Archibald Howie Pty. Ltd. v Commissioner of Stamp Duties (N.S.W.)
77 CLR 143(Judgment by: Williams J)
Archibald Howie Pty. Ltd.
v. Commissioner of Stamp Duties (N.S.W.)
Judges:
Rich J
Dixon J
Williams J
Subject References:
Stamp Duties
Judgment date: 18 October 1948
Melbourne
Judgment by:
Williams J
The question that arises for decision on this appeal is whether the transfers of shares referred to in the case stated were liable to be assessed for duty under the provisions of s. 66 (3) (a) or s. 66 (3A) or s. 66 (3B) of the Stamp Duties Act 1920-1940 (N.S.W.).
2. Section 66 (3) (a) applies to a conveyance made without consideration in money or money's worth; s. 66 (3A) to a conveyance made upon a bona-fide consideration in money or money's worth of less than the unencumbered value of the property conveyed; s. 66 (3B) to a conveyance made upon a bona-fide consideration in money or money's worth of not less than the unencumbered value of the property conveyed.
3. The majority of the Supreme Court (Jordan C.J. and Street J.) held that the transfers were made without consideration in money or money's worth and were liable to be assessed under the provisions of s. 66 (3) (a). The Chief Justice said that in essence the company was simply giving property to its shareholders who gave nothing in the nature of consideration (in) exchange. Street J. said that no consideration moved from the shareholders to the company. Davidson J. was of opinion that the transfers were made upon a bona-fide consideration in money or money's worth and were liable to be assessed under the provisions of either s. 66 (3A) or s. 66 (3B), and that the choice between these sub-sections depended upon whether the values of the interests in the company which were surrendered were less or not less than the value of the shares transferred. He said that he could not decide this question without additional evidence. The appellants contend the transfers should be assessed under the provisions of s. 66 (3B). In my opinion they are right.
4. The facts are set out in the case stated and need not be repeated. Prior to the special resolution to reduce the capital of the company, which was passed at an extraordinary general meeting held on 24th March 1947, the capital of the company was 125,000 pounds divided into 125,000 shares of 1 pound each, of which 85,470 shares had been issued and were fully paid and 39,530 were unissued. The company held shares in other companies standing in its books at the value of 83,181 pounds 0s. 9d. The special resolution provided that the capital of the company should be reduced from 125,000 pounds divided into 125,000 shares of 1 pound each, to 41,666 pounds 15s. divided into 39,530 shares of 1 pound each and 85,470 shares of 6d. each, and that such reduction should be effected by returning to the holders of the 85,470 shares which had been issued paid up capital to the extent of 19s. 6d. per share by distributing in specie at the values thereof appearing in the books of the company to the shareholders proportionately to their holdings certain assets of the company consisting of shares in other companies and the sum of 152 pounds 4s. 3d. in cash. The total amount of the reduction was therefore 83,333 pounds 5s. and the sum of 152 pounds 4s. 3d. was evidently included so that when it was added to the book values of the shares the amount to be distributed would be equal to the amount of the reduction of capital. (at p155)
5. The special resolution was passed pursuant to the authority conferred by s. 158 (1) of the Companies Act 1936 (N.S.W.) which provides, so far as material, that subject to confirmation by the court, a company limited by shares may, if so authorized by its articles, reduce its capital in any way, and in particular may, either with or without extinguishing or reducing liability on any of its shares, pay off paid up capital which is in excess of the wants of the company. The reduction of capital was confirmed by the court on 12th May 1947, and office copies of the order and minute approved by the court were duly registered with the Registrar-General. The special resolution then took effect (s. 161 (2) of the Companies Act). Subsequently on 21st May 1947 the company executed the transfers of shares in favour of the shareholders required to give effect to the special resolution. The actual value of the shares distributed was 117,362 pounds 7s. The shareholders also received 152 pounds 4s. 3d. in cash, so that they received assets and cash to the value of 117,514 pounds 11s. 3d. The issued capital of the company was reduced from 85,470 pounds to 2,136 pounds 15s., that is to say by the sum of 83,333 pounds 5s.
