Case M22

Judges:
HP Stevens Ch
CF Fairleigh QC
JR Harrowell M

Court:
No. 1 Board of Review

Judgment date: 10 April 1980.

H.P. Stevens (Chairman)

The question at issue in this case (the request for reference in relation to the year ended 30 June 1975 now no longer being at issue) is whether, in terms of sec. 80A and 80B(5), the taxpayer is entitled to deductions totalling $142,453 for prior year losses in its primary assessments for the years ended 30 June 1970 to 1972 inclusive. Requests for reference for the Div. 7 assessments relating to the same years are dependent upon the decision in respect of the primary assessments.

2. In the present references, unlike some recent cases, extensive documentary and oral evidence was placed before the Board. Senior counsel for the taxpayer reviewed all relevant authorities, viz. -

and referred, inter alia, to the number of decisions which relied upon the drawing of inferences because certain people had not been called to give evidence. He said that ``that process of reasoning is not available in the present case where everyone is called and has deposed to the relevant matters''. When it was suggested to him that ``the law has now been clarified to the extent that it really gets down to a question of fact'' senior counsel said ``Precisely. That is exactly what the main point of my submissions will be''.

3. I propose to deal separately with the documentary and oral evidence (both general background and ``material'') that was adduced and the symbols I will be using are as follows:

Documentary Evidence

4. Before setting out in chronological sequence the details revealed by the documents tendered it might be as well to set out initially the provisions of two deeds tendered - dated 13 March 1970 and 22 September 1970 respectively.

5. The deed of 13 March 1970 as tendered named, inter alia, the parties A, B, C, F (trustee) and L (lender and transferee), recited that whereas transfers had been executed in favour of the transferee for 10,315 shares and the lender had agreed to lend a sum to the taxpayer, and provided:

Clause

6. Under the approved scheme of arrangement participating creditors meant those whose claims were accepted and cl. 5(b) provided:

``Save and except as to benefits to which the Participating Creditors or any of them may be entitled under this Scheme of Arrangement the claims and all of them of the participating Creditors and each of them are hereby wholly extinguished PROVIDED THAT each of the claims of the Participating Creditors nominated in writing addressed to the Trustee by the Proposer within 30 days from the commencement date shall be assigned to the Proposer for a price equal to the amount which would otherwise be received by the Assignee from the Scheme Fund. For the purpose of the assignment hereunder the Participating Creditors and each of them hereby appoint the Trustee their agent and attorney for the purpose of signing such documents as may be reasonably necessary for the purpose of legally effectuating the assignments and each of them provided that such assignment shall be without cost to the Participating Creditors and each of them.''

The explanatory memorandum stated:

``The Scheme proposed involves the compromise of Creditors' claims so that upon the commencement of the Scheme all Creditors' claims against the Company are barred. The Trustee is obliged however to assign Creditors' claims if he receives a notice from a person who is prepared to pay for an assignment of all or any of the Creditors' claims. Any such assignment would not affect the above distributions to Creditors who would still receive the same amount.''

Thus the deed dated 22 September 1970 was between F and M and under it F ``assigns all right title and interest on behalf of the Creditors whose names appear in the Schedule hereto... to the Assignee absolutely'' for the consideration of ``a sum equal to the sum of 20c for each and every $ of the debts set forth in the Schedule hereto which said sum is estimated and agreed at the amount of $7,613.80''. The balances shown in the schedule were those as at 30 September 1969 (after an earlier distribution of 18c in $) less a further distribution of 26.2c in $ under the scheme of arrangement (apparently in May 1970) - see para. 24.

7. Turning now to the chronological sequence of events revealed by the documentary evidence, the taxpayer, incorporated in 1954 with an authorized capital of 10,000 shares of £ 1 each (increased

ATC 133

in 1961 to 50,000 shares of £ 1 each) ran into difficulties and, at an extraordinary general meeting on 6 May 1966, one F was appointed liquidator ``for the purpose of reconstruction''. During the relevant years of losses there was no change in shareholdings and these were the same as at 6 May 1966, viz.: 
      A}  Signatories to     5,185

      B}  memorandum         5,185

      C}  of association     5,185

      D                        334

      E                        334

      9   other individuals  2,560

                            ------

                            18,783 fully

                            ------ paid

Also on 6 May 1966 there was a meeting of creditors of which B was chairman. Included amongst the creditors present was one K representing L and K was appointed at that meeting to a committee of inspection.

8. On 16 May 1966 F was appointed liquidator by the Court (thus ending his previous position as ``voluntary'' liquidator) and, at a meeting of creditors held on 5 July 1966 (attended, inter alia, by K and B with F in the chair), F said ``the eventual sale of tax losses could result in a further payment of 15c in the $'' and explained ``that in due course tax losses would be determined and offered for sale on the open market. This would entail bringing the Company out of Liquidation and selling the structure devoid of all assets''. At another such meeting on 2 September 1966 (B, K and F all present) F said that ``subsequent to the sale of the Freehold Property and other assets it would be my intention to endeavour to dispose of the company's structure for benefits attached to past losses for Taxation purposes''. The minutes also record that discussion was invited and F ``answered questions on the sale of the Freehold Property and of the company structure, for benefits attached to past losses for Taxation purposes''.

