Federal Commissioner of Taxation v. J.V.M. Coppleson.Judges:
Full Federal Court
Bowen C.J.: Franki and Fisher JJ.:
This is an appeal from a decision of the Supreme Court of New South Wales allowing Dr. Coppleson (``the taxpayer'') an income tax deduction for the year of income ended 30 June 1976 of $36,184. His Honour found this
ATC 4551to be the value, less certain deductions, of redeemable preference shares in the company, Wirrawanda Limited, which the taxpayer, by his attorney Mr. Joye, transferred to Royal Prince Alfred Hospital on 25 June 1976. The transfer was expressed to be for ``nil'' consideration. The Hospital is a public hospital within sec. 78(1)(a)(i) of the Income Tax (Assessment) Act 1936. The section allows a deduction for gifts of money of $2 or more, or property with a value of $2 or more which was purchased by the taxpayer within the 12 months immediately preceding the making of the gift.
As the Commissioner disputed the making of the gift as well as its value, it is necessary to consider the circumstances of the transfer. In May 1976 the taxpayer was contacted by Mr. Joye, his financial adviser, who considered that because of the magnitude of the taxpayer's income the taxpayer was in a position to make a donation to a charitable organisation. He suggested that this could be done in a way which would produce a tax advantage by making a gift of redeemable preference shares to an institution within sec. 78(1). The taxpayer agreed with this proposal and it was decided that the gift would be to Royal Prince Alfred Hospital, the taxpayer having close links with that institution. The taxpayer travelled overseas shortly after this decision, appointing Mr. Joye his attorney and leaving him to effectuate the gift. Wirrawanda Limited was incorporated on 17 June 1976 with an authorised capital of 40,000 shares. Thirty-nine thousand nine hundred and ninety (39,990) $1 redeemable preference shares were alloted to Copston Securities Pty. Limited, the taxpayer's family company, on 23 June 1976. The remaining 5 issued ordinary shares were held by or on behalf of Yonilla Pty. Limited, trustee of the Prince Alfred Trust. Nothing turns on the ownership of these shares. All the shares were paid for in full. On 23 June 1976 the taxpayer purchased the preference shares, at par value, from Copston Securities. On 25 June the transfer of the shares to Royal Prince Alfred Hospital was executed. It was registered on 28 June 1976 and a share certificate was issued to the Hospital on 30 June 1976.
On these facts two questions arise for determination by this Court. First, was there a gift within the meaning of sec. 78(1)(a) and secondly, if there was a gift, what was the value of that gift at 25 June 1976?
For the Commissioner it was argued that there was no gift. Some reliance was placed on
Leary v. F.C. of T. 80 ATC 4438. In that case the nominal beneficiary, the Order of St. John, received and retained $120 out of the amount of $10,000 ostensibly given by the taxpayer. The balance circulated back in such a fashion that the taxpayer, who had borrowed $8,500 to enable him to make the gift, was enabled to purchase the interest of the lender for $17.17. All members of the Full Court of this Court were of opinion (inter alia) that benefaction was an essential element of a ``gift'' and that this was lacking in that case.
It was argued that this element was missing also on the facts before us and therefore sec. 78(1)(a) did not apply. This case does, however, differ markedly from Leary's case. We have the evidence of the taxpayer, unshaken in cross-examination, that he wished to make a gift to the Hospital to be used, he hoped, for research into cancer of the female genital tract. As Bowen C.J. observed in Leary's case (at p. 4441):
``It... seems relevant in applying para. 78(1)(a) to consider whether benefaction is intended towards and conferred upon the prescribed body when considering whether there has been a `gift' within the meaning of the provision. Intention may generally be gathered best from objective circumstances. However, evidence on the matter from the taxpayer is admissible and may be cogent.''
The Judge below, who saw the taxpayer giving evidence, accepted him as a witness of probity. Nothing has been put before this Court which would justify a departure from that finding.
The fact that the donor in circumstances such as these is, to some extent, motivated by a desire to achieve a tax deduction under sec. 78(1)(a), cannot itself disentitle him to that deduction. The Income Tax Assessment Act is framed with the aim of encouraging donations to the listed objects by offering a deduction. Thus, it will frequently not be benefaction alone which motivates such a gift. While the judgments in Leary's case emphasise the need for there to be a gift according to ordinary understanding,
ATC 4552proceeding from motives of benefaction, they do not require this to be the sole motive.
