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W.T. Malouf Pty. Limited & Ors. v. Brinds Limited & Anor.

Judges: Hope JA

Glass JA
Samuels JA

Court:
Supreme Court of New South Wales - Court of Appeal

Judgment date: Judgment handed down 8 October 1980.

Glass J.A.

This is an appeal by three plaintiffs who failed in the action which they brought to recover from two defendants the sum of $60,000.00 said to be due under a deed dated 19 November 1971. Under that instrument the plaintiffs, W.T. Malouf Pty. Limited, Malouf Bros. Pty. Limited and Michael William Malouf, agreed to sell and the defendant, Brinds Limited (hereinafter called ``the purchaser''), agreed to purchase the whole of the issued shares in the other defendant, Micrae Mining Investments Pty. Limited (hereinafter called ``the company''). According to the amended statement of claim filed on behalf of the plaintiffs it was a condition of the agreement for sale that the purchaser would cause the company to expend and that the company would expend a total amount of not less than $120,000.00 on mining operations on or before 30 June 1974 that the company had failed to expend any of the moneys in question and that the purchaser and the company were both liable under the said agreement to pay to the plaintiffs by way of liquidated damages an amount equal to 50 per cent of the difference between the amount the company was required to expend and the amount actually expended namely $60,000.00. The defendants' amended defence did not admit their failure with respect to the sum of $26,757.00 but otherwise conceded a breach of the agreement pleaded. But it went on to assert that the provision sued upon was void as a penalty and that the defendants were only liable for the loss actually sustained in consequence of the alleged breach. The proceeding, having been entered in the Commercial List, came on for hearing before Sheppard J. who by judgment delivered on 7 December last held that the provision sued upon was a penalty and that the plaintiffs were not entitled to recover more than nominal damages which he assessed at $1.00. On appeal to this Court the plaintiffs have submitted that his Honour fell into error in so ruling and the defendants have submitted that the provision did prescribe a penalty and advance a multiplicity of reasons for that conclusion.

The genesis of the transaction entered into by the plaintiffs as vendors of the shares and the first defendant as purchaser is to be found in sec. 77D of the Income Tax Assessment Act in the form in which it was originally inserted in the Principal Act by Act No. 93 of 1969. This provision, as quite plainly appears on its face, was actuated by the purpose of stimulating investment in various kinds of mining operations by allowing the investor a deduction from his taxable income. In view of the detailed submissions based upon the terms of its various subsections, it is necessary to set out most of them in full.

``77D(3) Subject to this section, a mining company that has, in a year of income,

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received moneys paid on shares may, for the purposes of the next succeeding sub-section and Divisions 10 and 10AA of this Part, within one month after the end of that year of income or within such further time as the Commissioner allows, lodge with the Commissioner a declaration in writing signed by the public officer of the company that the company has expended, or proposes to expend, such of those moneys as are specified in the declaration upon mining or prospecting outgoings.

(4)...

(5)...

(6) Subject to this section, a company that is a resident and has not, during a year of income of the company in which the company has received moneys paid on shares, carried on any business other than -

  • (a) eligible operations;
  • (b) the treatment in Australia of minerals obtained from eligible operations carried on by the company in Australia; or
  • (c) providing capital (whether by investment in shares or otherwise) to mining companies,

may, for the purposes of sub-section (10) of this section and Divisions 10 and 10AA of this Part, within one month after the end of that year of income or within such further time as the Commissioner allows, lodge with the Commissioner a declaration in writing signed by the public officer of the company that the company has expended, or proposes to expend, such of those moneys as are specified in the declaration upon outgoings of either or both of the following kinds, namely -

  • (d) mining or prospecting outgoings; and
  • (e) the making of payments to mining companies in respect of shares in those companies for the purpose of enabling the moneys included in the payments to be expended by those companies on mining or prospecting outgoings

(7) A company that has expended moneys in making payments to a mining company in respect of shares in the mining company is not entitled to lodge a declaration under the last preceding sub-section in respect of those moneys unless -

  • (a) the mining company has lodged a declaration under sub-section (3) of this section in respect of those moneys;
  • (b) the Commissioner has informed the first-mentioned company, in writing, that he is satisfied that the mining company has expended or will expend those moneys in accordance with that declaration; and
  • (c) the first-mentioned company has not been allowed a deduction under sub-section (4) of this section in respect of those moneys.

