Case M80
Judges:HP Stevens Ch
CF Fairleigh QC
JR Harrowell M
Court:
No. 1 Board of Review
H.P. Stevens (Chairman)
The overall question for decision in these references is whether the Commissioner, in arriving at the net income of a partnership (of 20 parties), has correctly disregarded share transactions (including a ``Curran'' bonus share issue of $1,000,000) and determined a net income of $4,649 in lieu of the returned net loss of $999,031.01. In deciding this overall question other issues arise and these will be set out in the paragraphs dealing with the respective arguments advanced - see now para. 47, 54 and 55.
2. Before proceeding to set out the facts it might be appropriate to quote the final paragraph of a letter from a firm of solicitors to a firm of chartered accountants viz.:
``... I realise that I am probably suggesting much more attention to detail than usual, but the only way that I can see the proposal failing is through things not being done with absolute precision.''
I have done so not because at this stage of writing I have formed any view as to whether the proposal has failed or succeeded (this process can only commence once the facts have been found) but because, as will be seen, the evidence is less than crystal clear as to what happened and more particularly as to when what happened did occur. One reason for this being that the diary of the main witness B (see para. 4 for designation) was said to be missing and no attempt was made to clarify matters through the solicitor's file of correspondence etc.
3. Normally in writing my reasons I separate documentary material from the oral evidence and present it basically in chronological order but that is not entirely appropriate here for documents bear dates whilst the oral testimony at times does not support those dates. Thus there will be some intertwining of documentary and oral evidence.
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4. The parties involved can broadly be categorised as -
- (a) a firm of chartered accountants and the partners and employees etc. thereof (providing 6 of 20 ``partners'');
- (b) clients of the firm of chartered accountant in capacities both as members of the partnership (8) and as the companies providing the basis of a ``Curran'';
- (c) a firm of solicitors and the partners thereof (2 partners);
- (d) a stock broker and relative (1 partner); and
- (e) a company to be a ``purchaser'' from the partnership.
The symbols I will be using are as follows:
- A * Senior partner in firm of chartered accountants
- B * Employee of firm - also director K
- C * Employee of firm
- D Client of firm
- D1 * Company of D
- D2 * Company of D
- E Stockbroker - also in control of K
- F * Firm of solicitors (two members partners)
- G One of client companies providing basis of ``Curran''
- G1 Shareholder in G (also member of partnership)
- G2 Shareholder in G
- H Other client company providing ``Curran'' basis
- H1 Parent company of H
- H2 Company interested in H1
- H3 Company holding control of H through shareholding H1 and H2
- J * Director of H1 and H2 (also member of partnership)
- K Company ``purchaser'' from partnership
- K1 Nominee company for K in ``purchase''
- L Member of Darwin firm of chartered accountants.
- * Some of partners.
The taxpayers concerned in the three references are B and two clients of the accounting firm - one a company the other an individual. Evidence in the references was given by B, C, L, representatives of G, H and H1 and the company taxpayer and the individual taxpayer.
5. A, B and E had lunch together some time late in May 1977 at which a ``Curran'' scheme was mentioned. There followed a discussion as to the feasibility of doing one ourselves, i.e. the firm of chartered accountants and B was directed to do exploratory work. First he had to look at the availability of suitable companies (and presumably this included the consent of the shareholders therein), the amount of capital required to do the ``Curran'' and to talk to people who might be interested in taking part in the ``Curran''.
6. Insofar as the availability of suitable companies is concerned the parties designated G and H were clients of the firm of chartered accountants and their accountancy work had been carried out by B. In May 1977 both companies were ``dormant'' and an analysis of their books of account indicates that the situation then was basically as follows:
G H
$ $
Authorised Capital 100,000 20,000
- Unissued Capital - 19,460
------- ------
Issued Capital 100,000 540
Capital Profits
Reserve 176,004 841,391
Capital Redemption
Reserve - 440
P/L Appropriation
A/c. 17,010(DR.) 522,106
------- ---------
258,994 1,364,477
-------- ---------
Loan G1 and H2
respectively * 254,491 1,360,477
Bank 4,503 4,000
------- ---------
258,994 1,364,447
------- ---------
- * There being loans of not lesser amounts from G1 to G2 and H2 to H1.
7. B had discussions with representatives of the shareholders in G and H. The date of these discussions could not be recalled precisely but it was obviously very soon after
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the lunch referred to in para. 5. In relation to G it was said by B that the representative advised, about a week later, agreement to the purchase by the partnership of the shares in G and was in turn told that it would be necessary to execute certain documents. It was also indicated that the partnership would be looking to borrow funds from the shareholders to finance the purchase. A meeting of directors of G2 was held on 6 June 1977 (A and the representative of G who gave evidence being the only persons present) at which it was resolved to execute the appropriate documents and to ``lend interest free, unsecured and at call an amount not exceeding the sale proceeds of shares in (G), including the shares belonging to'' an individual with a minority interest in G. B similarly discussed the situation of H with J and, in answer to a question as to why the shares should be sold to the partnership, told him firstly the company was of no use to him and secondly that H3 in acting as promoter of the partnership was interested in seeing the shares were sold: J then agreed (the reference to H3 acting as promoter of the partnership was never explained).8. Insofar as the people who might be interested in taking part aspect is concerned the evidence was far from complete. B said he telephoned D and there was a discussion of the possible amounts involved and the anticipated ``Curran'' deduction - told ``losses'' to be around $1,000,000. Subsequently B called D when formation coming to fruition (date not given) and D instructed B to make arrangements with the secretary of D2 - B having later discussions with that person. The representatives of two other clients were spoken to by A and B - date unstated by B but one of the representatives said it would have been in June 1977 when they went in to arrange for the preparation of income tax returns - and were told a partnership was in the process of formation. They were informed the partnership would borrow to finance the acquisition but such would be of a short term nature. B also had discussions with a representative of G1 and suggested, as tax adviser, it go into the partnership - date of discussion unstated and representative uncertain but directors meeting of G2 of 6 June 1977 refers thereto so that it must have been prior to that date. None of the persons spoken to who gave evidence had much appreciation of what was involved. The representative of G group thought there was to be a purchase of one or more companies with trade losses - she had little recollection of anything and at one stage said ``I am out of my depth'' and that A ``was the one who instigated the whole thing''. The representative of the company taxpayer thought it was like a Growth Fund ``we had been in'' before although he was told ``it would be a taxation advantage'' - advised of amount to put in knowing anticipated profits of company. The individual taxpayer said he was told he should join as he could save himself some tax. He sent papers to his solicitor and later signed some which he would not have read - he did not know when they were signed.
9. Following the ``lining up'' of both suitable companies and interested parties (and also an ultimate purchaser - see para. 28 - B being a director of K and E in control thereof) B arranged with F (two partners thereof being interested parties) for the necessary documentation - date of arrangement unstated. It will now be convenient to deal separately with matters relating to the partnership and the ``Curran'' transaction.
Partnership
10. Articles of Partnership bearing date 7 June 1977 were prepared by F consisting of a number of copies - cl. 12 acknowledged that ``this agreement may comprise a number of copies thereof each executed by one or more of the Partners'' - and this was said to be by reason of the parties being spread geographically. Four copies were tendered but a fifth said to have been signed by four parties (including the individual client taxpayer) was said to be missing - last seen some years ago. B said he sent out the copies but neither date of despatch nor dates of return were given - it is known however that the copy signed by the two partners in F was returned under cover of letter of 21 June 1977. Insofar as dates of deposit of capital contributions to be paid on or before signing are concerned the first appears to have been on 9 June 1977 and the last on 21 June 1977.
