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High Court of Australia Transcripts |
Last Updated: 22 November 2004
IN THE HIGH COURT OF AUSTRALIA
Office of the
Registry
Sydney No S299 of 2004
B e t w e e n -
CHIEF COMMISSIONER OF STATE REVENUE
Appellant
and
DICK SMITH ELECTRONICS HOLDINGS PTY LTD
Respondent
GLEESON CJ
GUMMOW J
KIRBY J
HAYNE
J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 17 NOVEMBER 2004, AT 10.17 AM
Copyright in the High Court of Australia
MR B.A.J. COLES, QC: May it please the Court, I appear with MR H.R. SORENSEN for the appellant. (instructed by Crown Solicitor for the State of New South Wales)
MR J.W. DURACK, SC: May it please the Court, I appear with MR D.G. CHARLES for the respondent. (instructed by Gilbert & Tobin)
GLEESON CJ: Yes, Mr Coles.
MR COLES: If the Court pleases - - -
KIRBY J: Mr Coles, just before you start, I asked the Registrar to inform both parties that I have had social contact with Mr Dick Smith personally, not any contact with the respondent. I understand there is no objection to my participating in the case and I intend to do so.
MR COLES: There is certainly none on the appellant’s part, your Honour.
KIRBY J: I understand both parties raised no objection but I thought I should draw that to notice.
MR COLES: Your Honours, in this appeal the appellant, the Chief Commissioner of State Revenue, claims that the consideration for a transfer of dutiable property comprises the totality of the amount required by the vendor to be paid under the relevant contract and, accordingly, that duty should be assessed on the basis of the total outlay by the purchaser, or the total outlay of $114 million rather than that amount as reduced by a dividend paid to the vendor which the vendor required the purchaser to finance. Your Honours, in our outline of submissions we have set out the principal relevant portions of the applicable legislation, that is to say, the Duties Act 1997 (NSW), an Act which in many respects is replicated in other States. Your Honours will note - - -
KIRBY J: Which reprint should we be using?
MR COLES: The applicable reprint or the most proximate reprint to the events of 10 April 2001 we understand is Reprint No 2, but your Honours will not be incommoded by the current reprint which we understand is Reprint No 4 and in either case your Honours will see that each of the submissions in writing furnished to the parties attaches, in the respondent’s case with rather considerable detail, the applicable statutory provisions and your Honours will find them there as readily accessible as in either of the reprints to which I have referred. In short, no material amendment that has any effect for present purposes has come in since the events the subject of the proceedings.
I did not want to take up
too much of your Honours’ time by surveying the legislation in any
detail. It is set out fairly
comprehensively in both our submissions. There
are a couple of things I should just draw particular attention to. It is
probably
correct to say that the central charging section, section 19,
whereby:
Duty is charged on the dutiable value of the dutiable property subject to the dutiable transaction at the relevant rate –
which is set out in Part 3 of the Act. Bearing in mind that the duty is thus charged, one can then go back to section - - -
KIRBY J: I thought Mr Durack, in the special leave hearing, he started with section 8.
MR COLES: Well, noticing where the duty is thus charged, one then goes back, I suppose, to note that in section 8(1)(b)(i), for present purposes, duty is charged by the chapter on both transfers of dutiable property and certain transactions, not themselves transfers but agreements contemplated to produce that consequence, that is to say - - -
GUMMOW J: What is the section that says if you paid on the agreement you do not pay again on the transfer?
MR COLES: That is section 18(2).
GUMMOW J: Thank you.
MR COLES: But it is subject to a condition
that:
The duty chargeable in respect of a transfer of dutiable property made in conformity with an agreement for the sale or transfer of the dutiable property is $2 - - -
GUMMOW J: Yes.
MR COLES: For present
purposes, may I just ask your Honours to notice the provisions of section
9, to which reference is made in the party’s respective written outlines.
Section 9(1) specifies:
The duty charged . . . on a dutiable transaction . . . is to be charged as if each such dutiable transaction were a transfer of dutiable property.
So that the dutiable transaction referred to in 8(1)(b)(i)
– that is to say, the “agreement for the sale or transfer of
dutiable property”, is charged as if it were a transfer of that property.
Then subsection (2), including the table, provides
that for the purpose of
charging duty, firstly, in subsection (a):
the property –
which is the property agreed to be
transferred –
is taken to be the property transferred –
I put that badly, but where the dutiable transaction is an
agreement for sale or transfer, the property so transferred is that which
is
agreed to be sold or transferred. I think I can come down to (c).
Likewise:
the transfer of the dutiable property is taken to have occurred at the time specified opposite the dutiable transaction in column 4 –
So that the transfer, in the case of an agreement to sell dutiable property is taken to have occurred at the time when the agreement itself is made, notwithstanding that the agreement envisages further steps to complete the transaction.
Section 11 then, your Honours,
defines duty of the property and there is no dispute that the property, the
subject of the transaction in these
proceedings, fell within
section 11(d)(i), that is to say:
shares in:
(i) a NSW company –
Section 12 provides
that:
(1) A liability for duty charged by this Chapter arises when a transfer of dutiable property occurs.
I have just been reading the context of what precedes it in
section 9 and subsection (2) provides that:
if a transfer of dutiable property - - -
GUMMOW J: Sorry, where
are you now, Mr Coles?
MR COLES: I was just drawing
your Honour’s attention to what appears in section 12 where
the:
transfer of dutiable property is effected by a written instrument, liability . . . arises when the instrument is first executed.
Section 13 may be of some importance in this appeal
inasmuch as it provides that the:
Duty charged by this Chapter is payable by the transferee, unless this Chapter requires another person to pay the duty.