(8) A declaration lodged by a company under sub-section (6) of this section shall be deemed not to be duly lodged, in relation to moneys specified in the declaration that have not been expended by the company in accordance with the declaration before the declaration is lodged (not being moneys that the company has, by the declaration, declared that it proposes to expend on mining or prospecting outgoings only), unless the declaration is accompanied by an undertaking in writing signed by the public officer of the company that the company will not, without the approval of the Commissioner, pay any of those moneys to a mining company in respect of shares in that company unless, before the payment -

  • (a) the mining company has lodged with the Commissioner, for the purposes of the undertaking, Division 10 and Division 10AA of this Part, a declaration in writing signed by the public officer of the company that the company proposes to expend the moneys on mining or prospecting outgoings; and
  • (b) the Commissioner has informed the first-mentioned company, in writing, that he is satisfied that the mining company will so expend the moneys.

(9)...

(10) The amount of any moneys paid on

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shares paid by a person in a year of income of that person to a company and included in moneys specified in a declaration duly lodged by the company under sub-section (6) of this section shall, subject to this section, be an allowable deduction from the assessable income derived by that person in that year of income.

(11)...

(12)...

(13) If, at any time, the Commissioner -

  • (a) is not satisfied, as to any moneys specified in a declaration duly lodged by a company under sub-section (6) of this section, that those moneys have been or will be expended by the company in accordance with the declaration; or
  • (b) is of the opinion that a company by which a declaration has been so lodged has, in relation to any moneys specified in the declaration, failed to comply with the undertaking given by the company under sub-section (8) of this section in connexion with the declaration,

the Commissioner may inform the company, by notice in writing given for the purposes of this sub-section, that he is not so satisfied or that he is of that opinion, as the case may be, and, upon the company being so informed -

  • (c) the amount of any deduction allowable under sub-section (10) of this section by virtue of the declaration shall be reduced by an amount which bears to the amount of the deduction before being so reduced the same proportion as the amount of the moneys as to which the Commissioner is not so satisfied or is of that opinion bears to the amount of the moneys specified in the declaration;
  • (d) the undertaking given under sub-section (8) of this section in connexion with the declaration shall cease to apply to the moneys as to which the Commissioner is not so satisfied or is of that opinion; and
  • (d) the undertaking given under sub-section (8) of this section in connexion with the declaration shall cease to apply to the moneys as to which the Commissioner is not so satisfied or is of that opinion; and
  • (e) the declaration shall, for the purposes of sub-section (11) of this section, be deemed not to have specified the moneys as to which the Commissioner is not so satisfied or is of that opinion.''

To those perplexed by the labyrinthine complexities of sec. 77D, the following synopsis may be useful as a short and, it is hoped, not inaccurate guide. Investors like the plaintiffs could secure for themselves an allowable deduction under subsec. (10) by investing in the shares of an ``interposed company'' such as Micrae Mining Investments Pty. Ltd. provided that company then invests the money so subscribed in the shares of a mining company and provided also that the interposed company does not itself claim a tax deduction in respect of that investment (subsec. (7)(c)). In addition the following successive steps were required to secure the approval of the Commissioner. The interposed company must lodge a provisional declaration under subsec. (6) accompanied by an undertaking under subsec. (8) not to pay the moneys to the mining company until the Commissioner is relevantly satisfied. The mining company then lodges a declaration under subsec. (8)(a). If the Commissioner is satisfied that the mining company will expend the moneys for mining purposes and will at the end of the current year lodge a declaration under subsec. (3), he can approve the payment by the interposed company to the mining company, subsec. (8)(b). The money may then be safely paid by the interposed company to the mining company and the declaration of the interposed company under subsec. (6) is now duly lodged under subsec. (8) so as to complete the investor's title to a deduction under subsec. (10). If the mining company fails to lodge its future declaration under subsec. (3) or if the Commissioner is for any reason not satisfied that projected expenditure has accorded or will accord with declared intentions he can at any time exercise his

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powers under subsec. (13) with prejudicial effect to the whole or part of the allowable deduction under subsec. (10). Provided, however, the Commissioner continues to be satisfied that declared intentions are being or will be carried out no time limit is set by the section on the period within which the proposed expenditure may be made by the mining company.