11. The Articles list the twenty parties thereto and, in this regard, D is not named therein. However, in an application for a
ATC 560
business name lodged on 9 June 1977, D was named as one of the persons ``to be registered as carrying on business under the'' applied for name. By statement of change (declared by B on 18 July 1977) it was notified D had ceased and D1 had commenced (from 7 June 1977) to carry on business under the business name. It is difficult therefore to be certain that the schedule listing the parties was that originally attached to the Articles of 7 June 1977 - the exhibits all being photocopies and not containing the original strike. Having mentioned the business name application this aspect might be completed now. Correspondence ensued and it was not until 26 April 1978 that a certificate of registration was issued - after lodgment of a further application giving ``date or proposed date of commencement'' as 11 February 1978 (another party also being substituted therein). The failure to have the name registered was said to be the reason why the transfers were in the names of the 20 members (see para. 20) in lieu of a single title.12. The Articles of Association, which have affixed Stamp Duty stamps rather than an official imprint, provide, inter alia -
``WHEREAS
A. The Partners have agreed to carry on in partnership the business of purchasing or acquiring for the purpose of their sale at a profit the shares debentures or other interests in any company or corporation public or proprietary and whether listed for quotation on any Stock Exchange or not the collection of any dividends bonuses or other entitlements accruing thereon and the resale of such shares debentures or other interests.
B. The Partners have agreed to the terms and conditions of the partnership and have agreed to enter into this Agreement for the purpose of recording the same.
NOW THIS AGREEMENT WITNESSETH that the Partners hereby mutually agree between them as follows: -
1. COMMENCEMENT AND LIMIT OF PARTNERSHIP:
- The partnership shall commence with effect from the 7th June 1977 and shall be limited to the business activities described in Recital A.
3. DURATION:
- The partnership shall continue until determined as hereinafter provided.
5. CAPITAL AND SHARES IN PROFITS:
(a) The capital of the partnership shall be the total sum shown in the schedule hereto and any further sum as the Partners may from time to time agree to contribute and the assets from time to time representing such sums.
(b) Each Partner shall on or before the signing hereof pay the sum set opposite to his name in the Schedule by way of contribution to the capital of the partnership and all such sums shall be paid to the credit of the partnership bank account.
(c) Each Partner shall share in the profits (if any) and contribute to the losses (if any) (whether such losses exceed the said capital or not) in the proportion of his contribution to the said capital. No Partner shall be entitled to make any drawings on account of his share of the profits and shall only be entitled to such distribution of profits as may be determined by resolution of the Partners from time to time.
7. MINUTE SECRETARY:
- From time to time the Partners shall appoint one of their number to keep Minutes of decisions by the Partners, supervise the preparation of accounts and have custody of the partnership minute book, books of account, other records and any share certificates and like documents of title relating to the partnership assets. All such books, records and documents shall always be open to the inspection of each Partner.
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8. MEETINGS NOTICES VOTING AND MINUTES:
(a) The Minute Secretary shall call a meeting of the Partners within two months after the preparation of the accounts referred to in Condition 6(b) and the business of such meeting shall in addition to the consideration of any business brought forward be the consideration of such accounts.
(b) The Minute Secretary may with the concurrence of at least two other Partners call meetings of the partners whenever he thinks desirable and shall call such meetings if required in writing by any four Partners to do so.
(c) All meetings shall be called by sending a notice in that behalf in a prepaid letter addressed to each Partner at the address for him shown in the Schedule or such other address as he may have notified to the Minute Secretary. Except in urgent cases such notices shall be posted in time to give each Partner at least twenty four hours' notice of meeting on the assumption that the notice will be delivered in the ordinary course of post.
(d) Each Partner shall have one vote for every complete sum of One hundred dollars ($100.00) subscribed by him to the capital. All questions shall be decided by a majority of the votes of those present and voting at a meeting duly called and such decision shall be binding on all Partners whether present at such meeting or not.
(e) Each Partner shall by instrument in writing under his hand be entitled to appoint another Partner or some other representative acceptable to the partners to attend and vote on his behalf at any meeting. A corporation may be a Partner and may appoint under seal a representative from time to time to attend at meetings and vote on its behalf.
(f) A resolution in writing (determined without any meeting) signed by all of the Partners shall be as valid and effectual as if it had been duly passed at a duly convened meeting of Partners and the Partners may sign the same on separate copies of the resolution or document circulated for that purpose.
(g) Minutes of the proceedings of every meeting of the Partners and the document or documents evidencing every resolution passed pursuant to Condition 8(f) shall be recorded and kept in proper books kept for that purpose and in the case of Minutes shall be confirmed either at the meeting to which they relate or at a subsequent meeting and shall be signed by the Chairman of the meeting at which the Minutes are confirmed. The minute book so signed shall upon production and without further proof be prima facie evidence of the proceedings recorded in it and of their regularity.''
13. In addition to the Articles of Partnership two other sets of documents were brought into existence - Resolutions bearing date 8 June 1977 and Powers of Attorney bearing date 10 June 1977.
14. The Resolutions, pursuant to Condition 8(f) of the Articles of Partnership, record an agreement to -
- (a) appoint a firm of stockbrokers with instructions to purchase at best 20,500 Woodside Petroleum Ltd. rights, 2,000 Audimco shares and 500 Pancontinental Mining Ltd. shares;
- (b) grant a Power of Attorney to four only of the 20 partners ``jointly and any two of them severally enabling them to sign share transfers, contract notes, proxies, etc., etc. relating to the partnership business,'' and
- (c) nominate any two of the same four to be signatures to a bank account.
15. Under the Power of Attorney the four named persons (including B, C & J) were authorised:
``1. To buy any moveable or immoveable property and to sell pledge mortgage or otherwise deal with or dispose of the interest of the Donor in same.
2. To commence carry on or defend all actions or other proceedings with respect
ATC 562
to the interests and rights of the Partnership.3. To receive and give receipts for moneys due to the Partnership and to adjust and settle all accounts relating to the Partnership.
4. To execute and deliver all contract notes, transfers, proxies, applications for shares, deeds or other documents necessary for the purposes aforesaid or any of them or for the management and development of the business of the Partnership AND to vote (and delegate proxies for voting) at the meetings of any company in which the Partnership may hold any interest.
5. Generally to do all acts necessary or expedient in the interests of the Partnership as fully and effectually as I could have done if personally present.
6. To appoint and remove at pleasure any substitute for or agent under them in respect of all or any of the matters aforesaid upon such terms as the Attorneys shall think fit.''
The Powers of Attorney were executed in the form of deeds and B was the witness to the signatures on nine of the individual powers of attorney. In cross-examination, B admitted he was not present when four of those particular powers were signed.
16. Under cross-examination B also said the powers were sought and granted on the basis that they would not be used for any purpose except to operate a bank account and statutory purposes. However they were also for another purpose. Thus, by separate deeds dated 24 June 1977 (stamped NT $2 29 June 1977), the powers of attorney were used to appoint L to respectively -
``... be the attorney in the Northern Territory of each of the Partners for them and in their names or in the Grantors' names or in the Donee's own name to purchase and acquire the shares set forth in the Second Schedule hereto from the persons and for the consideration thereby appearing and to execute sign seal and deliver in the Northern Territory all share transfers assignments and instruments and perform all acts matters and things which may be necessary or expedient to effectuate the purposes aforesaid''
and
``... be the attorney in the Northern Territory of each of the Partners for them and in their names to sell and dispose of the shares set forth in the Second Schedule hereto to the persons and for the consideration thereby appearing and to execute sign seal and deliver in the Northern Territory all share transfers assignments and instruments and perform all acts matters and things which may be necessary or expedient to effectuate the purposes aforesaid.''
These deeds and others are referred to again in para. 20.
17. The dates these Resolutions and Powers of Attorney were despatched for execution (B said this would have been for the Resolutions subsequent to 8 June 1977) and actually executed in unknown. B said he thought all the Powers of Attorney (of which he admitted control in disbursing and receiving) would have been back to him prior to 24 June 1977. Whether they were or not cannot be precisely stated although it is known that the Resolutions and Powers of Attorney executed by the two partners in F were (together with the Articles of Partnership) forwarded to B under cover of letter of 21 June 1977.
``Curran'' transactions
18. By letter of 20 June 1977 F wrote to B referring to drafts which had been sent them by B. The method of dealing with all aspects was set out viz.:
``A. ( Re H )
1. The following share transfers take place:
- (Nominee for H1) to the four Attorneys (who will hold as nominees for the Partners) - 1 ordinary share
- (H1) to the Partners - 19 ordinary shares
- (H1) to the Partners - 250 5% preference shares.
2. The Directors resolve to call a meeting to increase the share capital and at that meeting to indicate to shareholders their proposals to capitalise $841,200.00 and declare a dividend to be satisfied by the issue of 420,600 $2.00 ordinary shares.