I mention that, your Honours, because it is perhaps of some significance that the fact that the transferee pays the duty is simply the result of section 13 imposing that liability upon the transferee. Section 13 does not, for example, impose the liability on the person who actually pays the consideration, nor for that matter does the person who is the transferee necessarily have to be the person who has supplied the consideration, it is simply the person who is liable to make the payment of the relevant duty.
GUMMOW J: Was the term “transferee” defined? It appears back in section 9 in the table as “the purchaser or transferee”.
MR COLES: There is a dictionary at the back, your Honour. Most things are defined but I think “transferee” is not.
GUMMOW J: It does not look like it, no.
MR COLES: No. “Transfer” is defined but uncontroversially.
KIRBY J: You referred us to section 11. It has the little pyramid beside it in my reprint and that is said to indicate uncommenced amendments. Now, do any of those uncommenced amendments concern us?
MR COLES: They do not, your Honour. The section then
which deals with the dutiable value is section 21 of the Act in Part 2
and the dutiable value of dutiable property that is the subject of a dutiable
transaction. Materially, for present purposes:
(a) the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration or the value of a non-monetary consideration), and
(b) the unencumbered value of the dutiable property.
We are
not here concerned with any question of the unencumbered value of the dutiable
property - - -
GLEESON CJ: Well, if we were, what would be the date at which you would look for the unencumbered value of the property?
MR COLES: By section 9, your Honour, one would have to value it at the date of the notional transfer, that is to say, the agreement for the sale or transfer of the dutiable property, in our submission.
GLEESON CJ: What was the unencumbered value of the dutiable property here?
MR COLES: There was no actual evaluation undertaken of that. The parties were apparently content – or, more accurately, I suppose, the Chief Commissioner was content – to accept that the unencumbered value of the dutiable property was not greater than the monetary value of the consideration. So no occasion arose, on that basis of things, for looking at the unencumbered - - -
KIRBY J: But “not greater” depended upon the differing views as to what the value of the property was.
MR COLES: Yes. No doubt - - -
KIRBY J: There was no fallback position?
MR COLES: I emphasise, there has not been and is not before your Honours any fallback position.
KIRBY J: So you did not seek prove otherwise than by reference to the instruments, the value of the shares?
MR COLES: No, that exercise was not sought to be undertaken. I think they are the principal sections to which attention needs to be drawn, although, again, the paragraphs are the subject of some commentary in our respective submissions.
Could I ask your Honours then to look, if only briefly, at the share acquisition agreement, which your Honours will find on page 10 of the appeal book. The recitals and the parties fairly indicate the nature of the dutiable transaction. The two vendors, InterTAN Inc and InterTAN Canada, are respectively United States and Canadian corporations, and the purchaser, Dick Smith Electronics Holdings, is the only other party. If it matters, it is to be noted that the company itself, that is to say, the company whose shares were the subject of the transaction – InterTAN, I will call it - was not itself made a party, and the recitals describe compendiously the substance of the transaction as one for the buying and selling of the shares.
Elsewhere, without taking your Honours into the detail of the matter, it appears within the agreement itself that the vendors, the two North American companies, were selling shares in an Australian company - - -
KIRBY J: One American and one Canadian.
MR COLES: Yes, that is right. The Australian company, the company whose shares were being acquired by the transaction, was a company which, it seems, conducted business as a radio, television and consumer electronics supplier.
GUMMOW J: Where do we see the State of incorporation of the Australian company?
MR COLES: If your Honour goes to – it is recited in the parties on page 10. No, I am sorry, that is the purchaser.
GUMMOW J: No, I mean InterTAN Australia. It is mentioned on page 40 but not with any further indication.
MR COLES: Yes, I was just looking at the – there is information about the vendor certainly, and on page 40 your Honour will see - - -
GLEESON CJ: Is it not page 42, line 35?
MR COLES: Yes, that is right, it is, your Honour. That is precisely where one finds it. Elsewhere in the agreements your Honour will see that it is plain enough that the Australian company seems to have carried on business in the consumer electronics field that the agreement describes in a number of outlets.
GLEESON CJ: Was there any evidence as to the financial accounts of the Australian company?
MR COLES: Not in these proceedings, no, your Honour. The agreement makes provision for the preparation of completion accounts and the like but they were not in evidence in the proceedings.
GLEESON CJ: Is there any evidence to suggest that the Australian company was insolvent?
MR COLES: Not the slightest, your Honour, in any degree. Indeed, in our respectful submission, the inference anyone reading the agreement would draw would be that it is carrying on business in a number of branded outlets generally under the name of Tandy or Radio Shack and some others.
GLEESON CJ: So if anyone made a loan of money to the Australian company, they would thereby acquire an asset in the form of a debt owed by the Australian company having a value equal to the amount of the loan?
MR COLES: In principle,
yes. We do emphasise there is not the slightest suggestion or – not only
is there no evidence but it has not
been suggested and would not be suggested
that the company was in any sense unable to pay its debts. If your Honours
just note the
definition of “Purchase Price” which has been referred
to a number of times in submissions, at page 15 it means the sum
of
“$114,139,649.00 minus the Dividend Amount”. The “Dividend
Amount” is an important definition on page
12. It:
means all retained earnings (up to a maximum of $27,000,000) which the Company is able to pay on the Shares at Completion, or such other amount as the parties agree.
Seemingly this was a company which had retained earnings, no doubt earnings which it had not theretofore distributed by way of dividends and which therefore it may be supposed it had, in effect, reinvested in its business. That state of affairs we will be suggesting has a little to do with the way in which the transaction was cast.
