to hold --
- (1)
- The "shares" received by the appellant were "capital," and not "profits," as between him and either Company; and
- (2)
- therefore, by Blott's Case , they were "capital," and not "profits," as against the Crown. What, then, is the position in view of Blott's Case , which was strongly pressed upon the court?
Technically, I am aware that a decision of the House of Lords does not bind this court. But there are certain matters I cannot but remember. One is that a decision of the House of Lords is binding on that House, and cannot be departed from except by fresh legislation. Then I have to consider that if the same learned Lords were, when sitting in the Privy Council, to give precisely the same decision for the majority reasons, I should have to regard it as controlling whatever it decided. Next, I look upon the observations of the Privy Council in Trimble v Hill , 5 AC 342, at p 344, as a clear suggestion involving at all events that a relevant decision of the House of Lords should be accepted by an Australian court as decisive. And this, for a reason given further on in that judgment, namely, that --
"It is of the utmost importance that in all parts of the Empire where English law prevails, the interpretation of that law by the Courts should be as nearly as possible the same."
Having regard to these considerations, I only desire to say that, upon the best reading I can give to Blott's Case , I do not feel judicially at liberty to act unhesitatingly on Knowles's Case (above ) and Fisher's Case (above ), as I should otherwise have acted.
I would add that if ever the full effect of the reasoning in Blott's Case upon Knowles's Case and Fisher's Case comes before the court for consideration, it will be useful to peruse the very learned and careful treatment of the subject of the respective rights of settlor, life tenant and remainderman in the treatise of Mr Irving, published in Edinburgh and London in 1910, in which, not only Bouch v Sproule (above ), but numerous other cases, English and Scottish, are brought into review.
I have said, and this is only on the facts, that I am at liberty to decide, apart from Knowles's Case and Fisher's Case , that, in my opinion, the appellant did, in the process of distribution, get, in a very large proportion, a share of the profits of the old Company. This was contested by the appellant, who said the assets were all capital. The Crown's view was in effect that, whatever the nature of the property of the old Company was the moment before the winding up resolution, it remained so the moment after. Had there been sufficient cash retained by the old Company to restore all the capital actually paid by the shareholders, the whole 800,000 shares would have been profits of the Company. And the fact that they were distributed could not alter their character. It is, in my opinion, clear that whoever participated in those shares on the winding up, participated in the profits of the old Company. In an ordinary winding up, if
"the surplus is more than sufficient to return to each shareholder the capital paid up by him, there is a profit, and the question then is, how the profits are to be shared"
-- Lindley , p 1171, and see subsequent page. It was contended that "surplus assets" in such a case were not "profits," but "capital," that is, capital in the only relevant sense, in apposition to "profits" in s 14 ( b ), namely, capital of the Company. Obviously, if "profits" of the Company, the section is so far satisfied, and it is immaterial whether in some way the property can be designated some one else's "capital."
It is almost tedious to support the statement from Lindley by authorities, but it is, I think in the circumstances, necessary. I shall simply, however, cite the references -- Birch v Cropper , 14 AC 525, particularly Lord Herschell's judgment; Re Weymouth and Channel Islands Steam Packet Company , (1891) 1 Ch 66 at p 76; Re Armitage, Armitage v Garnett , (1893) 3 Ch 337 at p 346, per Lindley, LJ; Re New Transvaal Company , (1896) 2 Ch 750, at p 755; Re Ramel Syndicate Ltd , (1911) 1 Ch 749, at p 753; Re Springbok Agricultural Estates Ltd , (1920) 1 Ch , p 563. And, as Lord Moulton (when Lord Justice) said in Re Spanish Prospecting Co Ltd , (1911) 1 Ch 92, at p 100 --
"Profits may exist in kind as well as in cash."
But it was urged that reconstruction altered this. One argument was that you must look at the transaction as a whole, and see what the old Company ultimately intended to effect, and in the end effected, namely, the conversion of its assets into capital of the new Company. I cannot accede to the argument. As the Privy Council, in the Swan Brewery Company Ltd v Rex , (1914) AC 231, at pp 235-6, observed of a much less complicated case --
"True, that in a sense it was all one transaction, but that is an ambiguous expression. In business, as in contemplation of law, there were two transactions."