The company was incorporated on 29 June 1970. I shall at this stage set out only that part of its history which explains the commercial setting in which the shares in it were sold and which relates to the principal ground argued before us. On the same day 140,000 shares were allotted as fully paid to the three plaintiffs in the following proportions viz. 80,000 to W.T. Malouf Pty. Ltd., 30,000 to Malouf Bros. Pty. Ltd., 30,000 to Michael William Malouf. On 30 July 1970 a declaration pursuant to sec. 77D(6) was forwarded to the Commissioner of Taxation under a covering letter of that date. The declaration contained the following paragraphs:

``2. That the company is a resident of Australia and has not during the year ended 30 June, 1970 carried on any business other than (a) eligible operations (b) the treatment in Australia of minerals obtained from eligible operations carried on by the company in Australia (c) providing capital to mining companies.

3. The company has received during the year ended 30 June, 1970 `moneys paid on shares' as defined in s. 77D(1) of the Act amounting to $140,000 from persons who are residents of Australia within the meaning of resident contained in s. 6(1) and s. 77D(1) of the Act.

4. The company has expended or proposes to expend, the said sum of $140,000 upon outgoings of either or both of the following kinds, namely -

  • (a) mining or prospecting outgoings, and
  • (b) the making of payments to mining companies in respect of shares in those companies for the purpose of enabling the moneys included in the payments to be expended by those companies on mining or prospecting outgoings.''

If the company had in its declaration merely stated an intention as in 4(a) to expend money in mining or prospecting outgoings there would have been no problem. However by informing the Commissioner that it also proposed to act in accordance with the statement in 4(b), there were immediately brought into play the interlocking provisions contained in subsec. (3), (6), (7) and (8). It was doubtless in a helpful attempt to explain these complexities that the Commissioner forwarded a letter to the company dated 23 November 1970 which in substance was as follows:

``As you would know, the provisions of section 77D, relating to the allowance of deductions for share capital subscribed to companies interposed between mining companies and the shareholders by whom the capital is to be provided have, as a general rule, been applicable only in cases where the mining company is directly and closely associated with the other company involved in the transaction.

Where such an association exists, the Commissioner is usually able to be reasonably satisfied that moneys paid on shares to an interposed company will be passed on to the associated mining company and be expended by it on mining or prospecting outgoings and also that the interposed company is a company of the kind described in section 77D(6).

There is nothing in your letter to indicate that the relationship that will exist between the mining companies and Micrae Mining Investments Pty. Ltd. is such that the Commissioner could be satisfied that the declared funds have been or will be expended by the company in accordance with the requirements of the section. There is, however, an alternative procedure which could be followed and which might be of assistance to the company. This procedure would apply in relation to the payment which, it is noted, was made to Bamp Mines Pty. Ltd. subsequent to 30 June, 1970.

Should Micrae Mining Investments Pty. Ltd. subscribe for shares in other mining companies in a reasonable time, these companies could immediately lodge declarations under section 77D(3) in respect of those particular moneys. These declarations, as well as a similar declaration required of Bamp Mines Pty.

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Ltd. would, without reservation, be accepted as being formal as to time. Once these declarations were lodged, determinations would be made - in the light of all the relevant facts - whether the companies are mining companies for the purposes of section 77D and whether the Commissioner should be satisfied that those companies will expend the moneys on mining or prospecting outgoings. It would then be open to the Commissioner to apply the relevant provisions of section 77D(7).

If in the event, Micrae Mining Investments Pty. Ltd. were informed in terms of section 77D(7)(b), it could then lodge a declaration under section 77D(6) in respect of so much of the moneys received from the individual shareholders and paid to the mining companies. An extension of time would be granted for the lodgment of any such declaration until examination of the matters affecting the mining companies is completed. Should Micrae Mining Investments Pty. Ltd. adopt this course, then a decision would be made whether, on the facts, the company is qualified to make a declaration under section 77D(6) in respect of the moneys in question.''