I say that, your Honours, because the agreement made some fairly specific provisions as to what was to happen pending completion of the agreement and, although not much concentration was brought to bear on them in the proceedings below, they are worth pointing to. If your Honours would look at page 18 of the appeal book, some detailed provisions are made for the conduct of a business and some obligations are imposed upon the vendors to ensure that the company, in effect, keeps the business operating as a going concern pending the completion of the transaction. In particular, it is not to conduct its business otherwise than in the usual course.
GUMMOW J: Nor declare any dividends.
MR COLES: Importantly, it is not to dispose of any assets under (b) and it is not to declare or pay any dividend or make any distribution of what, on the hypothesis of the agreement, was its known – or out of its known retained profits - - -
GLEESON CJ: Other than a dividend - - -
MR COLES: Other than - - -
GLEESON CJ: - - - declared in accordance with 4.4.
MR COLES: Other than a dividend which the agreement made provision for. We ascribe to that state of affairs, if your Honours please.
GLEESON CJ: And that dividend was to be declared prior to completion.
MR COLES: On or within a minute or within a few seconds – I am sorry, yes, your Honour is right. The declaration – yes, quite.
GLEESON CJ: It says, on page 19, 4.4, that the dividend is to be declared prior to completion.
MR COLES: Absolutely. That is right, your Honour, and there is a provision about the time within – indeed, not only prior to but very proximately anterior to.
GLEESON CJ: Well, the record date for the dividend was to be one day prior to completion, and the dividend was to be payable on completion. So what was to be transferred on completion was shares in a company that had declared and paid a dividend.
MR COLES: Yes, that is undoubtedly so. As a matter of description, a question that immediately arises, and let me deal with me now, is that in the Court of Appeal it was said by the majority that the subject matter of the contract must be regarded as a contract for the sale of shares ex dividend. We, of course, take issue with that, and let me deal with that now. We do it for these reasons. Firstly, it is plain enough that at the date of the contract itself, all that, according to the description in the contract, the sale concerned was the shares unembarrassed by any qualifying description as to whether they were con dividend, ex dividend or anything else - - -
GLEESON CJ: The contract obliged the company to go ex dividend before completion.
MR COLES: The contract as between the parties. The company, of course, was not a party to the contract, but the contract obliged the parties.
GLEESON CJ: Obliged those in control of the companies - - -
MR COLES: Yes, that is right.
GLEESON CJ: - - - to declare a dividend before completion and pay the dividend on completion.
MR COLES: And to pay it out of the funds – this is the point we wish to emphasise, of course – to pay it out of funds supplied for the purpose by the purchaser; not, as might otherwise have been the case, out of the erstwhile retained profits which the company - - -
GLEESON CJ: Companies can only pay dividends out of profits - - -
MR COLES: Quite.
GLEESON CJ: They might raise the cash to discharge their liability to their shareholders by borrowing from a bank or some third party.
MR COLES: Yes. It is not unimportant, in our submission, that the parties were concerned to ensure that the source of the funds raised to pay the dividend were moneys borrowed or supplied – well, not borrowed but funded – “funded” has its own circumstances – funded by the purchaser. We do wish to emphasise, your Honours, we have made the point in our submissions, but let me restate it. The subject matter of the contract is shares and no more. It is an economic consequence of the completion of the agreement that when the shares are transferred they will be shares upon which a dividend has been paid, and paid referable to the retained profits of the company out of which is the only source from which any point of quantum that such a dividend could be paid.
In our submission, that does not cause the contract for sale to be a contract for sale of shares ex dividend. They were not, as Justice Davies pointed out in the Court of Appeal, shares which bore that quality at the date of the agreement. Indeed, section 9, we would suggest, of the Act requires one to look at the matter on the basis of the agreement at the time of its execution, I would suggest, so that - - -
KIRBY J: That is a critical point in your reasoning - - -
MR COLES: Well, it is not the only point. We say three things, really. We say, one, the proper way of finding out what the subject matter of the contract for sale is is to simply look at what the agreement, properly construed, identifies it as, and we say here it was shares in a company which was a going concern - - -
KIRBY J: “Properly construed” is the problem.
MR COLES: It is. Secondly, we say, of course, that if the point we make about section 9 is right then one does not look later down the track to see how the agreement was implemented to work out what the subject matter was because – and that is really our third point – that funding is by no means the same as, for purposes of identifying consideration, funding is not the same as lending. One may perform one’s funding obligation by making a loan or one may perform it in many other ways but it was a, in effect, misapprehension of the circumstances in the courts below, particularly the court of first instance where Mr Justice Gzell, we think, went so far in paragraph 16 of his judgment to regard the contract as a contract for the acquisition of two assets - - -
GUMMOW J: Where do we see that?
MR COLES: In paragraph 16 of Justice Gzell’s - - -
GUMMOW J: It is page 104, is it?
MR COLES: It is on page 104, your Honour, yes.
KIRBY J: I do not quite understand the point you are making about that.
MR COLES: Well, I was really putting, your Honours, that it is important – well the limited point I was just making at the moment, your Honour, was that the obligation was on the purchaser to fund, that is to supply an amount of money, which could be used by InterTAN to pay to the vendors the amount of a dividend which they were going to be going to declare and I drew attention to the fact that - - -
KIRBY J: Is the issue whether that was a severable loan to the company or is to be regarded as consideration applicable to the value of the shares demonstrated by the fact that it is paid at the same time?
MR COLES: Well, the issue is that the Chief Commissioner says well, the payment of the amount of funding was a payment which itself induced the vendors to part with the shares.
GUMMOW J: Well, the
point appears from line 20, does it not? The issue anyway:
In the instant circumstances, the “funding” of InterTan led to the plaintiff obtaining a debt.