Although the taxpayer was a director of Wirrawanda, this did not result in his receiving any benefit from the assets held by that company. We accept that this arrangement was to allow the taxpayer to control the investment of the capital of the company, the Hospital according to the evidence having the reputation, at least among those who worked there, of being somewhat unsuccessful in its handling of such donations.
Despite his position as director the taxpayer took almost no interest in what income from the shares given was in fact being paid to the Hospital. Nor did he make any effort to ensure the capital of the company was so invested as to produce sufficient return to meet the preferential dividend. Although he admitted a complete lack of interest in financial affairs, it is surprising that he was so unconcerned with the donation. Although there was no satisfactory explanation for this attitude, it is of insufficient weight, having regard to the finding of the trial Judge, to warrant drawing an inference adverse to the taxpayer.
Certain unsatisfactory features of the gift, viewed in the light of the expressed purpose of conferring a tax benefit on the taxpayer, were pressed by Counsel for the Commissioner. We understood this to be an attempt to show that there was some other transaction behind the ostensible gift and for this reason the Court should find that there was no gift, although the proposition that the transaction was a sham was not pressed. Counsel freely conceded that he was unable to show what this other transaction was. We have not been persuaded that this Court should upset the findings of the Judge at first instance that the transaction was genuine.
We find that Dr. Coppleson did make a gift of the 39,990 redeemable preference shares in Wirrawanda Limited to Royal Prince Alfred Hospital on 25 June 1976, receipt of which was acknowledged by Mr. B. Woods, the Commercial Director of the Hospital on 30 June 1976.
It is therefore necessary to determine the value of the shares at 25 June 1976. Two alternative bases for valuation were pressed upon the Court. Counsel for the taxpayer argued that it was appropriate to value the shares by reference to their asset backing. This was based on the proposition that the holders of the redeemable preference shares could force a liquidation of the company, a proposition which will require examination.
For the Commissioner it was argued that the correct basis of valuation was by capitalising the anticipated income from the shares. At this point it is necessary to advert to a compromise arrived at between the parties. The learned trial Judge valued the redeemable preference shares in the company as at the date of the gift at $36,184. He said:
``In the result, I hold that the hypothetical purchaser would be in a position to compel a liquidation, and that the real value of his shares is thus the value of the underlying assets which he would obtain upon such a liquidation.''
Before this Court the parties agreed that $36,184 was the value of the shares if the basis of valuation adopted by the trial Judge was correct.
Counsel for the Commissioner argued that it was not the correct basis of valuation and the parties agreed that, if the Court should hold that the method of valuation adopted by the trial Judge was incorrect, the value of the shares was $24,000.
The core of the argument concerning the two methods of valuation resides in the rights of the holders of redeemable preference shares. These rights are set out in the articles of Wirrawanda Limited. Basically, the company adopted Table A of the Companies Ordinance 1962 (A.C.T.). There were minor variations, the most relevant being those dealing with the redeemable preference shares. These provisions are to be found in Art. 1B and 1C. In particular, redemption of these shares is governed by Art. 1C(f)(1)(i) and (ii), and 1C3(i). These Articles are as follows:
(f)(1) Redeemable Shares may be redeemed,
- (i) at the option of a holder thereof within six months of the date of allotment of the Redeemable Shares to be redeemed, by such holder giving to
ATC 4553the Company not less than thirty days notice requiring redemption;
- (ii) at the option of the Company after the expiration of six months and within fifteen years from the date of allotment of the Redeemable Shares to be redeemed, by it giving to any holder of Redeemable Shares not less than thirty days notice requiring redemption.
3(i) Subject to the provisions of the Companies Ordinance the Company shall be bound to redeem Redeemable Shares in respect of which notice as aforesaid has been given in accordance with such notice and as set out below;...''
The Articles then go on to deal with the amounts which will become payable to the holders of redeemable preference shares on redemption, and other incidental matters.