ATC 563
3. The shareholders hold a meeting authorising the increase of the Company's capital by $840,000.00 to $880,000.00 by the creation of 420,000 new ordinary shares of $2.00 each. (In this regard there are also available 5,960 unissued ordinary shares in the existing capital.) In addition the Minutes of this meeting should note and approve of the Directors' proposals.
4. The Directors hold a further meeting at which they pass the resolutions to capitalise profits, etc. and resolve to allot the 420,600 $2.00 ordinary shares amongst the holders of the existing ordinary shares.
5. After the allotment of new shares the registered shareholdings on the Darwin Register will be:
Old New Total The four Attorneys 1 21,030 21,031 The Partners 19 399,570 399,589
- The Partners will also continue to hold 250 5% convertible preference shares.
6. The following share transfers take place:
- The four Attorneys to K1 (as nominee for K) - 1 Ordinary share
- The four Attorneys to K - 21,030 ordinary shares
- The Partners to K - 399,589 ordinary shares
- The Partners to K - 250 5% convertible preference shares.
B. (Re G)
1. The following share transfers take place:
$2.00 Ord. shares (G2) to the four Attorneys (as nominees for the Partners) 1,000 (G2) to the Partners 45,840 (Minority shareholder) to the Partners 3,1602. The Directors resolve to call a meeting for the purpose of increasing the share capital and also resolve to recommend to that meeting the capitalisation of profits and declaration of a dividend.
3. A shareholders' meeting takes place at which:
- (a) The capital is increased by $160,000.00 to $260,000.00 by the creation of 80,000 new ordinary shares of $2.00 each.
- (b) Note the Directors' recommendation and pass the resolutions capitalising profits and declaring the dividend.
4. A further Directors' meeting takes place at which the new shares are allotted.
5. After the allotment of new shares the registered shareholdings on the Darwin Register will be:
Old New Total The four Attorneys 1,000 1,588 2,588 The Partners 49,000 77,812 126,8126. The following share transfers then take place:
$2.00 Ord. shares The four Attorneys to K1 (as nominee for K) 1 The four Attorneys to K 2,587 The Partners to K 126,812Would you please thoroughly check the above and let me have any comments you may wish to make as quickly as possible.
So far as the preparation of documents is concerned, I would suggest the following:
- (a) I will arrange the preparation of all appropriate Powers of Attorney for the operation of the Northern Territory Register and you can arrange minutes, requests for removal, share transfers, etc.
- (b) I will draft the wording of the various minutes authorising the increase of share capital, capitalisation of profits and declaration of profit and declaration of a dividend for incorporation in various minutes of meetings to be drafted by you.
- (c) When all documents have been prepared I would suggest that we meet to put them together, draft
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appropriate instructions to the Northern Territory and send documents as appropriate there, and then prepare a full and detailed check list and timetable.''
19. Under cover of letter of 21 June 1977 F returned certain documents (see para. 17) and advised:
``At this stage we are enclosing the original and two spare copies of each of the following documents:
- 1. Power of Attorney from the Partners to L (re acquisition of shares).
- 2. Power of Attorney from (nominee of H1) to L.
- 3. Power of Attorney from H1 to L.
- 4. Power of Attorney from (Minority holder) G to L.
- 5. Power of Attorney from G2 to L.
- 6. Power of Attorney from the Partners to L (re sale of shares).
- 7. Power of Attorney from K to L.
- 8. Power of Attorney from K1 to L.
- 9. Request for conversion of `A' shares in H into ordinary shares.
- 10. Resolutions to be passed by the Directors of H (the resolutions to be passed at the succeeding meetings of shareholders and Directors follow from these).
- 11. Resolutions to be passed by the Directors of G (the resolutions to be passed at the succeeding meetings of shareholders and Directors follow from these).''
20. B phoned L and sent him a letter of 24 June 1977 in the following terms:
``Further to your telephone conversation with out Mr. (B), we enclose the following documents:
1. Certified copies of Directors' resolutions to open branch registers in the Northern Territory.
2. Powers of Attorney in your favour from:
- (Minority Holder G)
- G2
- 4 holders of Power of Attorney
- Nominee of H1
- H1
- K
- K1
3. Requests for transmission of Shares and Share Certificates as follows: -
H - H1 19 Ord. - Nominee of H1 1 Ord. - H1 250 Pref. G - G2 46,840 Ord. - Minority holder G 3,160 Ord.4. Share Transfers to be executed under Powers of Attorney as follows: -
H No. Vendor Purchaser of Shares Nominee 4 holders H1 P/A 1 H1 Annexure " A " 19 H1 Annexure " A " 250 Pref.H No. Vendor Purchaser of Shares Annexure " A " K 250 Pref. Annexure " A " K 19 4 holders P/A K1 1 Annexure " A " K 399,570 4 holders P/A K 21,030G No. Vendor Purchaser of Shares Annexure G2 " A " 45,840 G2 4 holders P/A 1,000 Minority Annexure holder G " A " 3,160 Annexure " A " K 49,000 Annexure " A " K 77,812 4 Holders ofP/A K 999 4 holders of P/A K 1,588 4 holders of P/A K1 1''
Annexure ``A'' listed the 20 members of the partnership.
21. The certified copies of Directors resolutions were dated 17 June 1977, the Powers of Attorney 24 June 1977, request for transmission of shares 24 June 1977 and conversion of shares 23 June 1977. The share transfers were all completed except for date of execution and signature (to be done by L) and were for: -
Re H No. of Shares Consideration
$
Nominee to 4 holders
H1 P/A 1 67,995.00
H1 to Annexure
"
A
"
19 1,291,905.00
H1 to Annexure
"
A
"
250 Pref. 500.00
------------
20 Ord. + 250 Pref. 1,360,400.00
------------
Annexure
"
A
"
to K 250 Pref. 500.00
Annexure
"
A
"
to K 19 62.18
Annexure
"
A
"
to K 399,570* 1,293,505.88
4 holders P/A to K 21,030* 68,079.26
4 holders P/A to K1 1 3.28
------------
20 Ord. + bonus issue 1,362,150.60
420,600*+ 250 Pref. ------------
Re G
G2 to Annexure
"
A
"
45,840 233,325.60
G2 to 4 holders
P/A 1,000 5,090.00
Minority to Annexure
holder G
"
A
"
3,160 16,084.40
------ ----------
50,000 254,500.00
------ ----------
Annexure
"
A
"
to K 49,000 97,469.86
Annexure
"
A
"
to K 77,812* 154,782.14
4 holders P/A to K 999 1,987.19
4 holders P/A to K 1,588* 3,158.82
4 holders P/A to K1 1 1.99
------ ----------
50,000 + bonus issue 79,400* 257,400.00
------ ----------
22. L said the above letter was received on 26 June 1977 and he instructed staff to open Branch Registers for G and H and those were opened on 28 June 1977. He then, as requested, advised B by telephone accordingly. Following this advice B had a number of meetings - some of which were on 28 June 1977 and others on 29 June 1977. However C who was also involved deposed that his diary record indicates all were held on 28 June 1977. At these meetings the necessary resolutions were passed and later, according to B written up sometime in the period July to December 1977 - no notes taken at time of meetings and resolutions reconstructed from letters of F.C.'s recollection was of pre-prepared minutes. There is thus some doubt as what in fact happened and when. This doubt is compounded when B said minutes were kept loose in a central place (so that when Minute Books tendered all relevant sheets were loose) and C deposed minutes would be affixed as soon as practicable after a meeting - within a week or so.
23. The Minute Book of G records a meeting of directors on 28 June 1977 (B and C in attendance) at which transfers of shares on the Darwin Register (as per para. 20) were approved, B and C appointed directors (B appointed Chairman and additional Secretary), other directors and secretary resigned and it was resolved that an Extraordinary General Meeting of members be convened forthwith to consider two resolutions viz.:
- That the authorised capital of the Company be increased by $160,000 to $260,000.00 by the creation of 80,000 new ordinary shares of $2.00 each.
1. Special Resolution
- That the sum of $158,800.00 forming part of the Capital Profits Reserve Account (comprising profits derived wholly and exclusively from the sale of assets not acquired for the purpose of resale at a profit) be capitalised and distributed amongst those who are ordinary shareholders on the date of passage of this resolution (namely 28th June, 1977) on the footing that they became entitled thereto as capital.