6. In Borland's Trustee v. Steel Bros. & Co. Ltd. (1901) 1 Ch 279, at p 288 , Farwell J., in a passage which Lord Russell of Killowen in Inland Revenue Commissioners v. Crossman [1937] AC 26 , at p 66 described as an accurate exposition of the nature of a share, stated that a share is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with . . . the Companies Act . . . a share is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount (the italics are mine). Lord Russell himself said in Crossman's Case (1937) AC, at p 66 that the nature of the property in a share is that "it is the interest of a person in the Company, that interest being composed of rights and obligations which are defined by the Companies Act and by the memorandum and articles of association of the company."
7. Such rights include the right to participate in dividends whilst the company is a going concern and the right to participate in the distribution of assets available for the shareholders upon a winding up. They also include the right to receive capital in excess of the wants of the company which the company resolves to distribute upon a reduction of capital. Such a reduction requires to be confirmed by the court mainly to ensure that the creditors will not be prejudiced but also to ensure that the reduction will not operate unfairly between the shareholders. Distributions of profits to shareholders by way of dividend or of capital upon a winding up or upon a reduction of capital are usually made in money. But where the articles so provide in the case of dividends or upon a winding up, and where the special resolution so provides in the case of a reduction of capital, the distribution may be made in specie.
8. Except in the case of a compulsory liquidation, all these distributions originate in a voluntary act on the part of the company. But when the company voluntarily declares a dividend it becomes indebted to the shareholders for the sums they are entitled to be paid (In re Severn & Wye & Severn Bridge Railway Co. (1896) 1 Ch 559 ; Bond v. Barrow Hoematite Steel Co. (1902) 1 Ch 353, at p 362 ; In re Accrington Corporation Steam Tramways Co. (1909) 2 Ch 40, at p 47 ). When the company goes into voluntary liquidation s. 282 of the Companies Act provides that the property of the company shall be applied in satisfaction of its liabilities, and subject to that application shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company. When the company voluntarily passes a special resolution to pay off capital in excess of the wants of the company and the special resolution takes effect, the company becomes indebted to the shareholders to whom the money is payable in the same manner as it becomes indebted upon a declaration of dividend (In re Artisans' Land and Mortgage Corporation (1904) 1 Ch 796 ). The decision of Byrne J. that the debts for unpaid dividends and unpaid capital are specialty debts may be open to criticism (R. v. Williams [1942] AC 541 , at p 555 ). But there is no reason to doubt his statement that "when you have to consider the question of dividends and unpaid returns of capital the shareholders' claims depend in each case on their rights which arise out of the articles of association" (1904) 1 Ch, at p 802 . In each case the shareholders become legally entitled in due course to part of the sum of money of more or less amount to which Farwell J. referred in the passage cited (Borland's Trustee v. Steel Bros. & Co. Ltd. (1901) 1 Ch, at p 288 ).
9. 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. Amongst the most valuable of these rights are the rights to share in the distributions of moneys and assets already mentioned. The declaration of a dividend and the taking effect of a special resolution to return capital create debts because the shareholders have acquired the legal right to be paid these moneys for valuable consideration. If the moneys were not payable as debts but as gifts the shareholders would have no legal rights to sue for them. The authorities already cited show that the shareholders have these legal rights. They are legal rights which flow from the original issue of the shares. They are ingredients in the chose in action which each original shareholder purchased from the company. If an original shareholder sells and transfers his shares the transferee upon registration "will become legally entitled to all the rights of a member, e.g. the right of attending meetings and voting and of receiving dividends" (R. v. Williams (1942) AC, at p 558 ).