There have been various views of the application in that case of those observations, but there can scarcely be any doubt about this. In the first place, as a matter of authority, the case of the Stamp Duties Commissioner v Broken Hill South Extended Ltd , (1911) AC 439, is inconsistent with it. Next, if it is approached from the standpoint of reasoning, the position is as follows:
The fact that the distribution was part of a scheme of reconstruction does not alter the legal position. Lord Wrenbury, when a Judge of first instance, said -- Re South African Supply and Cold Storage Company , (1904) 2 Ch 268 -- that "reconstruction" was a commercial and not a legal term, and even as a commercial term, had no definite meaning. In that case His Lordship had to consider whether certain steps were taken for the purpose of reconstruction. At pp 285-286 he said --
They did not go into liquidation for the purpose of winding up in the sense of realising their assets and dividing the proceeds amongst themselves. They went into liquidation for the purpose of giving effect to this particular form of enjoying their assets, namely, by getting for them shares in another company, and dividing those shares or having the potentiality of dividing them, if proper resolutions were passed by the several companies, among the shareholders in the way that is detailed in those speeches.
Then the learned Judge goes on to say what he thinks is in substance a "reconstruction." Adopting his views, the operation in this case was a reconstruction. But granting that, was not the sale a real sale? Was not the consideration given a real consideration? And, if so, were not the former assets of the old Company, consisting of capital assets and profits, assets transmuted into shares of the new Company?
Lord Lindley, in his work on Companies (6th ed ), at p 1211, says, in dealing with reconstruction --
"In point of law, the two companies are, however, distinct persons."
The second company would not be a continuance of the first, even if it were of the same nature -- Simpson v Palace Theatre , 69 L.T. 70. Much less can it be so when one is a no-liability mining company and the other is a limited liability trading company, the extent of the charter of which we do not know. As Wood, VC., said, in Re Empire Assurance Corporation, Ex Parte Bagshaw , LR 4 Eq 341, at p 347, it is a "new concern." The purchasing company might have been one in another State or even another country -- see Re Irrigation Company of France , 6 Ch App 176, at pp 192-193. Consequently, I cannot regard the transaction of selling the assets of the old Company for a price consisting of the shares in the new Company, as any transformation of profits into capital. It was simply, as Lord Wrenbury said in the passage quoted from the South African Company's Case (above ), "a form of enjoying their assets by getting for them shares in another company."
I ought in passing to notice an argument raised on the strength of s 16. It was said that s 16, when applied to s 14, had the effect of showing that s 14 ( b ) did not add anything to the statutory meaning of "income" that that term would not otherwise have. In other words, notwithstanding the express terms of s 14, the word "income" had its bare natural meaning, as in Lawless v Sullivan , 6 AC 373, where no extending definition existed. It was said that s 16 showed that the "profits" which a company was, by s 14 ( b ), contemplated as paying or crediting, were profits which were in the hands of the company "taxable income." For instance, it was said that the sale of an asset at however great a profit, did not produce a profit within s 14 ( b ), unless it was a "trading profit." It was conceded that it was or might be a "profit" which a trading company could distribute, and that a dividend might validly be declared and paid in respect of it, but it was said that unless it could be shown to be part of the company's taxable income -- see Mooney v Commissioner of Taxation , 12 ALR 266 -- it was not part of the shareholders' income. I think that is not a construction that accords either with the word or the spirit of the enactment. Whatever the company divides as "profits," and is received as such by the shareholders, is taxable. The Treasury is not concerned to travel behind that fact and investigate further. The Legislature declares that those "profits" of the company so "credited or paid" shall be shareholders' "income" for taxation purposes, even though otherwise they would not be so comprehended.
That brings me to the most substantial point made and stated very clearly, and I think unanswerably, by Mr Weigall, namely, that this was not profits "credited or paid" to a shareholder within the meaning of s 14 ( b ). As to whether it was "profits," I have said that, in my opinion, it was. The shares actually reached him, and they represented mostly "profits." I discard the argument that he had only the same proportion in the same assets as before the sale to the new Company. Whatever weight be given to a new issue of shares in the same Company, this was a different entity, a different Company, with a different enterprise. Commercial equivalence, even if it exists between two distinct enterprises, does not destroy their legal separateness. In my opinion, the whole problem comes down at last to the one question: Can these profits which the appellant obtained on the winding up distribution be said to have been "credited or paid" to him within the meaning of s 14 ( b )? I stated during the argument that this was, in my opinion, the crux of the case, and after full consideration, once we find that the shares were "profits," I still think so.