That is true, is it not? Then
he says the question is whether what is then stated follows as a sufficient
legal conclusion for the
Duties Act:
The loan was not, in my view, money passing from the plaintiff in moving the share acquisition. It was money passing from the plaintiff to acquire the debt.
So it is a characterisation question.
MR COLES: We say the contract did not amount to a contract for the acquisition of shares on the one hand and separately, a debt on the other - - -
GLEESON CJ: It was not money passing to the vendors, was it?
MR COLES: The funding?
GLEESON CJ: If you constructed a balance sheet of the respondent company immediately following completion, in the assets would be two relevant assets, would there not? The first would be a debt owed by InterTAN Australia to the respondent.
MR COLES: Yes.
GLEESON CJ: What would be the value of that asset?
MR COLES: Presumably, at its disclosed amount.
GLEESON CJ: So, 25 million.
MR COLES: Yes, $25 million.
GLEESON CJ: And the other asset would be the shares in InterTAN conveyed by the vendors.
MR COLES: Yes.
GLEESON CJ: What would be the value of that asset?
MR COLES: If brought to account at book value, that would be the $88 million.
GLEESON CJ: The 88 million.
MR COLES: Yes.
GLEESON CJ: So the balance sheet, immediately following completion, of the respondent would show an asset in the form of a debt of 25 million and an asset in the form of shares worth 88 million.
MR COLES: Yes. So far there is no disagreement, your Honour.
GLEESON CJ: Well, why is not the consideration for the shares 88 million?
MR COLES: Because, your Honour, in our respectful submission, consideration needs to be understood in its wider sense of what it is that the vendor required to move it to transfer the shares. The fact that the company is able to construct a balance sheet accurately enough along the lines your Honour describes is ultimately the result of the manner in which the parties chose to implement the agreement.
Here, the purchaser chose to perform its obligation to the vendor, which is an obligation to supply money by way of funding, by means of making a loan to InterTAN. That created the debt, of course, and thus necessarily created the asset which your Honour has described and which can be so brought to account, but the agreement itself did not require, let alone did it contractually oblige the purchaser to acquire a debt from InterTAN. We emphasise the method or the mechanism whereby post-contract the purchaser chose to implement or perform the transaction and, in our respectful submission, one does not judge the duty consequences of the transaction by the method or mechanism which the parties adopted to give effect to it or to perform or complete it.
GLEESON CJ: Apart from making a gift of $25 million to InterTAN, how else might it lawfully have been done?
MR COLES: I suppose there could have been a subscription for shares, which would have produced ownership of shares rather than a debt. There could have been a number of ways.
GLEESON CJ: Then the new shares would have been an asset.
MR COLES: In our respectful submission, just so. It is not, in our respectful submission, the law that something ceases to be good consideration merely because it produces, in the hands of the payer, an asset.
GLEESON CJ: But there are creditors of Dick Smith Electronics Holdings Pty Ltd who would have had something to say about the need for that company to get full consideration for whatever it got, in return for the 25 million.
MR COLES: Well, they may have taken the view, with respect, your Honour, that the company got, for its outlay of 114 million, all of the shares which it contracted to purchase, which is really the Chief Commissioner’s point in the present appeal.
KIRBY J: Yes, there was some rather vague mention in the judgment, I think in the Court of Appeal, that for all they knew the loan was called up. Now, do we know that? Was that - - -
MR COLES: No, there is no evidence about what happened to the loan.
KIRBY J: So we just do not know whether it was treated as - - -
MR COLES: We are content to suppose, your Honour, that in the fashion described by your Honour the Chief Justice, the loan reposed on the books of the company as an asset. The point we wish to emphasise, of course, that is not as a result of the dutiable transaction; that is to say, the agreement to acquire the dutiable property. That is a result of how they did it.
GLEESON CJ: Where is the evidence about that loan? I just could not pick it up. It is referred to in all the judgments and everybody assumes it, but is it in evidence?
MR COLES: It is an agreed fact, your Honour. There was no loan - - -
GLEESON CJ: Is there a record of the agreed fact? I just want to be precise about it, that is all.
MR COLES: Well, Mr Durack, who was in the proceedings at first instance, tells me that in open court before Justice Gzell it was recorded as an agreed fact, that there was a loan made. No, I am sorry to be - - -
GLEESON CJ: I am sorry to nag about this. I would just like to see the record of what was agreed. We have to write a judgment at some stage.
MR COLES: Yes.
GUMMOW J: Was there a transcript kept before the primary judge? I would think so.
KIRBY J: Perhaps your solicitors have the short transcript in the - - -
MR COLES: Can I inquire of my solicitors in a moment whether that is so, your Honour?
GLEESON CJ: If the fact of this loan was an agreed fact between the parties, at some stage before you finish – and there is no dispute about it - - -
MR COLES: No.
GLEESON CJ: You might let us have the precise terms of the agreement.
MR COLES: Well, I would like to – yes, well, if your Honours would look at page 99 of the appeal book in the judgment of Justice Gzell, his Honour records the relevant fact.
KIRBY J: Which paragraph?
MR COLES: That is in paragraph 5,
your Honour, at the bottom of the page. He says:
Immediately after the payment of this amount, the plaintiff “funded” InterTan by way of a loan of $25,584,097 -
et cetera. In effect, the vendor sold their shares ex dividend.
Now, granted that was the effect that does not, in our submission, deny the contention that the amount paid by the purchaser to fund the company’s payments to the vendor – payment by the company to the vendor by way of dividend, was nevertheless consideration. You can look at it, in our respectful submission, in a number of ways.