9. Difficulties were experienced in disposing of the freehold property and it was not until 26 June 1968 and 22 August 1968 respectively that F affixed the taxpayer's seal to firstly a memorandum of transfer and then a memorandum of mortgage (repayable by four (4) equal bi-monthly payments - the last thus being due in April 1969). As a result, by early 1969 the taxpayer was approaching the ``devoid of all assets'' state and F was proceeding to carry out his intention as referred to in the preceding paragraph. By letter dated 14 July 1969 from F to K reference was made to previous discussions ``regarding a proposal that you purchase the tax losses of the'' taxpayer, the confirmed losses $144,338 were set out and it was requested ``if you are agreeable to these terms... your advice together with cheque...''. A letter of same date was sent to N and this, inter alia, requested N to arrange an appointment with G to discuss procedures and stated ``We would propose having our solicitor present to receive instructions regarding preparation of a sale agreement''.

10. By letter of 28 July 1969 H was advised by F of a conference to discuss procedures, forwarded a copy of a memorandum so that he could give the matter some preliminary consideration and looked forward to his attendance at the conference. The memorandum set out the shareholders, tax losses as $139,383 and showed a deficiency of $79,277. A memorandum (date unknown) from H referred to the letter of 28 July 1969 and attachment and made certain comments. (These are the documents referred to by Mr. Fairleigh in para. 32(a) of his reasons.)

11. Having been admitted, the weight that should be placed upon the documents is another matter. They must be considered in the context of the evidence as a whole and may (or may not) be of worth. The documents indicate that it was then intended that all shares other than those of A and B should be transferred to the purchaser whilst 1,435 held by each of those two should also be transferred. This would leave A and B each with 3,750 shares being more than 40% of the total capital. Reference is also made to a reduction of capital with neither A nor B being ``advised of the intention so to reduce capital'', the granting of an option after the reduction of capital ``by the new directors nominated by the purchaser in favour of the purchaser without consultation or reference to'' A or B. They also refer to payment of amounts being on certain conditions with the only parties to this agreement being the purchaser and the liquidator and neither A nor B should be consulted. Putting it at its lowest the solicitor's memorandum indicates that F was being advised that the proposed

ATC 134

disposition of the loss structure should be on a basis of keeping A and B (the then intended ``continuing'' shareholders) ignorant of some aspects of what was to happen and that, right from this early stage, more was involved than a simple (or mere) purchase of a percentage shareholding interest in the taxpayer - it is this latter aspect that I regard as being most ``material''.

12. By letter of 30 July 1969 N wrote to O requesting that they obtain a certain senior counsel's opinion on a proposal ``whereby Mr. (K) intends to purchase the tax losses of'' the taxpayer. Certain details were set out including that a K company ``proposes to take advantage of the tax losses pursuant to Section 80A and 80D of the Act'' and posed particular questions to be asked of counsel. Such a conference took place (date unknown) and will be referred to when the oral evidence of N is set out since, although reference was made to a brief to counsel, neither that nor counsel's written opinion was produced to the Board.

13. The solicitors H wrote to the liquidator attention G on 7 November 1969 setting out the three legal processes required before ``the situation will be clear from the point of view of the application in pursuance of Section 181 of the Companies Act''. It proposed that the summons to stay proceedings conditionally and the summons for directions be both returnable for 1 December 1969 and that, thereafter, and prior to the law vacation, the petition for reduction of capital would be returned. The required special resolutions for the capital reductions were set out and it pointed out at least 21 clear days of notice will be required ``so that the meetings will not have been held by 1st December 1969 when the two Summons... are returnable before the Court''.

14. Notice of an extraordinary meeting of shareholders setting out the proposed special resolutions issued on 21 November 1969. The date of the meeting was 28 November 1969 (i.e. prior 1 December 1969), it being ``desired to hold the meeting at short notice''. A proxy form was attached and the notice indicated ``this procedure is necessary to prepare the company structure for sale for the value attaching to its tax losses''. The taxpayer's minute book indicated that the only person present at the 28 November 1969 meeting was G and since the required quorum was absent, the meeting was adjourned to 5 December 1969 (i.e. after 1 December 1969). At the adjourned meeting G, B and another are recorded as being present and the necessary special resolutions were passed - G tabling proxies in respect of 12,864 shares (including one dated 28 November 1969 from C). The Supreme Court approved the reduction of capital on 28 January 1970 and on the same date F's firm wrote to N enclosing a certification of tax losses totalling $142,453 and suggesting an early conference ``with you and your clients' solicitors with a view to setting up procedures for the purchase of this loss structure''.

15. On 10 February 1970 the agents for the liquidator sent letters to all shareholders except B and C. This letter indicated that the Court had reduced the shares to a nominal value of 1c each, the taxpayer was insolvent, and that in order to obtain some benefit for the creditors it was ``proposed to sell the company structure for the value attaching to its tax losses'' and said ``To this end your co-operation is sought in disposing of your shares to the loss company purchaser for their face value of 1 cent each''. A form of transfer was attached and, although E agreed (to a question in chief by senior counsel) that it was a blank form (see para. 39), it would appear from the photocopies attached to an affidavit of G dated 13 March 1970 (see para. 19) that this was not completely so. What was sent was a form filled in except for the transferee's particulars. The photocopies also show that apart from two sent back dated 11 and 17 February 1970 they were returned undated and, with one or two exceptions, the signature unwitnessed (in particular A, B and C were unwitnessed). The letter indicated the consideration would be forwarded upon completion of the transaction towards the end of March 1970.