The answer to the question depends on the legal effect of the way he got profits. The No-Liability Company was subject to Part II. of the Act of 1915. Section 408 has been referred to. It confers, in common with corresponding legislative provisions for voluntary winding up, the power of controlling the matter without the intervention of the court. One of the great difficulties that at one time existed in the case of incorporated companies was that, except by the intervention of the court of Chancery, the shareholders were unable to wind up their affairs. This section -- first securing that no creditors can possibly be prejudiced -- puts the matter entirely in the hands of the shareholders. It enables the statutory majority to stop the undertaking, and wind up their joint affairs. It requires them, by the same majority, to instruct the directors as to the course to be pursued "for the purpose." This, in my opinion, includes all directions as to continuing the operations or not, and, if continuing them, then "for the purpose" of winding up. Nothing can be "for the purpose" which is inconsistent with winding up. The Company has then entered the first stage of dissolution, and is legally moribund. The "purpose," however, includes directions as to getting in outstanding property or claims and debts owing to the Company, and the mode of realising assets if necessary, for distribution or otherwise, and generally for completing the winding up. The expression "the course to be pursued by the directors" is analogous to the words "course to be pursued by the liquidator," which form the heading of Pt 4, and the group of ss 386 to 389 inclusive. The class of acts comprised in that group are certainly included in the quoted words contained in s 408.
In the case of a winding up by the court, s 406 provides that the court is to adjust the rights of the contributors amongst themselves, and
"distribute any surplus that may remain amongst the parties entitled thereto."
I quote that section as showing ( inter alia ) that it is not the Company or the liquidator that does these things -- it is the court. The words in s 408,
"the mode of disposal of any surplus of the company's property which may remain after the completion of the winding up,"
may, and probably do, have reference to assets which for some reason are not distributed before dissolution. Such cases have arisen, as in the Mayor of Colchester v Brooke , 7 QB 339, at p 384; and in Henderson's Nigel Co Ltd , 105 L.T., p 370. I do not think those words relate to the mere mode of realisation of the assets for the purpose of distribution among the shareholders, and this for three reasons. First, because the words that precede them are sufficient for the purpose; secondly, because the words "mode of disposal" are equivalent to the words "disposed of as such majority shall direct," in subs (2), the word "disposal" being very extensive; and lastly, because of the words "remain after the completion of the winding up," which, of course, includes distribution, and I do not think that the Act contemplates the dissolution of the Company before the surplus property is actually distributed, so far as is practicable. Now, the resolutions of September 27th, 1918, consist of
- (1)
- a resolution to wind up voluntarily; and
- (2)
- a resolution to distribute the assets in specie, with a direction that the cash is to be distributed by giving 10s. 6d. to each fully paid-up shareholder, and the shares in the new Company to be distributed by giving each shareholder, whether paid up or contributing four shares for every share he held in the old Company. The first part is clearly competent.
The second part is equally clearly competent, as far as relates to the direction to divide in specie . And then when we come to the provision about the proportion each one is to get, we are brought face to face with the real problem in the case. The 10s. 6d. is admittedly return of capital, and no question of taxation is raised as to that. Nevertheless, it is very important in considering the resolution, because Part II. of the Act does not contemplate capital being returned, except in winding up.
The point we have now to determine is whether the division of the shares, so far as they consist of profits of the old Company, is a payment of those profits or not, within the meaning of "paid" in s 14 ( b ). Did the appellant owe his receipt of the shares to any act of the old Company which can fairly be called payment? In my opinion he did not. The resolution of the Company as to the 10s. 6d. and the shares was superfluous. It was more an explanation than a determination, and, if it was a determination it merely determined what the law required if such a determination had not been arrived at. Section 408 must be read with s 416. The latter section applies to winding up by the court, as well as to winding up voluntarily, but the part common to both is this --
"If after all the liabilities of a no-liability company are discharged there remains any surplus of its property, the surplus shall be distributed amongst all the parties entitled thereto."
Who are "parties entitled thereto." The Act does not say. It leaves it even more indefinite than do the trading companies' provisions, for there we find the surplus is to be distributed in voluntary winding up "among the members according to their rights and interests in the company." Here we have "the parties entitled thereto." That throws us back on the task of ascertaining who are "the parties entitled thereto," and then what each is "entitled" to. Perhaps the first question is the meaning of "surplus." In s 416 "surplus" clearly means the sum remaining (when the assets are estimated in money) after providing for the liabilities. As these have, ex hypothesi , been discharged in this case before the winding-up resolution, "the surplus" means the whole 800,000 shares. The parties entitled thereto, since they are not designated by the Act, have to be ascertained ex necessitate by the rules, so far as these are valid. I mean that the rules cannot go beyond the scope assigned to them by the Act, or go counter to any express or implied requirement of the Act. By s 355 rules are "for the management and purposes of the company." Bisgood v Henderson's Transvaal Estates Ltd ., (1908) 1 Ch 743, is important to remember in this connection, and it has been followed in Ethcridge v Central Uraguay Northern Extension Railway Co Ltd ., (1913) 1 Ch 425, at p 436. Here, however, the rules contain nothing contrary to the Act, and as to r 130, I consider it as nothing more than a harmless statement of what could be done without it. It could not relieve the Company from complying with s 408 in giving the necessary instructions to the directors as to how they are to proceed. But the rights of the shareholders after the Company has ceased to function are not affected.