If one simply looks at the receipt by the vendor of a dividend from InterTAN, naturally enough, one would say, “Well, that is the receipt; not in the character of vendor so much as in the character of a shareholder creditor from a company of repayment of a debt which arises on the declaration of the dividend.” But if one looks at it in the terms of the agreement – after all, it is the agreement that attracts the liability of any duty, the obligation of the purchaser was simply to supply the money so that InterTAN could then declare – or the members could then cause that dividend to be paid - - -
GLEESON CJ: But the agreement required InterTAN Australia to get rid of $25 million on completion.
MR COLES: Necessarily, of course, for the benefit of the vendors, who wish to receive the total sum of $114 million, we say, as the price for which they were prepared to dispose of the shares in favour of the purchasers.
GLEESON CJ: But the vendors received $25 million as shareholders.
MR COLES: Yes, indeed.
GLEESON CJ: And they received $88 million as vendors.
MR COLES: Yes, because of an agreement pursuant to which they agreed to sell the shares as vendors, which, in that capacity as vendors, they require that - - -
GUMMOW J: It is a question of whether you can have one characterisation or two characterisations.
MR COLES: Yes, it is, and, in our respectful submission, the two are not mutually exclusive - - -
KIRBY J: Do you say, from the vendor’s pocket point of view, the two are both part of the consideration?
MR COLES: We do. We say that the consideration or the price, in ordinary terms, as opposed to the defined price, payable under this agreement was the aggregate of the purchaser’s funding obligation and the purchaser’s share price obligation; that is to say, the aggregate of the $88 million and the $25 million.
GUMMOW J: What do you say about paragraph 13 of your opponent’s written submissions, particularly the last sentence? It is on page 5, paragraph 13.
MR COLES: We are at issue as to whether that is the proper construction of the agreement. I think, your Honour, that is the – yes, our learned friend there says that - - -
GUMMOW J: It could have been waived.
MR COLES: We submit not. The agreement does not contemplate any waiver at all of the funding obligation. It is not material that there was not in fact, but Dick Smith’s funding of InterTAN, in our respectful submission, was – well, our answer to that is, the agreement does not so provide.
GUMMOW J: What do you say about paragraph 18, which seems to be this characterisation point taken against you?
MR COLES: Paragraph 18, your Honour?
GUMMOW J: Yes, on page 6.
MR COLES: Yes, I am sorry. We say these things. The issue really is not what the vendors received or from whom. Rather, we say there is, in effect, no relevant anomaly, given that of the funding and dividend payment obligations, only one of them is an obligation of Dick Smith to the vendor. The issue here, we say, is whether the funding obligation is part of the money consideration which moved the transfer, and the consequences to the vendor - - -
GUMMOW J: What does this phrase “move the transfer” embrace?
MR COLES: That is the expression popularly adopted - - -
GUMMOW J: I know it is in the cases.
MR COLES: - - - no doubt due to what Sir Owen Dixon said in Archibald Howie.
GUMMOW J: I know.
MR COLES: If that remains still the law, then it is not really to the point that the – well, can I come back - - -
GLEESON CJ: We are asking what it means. We are not trying to query whether it remains the law.
MR COLES: If the vendor may, in effect, wear more than one hat and be a vendor as well as a creditor, the vendor may be actuated by the performance of payment obligations - - -
HAYNE J: Does it mean any more than that one is not to segment, divide, carve up the transaction into separate constituent elements?
MR COLES: No, it does not, in our submission. Merely because one may find - - -
HAYNE J: The fact that one can characterise some of the stipulations as giving rise to debt, some of the stipulations as giving rise to a transaction which, if it stood alone, would wear another label, may be interesting.
MR COLES: Exactly, but so be it if, at the end of the day, the conclusion is that it was in consequence of the requirement that there be paid a certain sum of money in this sort of situation that actuated the vendor’s transfer of the dutiable property, then it is the totality of the consideration, whether or not it bears some other quality or character.
GUMMOW J: That is your answer to paragraph 18?
MR COLES: Yes, that is right.
GUMMOW J: Or an answer to paragraph 18.
GLEESON CJ: What do you say about - - -
MR COLES: We say that it is, in a sense, misleading or it distorts the process to look at what it was that the vendor received in his different capacity as a creditor of the company, once the dividend was declared, putting aside the question he can still wear the character of a vendor as well. What is important is that the purchaser supplied the money without which the vendor would not have – or without which the relevant dividend would not have been declared. In other words, it was in contemplation that the dividend would be declared and paid because the purchaser had undertaken the agreement to fund it.
GLEESON CJ: What do you say about the third sentence in paragraph 30 of the judgment of Justice Davies on page 122?
MR COLES: That seems to be correct, your Honour.
GLEESON CJ: I thought the purchaser received a debt, an asset in the form of a debt.
MR COLES: No, but the point being the purchaser did not receive any benefit under the agreement, under the dutiable transaction.
GLEESON CJ: Any benefit for what?
MR COLES: What his Honour is saying is
that:
the purchaser did not receive any benefit other than the transfer of the shares.
That would be correct in the sense for which we
contend.
GLEESON CJ: But it must mean any benefit for the money it paid out.
MR COLES: Yes.
GLEESON CJ: Well, it paid out $114 million and what it received for $114 million was a debt worth $25 million and some shares.
MR COLES: The reason why I am suggesting that Justice Davies is right is this. The purchaser did not receive any benefit other than the transfer of the shares in consequence of the agreement, the agreement being the agreement for the acquisition of the shares and not an agreement for the acquisition of a debt. If his Honour is there, as we submit he is, correctly to be understood as talking about the benefit which the purchaser received in consequence of the only thing that matters – that is to say, the dutiable transaction – then the dutiable transaction conferred but one benefit on the purchaser, namely, the transfer of the shares. Incidentally, after the event and not by virtue of the agreement itself, but by virtue of the mechanism of its implementation, the purchaser received another benefit.