- And that such capitalised fund of $158,800.00 be applied on behalf of the ordinary shareholders in paying up in full 79,400 of the unissued ordinary shares of $2.00 each in the capital of the company
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- And that such 79,400 ordinary shares be distributed accordingly amongst the ordinary shareholders in full satisfaction of their interest in the said capitalised sum and in proportion to the number of shares held by them respectively.
2. Ordinary Resolution
This Ordinary Resolution differed slightly from that supplied by the solicitors (para. 19) by omitting ``in accordance with the recommendation of the Directors''. B and J ``being all the shareholders of'' G consented to the short notice and at an Extraordinary General Meeting (B and J with C in attendance) of 28 June 1977 the resolutions were passed. However, despite the notice of resolution omitting reference to director's recommendation, the resolution as passed by the shareholders commenced with the words ``That in accordance with the recommendation of the Directors the sum of...''. The notice of resolution for H was the same as for G whilst that as recorded in the Minute Book also commences with the same words - neither B, C nor J were at the Directors meeting of H and neither B nor C were appointed directors at that meeting. The resolutions for H also are not in accordance with that supplied by the solicitors which, inter alia, stated -
``Resolved that at the Extraordinary General Meeting referred to above the shareholders be informed that subject to the increase in the Company's authorised capital being approved the Directors propose to exercise their powers under Article 96 and pass a resolution to the following effect:''
The reason for the variation between the two sets of resolutions having been explained in the letter of 20 June 1977 viz.:
``(b) There will need to be a significant difference between the treatment of H and G, as in the case of H the Directors appear to have an absolute power to declare dividends while in the case of G the usual provisions under which the Directors recommend and the shareholders do the declaring apply.''
In relation to the directors meeting of H the representative of H1 (also director of H) said he merely signed what B put in front of him - could not remember when signed. B and J ``being all the shareholders of'' H consented to short notice and at the Extraordinary Meeting of Shareholders (B and J only present) the resolutions (this time increasing authorised capital to $860,000 by 420,000 new ordinary shares of $2 each and applying $841,200 of the Capital Profits Reserve in respect of 420,600 shares) were passed.
24. In respect of the meetings of B and J ``being all the shareholders'', B said he left his office and went down the hall to that of J and announced that as shareholders of G and H we are now having a meeting. In chief B deposed that he then continued on re bonus etc. but in cross-examination admitted nothing had been read, that there had been no notice at all and that the notice of meeting and consent to short notice had been typed up some months after the event. As indicated para. 22 this applies to all relevant minutes in the Minute Books of G and H. It will be noted that although in respect of G there was no Directors' recommendation re allotment in the notice of resolution (nor a resolution specifically alloting bonus shares) despite one in the minuted resolution there was, in relation to H no Directors' resolution to allot anywhere. See also para. 43 re documents lodged Corporate Affairs Commission.
25. Following these ``meetings'' two telexes were sent to L - in this regard B had made arrangements to utilize the services of the telex operator of the stockbroking firm and had forwarded her in advance three messages (six typed sheets 1(a), 1(b), 2(a), 2(b), 3(a) and 3(b) respectively). The first was sent on 28 June 1977 at 2.20 p.m. and comprised sheets 1(a) and 1(b). It reported the directors had approved the registration of transfers to the 4 holders of P/A and the partnership (as set out above) and said ``Vendors and Purchasers advise that consideration for the shares has been paid. Please make the appropriate entries in the `branch registers' and advise when complete''. (Insofar as payments are concerned a number of cheques all originally dated 28 June 1977 are involved and are dealt with in para. 29.) A return telex was received by the operator at 3.55 p.m. and advised to B for another telex (in terms of sheets 2(a) and 2(b)) was sent to L at 4.15 p.m. advising of the Capital Profits Reserve transactions, of the ``allotments'' to be made (use of Annexure ``A'' therein obviously referring to the details sent by letter of 24 June - see para. 20) and asking ``please make
ATC 567
appropriate entries in branch'' registers ``of members and advise when complete''. A return telex was received late on 28 June 1977 and advised to B early on 29 June.26. ``Meetings'' of directors were held on 29 June 1977 approving the transfers from Annexure ``A'' and the 4 holders of P/A to K and K1 (B and C being those present at the G meeting and neither being present at the G meeting). A further telex (in terms of sheets 3(a) and 3(b) was sent to L at 10.25 a.m. advising approval of the transfers and ``Vendors and Purchasers advise that consideration has been paid. Could you please make the appropriate entries in the Branch'' registers ``PS. Do not close Branch Register (5) as further transfers pending''. (The payment aspect is dealt with in para. 29 whilst nothing was said concerning the ``further transfers pending''.) L sent a telex advising the shares were registered and this was received at 3.40 p.m. on 29 June 1977.
27. Paragraph 6 sets out the position in regard to G and H prior to the various transactions concerned and the position immediately after the increase in capital and ``issue'' of further shares can be shown thus:
G H
$ $
Authorised Capital 260,000 860,000
- Unissued 1,200 18,260
------- -------
Issued Capital 258,800 841,740
Capital Profits
Reserve 17,204 191
Capital Redemption
Reserve - 440
P/L Appropriation
A/C 17,010 (DR.) 522,106
------- ---------
258,994 1,364,477
------- ---------
Loan G1
&
H2
respectively 254,491 1,360,477
Bank 4,503 4,000
------- ---------
258,994 1,364,477
------- ---------
Neither the basis of the respective purchase and sale prices for G of $254,500 and $257,400 or for H of $1,360,400 and $1,362,150.61 (see para. 21) was given to the Board. It is not apparent why as at 29 June 1977 the shares should have had any greater value than as at 28 June 1977.
28. The above dates are the respective ones when L as attorney is said to have ``purchased and acquired'' the shares and ``sold and disposed'' of the shares. Of course, if the purchase and sale had been at any earlier dates (i.e. before Darwin Register opened on 28 June), N.S.W. Stamp Duty should have been payable. In this regard B admitted in cross-examination that the shares had been already presold to K before they were ``purchased''.
29. Turning to the ``payment'' aspect (both purchase, sale and loans) there were a series of cheques viz.:
Cheque Butt Notation
Party No. Amount Payee (P'ship only)
$
P'ship 802 1,360,400.00 H1 Shares in H
803 254,500.00 G2 Shares in G
804 1,360,400.00 H1 Repayment of loan
805 254,500.00 G2 Loan repayment
H1 479 1,360,400.00 P'ship (Loan to P'ship)
N/A 1,362,150.00 K (Loan to K)
G2 305 254,500.00 P'ship (Loan to P'ship)
307 257,400.00 K (Loan to K)
K 208 1,619,550.60 P'ship (Shares in G and H)
ATC 568
B attended to all banking for all parties - each deposit slip bearing his signature - and deposits to the various accounts were made on 29 and 30 June 1977. The deposit slips for 29 June 1977 originally were dated 28 June 1977 whilst one for 30 June 1977 was also altered from 28 June 1977. All cheques involved were dated originally 28 June 1977 although some of these were altered to 29 June 1977.
30. Prior to the banking of the cheques the respective balances in the accounts of the various parties were:
Partnership G2 H1 K
$ $ $ $
3,474.15Cr 412.44Cr 116.41Cr* 1,881.20Dr
* Pass sheet missing - calculated as explained at hearing.
The deposit slips for 29 June 1977 record the following -
Partnership G2 H1 K
$ $ $
Debit Chq 802 1,360,400 305 254,500 479 1,360,400 -
805 254,500
Credit Chq 305 254,500 805 254,500 802 1,360,400 -
479 1,360,400
As all were made simultaneously the respective account balances did not alter. It will be noted that the loan by G2 to the Partnership was repaid immediately. The deposit slips for 30 June 1977 record the following:
Partnership G2 H1 K
$ $ $ $
Debit Chq 803 254,500.00 307 257,400 N/A 1,362,150.60 208 1,619,550.60
804 1,360,400.00
Credit Chq 208 1,619,550.60 803 254,500 804 1,360,400.00 N/A 1,362,150.60
3,000* 1,800.00* 307 257,400.00
* Evidence was not given re these amounts and beyond the fact the $1,800
represents a cheque from H3 nothing is known.