The case falls to be determined on general principles of law. The principle applicable are fully stated in Birch v Cropper , 14 AC 525. It is quite unnecessary to state them, for in doing so it would be merely repeating the words of Lord Herschell or Lord Macnaghten, and, as no one contests the principle or the conclusion, any quotation of the judgments of those learned Lords would be effort without result. The conclusion so far is that the shareholders' contributions having been equalised, they participate in the remaining assets of the old Company, in proportion to the number and value of their shares, that is they get four shares in the new Company. But that only determines who are entitled, and in what proportion, and still leaves open the essential question in debate. Are those shares, so far as they represent profits, "credited or paid" to the shareholder within the meaning of s 14 ( b ). To say the shareholders are, by the operation of the Act, entitled in such proportions and through their shares, is as true of an ordinary dividend as of the general assets in winding up.
The matter must therefore be further examined. In my opinion, the answer is No, the profits are not "so credited or paid," and the reason for my answer is summed up in a phrase -- There was no debt. The words "credited and paid" in the collocation found in s 14 ( b ), namely, "dividends interest profits or bonus credited or paid to any depositor member shareholder or debenture-holder of a company," etc., imply a debt from the Company. Company (by s 3) "includes all bodies or associations corporate or incorporate," but does not include partnerships. It includes, therefore, for instance, building societies and insurance companies. "Depositor" includes a depositor in a building society; "interest" includes interest on the deposit by such a person, as well as interest on advanced share contribution. "Profits" means profits which the Company has made, and as to "bonus," there is no line of demarcation which delimits a dividend from a bonus. It conveys the notion of an abnormal distribution. "Dividend" carries with it in general practice the idea of a more regular distribution, more regular in point of time and method and amount; while "bonus" carries a sort of intimation that in some way it is to be regarded as exceptional. But in law there is no distinction. Both "dividend" and "bonus" connote, unless by express words or necessary implication the contrary appears, that as between company and shareholder, the company continues its undertaking as a going concern, and retains its capital for that purpose. In the case of the old Company, it may be noted that it could not lawfully declare a dividend except out of profits arising from the business of the Company -- s 342. The terms "dividend," "interest" and "bonus" are clearly not applicable here. The case must depend solely on the force of the word "profits." As between "dividend" and "bonus," or equivalent terms, little, if any, weight can, since Bouch v Sproule , 12 AC 385, be attached to the mere difference of terminology. If, for instance, a company were to use neither "dividend" nor "bonus," but some such word as "distribution" or "division" or "interest," or "sharing," or "participation," it would make no difference. Bouch v Sproule (above ), however. in marking a new boundary line for the determination of "capital" and "income," used certain expressions that legislation has been careful to note, and this is important to observe. In that case, the will used the words "interest dividends and annual income;" the company declared a "bonus dividend," which Lord Herschell (p 391) called a "bonus," the word Lord Erskine had used in Witts v Steere , 13 Ves. 363 (see note to Brander v Brander , 4 Ves. 800 at p 801). And see p 397, also Lord Herschell, and at p 400 by Lord Watson. The employment of all these terms marks the anxiety of the Legislature that in whatever form profits of a company are "credited or paid" to the members, etc, "credited or paid" shall be regarded as the recipient's income for the purpose of taxation. Whether it becomes "taxable income" depends on circumstances stated in the Act.
As to the words "credited or paid," the conclusion of Lord Herschell's judgment in Bouch v Sproule (above ) was (p 399) --
Upon the whole, then, I am of opinion that the company did not pay or intend to pay any sum as dividend, but intended to and did appropriate the undivided profits dealt with as an increase of the capital stock in the concern.
At p 403 Lord Watson says --
"It was equally within the power of the company to capitalise these sums by issuing new shares against them to its members in proportion to their several interests."