GLEESON CJ: Cam we go back again to section 21(1)(a) of the Duties Act 1997. What we are concerned to find is the consideration for the dutiable transaction. Now, the dutiable transaction was an agreement for the sale of shares and the shares were to be stripped of their accrued profits on completion.
MR COLES: Yes.
GLEESON CJ: It was like selling a cow with a calf and the cow was to give birth to the calf on completion. Right?
MR COLES: On completion, yes.
GLEESON CJ: Yes. Now, the consideration for the dutiable transaction is the consideration for the transfer of the shares, that is, on the face of it, the amount of money that the purchaser was paying the vendors for the shares, the purchase price as defined in the agreement. Now, under the agreement, because of the provisions relating to the declaration of dividend and funding of the dividend, there was also going to be a payment of money not to the vendors, but to the company, InterTAN Australia.
MR COLES: Yes.
GLEESON CJ: That was the payment of the $25 million which ultimately took the form of a loan. As you rightly said, it might have taken the form of a subscription for capital. It is a little difficult to see how, unless there was something very unusual about the articles of association of Dick Smith, it could have taken the form of a gift. So, what we are concerned with is the consideration – on the face of it, the consideration from the purchaser to the vendor for the transfer of the shares.
MR COLES: Yes, which, in our submission is answered - - -
GLEESON CJ: Why is that not, as Justice Meagher said, both in substance and in form the purchase price as defined in the agreement?
MR COLES: There are a number of responses we would have to put forward to that. We say the purchase price defined in the agreement is really the aggregate of the financial obligations imposed the purchaser. To define the purchase price, that is to say, the capital P “Purchase Price”, is the one your Honours have seen.
GLEESON CJ: You have to treat the declaration of the dividend as part of the consideration, do you not?
MR COLES: No, we have to treat the funding – the part of the consideration that adds the 25 onto the 88 is the payment by the purchaser to the company, not necessarily the payment by the company to the vendor. They are two separate – they are all, of course, much interrelated and connected, but the point is, it is the funding which - - -
GUMMOW J: It is 7.7 and 7.8, is it not?
MR COLES: If I could invite your Honours’ attention back to where I really started - - -
GUMMOW J: Paragraphs 7.7 and 7.8 against Davis Investments, in a sense, what Sir Owen Dixon said about the particular meaning of consideration in this context.
MR COLES: It is important who
was promising performance of what to whom, in our submission. In
paragraph 7.7, if I can start there:
On Completion, immediately after payment of the Purchase - - -
GLEESON CJ: Hang on,
what about beginning with 7.6?
MR COLES: I do apologise, your
Honour. Yes, that is the obligation to pay the purchase price as defined, that
is to say, the 114 less, of
course, the amount computed as the dividend amount.
So 7.6 locks that obligation in, 7.7 then supplies, together with the following
section, the rest of the consideration, in our submission:
On Completion, immediately after payment –
so there
are two successive events of money changing hands, which together constitute
completion. Two successive events constitute
completion within the concept of
what is said in clause 5.1 to which I should have taken your Honours
back, because it is:
On Completion –
your Honours see from
clause 5.1 –
the Vendors, as beneficial owners, will sell and the Purchaser will purchase, free and clear of all Encumbrances, the Shares for the Purchase Price.
So at that event described as “completion”
there are two successive payments, one after the other. The purchaser is to
fund the company. That is a promise, of course, by the purchaser to the vendor,
not a promise to the company. So the company is
able to discharge the debt
created by the declaration of the dividend:
Immediately following such funding, the parties shall procure –
Now, interestingly, the agreement is cast in terms of a
joint or a collective obligation on each of the parties to procure that the
company makes the payment of the dividend. It is not simply, for some
reason - - -
KIRBY J: Would it have made any difference if the payments had been a month apart?
MR COLES: I do not think so, your Honour. I suspect not, your Honour, although if one is looking at what the parties seem to regard – well, it may not have, your Honour. But what is important if one is attempting to characterise the nature of the purchaser’s payments, they are both, in effect, completion payments and the object of completion is to procure the vendor’s performance of its contractual obligation, namely, the transfer of the shares.
GLEESON CJ: I suppose, as a practical matter, they wanted to ensure that this dividend was paid while they were still in control of the company.
MR COLES: I would have thought so, your Honour.
GLEESON CJ: And I imagine that there was some kind of exchange of cheques on completion.
MR COLES: Yes, the evidence did not detail what happened in the office of the solicitors where completion occurred, but one can surmise along, as your Honour describes.
KIRBY J: Right. I thought there is some description of the large number of transactions that had to be done at the office of Allen Allen & Hemsley.
MR COLES: Mr Justice Davies supplied his overview of how one would suppose the transaction might have occurred and it is unexceptional.
KIRBY J: Is it your submission that in using the analogy that the Chief Justice used, the vendors got both the cow and the calf?
MR COLES: The correct question to be answered, in our respectful submission, is that because the vendors would not have transferred the shares unless the purchasers had paid these two sums of money, the correct conclusion is that the consideration for the transfer of those shares was the aggregate of the two sums of money.
GLEESON CJ: It was contemplated all along that the vendors were going to keep the calf and sell the cow and the question is: what is the consideration for the cow?