The overall result of these simultaneous transactions was to leave K's balance unchanged, to increase that of the others by $4,650.60, $100 and $49.40 respectively and, so far as is known, to reduce that of H3 by $1,800 and another by $3,000.
31. As indicated in para. 27 it is not apparent why a higher price should have been paid on 29 June cf. 28 June. It is also not clear who met the ``expenses'' of the operation beyond the partnership paying the telex charges of $9, the Darwin Share Registry expenses of $313.30 and Corporate Affairs Commission filing fees of $21. As far as is shown by the evidence neither the partnership, G nor H paid anything for the services performed by the firms of accountants and solicitors respectively (i.e. if any accounts were recorded). C deposed that any time he spent was charged ``back to the office to the general office account''.
32. In addition to the above ``Curran'' transactions the partnership has been involved in a further two. The first in October/November 1977 and the second in February 1978. Brief mention is made thereof.
33. The first was preceded by the retirement on 27 October 1977 of the individual client taxpayer who had
ATC 569
contributed $1,200 capital. He had been asked if he wished to continue but, since he had heard it might not be legal he decided not to continue. A letter signed by B of 28 October 1977 said, inter alia:``On 27th October,... indicated that he wanted to retire from the Partnership by selling his 6% to the remaining Partners based on the Net Asset position at 27th October, 1977. A cheque for $1,570.37 has been paid to... being his 6% interest and I now enclose a Circulatory Minute for your signature and return to me in confirmation of this.
The effect of this, for the continuing Partners will be that the funds of the Partnership will be reduced by $1,570.37 to $24,602.55. However, each continuing Partner's interest in the Partnership will increase slightly from 28th October, 1977.''
The final paragraph is in line with the fact there was no ``purchase'' by the remaining partners as such - the cheque drawn by the partnership being debited to the partnership capital account. Following this retirement shares were ``purchased'' on 31 October 1977 for $872,812 and, after a bonus issue of $821,178, ``sold'' for $874,612. Thus the books record a loss (before expenses e.g. further $342.45 for Darwin services) of $819,378 and the receipt of bonus dividends of $821,178.
34. Turning to the second transaction this was also preceded by a change in membership of and interest in the partnership. There is no correspondence available concerning the change but the books of account record that on 15 February 1978 the existing nineteen members had returned to them amounts of $9,650 and $10,110.79 respectively - although the second figure was designated ``Current Account'' both amounts were debited to the partnership's capital account (for one partner the result was to reduce her capital to NIL she apparently retiring reducing the partners to 18). Then on 16 February 1978 two new parties paid in, on account of capital, sums of $14,300 and $250 respectively whilst D1 and D2 paid in additional capital of $4,500 and $21,600 respectively - all receipts were credited to the partnership's capital account. Accepting the original capital had been reduced by only the amounts of $1,200 (para. 33) and $9,650 (as above) and increased by the above total receipts of $40,650, then as at 16 February 1978 there was a total capital of $49,800 held as follows:
$
New Partner 1 14,300
New Partner 2 250
D1 (original partner) 7,000
D2 (original partner) 25,000
16 of remaining 18
original partners 3,250 $49,800
------ -------
This change was followed by the ``purchase'' on 18 February 1978 of shares for $3,029,010 (loan of same amount) and, after a bonus issue of $2,116,359, ``sold'' for the identical amount (loan again). Therefore the books record a loss (before expenses - the Darwin firm does not appear to have been used) of $2,116,359 and the receipt of bonus dividends of $2,116,359.
35. Thus the books record for the 1978 year a loss (before expenses) on such transactions of $2,935,737 and bonus dividend receipts of $2,937,537.
Other Share Transactions
36. Having ``lined up'' the ``Curran'' companies and interested parties B contacted E, informed him the partnership was commencing operations and asked him to make recommendations re listed companies (the partnership to itself handle any private company transactions). It was thought this was on 8 or 9 June 1977 and that a day after a handwritten list was handed him covering four companies. Brokers' statements indicate that, except for one (14 June 1977), such transactions took place on 9 June 1977 - the resolutions of 8 June 1977 para. 14 do not refer to the excepted transaction. As at 22 June 1977 the broker was owed $16,520.85 and this was covered by the first cheque in the company's cheque book dated 24 June 1977 although it was not until 27 June 1977 that the full partnership capital contributions totalling $20,000 were deposited. The cost of a cheque book $5 and the above cheque being debited to the account on 28 June 1977 (balance in account then $3,474.15).
37. No partnership meetings were held but B said he issued (dates of preparation and issue unknown) statements and there were tendered undated sheets in respect of share trading for the period ended 17 June
ATC 570
1977 and fortnight ended 1 July 1977. The first showed purchases only (no sales) whilst the second included the ``Curran'' transactions and gave a Net Loss after expenses of $14 of $998,732.51. The audited Profit and Loss Account issued later shows a Net Loss of $999,031.01 and a comparison shows a slightly different Purchases figure and stock on hand figure - however any attempted reconciliation would seem irrelevant.38. Adopting the figures as per the partnership's books of account they may be analysed as follows:
"
Curran
"
Other Total
$ $ $
Sales 1,619,550.60 3,493.94 1,623,044.54
------------ --------- ------------
Purchases 1,614,900.00 24,115.50 1,639,015.50
Bonus Issue 1,000,000.00 - 1,000,000.00
------------ ---------- ------------
2,614,900.00 24,115.50 2,639,015.50
Closing Stock - 16,953.95 16,953.95
------------ --------- ------------
2,614,900.00 7,161.55 2,622.061.55
------------ --------- ------------
Gross Loss 995,349.40 3,667,61 999,017.01
Add expenses * 9.00 5.00 14.00
---------- -------- -----------
Net Loss 995,358.40 3,672.61 99,031.01
---------- -------- -----------
* Allocating telex charges to
"
Curran
"
and Bank charges to other.
The partners capital account was debited with the amount of the Net Loss of $999,031.01 and credited with the bonus dividends of $1,000,000 thereby increasing it by $968.99 to a balance as at 30 June 1977 of $20,968.99. This $968.99 increase can also be expressed as the difference between a ``profit'' on ``Curran'' of $4,641.60 ($1,000,000 - $995,358.40) and the loss on Other of $3,672.61 and represents the net ``financial'' result of the partnership's operations for the year ended 30 June 1977 (ignoring on a cash basis the Darwin registry charges paid by the partnership on 19 August 1977).
39. For the year ended 30 June 1978 a similar analysis of the partnership's books shows:
"
Curran
"
Other Total
$ $ $
Sales 3,903,622.00 148,470.76 4,052,092.76
------------ ---------- ------------
Opening stock - 16,953.95 16,953.95
Purchases 3,901,822.00 171,931.27 4,073,753.27
Bonus Issue 2,937,537.00 - 2,937,537.00
------------ ---------- ------------
6,839,359.00 188,885.22 7,028,244.22
Closing stock - 52,703.55 52,703.55
------------ ---------- ------------
6,839,359.00 136,181.67 6,975,540.67
------------ ---------- ------------
Gross Loss/Profit L 2,935,737.00 P 12,289.09 L 2,923,447.91
Dividends Received - 998.00 998.00
------------ ---------- ------------
L 2,935,737.00 P 13,287.09 L 2,922,449.91
Expenses * ? ? 2,402.72
-------------
Net Loss $2,924,852.63
-------------
* Details inadequate to allocate.
ATC 571
The partners capital account was debited with the amount of $2,924,852.63, credited with bonus dividends of $2,937,537 and (after taking into account the amounts referred to in para. 33 and 34) the balance as at 30 June 1978 was $52,972.20.