At p 404 he says that the money "should not be paid to the shareholders, but should simply, by means of an entry in the company's books, be imputed in payment of the call of £ 7 10s. upon each new share." The Legislature, as it appears to me, has, by the word "credited," sought to reach cases where, through a member or shareholder who has not been "paid" the dividend or bonus, there has been credit in the Company's books imputed to the share he holds. This may or may not be satisfied under the Federal "Income Tax Act" by such a transaction as took place in Blott's Case (above ) or Bouch v Sproule (above ) . I am not aware whether any attention was directed to the word "credited" in either the Swan Brewery Case , (1914) AC, at p 231, or Blott's Case (above ), and I leave that entirely open for consideration should the question arise. But at all events, "profits credited or paid" are, as it seems to me, pointed to "profits" which have in some way been made a debt by the Company to the shareholder, etc. In the case of a shareholder, that would be by a "dividend or bonus" -- or even by "interest" used in the sense of distribution of profits. But the declaration of a "dividend" creates a debt -- Re Severn and Wye and Severn Bridge Railway Co , (1896) 1 Ch 559, at p 564.
Where there is no debt, or "debit," the word "credit" or the word "pay" in relation to profits, is meaningless, for there is nothing called for payment, and there is no balance to be struck. And in its essence the distribution of surplus assets in winding up creates nothing in the nature of a debt by the Company to anybody -- see Spence v Coleman , (1901) 2 KB 199. Nor is it a payment. The debts owing by the Company have been paid; the debts owing to the Company are gathered in; the contributories' positions are equalised or are as agreed; and the property of the Company falls to be divided, not by the corporation, but among the corporators, for the Company has itself ceased to have any use for it, since its undertaking is at an end -- Wallace v Universal Automatic Machine Company , (1894) 2 Ch 547, at p 553 -- and it is on the road to dissolution. The Act itself bound the corporators together for a common purpose, and gave them so bound a new legal identity; the Act itself then severs the bond, and destroys that new identity. It gathers together initially for the common purpose, individual contributions, and makes them the property, not of the aggregate of the individuals, but of the new entity created and equipped for the common purpose. When that purpose is terminated the fundamental reason for association has gone, and so the Act starts to retrace its steps and to undo the results it effected, even to complete dissolution of the corporation. On the way it proceeds to restore the individual rights of the corporators to the contributions they made, together with all that those contributions have produced, that is to say, the "surplus assets" of the Company -- compare Re Printers and Transferrers Amalgamated Trades Protection Society , (1899) 2 Ch 184, at p 189. Those "surplus assets" are not the "capital" of the Company, because they may include "profits" -- see per Stirling, J, in Re Jones, Clegg v Ellison , (1898) 2 Ch 83, at p 89; but they "represent" the capital, in the sense that they have been produced by the capital of the Company, and since they are "surplus," they are cleared of any other claim. But the individual rights now existing in the surplus assets are not a "debt" by any person, natural or artificial, to the shareholder. The Company owes him nothing, not even the capital necessary for adjustment. His rights are in relation to his fellow shareholders, and them alone. As James LJ, observed in Gooch's Case , LR 7 Ch 207, at p 211 --
A winding up is in truth a partnership suit, and the official liquidator is the receiver and manager of the partnership assets, and also fills the character of an accountant to make up the books and accounts, so as to ascertain each partner's share of liability and share of surplus, if there should be any.
The Lord Justice there spoke of a winding up in court, but though the machinery is different in the voluntary mode, the principle is the same, and substituting "directors" for "liquidator," the observations apply. Indeed, the real truth of the matter comes out more clearly in a voluntary winding up than it does at first sight in a compulsory proceeding. The Act has entrusted not to a mere majority of the partners, as I may call the shareholders for this purpose, to say the common enterprise shall be abandoned, but has fixed a statutory majority. But this statutory majority is what Jessel, M.R , calls "a domestic tribunal" to determine whether the common purpose shall be further pursued or abandoned. The shareholders decide by this majority, according to their view of what is most for their interest, and if they determine to abandon the enterprise and realise their shares by division of the property (for that is one mode of realisation) -- see Re Dawson, Pattison v Bathurst , (1915) 1 Ch 626, at p 635 -- they may do so. A "share" in a company is simply a portion, an aliquot portion, of the company's capital -- see Bartholomay Brewing Co (of Rochester) Ltd v Wyatt , (1893) 2 QB 499, at p 516. In the distribution of surplus assets, whether or not that aliquot portion is, in the circumstances when equalised -- Re Wakefield Rolling Stock Co , (1892) 3 Ch 165, at p 173 -- the sole measure of the right to share the whole assets, the distribution obliterates and destroys the share in the capital It does not cancel a debt, it does not give rise to a payment or a credit.
And for this reason, and this reason alone, I am of opinion the appellant should succeed.