MR COLES: The fact that that might be so, in our respectful submission, does not of itself answer the fairly dry legal question: what was the consideration for the sale? Consideration when paid may achieve a variety of benefits and usually achieves some. So that it is not, in our respectful submission, to the point that if by the mechanism of implementation of the transaction the purchasers also received an additional asset to their account, that was any the less to be regarded as part of the consideration which the vendors exacted as the price of transferring the shares.
KIRBY J: Is there any mischief that is done by the theory that the respondent propounds in the operation of the Duties Act upon this instrument? In other words, if their theory is right and the view taken by the majority in the Court of Appeal is right, does that lead to the possibility of so structuring the payment made to the vendor as consideration for the purchase that you can, in effect, determine for yourself the value of the shares and the amount of duty that you will pay?
MR COLES: We do not, with respect, see that as a problem because the question - - -
KIRBY J: If that is so, if you do not see it as a problem, is that not an acknowledgement that the transaction is a genuine transaction for two things: sale of shares and creation of a debt?
MR COLES: There is no dispute. There is no suggestion it is otherwise than – there is no suggestion it is not a genuine transaction. I hasten to emphasise that. The question whether it is a transaction for the sale of shares and for a debt requires one to look at the agreement, and there is nothing in the agreement which reveals any intention of the parties to have the purchaser acquire a debt. As I have said, I think perhaps somewhat repetitiously, the fact that the purchaser ended up acquiring a debt is I suppose not wholly fortuitous but at least consequential result of the way the transaction was put into effect. It is our submission that, firstly, the agreement did not require, let alone make provision for, the purchaser to acquire a debt as a term of the agreement. It is not an agreement for the acquisition of any other asset than the asset described, the shares.
HAYNE J: Though I understand no separate case has ever been made or is now made about what might be called true value of the shares, does the availability of the alternative cast any light upon how you are to understand consideration in a context such as the present?
MR COLES: It is hard to answer that question emphatically no.
HAYNE J: Let me assume A Co, pregnant with retained profits, is to be acquired by B Co. What price would B Co pay for the whole issued capital of A Co? Would it be a price that would take account of the retained profits and their value?
MR COLES: One supposes so, your Honour, but this is part - - -
HAYNE J: If, therefore, in the example I give, there is a stipulation in the sale agreement that the company or that the company or persons who own all the shares in A Co will have a price which is computed ex dividend but on terms that simultaneously with completion they are paid a dividend of all retained profits, does it mean that the Commissioner must look to the second alternative for assessing duty or does it cast any light on what is meant by consideration for the shares?
MR COLES: It may be. The Commissioner is not compelled, of course, in whichever he - - -
HAYNE J: I understand that, but the obligation is to charge the greater.
MR COLES: Yes, exactly and that is – in our submission - - -
HAYNE J: Does it cast light on what is meant by consideration in this context?
MR COLES: It does not subtract, in our respectful submission, from viewing consideration in the way that it has been viewed as simply that which causes the vendor to transfer the asset.
KIRBY J: You seem to very cautious in answer to Justice Hayne’s question which has put in a more accurate way the matter that was concerning me because it does tend to throw light upon the consideration/value of the shares that a purchaser is willing to pay that total sum.
MR COLES: Well, the structure of the Act seems to pose the two as true alternatives and give the Commissioner the entitlement to duty assessed on the greater.
GLEESON CJ: There is a timing question here, is there not? There does seem to be any evidence about this, but correct me if I am wrong, but I presume that the only reason for the funding obligation was that the company did not have cash to pay out these retained earnings by way of dividend.
MR COLES: I would wish to emphasise, your Honour, that the funding obligation is to be seen also in terms of what the purchaser wanted.
GLEESON CJ: Yes, but let me suppose for a moment that is right – suppose that the facts were – and I know they were not – that this company not only had retained profits of $25 million but had a credit balance in a bank account of $25 million.
MR COLES: Yes.
GLEESON CJ: And suppose that the agreement was that before completion the company would declare a dividend of $25 million to the vendors and that on or before completion, the company would pay $25 million to the vendors. Just assume those facts. Now, coming back to section 21(1)(a) and (b) of the Duties Act, presumably in the example that I have given, the purchaser would pay as the purchase price $88 million?
MR COLES: Yes, subject perhaps to commercial perceptions as to perhaps some reasons why it might pay more, but yes.
GLEESON CJ: Suppose there was an agreement for sale in the circumstances that I have contemplated under which the purchase price was $88 million, the retained profits were $25 million, they were available in cash and they were to be paid in cash on or before completion of the vendors. Now, when you came to apply 21(1)(b), would you treat as the unencumbered value of the shares in InterTAN Australia as at the date of the agreement, $114 million or would you treat it as $88 million?
MR COLES: You would probably treat it as $88 million - - -
GLEESON CJ: Why?
MR COLES: Because that is a very clear case of a sale of shares uncontroversially ex dividend.
GLEESON CJ: But why?
HAYNE J: Why?
MR COLES: Apart from the transfer transaction, the dividend is going to be paid to the vendor simply out of the money in the bank account.
HAYNE J: Why? It is a stipulation for the sale of the shares. I will not sell you my shares. I control A Co - - -
MR COLES: In that event, the proposition for which we contend would be applicable.
GLEESON CJ: Let us get it clear, because this really does raise a very fundamental question about the way this Act operates. I want to be as clear as possible about this. You have a contract for the sale and purchase of shares in a company called A Co. A Co has retained profits of $25 million, and so long as it has those retained profits of $25 million, the total value of the assets of A Co is $114 million. B Co enters into a contract to buy all the share capital of A Co, and the terms of the contract provide that prior to completion A Co will declare a dividend of $25 million, and on or before completion, will pay a dividend of $25 million to the vendors of the shares. How does the Act operate in that circumstance, bearing in mind the provisions of both paragraphs (a) and (b) of 21, and bearing also in mind that, undoubtedly, the consideration for that purchase will be $88 million?