16. By letter of 13 February 1970 H wrote to the taxpayer care of F enclosing, inter alia, a timetable of events concerned with the approval of a scheme of arrangement and affidavit to be sworn by F and confirming the shareholding to be transferred (still as per para. 11). Also enclosed was ``original Deed and one copy for your records. Would you please attend to execution of same''. A copy deed in the file immediately under the above

ATC 135

letter and bearing the symbols 13.270 PK lists the shares to be transferred as per the letter of 13 February 1970 and, inter alia, has L as ``transferee'' and M as ``lender''. Although no evidence was given in relation to the above (or other) symbols appearing on documents, it is common knowledge that it is a not unusual practice of many solicitors to have their typists use symbols to indicate the date of preparation so as to avoid confusion between original drafts, first amended drafts, etc., and final draft. I take it therefore that the deed attached to the letter of 13 February was typed on that date - 13.270 meaning 13 February 1970 - and the same applies in respect of the other symbols that will be referred to later. O, by letter of 24 February 1970, raised certain points after having ``perused the deed'' and these were referred by N to G on 26 February 1970. H was advised by the liquidator's firm on 2 March 1970 that the purchasers now wished to rely on the shares held by B, C and D as it was expected D would not complete a transfer - B and C to be left with 4,060 shares each in lieu of the para. 11 figure of 3,750 for A and B - and the number to be acquired was 10,329 in toto. H replied on the same day (2 March 1970) and enclosed an original deed for execution - this explains the symbols 2.370 PK on most pages of the deed finally executed (see para. 20) and the first schedule thereof. However this first schedule indicates that 10,315 shares were to be transferred - 1,285 by each of B and C leaving them with 3,900 each in lieu of 4,060 - and it would seem that the fact that E (along with D) would also not sign a transfer became known on 2 March 1970 and caused a slight adjustment to the figures previously advised in writing totalling 10,329. On 4 March 1970 F's firm forwarded this deed to N and requested prompt advice ``as we wish to make arrangements for the execution thereof by the Directors of the'' taxpayer.

17. H on 19 February 1970 issued a notice to the creditors advising that by an order of the Court of 16 February 1970 a meeting would be held at the offices of F on 9 March 1970 to consider a scheme of arrangement. A proxy form, copy of the scheme, explanatory memorandum and statement, was enclosed. The explanatory memorandum and statement indicated B and C were unsecured creditors and would as shareholders and directors of the company share in the distributions under the scheme. Despite the Court order reducing capital (para. 14) the statement still showed issued capital as 18,783 $2 fully paid shares $37,566. G chaired the meeting of 9 March 1970 which carried the necessary resolution unanimously.

18. By letter of 10 March 1970 H wrote to N enclosing a counterpart of the final engrossment executed by all the transferors of shares and requesting that you please execute the counterpart so ``we can then have a formal exchange of agreements prior to the hearing of the Petition of the Court'' on 16 March 1970. N sent the counterpart to K on 11 March 1970 asking that it be executed by L and M. By letter of 16 March 1970 N wrote to F ``enclosing the deed duly executed by our clients''. Also on 16 March 1970 H wrote to F advising the Court had approved the scheme and advised concerning settlement requirements. These included the necessary directors' minute (for which drafts were enclosed), directors' resignations (enclosed), cheques for share consideration $103.15 and loan amount, and share scrip, if any, for the shares to be transferred. H by letter of 18 March 1970 to N advised the scheme of arrangement had been approved on 16 March 1970, the deed had, as discussed with N, been dated 13 March 1970 and enclosed the original deed signed by all parties ``other than your client'' advising ``we are retaining the counterpart agreement executed by our client''. This letter has a handwritten endorsement by N ``Agreement shown to (O) on 23/3/70 and approved by him''. A letter from H to F of 23 March 1970 refers ``to the settlement effected at your office today with (N)'' and confirms that N had been handed, inter alia, share transfers and minutes of meeting of directors held on 19 March 1970 - it was noted ``that you are yet to receive a cheque for $103.15 being the consideration payable for transfer of shares''. F wrote to N on 6 April 1970 asking for this amount ``at your earliest convenience''. By letters dated 13 April 1970 cheques were issued to the transferors by F.

19. The affidavit of G dated 13 March 1970 referred to in para. 15 referred, inter alia, to a deed dated 13 March 1970 (bearing the symbols 2.370 PK) and indicated that it had (with one irrelevant exception) been

ATC 136

signed by all parties. The letters referred to in the preceding paragraph show L and M had not then executed the deed (the counterpart executed by L and M being forwarded on 16 March 1970). The deed (an unsigned copy attached to the affidavit) had as its parties, inter alia, M referred to as transferee and L referred to as lender (a reversal of the order in that of 13.270 - see para. 16). The photocopies of the transfer forms (see para. 15) for B and C, unlike the others, do not have the share numbers of the 1,285 shares to be transferred on them and it was not explained when the actual transfers were signed by B and C (certainly, unless the number to be acquired was originally left completely blank, it had to be some time after 2 March 1970 because, until that date (see para. 16), they were to transfer a lesser number).

20. Although in the deed of 13 March 1970 referred to above (all relevant pages with the symbols 2.370 PK) both L and M were named as parties (as they were in that with the symbols 13.270 PK), this was not so in the deed tendered as an exhibit - M not a party (see para. 5). As tendered the document consisted of the deed itself (10 pages with two each numbered 8) with a first schedule (one page), a second schedule (the scheme of arrangement five pages), a third schedule (one page), a fourth schedule (two pages) and a backing sheet in that order. The first page of the deed bears the symbols 23.370 WM, pp. 2-9 inclusive together with the first and fourth schedules bear the symbols 2.370 PK, the second schedule (a photocopy rather than a typed original) the symbols 12.270 PK, the third schedule (also a photocopy) has no symbol, whilst the backing sheet still names,inter alia, L and M as parties and has the symbol 17.270 PK. The second p. 8 also still has M referred to as a party for which the common seal was to be affixed. In view of the symbols on p. 1 (and para. 18 and 19) it is my view that, on 23 March 1970 (date approved by O - para. 18), there was a substitution of the original p. 1 of the deed. The signatures of A and B appear on the second page numbered 8 and that of C on p. 9 and, from para. 18, it is clear that they had signed before the substitution took place - if that p. 8 had been altered to accord with the change in parties as per the new p. 1 the signatures of A and B would have again been required. It would follow from this that the Court granted its approval on the basis of an exhibit (the deed) different from that finally actually entered into. Senior counsel's attention was drawn to this matter and he submitted it was unimportant in that all the Court wished to be satisfied on was whether there was in fact a purchaser in existence.