In passing, we note it is unusual for such an option to be given to the holder of redeemable preference shares. However, it was not argued that the allotment was invalid and, of course, neither Wirrawanda nor the Hospital was a party to these proceedings. Entry of the shareholding was effected in the register of members. Even if the condition concerning the shareholder's option was contrary to the Companies Ordinance it would probably mean only that the offending condition would be eliminated (see
Woodgers & Calthorpe Ltd. (In Liq.) v. Bowring (1935) 35 S.R. (N.S.W.) 483 at p. 485). If a case for rectification could be made out, no doubt the appropriate court could be approached. However, the Commissioner would have no standing to assert such a claim; nor did he seek to suggest it in the present proceedings.
The argument before us centred on the meaning to be given to cl. 1C(3)(i), in particular the meaning to be attached to the words ``subject to the provisions of the Companies Ordinance,...''. For the Commissioner it was argued that this made the company's contractual obligation to redeem upon receipt of notice from the shareholder conditional. It is, so the argument proceeded, cut down by sec. 61(3) of the Companies Ordinance. Section 61(3) forbids redemption of redeemable preference shares except:
``(a)... out of profits which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption; and
(b) [unless] they are fully paid up.''
If either of the funds mentioned in sec. 61(3)(a) is not available, so it is said, the company will not be in default if it refuses to redeem shares upon notice being received from a holder of redeemable preference shares.
For the taxpayer it was argued that the obligation on the company to redeem on receipt of a notice from a holder of redeemable preference shares is unconditional. The reference to the Companies Ordinance was, it was argued, merely a reminder to the reader that there were sections of the Ordinance which were relevant to redeemable preference shares. However, those provisions did not govern the obligation to redeem, merely the permissible modes of redemption.
Two decisions in particular were referred to in this context. They are
Re Holders Investment Trust Ltd. (1971) 1 W.L.R. 583, a decision of Megarry J. (as he then was), and
Re Marra Developments Ltd. (No. 2) (1978) 3 A.C.L.R. 798, a decision of Waddell J. in the Supreme Court of New South Wales. Despite the searches of Counsel, it appears that in no other case has this problem been litigated. In both the above cases the learned Judges referred to the question before us, but in neither case was it necessary to form a concluded view.
In Re Marra Developments Ltd., Waddell J. expressed concurrence with advice given to directors of the company that, in the event of the company failing to redeem redeemable preference shares on the due date, the holders of these shares could force the company to be wound up. This was, however, in the context of a case where there were profits of the company and, in fact, the directors were seeking to make provision for the redemption of the shares from available profits. The ordinary shareholders alleged that the directors were disregarding their interests and were managing the company in
ATC 4554the interests of holders of redeemable preference shares alone. His Honour was, therefore, considering whether it is permissible for the directors to conduct the affairs of the company in such a way that the issue now before us never arises.
In Re Holders Investment Trust, at p. 587, Megarry J. referred to a contention of the company that if there were no funds available (within the terms of sec. 58(1) of the Companies Act 1948 (U.K.), which is the corresponding section to sec. 61(3) of the Companies Ordinance) the company would not be in default under an article requiring it to redeem redeemable preference shares on a given date. He said:
``This is a point that I do not have to decide... but for the present I need say no more than that I share the doubts which have been expressed about the company's contention.''
The case before Megarry J. was an application to reduce the capital of the company by cancelling redeemable preference shares redeemable in 1971, in exchange for unsecured loan stock, redeemable some four to nine years later. The main issue was the propriety of certain holders of both redeemable preference shares and equity stock voting for the proposal motivated by its benefits for them as ordinary stockholders, rather than considering the benefits and detriments for holders of redeemable preference shares. The passage contains a passing comment on the advice given to a party. The case concerned quite a different issue, it cannot be decisive of the question now before us.
We consider, therefore, that we should approach the matter as a question of principle. When considering the Articles of the company the reference to the Ordinance in cl. 1C(3)(i) adds nothing. That condition exists even if not expressly stated. Both parties contracted on the basis of the law and part of that law is sec. 61 of the Companies Ordinance. The parties cannot be presumed to have assumed obligations which it is unlawful for one of the parties to fulfil. It is not a case where supervening legislation operates to make the fulfilment of its obligations by one party unlawful. Rather, the parties are contracting on the basis of a given law. In these circumstances, failing the availability of one or both of the funds specified in sec. 61(3), the company is not in default under its contract with the holders of redeemable preference shares if it fails to redeem after receipt of the requisite notice.