The efforts of the company to meet the requirements of the Commissioner were, to say the least, dilatory. The payment of $4,000.00 to Bamp Mines Pty. Ltd. to which the Commissioner refers in his letter, was made on 5 August 1970 but on 22 October 1971 no declaration under sec. 77D(3) (referred to for convenience as a D(3) declaration) had ever been lodged. The company had on 18 December 1970 invested $20,000.00 in Mogul Mining N.L. The evidence does not disclose at what date that company lodged with the Commissioner its D(3) declaration (it was not due till July 1971) but it does reveal that on 22 September 1971 the Commissioner had informed the company in accordance with subsec. (7)(b) that he was satisfied that the mining company had expended or would expend moneys in accordance with such a declaration. The position so far as the Commissioner was concerned immediately before the execution of the deed is disclosed in an office memorandum dated 22 October 1971 which is reproduced below. The Mr. Chippendale referred to was an employee of the plaintiffs' accountant, Mr. Young. Explanations in parentheses have been added. 

                                 ``OFFICE MEMORANDUM

                                  File No. A94440

Name       Micrae Mining Investments Pty. Ltd.

           Record of phone calls 28-4925 - Chippendale

Date

22.10.71      1970 D(6) Declaration - valid - lodged with D(8) undertaking.

              $140,000 subscribed by shareholders.



                20,000  to Mogul Mining N.L. - D(7)(b) issued on 22.9.71

      N/A        4,000  to Bamp Pty. Ltd. - no D(3) ever lodged

               116,000  unexpended?

               -------

               140,000

               -------

             Mr. Chippendale will ascertain whether any more of the funds have

             been or are in the process of being, invested and ring back next

             week.



             He does not accept that any uninvested balance is now lost as a

             deduction to shhldrs (shareholders), in the absence of any time

             limit in the Act in which investments must be effected, and it

             seems a D(13) will be necessary in this case. As I explained, it

             is always open to the shhldr (shareholder) (D. Gibbs) deprived of

             his dedn (deduction) under D(10) to appeal to the B/R (Board of

             Review).



1.11.71      Chippendale rang - he is still ascertaining position re $116,000,

             and will ring back. I explained position re Bamp P/L - it is up

             to txpr (taxpayer) to chase them up. He will lodge D(6) for







              

             $20,000 to Mogul.

8.11.71       No further word from Chippendale proposed to make no further

              enquiries re $116,000 but to issue D(13) notice when processing

              D(6) re Mogul $29,000.



              D.J. Gibbs.''

The deed entered into between the plaintiffs and the defendants recited the incorporation of the company and the investment in it of $140,000.00 by the plaintiffs for fully paid shares. It then provided that the vendors were to sell and the purchaser to buy the said shares at a price of 85 ½ c per share making a total sale price of $119,810.43. The deed contained the following two clauses upon which the vendors have sued:

``8. It is a condition of this Agreement that the Purchaser shall cause the Company to expend and the Company hereby agrees to expend on mining or prospecting outgoings as defined by Section 77D(1) of the Income Tax Assessment Act 1936-1971 (`the Act') or on the provision of capital for mining companies for which the Commissioner has given written approval pursuant to Section 77D(7)(b) of the Act on or before the 30th June, 1974 a total amount of not less than $120,000 of which an amount of not less than $40,000 shall be expended on or before the 30th June, 1972 and of which a further amount of not less than $40,000 shall be expended on or before the 30th June 1973. And in regard to the dates referred to in this Clause time shall be of the essence of the Agreement.

9. In the event that for any reason whatsoever the Company does not expend the amounts referred to in Clause 8 hereof within the time and for the purposes set out in that Clause or within such further times as the Vendor Michael William Malouf may agree then the Company and the Purchaser will forthwith jointly and severally be liable to the Vendors by way of liquidated damages on each such occasion for an amount equal to 50 percentum (50%) of the difference between the amount then required to be expended pursuant to Clause 8 hereof and the amount actually expended by the Company thereunder.''

The disparity between the capital of $140,000.00 subscribed in the interposed company and the promise in cl. 8 that future expenditure would amount to $120,000.00 is presumably explained by the view that $20,000.00 had been placed in Mogul Mining Co. with the approval of the Commissioner subject only to the lodgment of a D(6) declaration and that the $4,000.00 paid to Bamp Pty. Ltd. could be disregarded either because the failure of that mining company to lodge a D3 declaration imperilled its availability or because it was a relatively small sum.