21. This view is also supported by the fact that, whilst K initialled each of the eight operative pages of the deed and minor alterations therein as well as all pages of the schedules to the deed, neither F nor A, B and C did so. Rather G, who signed the second p. 8 as witness to the affixing of the taxpayer's seal and as witness to F, signed all pages of the deed and schedules whilst the person who is shown on the second p. 8 and p. 9 as witnessing the signatures of A, B and C, likewise signed all pages. As para. 15 shows, A, B and C signed share transfers which were not ``witnessed'' until much later and the same is I consider true for the signatures to the deed (the ``witness'' not being called to give evidence).

22. At the directors' meeting of 19 March 1970 (referred to in para. 18) the resignations of A, B and C (dated simply for B and C as March 1970 but for A as 5 March 1970) as directors were accepted whilst K and his wife were appointed directors. It was also resolved to approve the transfer of the 10,315 shares from the existing shareholders to L - the secretary to register upon stamping and, upon production of the old scrip, issue new scrip. The actual share transfers, apart from the two dated February 1970, all bear the date 23 March 1970 whilst that is the date of transfer shown in the share register except for the two dated February which show that as the date of transfer also. New scrip has been issued to L (and for the subsequent transfer of one share from L to Mrs. K) but not to B and C. The signatures of the transferors are shown (except for two) as witnessed by G who obviously inserted the date 23 March 1970 as well as details of the transferee. On the transfers of B and C the handwriting, except for the signatures of the transferors, is all that of G. The date those were actually signed by B and C is unknown.

23. I have quoted the date of the directors' meeting as 19 March 1970 but, in terms of the deed of 13 March 1970, the directors

ATC 137

covenanted that ``on the date of completion'' they would convene a meeting for the necessary purpose. No explanation has been given as to why such meeting should have been before completion and it may be that there was no meeting as such - B and C simply (at some unknown date) signed the necessary pre-prepared pieces of paper. In fact both B and C signed the two pages of the minutes and not just B as chairman of the meeting - B signed p. 2 twice (once above the word chairman and again below that word) 
      Issued capital         $187.83       Bank                $3,182.63

      Unsecured creditors  71,028.92       P/L appropriation   68,034.12

                          ----------                          ----------

                          $71,216.75                          $71,216.75

                          ----------                          ----------

These figures were the basis for the opening of a new set of books for the taxpayer by entries of 30 March 1970 (since F retained the $3,182.63 a capital reserve account was debited for this sum). The figure of $71,028.92 was in fact credited to the same account - although the journal entry was to trade creditors. The entry for the $22,080 loan by L was debited to the reserve account and credited to L account. The $7,613.80 consideration by M under the deed of assignment of 22 September 1970 (para. 6) was, by journal entry of 30 June 1970 (obviously made after that date), debited to L's account and credited to M's account. The balances assigned by F to M pursuant to the deed of assignment (no nomination in writing as required by cl. 5 and 5(b) - para. 5-6 - was placed in evidence) totalled $38,168.42 (after distribution by F out of $3,182.63 plus $22,080) and, a further entry of 30 June 1970 (again obviously later), debited the capital reserves account and credited M's account accordingly. The net result of all these entries was to give the capital reserve account a credit balance of $7,597.87 - the same figure as suggested in a letter of 5 February 1971 from F to N representing an amount of $12,279.47 (inter alia, creditors compromised or not proved) less F's total costs $4,681.60. A statement of application of scheme funds ($25,262.63) attached to this letter showed, inter alia, a distribution by F on the debts assigned of $17,921.36 (leaving a balance of $38,168.42) and total disbursements of $4,681.60. The above entries resulted also in credit balances of $14,466.20 and $45,782.22 in the accounts of L and M respectively.

24. Upon the transfers being registered the shareholdings in the taxpayer were then - 

      B    3,900}

      C    3,900}

      D      334}    45.1%

      E      334}

      L   10,315     54.9%

          ------   -------

          18,783   100.00%

          ------   -------

(thus, prima facie, satisfying the not less than 40% test of sec. 80A) whilst, upon completion, the situation of the taxpayer was as follows:

25. At a directors' meeting of 26 March 1970 (Mr. and Mrs. K with N in attendance) it was resolved to acquire from L the business and assets of L to take effect as from 1 April 1970 - the entries necessary in the books (including goodwill $80,815) were made as of 30 June 1970 and increased the credit balance in L's account to $191,807.36. In the balance sheet as at 30 June 1970 the loan creditors' figure of $239,259.71 represents the above $45,782.22 for M, $191,807.36 for L and an amount of $1,670.13 for K. At another meeting on 26 March 1970 L transferred one share in the taxpayer to Mrs. K whilst, at an extraordinary general meeting of shareholders on 24 April 1970, the taxpayer's name was changed to L (N.S.W.) Pty. Ltd. Annual general meetings of shareholders are minuted on 31 December 1970 and 2 December 1971 - resolved no dividend be paid - only Mr. and Mrs. K being present. A meeting of shareholders was held on 29 March 1972 (to elect Miss K as a director) and this was attended by Mr. and Mrs. K and E (this has been the only meeting attended to date by any ``continuing'' shareholder). On 27 July 1972 (after a requisition for details re loss claims by the Commissioner of 23 February 1972) a directors' meeting resolved that a dividend of $200 be paid out of the profits for the year ended 1972 and this was confirmed at the annual general meeting of shareholders on 29 December 1972. Cheques were drawn and issued in August 1972 and, although E denied receiving any dividends, it would seem that only that for C was returned unclaimed - being subsequently re-issued on 12 February 1973.