40. No transactions in private company shares took place during the year ended 30 June 1979 and the result was:
$ $ $
Sales 136,064.28
Opening Stock 52,703.55
Purchases 121,245.55 173,949.10
----------
Less: Closing Stock 37,004.05 136,945.05
---------- ----------
Gross Loss 880.77
Less: Dividends received 790.75
----------
90.02
Add: Expenses 146.90
----------
Net Loss 236.92
----------
This reduced the balance in the partners capital account as at 30 June 1979 to $52,935.28 which was represented by:
41. The details for the year ended 30 June 1980 show (again no private company transactions).
Stock on hand $37,004.05
Bank 220.36
Broker 15,510.87
----------
$52,735.28
----------
$ $ $
Sales (incl. commod.
trading) 234,871.58
Opening stock 37,004.05
Purchases (incl. commod.) 210,907.10 247,911.15
----------
Less: Closing Stock 31,636.24 216,274.91
---------- ----------
Gross Profit 18,596.67
Dividends and other credits 1,118.75
----------
19,715.42
Expenses 1,627.20
----------
Net Profit $18,089.22
----------
The books also show partners drawings on 24 June 1980, totalling $10,000 whilst apart from the stock figure the other assets were Bank $1,510.71 and Broker $27,677.55 - a total of $60,824.50.
42. An analysis of the broker's sheets tendered shows the following (on the basis of each line representing a separate transaction even if, for example, one purchase or sale order was effected in more than one smaller parcels).
To 30.6.1977 1978 1979 1980
Purchases 10 64 26 38
Sales 4 51 24 43
ATC 572
E left a particular firm of brokers in March 1979 and went to another and he took the partnership as a client with him. The last sheet tendered for the first broker shows a Cr balance of $32,130.87 which was paid out on 2 March 1979 and credited by the second broker on 7 March 1979.
Corporate Affairs Commission
43. Following the various resolutions (para. 23-24) documents were lodged with the Commissioner. In respect of each of G and H there were lodged:
- (a) Notice of Resolution (to increase authorised capital);
- (b) Notice of Increase in Share Capital;
- (c) Statement containing particulars of shares allotted otherwise than for cash;
- (d) Return of Allotment of Shares.
Each document was signed by B, dated 28 July 1977 and bears the Commissioner's date of lodgment as 8 August 1977. In respect of G there was also lodged Particulars and Changes of Particulars in Register of Directors, Managers and Secretaries. This was signed by B, also dated 28 July 1977 but the Commissioner's date of lodgment is 16 June 1978.
44. The copy of the resolution annexed in respect of G for the Statement ((c) above) was that recorded for the extraordinary general meeting of shareholders as set out in para. 23 supra . However that annexed in relation to H stated:
``At a meeting of Directors of the Company held on 28th Day of June, 1977, the following resolution was passed:
- `That the sum of $841,200.00 forming part of the Capital Profits Reserve Account (comprising profits derived wholly and exclusively from the sale of assets not acquired for the purpose of resale at a profit) be capitalised and distributed amongst those who are ordinary shareholders on the date of passage of this resolution (namely 28th June, 1977) on the footing that they became entitled thereto as capital
- And that such capitalised fund of $841,200.00 be applied on behalf of the ordinary shareholders in paying up in full 420,600 of the unissued ordinary shares of $2.00 each in the capital of the Company.
- And that such 420,600 ordinary shares be distributed accordingly amongst the ordinary shareholders in full satisfaction of their interest in the said capitalised sum and in proportion to the number of shares held by them respectively'.''
As indicated para. 24 the Minute Book does not record a Directors' meeting on that date (neither B nor J being appointed a director) although B said the Extraordinary General Meeting of Shareholders had been wrongly described. Such Minute had been signed by him as Chairman of the Shareholders Meeting which he had said (para. 24) he and J had had as shareholders. Whilst I have some doubts at this stage of writing as to whether any meetings of shareholders were held I am in no doubt but there was no meeting of Directors of H, such as presented to the Commissioner.
General
45. In respect of both G and H the Directors passed resolutions in 1978 that an Extraordinary General Meeting of Shareholders be held to consider and if thought fit pass as a special resolution -
``That the Company be wound up voluntarily.''
For H the Directors' resolution is the last loose minute in the company's Minute Book but, for G, the last loose minute is that of an Extraordinary General Meeting of Shareholders (B and C present) at which such resolution was passed and A appointed liquidator. It was said that liquidation has not taken place and that G and H are still extant (presumably with K as shareholder, the ``shareholder'' loans owing to G and H by G1 and H2 respectively and K owing the amounts loaned to it by H1 and G2).
46. The returns of income lodged by G and H for the year ended 30 June 1977 showed the ``distributions'' ex Capital Profit Reserves and listed the 20 partners individually with the respective number and value of shares distributed to each.
Argument
47. On behalf of the taxpayers it was strenuously submitted that the existing
ATC 573
situation was on all fours with that pronounced upon by the Full High Court inCurran v. F.C. of T. 74 ATC 4296 ; (1974) 131 C.L.R. 409 and that the majority decision therein forced a conclusion in favour of the taxpayers. Just as forcefully Senior Counsel for the Commissioner contended that this was not so since the facts are different whilst a number of questions raised here were not at issue in Curran . In the circumstances it might be profitable, before summarizing the respective arguments put forward by each counsel, to consider the decision in Curran's case .
48. In Curran's case the Full High Court were dealing with a Case Stated (which seems only to be set out in 5 A.T.R. at pp. 62-74) and the decision must be read in the light of the stated facts. It dealt with a transaction that took place in 1969 by Curran who, as well as being a partner in a firm of stock and share brokers, ``carried on also the business of dealing in stocks and shares in his own right''. On 28 April 1969 he purchased shares in Stewart Bacon for $186,046.48 and transfers of these shares were approved at a meeting the same day. That meeting also resolved that a shareholders meeting be called for 6 May 1969 to increase the nominal capital, amend the Articles of Association and approve an issue of shares. On 6 May 1969 an extraordinary general meeting of members passed resolutions increasing the authorized capital, amending the Articles to insert an additional Article 96A allowing a general meeting to declare dividends and capitalizing the Capital Profits Reserve and distributing it in pursuance of Article 96A. Following this meeting of members a meeting of directors allotted 191,000 fully paid $1 shares to Curran and subsequently (on the same day) he sold the original shares acquired for $197.52 and the newly allotted shares for $188,631.60.
49. There were no issues raised in relation to the validity of the allotment or to the ``payment'' on either the purchase or sale for the Case Stated is silent thereon and the only questions asked in respect of the Stewart Bacon shares were whether Curran had incurred a loss:
- (i) on the original shares of $185,848.96 ($186,046.48 less $197.52); and
- (ii) on the newly allotted shares of $2,368.40 ($191,000 less $188,631.60).
Thus the Court was considering a situation where it was accepted that each step had been legally effective and the only issue was whether the particular transaction (by an acknowledged dealer in shares) had been correctly recorded (for one aspect only) by Curran in his ``account of his share trading''. In that account Curran had treated the shares as trading stock and the bonus issue as having a cost of $191,000. The Commissioner did not dispute the overall treatment but claimed the bonus issue cost as treatment but claimed the bonus issue cost as NIL. As the Chief Justice said -
``... the Commissioner submits that the purchase price of the bonus shares was nil and that whilst their acquisition should be reflected in the account amongst the purchases, no sum should be entered against them as a purchase price.''
50. In the present references there are issues as to whether the particular shares are trading stock and as to whether the steps taken have been legally effective. Also the factual position indicates a lack of identity.
51. Counsel for the taxpayers accepts there is a lack of complete identity in form but said they were identical in substance. However it is one thing to take a series of steps (each properly executed and legally effective) and another to intend to take such steps but fail to do so. The man who intends to cross a deep stream by means of a series of stepping stones and drowns because he missed one stone cannot by reason of his intention, be regarded as having successfully made each step and safely reached the other side.
52. Their Honours did not need to consider issues raised here such as the effect of provisions in the Companies Act or the other issues mentioned in para. 49. Counsel's suggestion that their Honours should be taken as inferentially having decided all the present issues in favour of Curran does not really require an answer. Whatever might be uncertain about legal decisions the one certainty is that they are based solely on the facts found and not on what Counsel says would have been the Court's view if a different set of facts had been found.