As has been previously stated, the purchaser and the company defend upon the ground that the payment provided for by cl. 9 is by its nature not liquidated damages but a penalty and as such is irrecoverable. Before discussing the main ground upon which the payment is said to be a penalty it is necessary to set out certain additional matters proved at the trial. A Mr. Young, who was described as the accountant of the plaintiffs, agreed that in October and November 1971 Mr. Chippendale of his office was having conversations regarding the affairs of the company with officers of the Taxation Department. The following passage appears in his evidence:

``Q. Round about 25th October 1971 the probabilities are, are they not, that you were aware that the department was claiming that moneys originally subscribed to Micrae which had by then not been extended were lost to the shareholders as a deduction? A. Yes.

Q. It is probable, is it not, that you passed that information onto Mr. Malouf? A. That I don't know. I don't know whether it is probable or not.

Q. You may have, but you are not sure?

A. Yes.

Q. You recall the agreement of 19th November in respect of the sale of the shares in Micrae? A. I recall the agreement, I am not sure of the 19th November.

Q. I think you can take it that that was the date of it. Did you negotiate that

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agreement on behalf of the vendors? A. No, I assisted in the negotiations.

Q. Did your firm negotiate it? A. No we assisted

Q. Who did you assist? A. Mr. Malouf.''

Mr. M.W. Malouf gave evidence to the following effect:

``Q. Do you recall having any discussion with Mr. Young or Mr. Chippendale in October or November 1971, that is just prior to the sale agreement to Brinds, about the question as to whether the Commissioner would allow any deductions in respect of moneys paid to Micrae? A. I don't quite get the question. You mean for the interest it received? I just don't quite know what you mean.

Q. Do you recall any discussions with either of those gentlemen in that period about s. 77D deductions? A. About the expenditure of the money Micrae had?

Q. Yes, about that. Do you remember any discussion about - A. I remember something about it, that we were worried about the money.''

It was further proved that on 25 November, that is six days after the date of the deed, the Commissioner issued a notice under sec. 77D(13) in the following terms:

``Micrae Mining Investments Pty. Limited is hereby informed, for the purposes of sub-section (13) of section 77D of the abovementioned Act, that I am not satisfied that moneys totalling $120,000, being part of the moneys received by the company during the year ended 30 June, 1970, as moneys paid on shares for the purposes of that section and that the company specified in its declaration under sub-section (6) of that section dated 30 July 1970, have been, or will be, expended by the company in accordance with the declaration.''

Upon the above material the trial judge made the following finding which in the submission of the defendants was clearly open to him on the evidence:

``In my opinion, as the defendants have submitted, there was, well before the deed was executed, never any prospect of the Commissioner doing otherwise than proceeding pursuant to sub-s. (13) of the section. That he did six days after the deed was executed. One cannot help wondering, as counsel for the defendants put to me, whether the plaintiffs did not foresee that that was what was about to happen and endeavour, by entering into the deed in the form in which it was, to obtain a windfall profit as a result of the operation of cl. 9. I do not make that finding because the evidence does not enable me to do so. But what I am clear about is that the early correspondence with the Commissioner, which I have set out, shows that a notice pursuant to sub-s. (13) was a foregone conclusion. That being the situation, the plaintiffs were at no time lawfully entitled to the benefit of any deductions pursuant to s. 77D of the Act. My conclusion in that regard is another reason why the amount promised to be paid in cl. 9 must be a penalty and why the plaintiffs cannot recover more than nominal damages in this case.''

Before this Court the arguments respectively advanced by the parties took the following form. It was common ground between counsel that the governing rule to be applied was to be found in
Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd. (1915) A.C. 79 at pp. 86-7 and in particular in the following two propositions:

``1. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.

2. It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.''

Mr. Morling Q.C., for the defendants, argued that cl. 9 imposed a penalty because the attitude taken by the Commissioner before the sale, as corroborated by his notice shortly thereafter, showed that the chance that a deduction would be allowed to the vendors could not be realistically assessed at more than ten per cent whereas cl. 9 assessed that prospect at 100 per cent. Since the vendors had been shown to be well aware of the Commissioner's attitude, the

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provision made by cl. 9 could not be regarded as a genuine pre-estimate of the financial loss which they would suffer if the expenditure were not made. Mr. Handley Q.C. for the plaintiff vendors, submitted that the statute imposed no time limit within which to spend the money, that there was a chance that the Commissioner would change his attitude or that the Board of Review would in the exercise of its discretion take a different view from him and that the purchaser bore the onus of proving that the vendors in all the circumstances had no reasonable prospect of getting the deduction allowed. Since on the evidence it had failed to establish that fact, it followed that if the money had been spent there was a reasonable chance that the vendors would receive the benefit of the deduction and that the sum stipulated was not extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to follow from the breach but did no more than equal it.