10. We were referred to two English decisions upon s. 74 of the English Finance (1909-1910) Act 1910. That section imposes a stamp duty on gifts inter vivos. Sub-section (1) provides that any conveyance or transfer operating as a voluntary disposition inter vivos shall be chargeable as if it were a conveyance or transfer of sale. Sub-section (5) provides that any conveyance or transfer (not being a disposition made in favour of a purchaser or incumbrancer or other person in good faith and for valuable consideration) shall, for the purposes of this section, be deemed to be a conveyance or transfer operating as a voluntary disposition inter vivos, and . . . the consideration for any conveyance or transfer shall not for this purpose be deemed to be valuable consideration where the commissioners are of opinion that by reason of the inadequacy of the sum paid as consideration or other circumstances the conveyance or transfer confers a substantial benefit on the person to whom the property is conveyed or transferred. In the first case, Associated British Engineering Ltd. v. Inland Revenue Commissioners (1941) 1 KB 15 , a company passed a resolution to distribute as a capital bonus amongst its shareholders a number of fully paid shares and stock units which it held in two other companies. It was held that the transfers were liable to duty under the section because the bonus was a voluntary disposition by the company of its reserves. Lawrence J. said: "I do not think that it can successfully be argued that the company was not acting voluntarily because it was acting in pursuance of the wishes of the majority of the corporators legally expressed" (1941) 1 KB, at p 19 . With this statement there can be no quarrel. It does not appear to have been argued that the transfers were dispositions made in favour of other persons in good faith and for valuable consideration within the meaning of the words in brackets in sub-s. (5). If it had, his Lordship might have acceded to the argument for he said that "the resolution no doubt gave to the shareholders in the appellant company a right of action in respect of the declaration of this capital bonus" (1941) 1 KB, at p 19 . The further point would then have arisen whether the consideration should not be deemed not to be valuable consideration because of the particular provisions of the latter part of the sub-section. The decision of his Lordship that the disposition of the shares was voluntary because the company was under no legal obligation to make it does not appear to me to throw any light on the meaning of s. 66 of the Stamp Duties Act. In the second case, in Wigan Coal & Iron Co. Ltd. v. Inland Revenue Commissioners [1945] 1 All ER 392 , the company paid off its capital to the extent of 10s. per 1 pound share, and effected the reduction by the transfer to its shareholders of shares which it held in another company the market value of which considerably exceeded the 10s. by which the capital had been reduced. The Inland Revenue Commissioners considered that the consideration for the transfers of the shares was inadequate because the transfers conferred a substantial benefit on the transferees. The only question which Wrottesley J. had to decide on appeal was whether there was sufficient material on which the Commissioners could come to this conclusion. He held that there was and in the course of his judgment said with reference to the latter part of sub-s. (5) that "where a statute says that A is to be deemed to be B it deals purposely with things that are not B; and it would not be necessary to say that A was deemed to be B if A and B were the same thing." The case is therefore a decision on the words of the particular statute. It is not a decision that a shareholder who receives money or assets by virtue of his shareholding in a company receives something for which he has not given full consideration in money or money's worth.
11. In the present case the capital was reduced by 83,333 pounds 5s. whereas the shareholders received shares and cash worth 117,514 pounds 11s. 3d. But in my opinion this is immaterial. 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. Any other conclusion would lead to wide repercussions. Distributions of money are not liable to stamp duty under the Stamp Duties Act because that Act taxes instruments and not transactions. But the Gift Duty Act 1941 taxes transactions, and the Gift Duty Assessment Act 1941-1947 defines gift to mean any disposition of property which is made otherwise than by will without consideration in money or money's worth passing from the disponee to the disponor, or with such consideration so passing if the consideration is not, or, in the opinion of the Commissioner, is not, fully adequate.
12. For these reasons I would allow the appeal, set aside the order of the Supreme Court, and answer the questions asked in the case stated by saying that the transfers of shares were liable to be assessed for duty under the provisions of s. 66 (3B) of the Stamp Duties Act 1920-1940. The respondent should pay the costs of the appellant in the Supreme Court and of this appeal.