ATC 138

26. Further dividends were declared at the directors' meetings of 14 February 1975 ($440 ex 1974 profits), 23 April 1976 ($417 ex 1975 profits), 22 April 1977 ($129 ex 1976 profits), 28 April 1978 ($59 ex 1977 profits), 27 April 1979 ($13 ex 1978 profits) and 1 October 1979 ($2,253.96 ex 1979 profits).

27. The February 1975 amounts were credited to a sundry shareholders account and cheques were not issued in respect of B, C, D, E and Mrs. K. The April 1976 dividend was credited to the same account but cheques therefor were drawn on 30 June 1976 and issued on 8 October 1976 (as per returned unclaimed cheque in respect of E). The April 1977 dividend was also credited to the same account as was that in respect of April 1978. Letters dated 25 August 1978 issued to B, C, D and E from N, enclosed cheques in respect of the 1975, 1977 and 1978 entitlements and advised that it was in accordance with instructions received from the directors, the 1976 dividend had already been forwarded and it appeared the 1975 amount had been inadvertently overlooked. No explanation was given as to why the 1977 amount had apparently also been overlooked. Letters from N issued on 16 November 1979 enclosing the April 1979 cheques whilst further letters of 11 February 1980 accompanied the October 1979 dividends. All letters to E were addressed to the same place as for the returned October 1976 cheque.

28. In addition to the returned cheques to C of 7 August 1972 (para. 26) and to E of October 1976 (para. 27) - the former issued by N and the latter by L - a folder tendered shows there were also returned -

This reflects the overall evidence of N and K (para. 46) that items could be issued by either L or N. The returned notice of annual general meeting does not have a copy of the taxpayer's accounts attached to it and it seems clear such were never issued.

29. As indicated para. 25 the taxpayer acquired the business of L and, for the years ended 30 June 1970 (three months trading only), 1971 and 1972, profits of $13,406.29, $59,814.45 and $83,808.51 were derived from sales of $160,038.11, $592,038.80 and $631,393.32 respectively. By then the earlier losses had been recouped - a credit profit and loss appropriation balance of $88,995.13 at 30 June 1972. The books of account reveal that over the period 1973-1978 inclusive an overall loss occurred - profit and loss appropriation balance 30 June 1978 $84,467.25. It would seem from the books another company L (A/asia) Pty. Ltd. began to take a part - sales being introduced by journal entries in respect of work for L and L (A/asia) Pty. Ltd. Also entries were made for expenses paid by the taxpayer on behalf of those two companies although some were reversed ``as per advice from Mr. K''. By journal entry of 30 June 1973 an amount of $117,833.42 was transferred from the ledger account of L to that of L (A/asia) Pty. Ltd. ``in accordance with instructions'' whilst, by another of 30 June 1979, the goodwill figure of $80,815 was written off thereby reducing the profit and loss appropriation balance to $3,639.25. The last is explained by an earlier entry of 28 February 1979 recording the sale of the taxpayer's assets (the initial entry was for $109,156 being the book value after depreciation of the assets) to another company L (Holdings) Pty. Ltd. A subsequent entry debits sales and credits L (Holdings) Pty. Ltd. for $120,000 ``to correct accounts re cash received on sale...'' and there has been inserted into the original entry an additional debit of $10,844 to L (Holdings) Pty. Ltd. and also a credit to capital profits reserve. There is no minute in the taxpayer's minute book concerning the sale of its business undertaking for (I take it) $120,000.

30. In regard to the ``sale'' it might be noted that it is arguable that it was completely unauthorized. Halsbury's Laws of England, 3rd ed., vol. 6, pp. 456-457 refers to the powers of sale of a company and states ``the whole business and undertaking or a part of the undertaking may be sold if the sale is authorized by the memorandum of association''. In the present case the memorandum of association (just over one page and eight clauses only) contains no provisions relating to the sale of the whole or part of the taxpayer's business and undertaking. Putting to one side the question of whether or not the ``sale'' was an authorized one, the preceding details indicate, and I so find, that the taxpayer's

ATC 139

activities have been manipulated to suit the interests of K and his companies and that it has now been stripped of its business undertaking without the ``continuing'' shareholders having been given any opportunity whatsoever to exercise (and protect) the full rights they are alleged to have at all times retained since March 1970 by virtue of their 45.1% (para. 24) share interest. These aspects were drawn to the attention of senior counsel during his address and he said they would be considered and, if necessary, a written submission lodged - none has been received.

Oral Evidence

31. B, C, E, G, K and N all gave evidence in the course of the taxpayer's case whilst the only witness for the Commissioner was a senior investigation officer. I set out this evidence in the order in which it was given. However, I should say in advance that, looking at the evidence given overall, it fails to constitute a full and precise picture of what occurred and, in particular, of what was said by the various parties. The reasons for this will become clear from the somewhat more expansive than usual statement of their evidence as a whole - as distinct from just ``material'' findings of fact therefrom.