Although I took a different view during the hearing I am now satisfied that the submission of the vendors should be accepted. As Mr. Handley stressed, there was no inequality in the bargaining position of the parties. The vendors in selling their shares in the company were in effect selling at a 15 per cent discount $140,000.00 capital which they had subscribed to it. It can be presumed that the arrangement suited both parties for the reason that, following the collapse of the mining boom, the vendors were experiencing difficulty in finding an investment outlet for these funds but the purchaser would not. In these circumstances I consider that the vendors would have been entitled to put their tax position to the purchaser in the following manner. ``We've had problems with the Commissioner who is threatening to disallow the deduction because of our relative inactivity between the 29th June, 1970 and 19th November, 1971. Nevertheless we think we can get the deduction allowed by him and failing that by the Board of Review provided the money is duly spent. But if the company fails to spend the money the tax deduction will be completely lost. Accordingly we want you to promise that the company will spend the $120,000.00 and that, if it does not, our loss consequent upon its failure is equal to the loss of the tax deduction which would otherwise be available to the three of us and for purposes of valuing that deduction the average marginal rate of the three taxpayers can be taken as fifty per cent.'' I cannot see that this is an estimate of loss which is unconscionable in amount or fixed in terrorem. It has not been shown in my view to be other than a genuine estimate, though no doubt highly optimistic, of what the maximum cost to the vendors would be if the money was not spent. To put it another way, it was an assessment at 100 per cent of a chance which objectively speaking, rated well below that but it was nevertheless an assessment which both parties accepted. In the
Clydebank Engineering case (1905) A.C. 6 the House of Lords treated as a provision for liquidated damages a stipulation that the sum of £ 500.0.0 per week was payable for failure to deliver in time four torpedo boats. Lord Halsbury said at p. 11:

``The very reason why the parties do in fact agree to such a stipulation is that sometimes, although undoubtedly there is damage and undoubtedly damages ought to be recovered, the nature of the damage is such that proof of it is extremely complex, difficult, and expensive.''

So it could be said here that the parties have agreed in advance on what should be the loss suffered by the vendors if the moneys were not expended. To litigate the issue of loss and prove that it amounted to less than the agreed figure is to undertake the very exercise which an agreement on liquidated damages is designed to obviate.

The calculation in advance of the damages which would be suffered by the vendors consequent upon the breach of cl. 8 involved difficulty at two levels. If the Commissioner had given his approval under subsec. (8) to a programme of expenditure, the computation of the value of the lost tax deduction to three taxpayers would offer some difficulty especially in the case of M.W. Malouf whose marginal rate would depend upon income received in each of three years. But in the situation which actually obtained there was in addition very great difficulty and complexity attaching to the calculation of the prospect the vendors had of obtaining from the Commissioner the allowance of the claim to a deduction in the actual event of the money not having been spent upon the

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hypothetical assumption that it had been spent. The clause obviated the necessity of proving what that chance would have been in the event of the failure to spend the money. So it is to be regarded as a prescription of the maximum loss the vendors would suffer in the event of non-performance and as such it cannot be categorised as extravagant and unconscionable in relation to the greatest loss which could be proved. There is a fallacy in the submission put to his Honour that the vendors knowing that they had little chance of getting the deduction allowed concealed their difficulties and sought a windfall profit by prevailing upon the purchasers to pay an amount equal to the deduction lost as a term of the agreement. It is to be remembered that if the purchasers performed the agreement, nothing was payable and the evidence supplies no reason for thinking that default on the company's part was a foregone conclusion. The defendants had the onus of proving that the estimate was not genuine. They proved only that, if the view of the Commissioner prevailed, it was excessively optimistic. But they also proved that the taxpayers' representative, Mr. Chippendale, did not ``accept that any uninvested balance is now lost as a deduction to shareholders'' and that the Commissioner accepted ``that it was open to a shareholder deprived of his deduction to appeal to the Board of Review''. There was no cross-examination of Mr. Malouf or Mr. Young to establish that they had no genuine belief that they would be able to succeed in having the deductions allowed. It follows that the defendants have proved only that the estimate which valued the prospect of recovering a deduction at 100 per cent was objectively inaccurate, not that it was subjectively wanting in genuineness.