53. It follows that I cannot accept Counsel's contention that the present case is on all fours with Curran - either factually or in the particular issues raised and that the
ATC 574
decision therein forces a conclusion in favour of the taxpayers. It may be that, after the various arguments are considered and ultimate findings reached, a similar conclusion to that in Curran could be arrived at but that will not be because all matters were considered and decided in that case.54. Turning now to the respective arguments it was submitted by Counsel for the taxpayers that, although B's evidence was lacking in detail and B had the dimmest of recall and the Minute Books could not be said to be perfect (prepared after the events), nevertheless it was clear:
- (a) a partnership had come into existence - financed with real funds from the partners;
- (b) it had embarked on a course of share trading activities through E and still continues such on the market;
- (c) the partnership had exposed itself to a liability for the full purchase price;
- (d) the shares in G and H had been transferred to the partnership;
- (e) the dealings in shares in G and H were part and parcel of the partnership's share trading activities; and
- (f) the ingredients of ``Curran'' had been carried into effect.
Therefore, since there was only a need to hold and receive exempt dividends, then, the partnership having acquired shares as share traders, it was entitled to the deduction. It did not matter if K had an equitable interest at the outset (although this was denied) since there was no provision similar to sec. 80B(5) to disqualify. Reference was made to -
F.C. of T. v. Kareena Hospital
Pty. Ltd. 79 ATC 4667
Patcorp Investments Ltd. v.
F.C. of T. 76 ATC 4225
F.C. of T. v. Westraders
Pty. Ltd. 80 ATC 4357
Hope v. The Council of the
City of Bathurst 80 ATC 4386
Griffiths v. Harrison (1963) A.C.1
55. For the Commissioner it was said no deduction was allowable in that -
- (i) there was no carrying on of a business of share trading;
- (ii) in any event, the G and H transactions were not part of that business - arranged for immediate sale at a loss (pre sold) in face of Partnership Agreement;
- (iii) there was no valid purchase of the shares in G and H - no funds existing and no arrangements for such - and not a situation where someone unilaterally buys and may, or may not, at its option sell to another;
- (iv) there was no valid issue of bonus shares even if meetings had taken place (which was subject to grave doubts);
- (v) the Powers of Attorney (the 9 witnessed by B) were void and L had no power to do what he did - there was no purchase and no sale since, whilst the parties might be estopped from denying such purchase and sale, such estoppel does not operate against the Commissioner;
- (vi) there were gaps arising from
-
- (a) loss of B's diary;
- (b) failure to produce C's diary;
- (c) loss of H's original Minute Books;
- (d) loss of one Articles of Partnership;
- (e) failure to call witnesses to give evidence re the negotiations for price and the bona fide nature of the transactions with K;
- (f) failure to produce Postage Book.
It was submitted that to have a successful ``Curran'' there must be a complete coincidence of facts and a complete dichotomy of purchase and sale. When a ``Curran'' is the commencing point one embarks on artificiality. Reference was made to -
-
A.C. Williams v. F.C. of T. 72 ATC 4157 ; (1972) 127 C.L.R. 226 -
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 -
F.C. of T. v. St. Hubert's Island Pty. Ltd. 78 ATC 4104 - In
re Parrott , Ex parte Cullen (1891) 2 Q.B. 151 -
Mosely v. Koffyfontein Mines Ltd. (1911) 1 Ch. 73 -
Seal v. Claridge 7 Q.B.D. 516 .
ATC 575
56. In considering the respective arguments it can be said initially that there is some force in item (vi) above
-
particularly (a), (b) and (e) thereof. No explanation was given as to why certain people (such as A, E, J and the solicitor partner) were not called. The solicitor partner was instructing solicitor and his presence whilst B was giving evidence was the subject of comment due to the anticipation he would also be giving evidence. One has to be careful as to the attitude to be adopted in such a situation (
Craddock
v.
F.C. of T.
69 ATC 4108
at p. 4109
and
Jones
v.
Dunkel
(1959-60) 101 C.L.R. 298
at p. 312
) but, having regard to the admitted deficiencies in B's evidence, it is difficult not to conclude that an inference can fairly be drawn that ``their evidence would not have assisted the'' taxpayers. I so conclude.
57. I do not accept the Commissioner's first contention and would find that the partnership carried on a business of share trading. Initially I inclined to the opinion that such activities were merely a setting erected post facto against which to view the transaction in the shares of G and H and should be treated as such. Whilst still having some doubts (in view of the changes prior to each of the subsequent ``Currans''), I think the volume and continuity of activity points to the partnership being treated in the manner contended for by the taxpayers.
58. Insofar as the Commissioner's second contention is concerned I would find that, well before 24 June 1977 (when full documentation was forwarded to L) all parties had committed themselves to the course of action whereby K was to acquire the shares in G and H. The inference is open, and I would so find, that this situation had come about prior to the actual constitution of the partnership. This is not to say that the partnership when constituted was not to have the benefit thereof but, in reality, they were not (other than by subsequent adoption) transactions of the partnership. Accordingly, whilst I accept that the transactions in the shares of G and H were on behalf of the partnership, I do not accept they form part of the share trading business of the partnership.
59. The third proposition is one which has troubled me for it is clear (and I so find) that without the ``round robin'' device the transactions could not have been effected. The partnership had insufficient funds and there is no evidence that K was in any different position. What occurred was, although cheques were drawn, the financial position of the parties (except to the limited extent as per para. 30) remained unaltered. All that happened was that the shareholding in G and H changed: e.g. H1 instead of being the parent company of H was now a creditor of K. There is an air of complete artificiality about the whole situation which is not assisted by the lack of any evidence concerning K or about what would be the situation if, for example, either K or H1 went into receivership.
60. Where there are arms length real situations it is clear there can be set offs or ``round robins'' but, in the absence of such (and particularly in an artificial position), can the mere exchange of cheques achieve anything? By exchanging pieces of paper two, three or more parties without any real funds (say not more than $100 between them) can ``create'' assets and liabilities (recorded as such in books) of say $10,000,000 (never intended to be honoured) if this is all the law requires.
61. The only authority referred to by Counsel (for the taxpayers) was F.C. of T. v. Kareena Hospital Pty. Ltd. (supra) wherein Lockhart J. said at p. 4675:
``(b) On 31 January 1973 the taxpayer lent the amount of premium as originally provided for, namely $120,000.00, to International. It paid a cheque to International for that sum on that day. On the same day, International paid the premium to Holdings by cheque, and Holdings paid a cheque to the taxpayer for the same amount. The transaction was treated by the taxpayer in its books as a reduction of an indebtedness owed by Holdings to it. In the result there was a `round robin' of cheques which left each company in precisely the same position as to money or cash as it was before any cheque was drawn and paid. His Honour held that, notwithstanding such circumstance, the paying and receiving of the cheque create rights and obligations different from those which previously existed. The assets and liabilities both of International and Holdings after the transaction were
ATC 576
different from what they had been before.''
62. In the present circumstances having regard to -
- (a) the lack of evidence concerning the negotiations for the ``loans'';
- (b) the lack of arrangements with a bank for accommodation;
- (c) the apparent interest free nature of the loans;
- (d) the fact they, i.e. the last ones, are still outstanding;
- (e) the finding (para. 58) that right from the commencement K was to be the purchaser of the shares,
I would find that the ``round robins'' (and particularly the first) achieved nothing. They were factitious even if not fictitious.
63. It follows that I would not regard the partnership as having initially acquired the shares in G and H in ``its'' own right. It was to be, at best, a holder on behalf of K. I would of course, reach the same conclusion even if both ``round robins'' were legally effective.
64. The Commissioner's fourth proposition had as its first head an argument based on particular provisions of the Companies Act to the effect that, assuming there were the necessary meetings, the increases in authorised capital were not effective until 8 August 1977 (see para. 43) so that there could be no issue of bonus shares on 28 June 1977. The relevant sections of the 1961 Act are 18, 21, 62 and 63. Pursuant to sec. 18(1)(c) the memorandum of every company shall be printed and divided into numbered paragraphs and dated and shall state, in addition to other requirements -
``(c) unless the company is an unlimited company, the amount of share capital (if any) with which the company proposes to be registered and the division thereof into shares of a fixed amount''
whilst sec. 62 gives a company power to alter the share capital provisions of its memorandum. Subsections (4) and (5) state -
``(4) Where a company has increased its share capital beyond the registered capital, it shall within fourteen days after the passing of the resolution authorising the increase lodge with the Registrar notice of the increase.
(5) If any company fails to comply with the provisions of sub-section (4) of this section the company and every officer of the company who is in default shall be guilty of an offence against this Act.''
Section 21 is in the following terms:
``21.(1) The memorandum of a company may be altered to the extent and in the manner provided by this Act but not otherwise.