32. N, a chartered accountant, said K drew his attention to the possibility of acquiring ``some shares in the company for the purpose of utilizing the tax losses'' and he then followed it up with G - to the best of his knowledge K had not consulted him on the general concept of acquiring a tax loss company prior to bringing the taxpayer to his attention. He attended the conference with senior counsel, along with O (who sent ``their own letter for brief to counsel'') and K, who said no arrangement of any sort at all should be made re the shares and preferably N, in particular, should have no contact with the continuing shareholders. He could not recall whether counsel suggested a capital reduction (N's letter of 30 July 1969 to O (para. 12) referred to an alternative scheme involving a reduction of capital). N deposed the only person he had any discussions with at all was G (on behalf of his client) and had none with any of the remaining shareholders. He was not present when the above transfers were executed, never received any old scrip and had no recollection of issuing new scrip to B and C - although he agreed it was unusual to issue scrip to some (para. 22) and not to others. The entries in the share register were made by his staff but he did not know when they were made.

33. In cross-examination N denied the capital reduction was ``done on our instructions'' although it was made clear to F ``we were not interested in buying it unless the capital was reduced''. His office had nothing to do with the preparation of any minutes prior to those of 25 March 1970. N had no idea when the deed was executed by L nor the date of completion or what his notation on the letter of 18 March 1970 (para. 18) referred to. He said he drew K's attention to the fact that items were being returned unclaimed and indicated that the amounts shown in the sundry shareholders' account were shown in the balance sheet as shareholders' loan account. N did not remember any negotiation with G concerning the price of 15 ½ c per $ losses.

34. B, who suffered a mild stroke in November 1975, said in chief that he was very upset at the collapse of the taxpayer and that his memory of the matter was very dim. He did not recollect that the taxpayer had entered into a scheme of arrangement with its creditors after liquidation or that he had received notices of meeting. He knew he continued to hold some shares (but not how many) and that he had received some ``odd'' dividends (which he was rather surprised to receive). Finally in chief he was asked whether he had entered into any agreement either verbal or written about what he could do with his shares and his answers were ``Not to my knowledge'' and ``Not that I can recollect''. In cross-examination B said he was unaware of how many shares he had in the taxpayer before liquidation, how many he had now and the number transferred - he never received scrip for the shares he continued to hold. He remembered somebody suggested a reduction of capital, had no recollection of discussing it with F (whom he said he had met) or anybody at F's office and when asked had he discussed it with anyone said he might have but had no recollection of it. B did not remember being at a meeting of 5 December 1969 - or moving a resolution at that meeting - but agreed that the purpose of the meeting was to assist the progress of the scheme for the selling of the tax losses.

ATC 140

35. When shown the original deed tendered B identified his signature but had no recollection of signing it nor could he remember anybody explaining it to him. He knew it would be necessary for him to sign documents to enable the tax losses to be disposed of so moneys could be obtained for creditors (he and C being creditors also) and it was quite likely someone at F's office would have asked him to sign and that he would have trusted their judgment. B had no recollection of a meeting of 19 March 1970. Similarly B could not recall being interviewed by an officer of the taxation department on 28 March 1973 although he identified his signature on what was said to be a report of that interview and agreed he would not sign a blank piece of paper. When pressed concerning the proposition that he was asked did he consider he ``still had some financial rights as to dividends or other rights, such as the right to vote at meetings'' and he had replied ``No rights whatsoever'', B answered ``Well it is written there. All I can add, or repeat rather, I have no recollection of it''.

36. B agreed that he knew the losses would be of benefit to others and that he ``would do nothing to stand in the way of (K) or his company making full use of that tax loss'' - he ``knew this was the purpose of the company buying them''. When asked where he had signed the various documents B said he did not really know. Finally in cross-examination B agreed that he knew he could not sell all his shares ``if the arrangements in relation to the tax loss were to be successful'' and agreed that this would have been ``the reason why you kept some of your shares'' - to the later question B also added ``This would have been - this is conjecture - this would have been explained to me by (F)''.

37. In chief C could not recall selling any shares and said he relied on B for everything - ``I was in the shop as an engineer and he was in the office and I think I signed some forms anyway''. He could not recall meeting G or N and answered the question ``Did you have any discussion with anyone about the conditions on which you would keep some shares in the company'' in the negative. Shown the deed and share transfer form he could not recall where he was when he signed them. C said he received no papers from the taxpayer other than one with a cheque and that he had not notified any changes in address. In cross-examination he was asked did he know about an idea of a sale for tax reasons and he answered: ``No, I had no idea of that. I never ever interfered with (B's) work. He looked after the office and I left it to him and when (F) came and said `Well you have got to do what you are told' well I just did what I was told''. He did not know how many shares were transferred and, when asked how many shares he had now, said ``I did not even know I had any till lately''. This was after a cheque, which he was very much surprised to get, was received (see para. 45).

38. When asked, C could not remember being interviewed by a taxation officer but identified his signature on a report dated 11 July 1978. Similarly he could not remember giving a proxy in respect of the meeting of 28 November/5 December 1969 to G.

39. E, who moved from Sydney to Brisbane about six years ago, recalled receiving the letter of 10 February 1970 from F and, when asked ``Was there a blank share transfer form attached to that letter'', answered ``Yes''. The letter was produced but not the form which she had put ``in the garbage''. She had attended one meeting for which she had received notice - that for 29 March 1972 to appoint Miss K a director, which took about two minutes. No other notices of meeting had been received and she had not received any dividends. Nor had she received any copies of annual accounts of the company.