The application of an accepted rule of law to an agreed set of facts has produced a close contest as to what result should ensue. The essence of the argument for the purchasers could be stated as follows. (a) If the purchasers had defaulted and the vendors were suing for damage, they could only recover for the loss of a chance of gaining a tax saving worth $60,000.00 and their damages would of necessity be discounted to a lesser sum. (b) This circumstance demonstrated that the undiscounted figure could not be a genuine pre-estimate of their damage. (c) It also showed that the greatest loss which could conceivably be proved by them was less than the stipulated sum. The vendors answered each of these points as follows. (a) If damages had not been liquidated, their precise estimation would have been a complex and difficult task. This makes it probable that the pre-estimate was a true bargain ( Dunlop at p. 88). (b) The assessment made by the vendors at the time of the agreement that the Commissioner's objections could be overcome by an energetic programme of mining investment has not been shown to lack genuineness. (c) If it was conceivable that the Commissioner's objections could be overcome, the failure to spend the money would mean a conceivable loss of $60,000.00. The purchasers have not shown that $60,000.00 liquidated damages is extravagant or unconscionable in relation to a conceivable loss of the same sum. For these reasons I would hold that the defendants have failed to establish that, because of the Commissioner's attitude at the time the agreement was made, cl. 9 exacted penalty from them.

The purchasers mainly succeeded before the trial judge upon a different ground which appears in the following passage from his judgment:

``In my opinion the evidence does not establish that the company had commenced business. It follows that the company was not able to lodge a valid declaration pursuant to sub-s. (6) and that the plaintiffs never had any entitlement to the s. 77D deductions which they claimed in their return of income for the year ended 30th June, 1970. It is true that the Commissioner allowed those deductions in part. But in my opinion that is of no consequence. The plaintiffs could not lawfully benefit from the deductions. That was a factor which existed at the time the deed was entered into on 19th November, 1971. The sum to be paid the plaintiffs, in the circumstances provided for in cl. 9 must therefore have been wholly disproportionate to any loss which the plaintiffs could possibly have suffered. It could not have been a genuine pre-estimate of damage within the principles to which I have referred. It follows that the amount provided for in cl. 9 must be a penalty and is not recoverable.''

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His Honour's chain of reasoning consisted, it can be seen, of the following links. The payment is a penalty because the taxpayers were debarred from claiming the deductions allowed by subsec. (10); they were debarred because the company could not validly file under subsec. (6) the declaration upon which the deduction depended; any declaration filed by the company under subsec. (6) would be invalid because during the year ended 30 June 1970 when the taxpayers paid money on shares it did not have the qualifications which subsec. (6) requires; it lacked qualifications because in point of construction the section refers only to companies then carrying on business and in point of fact it did not. The question of construction was raised before the Board of Review in Case K50,
78 ATC 471 but the members were unable to agree upon the answer.

The appellant vendors challenge his Honour's construction of the section as well as his finding of fact. With respect to the first matter it was stressed that there was an element of futurity in subsec. (6) in relation to the proposal to expend moneys in the period following the year of income as well as in the definition of mining company which includes a company which proposes to carry on eligible operations. The rhetorical question was posed: Why should subsec. (6) exclude a company which carries on no business at all in the year of income when the share capital is subscribed but proposes in the following year to carry on one or more of the businesses designated in para. (a) to (c) of the subsection. I do not myself derive much help in the task of construction from a consideration of policy matters of this kind which generally tend to be equivocal. I prefer to base my decision on the text of the subsection. The curious and convoluted phrase ``a company that... has not carried on any business other than (a), (b) or (c)'' conveys to my mind a different suggestion from the phrase which might have been used ``a company which has carried on the business of (a), (b) or (c) and no other''. The latter prescribes the requirement that the company has carried on some business of an approved kind. The former, it seems to me, is so worded as to prescribe the requirement that the company has not carried on any business at all unless it falls within an authorised exception. If that be the proper construction of the subsection, a company which has in the relevant year carried on no business at all meets that particular qualification. Whether his Honour erred in finding as a fact that the company carried on no business during the two days 29 and 30 June 1970 would on this view not arise. But I believe I should say that I would not myself come to a different conclusion. Depending as it did on the assessment of testimony given before him, his unwillingness to accept evidence that efforts were made on those two days to find an investment outlet could not be challenged. In addition I would not be prepared to disagree with the finding that the holding of an extraordinary general meeting of shareholders, a meeting of directors and the allotment of shares did not amount to the carrying on of business by the company.