(2) In addition to observing and subject to any other provision of this Act requiring the lodging with the Registrar of any resolution of a company or order of the Court or other document affecting the memorandum of a company, the company shall within fourteen days after the passing of any such resolution or the making of any such order lodge with the Registrar a copy of such resolution or other document or an office copy of such order together with (unless the Registrar dispenses therewith) a printed copy of the memorandum as altered, and if default is made in complying with this sub-section the company and every officer of the company who is in default shall be guilty of an offence against this Act.
Penalty: Fifty pounds. Default penalty.
(3) The Registrar shall register every resolution order or other document lodged with him under this Act that affects the memorandum of a company and shall certify the registration of every such order and on such registration and not before, the alteration of the memorandum shall take effect.
(4) The certificate of the Registrar shall be conclusive evidence that all the requirements of this Act with respect to the alteration and any confirmation thereof have been complied with.
(5) Notice of the registration shall be published in such manner (if any) as the Court or the Registrar directs.
(6) The Registrar shall where appropriate issue a certificate of incorporation in accordance with the alteration made to the memorandum.''
whilst sec. 63 states:
ATC 577
``63. Where a company has purported to issue or allot shares and the creation issue or allotment of those shares was invalid by reason of any provision of this or any other Act or of the memorandum of articles of the company or otherwise or the terms of issue or allotment were inconsistent with or unauthorised by any such provision the Court may upon application made by the company or by a holder or mortgagee of any of those shares or by a creditor of the company and upon being satisfied that in all the circumstances it is just and equitable so to do make an order validating the issue or allotment of those shares or confirming the terms of issue or allotment thereof or both and upon an office copy of the order being lodged with the Registrar those shares shall be deemed to have been validly issued or allotted upon the terms of the issue or allotment thereof.''
65. I have referred to the 1961 Act (a new Act following agreement between the A.C.T. and the States to have a new companies statute uniform with the others) for the impression was conveyed that Act No. 11 of 1971 introduced new provisions. However such Act merely deleted the word Registrar wherever occurring and substituted the word Commission - otherwise the present provisions (except for change to dollars) are the same as for 1961. Certainly the 1936 Act contained provisions requiring notification to the Registrar e.g.:
``155(1) Where a company having a share capital, whether its shares have or have not been converted into stock, has increased its share capital beyond the registered capital, it shall within fifteen days after the passing of the resolution authorising the increase, file with the Registrar-General a notice of the increase, and the Registrar-General shall record the increase.
(2) The notice to be filed in pursuance of sub-section one of this section shall include such particulars as are prescribed with respect to the classes of shares affected and the conditions subject to which the new shares have been or are to be issued, and shall be annexed to the printed copy of the special resolution authorising the increase to be filed pursuant to section ninety-eight of this Act.
(3) If default is made in complying with this section, the company and every officer of the company who is in default shall be guilty of an offence.
Penalty: Five pounds.''
But there was nothing similar to sec. 21(3) therein. It would seem that such requirement first was introduced in the 1961 Act and has remained unaltered since then (except in the minor respects referred to above). Such provision does not appear to have been considered by a Court - certainly neither counsel referred to one.
66. Senior counsel's argument was that whereas under the 1936 Act notification was merely procedural (see for example
Winn's Gold Mining Company (N.T.) Ltd.
v.
Wyld
(1874) S.A.L.R. 66
), now it was completely different so that an increase in capital is not effective until the date of registration. As at present advised I accept this submission. Counsel for the taxpayers sought to say there was no conceivable purpose for such a requirement and that sec. 21(3) should be read down as referring only to alterations in the memorandum other than capital. However, during discussion, it emerged that an innocent purchaser of shares could be saved from a swamping action by such a requirement. It was also said that sec. 63 would save the position
-
an order of the Court deeming validity
-
but would a deeming at a later date cover a position earlier when an actual position is then required? Further would a Court so order?
-
see
Re The Swan Brewery Co. Ltd. (No. 2)
(1978) CLC
¶
40-450
. Anyway a Board has to consider matters on the basis of the present position and no application has been made. General reference might be made also to
In
Re Coolibah Pty. Ltd.
80 ATC 4134
where apparently someone thought, in relation to an allotment on 28 June 1977, sec. 21(3) had not been complied with and an application under sec. 63 was necessary.
67. Accepting the above submission it follows that the resolution to increase the authorised capitals of G and H were ineffective as at 28 June 1977 so that there were no shares in G (small number only for H - see para. 6) available to satisfy the dividends declared on 28 June 1977. As Farwell L.J. said in Mosely v. Koffyfontein Mines Ltd . (1911) 1 Ch. 73 at p. 84:
ATC 578
``There are three steps with regard to new capital; first it is created; till it is created the capital does not exist at all.''
68. Although not directly relevant, it is interesting that in
Central Piggery Co. Ltd.
v.
McNicoll and Hurst
(1949) 78 C.L.R. 594
it was held that, despite registration as shareholders, the failure of the company to comply with the provisions of a Statute meant that the share register had to be rectified and moneys be repaid. In his reasons
Dixon
J. refers, inter alia, to
Mosely v. Koffyfontein Mines Ltd.
69. The second head of the fourth proposition was that there had (even if capital increased) been no allotment of shares for there had been no meetings of this purpose. I accept this argument. As pointed out in para. 23 whilst B and C were appointed directors of G neither they nor J were appointed directors of H and, as per para. 44, I am in no doubt there was no directors' meeting of H such as presented to the Corporate Affairs Commission.
70. In order to overcome difficulties like the above counsel for the taxpayers suggested that b was a director of H within the definition contained in sec. 5(1) i.e. ``a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act'' and was not within the exclusion of sec. 5(2) viz.:
-
``a person in accordance with whose directions or instructions the directors of a company are accustomed to act by reason only that the directors act on advice given by him in a professional capacity''. Admittedly the representative of H1 said he merely signed what B put in front of him (para. 23) and that he always took direction on these matters but I do not take this to mean that in the ordinary affairs of H and H1 directions were taken from B. In the present situation a taxation transaction was involved and what is more logical than to take the advice of a professional. Accordingly I would not regard B as a director of H. The provisions of sec. 5(1) were discussed in
Harris
v.
S.
(1975-76) CLC
¶
40-263
.
71. The final attack under this head was that there were grave doubts as to whether there were any meetings - those at which B and J consented to short notice etc. (para. 23-24) - at all. I share this doubt and, having regard to what is set out in para. 24, the alleged inaccuracy of the H minute (para. 44) as well as the failure to call J, I would find such did not take place. Pieces of paper were subsequently prepared to convey a different impression but they cannot take the place of actual meetings.
72. Turning to the fifth proposition, i.e. 9 of the 20 Powers of Attorney were ineffective, it was said sec. 38(1) of the Conveyancing Act applied. This section requires that ``Every deed, whether or not affecting property, shall be signed as well as sealed, and shall be attested by at least one witness not being a party to the deed''. It was questioned whether a deed was necessary but that was the form in which it had been chosen to execute the Powers of Attorney - and the above consequence must follow. Therefore there was a fiction in that L had no power to do what he did.
73. In answer it was submitted they were unnecessary in any event as pursuant to sec. 5 of the Partnership Act every partner is an agent of his other partners and action of four in appointing L was within the purview of the business of the partnership. Additionally L was not being asked to execute any deed - only share transfers - and they would be effective as parol instruments.
74. I am inclined to the view expressed in answer.
75. Insofar as the Commissioner's final proposition is concerned I do not think it is necessary to go beyond what has been said in para. 56 and 71.
Conclusion
76. It follows from the above reasons that I would reject the ``Curran'' claims made on behalf of the taxpayers. However this does not mean that I would uphold the decisions of the Commissioner. I would adopt the figure of $968.99 (para. 38) as the net income of the partnership for the year ended 30 June 1977 and adjust each taxpayer's share thereof accordingly. I do so on the general basis that, irrespective of the failure to create new capital, the failure to hold meetings etc., it was the overall intention to benefit the partnership in respect of these transactions and it was so benefited (para. 30). The adjusted shares will be for B $19.38, and for the two client taxpayers
ATC 579
(company and individual) $58.14 each. Assessments to be amended accordingly.This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.