40. The next witness called was G and I should say that whilst not imputing any intention to him to be other than frank, I found his evidence rather unsatisfactory. He gave evidence without reference to any of his office files (those files were subsequently produced to the Board and, although now retired, presumably were available for G who was in F's office on the morning of the first day of hearing at the least) and much of what he said was, in my view, reconstruction and not recollection. As I have said I impute no improper intention for he said right at the commencement of his evidence in chief: ``Let me say this right now, I do not remember in specific terms any precise conversations that took place after 10 years''. However, he then proceeded to say what would have been talked about or said. Senior counsel leading him considered he could rely on G's standard practice but, in cross-examination, G, when

ATC 141

asked whether transactions involving the sale of losses by F's firm during 1969 and 1970 followed more or less the same pattern, said:

``They were handled by different parties and the manner in which the sales took place would have depended to a degree upon - quite substantial degree upon - the partner involved or the officer of (F's firm) involved in the sale. The general framework of procedure might have been common but what was said or done in relation to the sale " (I take this to mean individual sale transactions) " could have been vastly different, I do not know.''

It is understandable that what is said (or the precise conversations) can vary according to the understanding, etc., of the parties who are being conversed with and I find the evidence of G insufficient to clearly establish that at the relevant time he did have a standard practice which he then invariably followed in all cases. Having said that I turn to what G deposed (not all of which I accept).

41. He recalled a discussion with N about the prospect of a client being interested (he believed it arose out of his contacts with N rather than K), identified a letter of 16 March 1970 from N addressed to F attention G on the basis he had no doubt he received it but could not identify it otherwise, and identified his handwriting appearing on the share transfer forms. He could not recall the procedure adopted in relation to the signatures appearing on the forms and whilst he also could not recall whether they were signed before or after the deed was executed believed ``that they would have been signed on the date that appears on the transfers'' (para. 15 indicates this is incorrect). When asked whether any ``express arrangement or undertaking concerning what the continuing shareholders could do with their shares'' had been made G said ``No'' and followed it by a general statement as to what he did in practice and felt sure N ``was also informed by me if he had to be, the risks that his client might take and what happened thereafter was not my concern but certainly I would not have sought any undertaking from the shareholders''. G recalled much of the negotiations was done through B and, after objections due to G referring to what he told B being ``to the best of my recollection because it would have been also what I would have explained to other people in similar circumstances'', said he explained the mechanics of tax losses, i.e. provided 40% is retained the tax losses could be used but no undertakings or agreements re the retention of that shareholding - the purchaser would have to take the risk. He also told B he was a full shareholder entitled to his share of the profits and that at a future date the purchasers of the loss structure might seek to acquire his shares but they would have to pay market rates at that time.

42. In cross-examination G could not recall the number of conversations with B and when asked ``would you agree it is the case that you have no certainty of the words you have given today being the precise words that you would have used to (B)'' said ``It would be folly for me to say otherwise''. He did not recall part of the scheme involved a capital reduction but agreed that such a course would enable the later swamping of the continuing shareholders. After being shown the minutes of 5 December 1969 he believed the reduction was a requirement of the purchaser before a scheme satisfactory to the purchaser could be brought about. When referred to the proxies he thought it likely he may have suggested to B that he get proxies for the chairman. Shown the deed he could not recall discussing it with B (as per para. 21 he did not witness B's signature) but would have done so - he did not believe B would have studied the deed but his attention would have been drawn to the directors' covenant cl. 8. Nor did he believe that B or C might believe they had no rights in relation to the taxpayer. He did not think the fact B and C as creditors would get something was used as a sales pitch and said ``I found (B and C) both men of integrity and they were anxious to get as big a realization for creditors as possible. Irrespective of whether they were creditors themselves''. He did not recall if the old shareholders returned any scrip.

43. When asked about the deed G did not know when the seal of the taxpayer was affixed (G signing as witness) nor of swearing an affidavit of 13 March 1970. Shown a copy he said it was not his signature although he believed he would have sworn such an affidavit. He agreed 13 March on the deed was in his handwriting, that for the scheme to be a success it required the co-operation of B and C and that it would be the best way of

ATC 142

transferring shares for the present directors to approve at a directors' meeting the transfers.

44. Finally in respect of G I quote two consecutive questions and answers given by G during cross-examination which were (along with those of B para. 36) the subject of discussion during addresses - counsel for the Commissioner seeking to rely thereon and senior counsel for the taxpayer seeking to give other than a literal interpretation thereto. They were:

``And I take it you asked them in effect whether it was something that they would be willing to go into?

Yes, I explained the circumstances that the purchaser would require to acquire a given percentage of shares in the company but as to the remainder for him to be able to successfully utilize the losses, they would have to remain in the old hands during the period of recovery. But there could be no undertaking in writing or verbally or otherwise sought from the continuing shareholders...

I take it that after you told the continuing shareholders or the proposed continuing shareholders about the matter, they in effect gave you the go ahead to proceed with it, is that right?

Yes.''

45. By leave a senior investigation officer was interposed and he deposed that he had made certain inquiries concerning the affairs of the taxpayer and in the course thereof interviewed B and later C. B was seen in the Taxation Office and C at a factory at Bankstown. He had a pre-prepared questionnaire for B and wrote B's answers down. B was shown the document (with the answers written in) and he signed it. A somewhat similar procedure was adopted for C although it would appear there were two visits and the document signed by C records matters from the first interview in addition to answers written in at the second. In cross-examination the officer said you had to tailor your questions to suit each case before they were typed out prior to an interview and denied suggestions that the answers recorded by him were summaries only. (I would accept senior counsel's later submission that they were summaries but do not think this establishes the summaries as incorrect or misleading answers.) The records of interview were tendered and the relevant part of that in respect of B has already been set out in para. 35 above. That in respect of C, records an answer to the effect that he was not advised of the necessity to retain ownership of shares until such time as the losses were recouped. To another question ``Do you regard yourself as being a shareholder in the company? If not, at what stage do you consider that you ceased to be a shareholder'' the following answer is shown: ``No. As far as I'm concerned (F) took all my shares years ago. I don't have any scrip''. However, in answer to an earlier question as to whether he had since 1970 received any dividends, it is recorded that he could remember one cheque for about $100 which K delivered personally about 18 months ago (the October 1976 cheque - para. 27 - in respect of C was for $86.58).