But if I am wrong on the construction and the company could not for that reason lodge a valid declaration under subsec. (6), I would still not hold that cl. 9 provides for a penalty. I would here repeat the opinions expressed in relation to the earlier question. The estimate made by the vendors' loss in the event of breach has not been shown to be lacking in genuineness even if the company was disentitled to lodge a declaration within the meaning of subsec. (6). The vendors in proposing the estimate of their loss consequent upon default and the purchasers in agreeing to it, may have adopted a different construction of the section or may have had a different view of the facts or may have had reason to believe the Commissioner would take no point on the subsection or may never have directed their minds to the problem at all. To the extent that it was a legal difficulty within their appreciation it has not been shown that they accepted it as an insuperable obstacle to a deduction which robbed their estimate of genuineness.

Adopting the same approach I would reject arguments that the sum payable under cl. 9 was a penalty because of (a) the failure to lodge the subsec. (6) declaration within one month, (b) the partial invalidity of the declaration lodged due to ineligibility of the sums paid to Bump Pty. Ltd. totalling $8,825.00, (c) the inability to identify the $140,000.00 subscribed because of the way the company had invested it, (d) on the assumption that cl. 8 had been performed, the failure of the tax savings to amount to

ATC 4492

more than $41,714.00 unless some $20,000.00 paid in Div. 7 tax were properly to be taken into consideration, (e) the circumstances that the defendants could have complied with cl. 8 by arranging for the company to spend moneys which it borrowed without resorting in any way to the capital subscribed by the taxpayers, (f) an argument that the expenditure of the $120,000.00 outside the periods stipulated in cl. 8 would still be a breach because time was of the essence and the sum provided in cl. 9 would in those circumstances be disproportionate to the vendors' loss, (g) the provision in the clause for a single payment to the plaintiffs jointly when they could not suffer any joint damage.

Grounds (a) to (c) merely raise problems in obtaining the satisfaction of the Commissioner which are of lesser degree than those previously considered. As to (d), if the combined tax saving of the three vendors would have been $41,714.00 disregarding Div. 7 tax, as the respondents' submissions concede, and their combined loss approximately $60,000.00, if the increased Div. 7 tax were added, the genuineness of the pre-estimate is thereby enhanced. (e) and (f) raise questions as to whether the defendants would have been in breach given a set of different circumstances which it is unnecessary to decide. As to (g), granted that each taxpayer in the event of non-performance would have suffered a separate loss, I cannot see that a provision requiring payment to the three of them of a collective sum trenches upon the genuineness of the estimate of their combined loss.

Finally it was argued that there was no breach in respect of the sum of $26,757.00 which was the subject of the following admissions at the Bar. The plaintiffs admitted that it was spent on the provision of capital for mining companies and the defendants admitted that it was spent without the written approval of the Commissioner pursuant to subsec. (7)(b). As I construe cl. 8 of the agreement, these facts constitute a breach since the purchaser was under a composite obligation to spend the money and also to secure the approval of the Commissioner to such expenditure by itself taking appropriate steps under subsec. (6), (7) and (8) and procuring that the mining company took appropriate steps under subsec. (3) and (8).

For these reasons I would hold that the damages for which cl. 9 provides are indeed liquidated damages and not a penalty; that the defendant company has been shown to have spent none of the $120,000.00 in the manner required by cl. 8 and that the plaintiffs are accordingly entitled to recover the sum of $60,000.00 by way of liquidated damages. I would propose that the appeal be allowed, that in lieu of the judgment below there be substituted judgment in the sum of $60,000.00 and that the plaintiffs should recover the costs of the trial and of the appeal. The defendants, if otherwise entitled, should have a certificate under the Suitors' Fund Act.


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