As the company would not be in default under its contract by failure to redeem in the circumstances of this case, the question of an appropriate remedy for holders of redeemable preference shares to enforce their contractual rights does not arise. However, if the company does not redeem following the receipt of notice from such shareholders, it may be appropriate to consider winding up, not because the company is in default under its contract with the holders of redeemable preference shares, but on the basis that it is just and equitable so to do. This was the foundation on which the taxpayer's argument was erected.
Provision for winding up on the ``just and equitable'' ground is found in sec. 222(1)(h) of the Companies Ordinance. It received detailed consideration from the House of Lords in
Ebrahimi v. Westbourne Galleries Pty. Ltd. (1973) A.C. 360. That case considered the English equivalent to sec. 222(1)(h), sec. 222(f) of the Companies Act 1948 (U.K.) and is a landmark decision on the ambit of the section. The leading judgment is that of Lord Wilberforce who, after mentioning the early restrictive interpretation which had been put on the section, went on to say at p. 374:
``There are two other restrictive interpretations which I mention to reject. First, there has been a tendency to create categories or headings under which cases must be brought if the clause is to apply. This is wrong. Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances. Secondly...''
In that case the company was of a type frequently referred to as a ``quasi-partnership''. The section will more readily be applied where disputes arise in companies of this kind, which are usually formed on the basis of personal understanding between the parties. While his Lordship was at pains to dispel any notion that the ``just and equitable'' clause should be limited to defined categories, we do not read his judgment as in any way suggesting that
ATC 4555winding up on this ground will be sanctioned readily.
Winding up on the just and equitable ground is an example of the court subjecting the exercise of legal rights to equitable considerations. There must be special circumstances to justify this intervention. One example is the misuse of legal rights in disregard of an understanding between the parties. Ebrahimi's case is an instance of this. In the case before us there are no such special circumstances. The company, in failing to redeem, would not be misusing its legal rights but merely acting, as it is obliged to do, in accordance with the law. The parties must be presumed to be aware of the statutory limitations. The transaction was a purely commercial arrangement, and there is no evidence of any understanding between the parties. Nor was there any evidence that the directors had acted unfairly or improperly or in breach of any duty. Indeed, no relevant change had taken place in the position of the company after the original allotment of the redeemable preference shares.
We are unable to discern any basis to support a petition for winding up upon the ``just and equitable'' ground. Some arguments could be put to the contrary. Winding up and transfer of assets to the Hospital would destroy the purpose which the taxpayer had of maintaining some control over the form of the investment. In addition, the taxpayer would not have had the same chance of endeavouring to ensure that income was used for research in the way he envisaged when making the gift.
The argument on valuation was based on the price a willing but not anxious purchaser would pay for the shares, one of the matters for consideration being the ability of that purchaser to compel winding up.
The right of a holder of redeemable preference shares to require redemption within six months after those shares were allotted, that is, virtually as soon as the company is formed in a case such as the present, may be illusory. The possibility of there existing either of the funds referred to in sec. 61(3) is remote indeed. It was common ground both before the trial Judge and before us that a hypothetical purchaser would not envisage the existence of such funds at the relevant time. Nevertheless, this is the basis on which they accepted the shares and they are bound by it. They cannot show any injustice or inequity which might enable them to invoke the jurisdiction of the court to obtain early access to their capital.
Considering all the circumstances, we conclude that the holders of the redeemable preference shares would not be able to compel the company to be wound up on the ground that such a course would be just and equitable.
In the result we would dismiss the appeal on the issue of existence of the gift. We would allow the appeal on the valuation of the shares.
The judgment of the court at first instance finding the value of the shares to be $36,184 should be set aside. In lieu thereof, the value of the shares should be assessed at $24,000.
We would remit the assessment of the Commissioner to be amended, to allow a deduction for the gift by the taxpayer valued at $24,000.
We would make no order as to costs.
1. The appeal so far as it concerns the validity of the gift be dismissed.
2. The appeal so far as it concerns the value of the shares be allowed.
3. In lieu of $36,184, the value of the shares given be assessed at $24,000.
4. The income tax assessment of Dr. Coppleson for the year of income ended 30 June 1976 be remitted to the Commissioner for amendment in accordance with the judgment of the Court.