46. The final witness was K. He recalled being on the committee of inspection of the taxpayer and of a conversation with N concerning ``the possibility of taking over some shares in'' the taxpayer. Subsequently he attended a conference with senior counsel who said the only danger was if one of the continuing shareholders went bankrupt. N told him no arrangements were to be made with the continuing shareholders and K said he had never had discussions with them about what they could or could not do with their shares. He agreed he was not a party to ``any express arrangement'' with them. In cross-examination K said F had referred to more money being available for the creditors if the losses could be sold but that is all he could remember about selling the losses. N had explained the risks but it was decided the ``risks were very minimum''. He could not recall anything about a reduction of capital. K said N decided what dividends had to be paid and he told us to draw a cheque and send it out (or send to N for him to send out). In re-examination he said he knew the continuing shareholders had to hold their shares and if they did not ``I would lose the losses'' but, being prepared to take the risk, did not take any steps to ensure they would keep their shares.

Submissions

47. Senior counsel for the taxpayer reviewed the evidence under a number of headings such as meeting of creditors,

ATC 143

conference with senior counsel, express undertaking, purpose of B and C, reduction of capital, notices of meeting, dividends, proxy and senior investigation officer's report. Based on this review he submitted inter alia that:

and contended there was accordingly nothing that fell within the terms of sec. 80B(5).

48. Counsel for the Commissioner similarly reviewed the evidence and submitted:

49. Having considered the evidence as a whole in the light of counsels' reviews thereof it is clear that there was much more involved in the transaction than a mere purchase of a given percentage shareholding in the taxpayer and that the affairs of the taxpayer have been conducted without a proper regard to the rights of the ``continuing'' shareholders. I do not accept that some matters can be attributed to sloppiness or those imperfections that happen in the practice of any profession and I doubt whether the presumption of regularity can really be called into operation when the evidence shows clear instances of an absence thereof. However, despite the above, the documentary evidence does show that there was no written ``contract, agreement or arrangement'' entered into by B and C to retain their holdings until the losses were recouped and, for such to be positively found, it must come from the oral evidence expressly or the totality of the evidence inferentially. Of course, if the state of the evidence were considered to be overall so unacceptable or unreliable as to raise uncertainty as to what in fact occurred then it would be necessary to decide whether, on the ordinary civil standard, the onus of proof had been discharged.

50. The difficulty with the oral evidence is that, as indicated in para. 31, apart from E (who was not a party to the deed of 13 March 1970), the memories of the other relevant witnesses were far from crystal clear as to what precisely occurred and, in particular, as to what was said. Although all deposed in chief there was no ``arrangement'', cross-examination elicited other answers which, if not completely inconsistent, cast doubt (not removed by re-examination) upon the original responses. Thus the respective reviews not unnaturally concentrated on those portions favourable to each point of view and sought to explain away the unfavourable portions.

51. This difficulty is illustrated by the evidence of B and G. B, who had had a stroke in 1975 and could not remember (amongst other things) an interview in 1973, could ``remember'' that, in 1970, there was no ``arrangement'' although, as para. 36 indicates, he apparently also remembered other matters which could lead to it being found that there was an ``arrangement'' (albeit not recognized as such by B). In relation to the evidence of G, questions arise as to how much is direct recollection and how much is reconstruction based not on his memory of 1969 and 1970 but of his work up to and including his date of retirement and, with reference to the matter referred to in para. 48(b)(v), to what extent a similar view to that taken by Mr. Fairleigh in Case K57 (para. 29 p. 568), viz., ``X was determined to add to his answers an omnibus statement intended to negative the fatal aspects of sec. 80B(5), and therefore his evidence is unreliable'', should be adopted. In relation

ATC 144

to B and G I should record that I have put to one side the suggestions of counsel for the Commissioner that G's evidence contained an element of what with hindsight G considered he should have said and that B's reflected advice received in discussions with the taxpayer's solicitors.

52. I have reconsidered the oral evidence and am of the view that it is open to find, and I so find, that:

53. Accordingly it is my view that the evidence establishes there was an express arrangement within the provisions of sec. 80B(5) between all parties that B and C would continue to hold their remaining shares so that K and his companies could take advantage of the taxpayer's tax losses. Although it is strictly unnecessary to do so I also find in the alternative that the evidence, if it were not such as to lead to a positive conclusion, is such that a similar conclusion by inference, from all the facts is open and I would draw that inference. I should also add that, although I am of the above view, to the extent that it is sufficient, in the light of F.C. of T. v. Cooper Brookes (Wollongong) Pty. Ltd. , to find such an arrangement between B and C and G only, I would do so both positively and inferentially.

54. Although I have been able to reach a positive decision it should be mentioned that, at one stage, I had some doubts (because of difficulties with the oral evidence (para. 49-51)) whether I could do more than say the taxpayer had not discharged the onus of demonstrating that the assessment was incorrect.

Conclusion

55. For the above reasons I would uphold the Commissioner's decisions on the various objections and confirm the taxpayer's assessments, both primary and Div. 7, for the years ended 30 June 1970 to 1972 inclusive. I would also confirm the primary assessment for the year ended 30 June 1975 - no evidence having been offered in relation thereto.

 

Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited

CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.

The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.