MR COLES: If the Commissioner takes the view that at the date of the contract the shares have their unencumbered value of $114 million, a view he may take, because he would say it is not until the agreement is performed - - -
GLEESON CJ: You would agree in the example that I have given you that the purchaser would pay $88 million.
MR COLES: That is right.
GLEESON CJ: And you say the way the Act operates in those circumstances is that (b) comes in to play, not (a)?
MR COLES: Well, it may be, your Honour. It is a possibility. I could not exclude the possibility. It is, in our submission, not this case - - -
GLEESON CJ: I have to admit, I am almost embarrassed to have to ask this question, Mr Coles, because it sounds like something extremely fundamental.
MR COLES: I am embarrassed in not having a clearer answer for your Honour.
GLEESON CJ: Let me suggest a possible alternative possibility. When you come to apply the expression, ‘the unencumbered value of the dutiable property” for the purpose of applying (b), you do not disregard, do you, the fact that on completion, by reason of the provisions of the agreement for sale, the shares will be ex dividend.
MR COLES: That depends, I think, on how one construes the effect, I think, of section 9.
GLEESON CJ: Well, sales of shares cum dividend, and sales of shares ex dividend take place every day.
MR COLES: Routinely, yes.
HAYNE J: What marks this transaction apart is that here we are dealing with 100 per cent ownership. We are not dealing with the case where the shareholder standing alone has no control over the assets. Here, we have the controller. It happens to be two companies, but let us walk past that for the moment. But here, it is 100 per cent of the share capital that is in play.
MR COLES: Here it does seem important to us that standing alone the vendors might, I suppose if they had wanted to, have said, “We would like a dividend”, but no doubt to do so they would have had to perhaps realise the invested assets into which the retained earnings had been ploughed back.
GLEESON CJ: That is what I put to you earlier. One gets the impression – although I do not see any evidence to back it up – that the reason for this stipulation about funding was that although the retained profits were there, they were not converted into cash, nothing unusual about that. But if they had been converted into cash, between the date of the agreement for sale and the date of completion, and the dividend had been paid before completion, how would section 21 have operated?
MR COLES: Well, a difficulty in answering that question, your Honour, is, of course, the section looks at the greater of two things. Really, I suppose that is part of the problem. If it operates in consequence of the effect of section 9, then it produces perhaps – some might say anomalously – the fact that one treats events as if they operated at the date of the agreement.
GLEESON CJ: What was that – I am embarrassed to have to ask you another question, Mr Coles. We gave a judgment, I thought in the last 12 months or so, in a case concerning the Victorian Stamp Commissioner, in relation to a sale of land with extraction of minerals.
MR COLES: It is Commissioner of State Revenue v Pioneer Concrete (Vic) 209 CLR.
GLEESON CJ: That sounds right.
MR COLES: I am indebted to Mr Durack for that reference, your Honour.
GLEESON CJ: Did that touch on this problem, or this kind of - - -
MR COLES: Your Honour, it may be that one just has to contemplate a different evaluative process when one is confronted with the revenue consequences of an agreement which says avowedly, “This is a contract to sell shares ex dividend” and makes that abundantly clear, as opposed to this agreement, which exhibits every intention - - -
HAYNE J: But, Mr Coles, it drives you hard up against the Archibald Howie issue.
MR COLES: Yes.
HAYNE J: And what Sir Owen Dixon meant by this notion of the consideration that moved the conveyance, rather than that which for contract purposes is identified as the consideration sufficient to support the bargain.
MR COLES: It does.
HAYNE J: Now, what is his Honour’s expression meaning in this context? Does it mean that one is to look, for example, at what the vendor gets? Does it mean something different?
MR COLES: The monetary value of that, without which the vendor would not have transferred the asset, is our submission. We do wish to lay some emphasis, your Honour, on what appears in clause 4.1 in terms of the part of the funding – part of the consideration, in a sense, for the funding paid by the purchaser was to ensure that the vendor, which might otherwise have done so, did not, in effect, subtract from the assets of the company by paying itself a dividend because that would necessarily have depleted the working capital of the company and denied or subtracted from the value of the asset, or the commercial utility of the asset.
That is the importance, in our respectful submission, of clause 4.1(d) because the vendor, in consideration of all of these sums, in our submission, the vendor has promised explicitly not to declare any dividend or make any – or not to pay or agree to declare, or pay any dividend or other distribution of its profits, or repay any of its shareholders’ loans, other than a dividend declared in accordance with 4.4, in effect, out of the moneys funded for that purpose by the purchaser.
So the commercial purpose of the arrangement is that the purchaser will receive shares, not simply in a company that has been stripped of its dividend but in a company which has kept its assets intact as a going concern. So that the shares - - -
GLEESON CJ: No, no, it has taken on a new liability. It has taken on a new liability of $25 million.
MR COLES: It may have, but that does not, in our submission, deny the ascription of the quality of consideration to the totality of the amounts laid out for the purpose of acquiring shares.
GLEESON CJ: I was only dealing with your suggestion that it has kept its assets intact. It has not kept its assets intact. It has distributed its retained profits, it has borrowed $25 million and it now has a liability of $25 million.
MR COLES: Again, because that is the way they did it, not because that is what they agreed upon, in our submission. The difference may be subtle in practical terms, but it is not unimportant that there was no commitment on the part of the company to borrow or any obligation on the part of the purchaser to lend. Rather, the promise was made to the vendor of the shares to supply moneys to the company without description of their legal quality or without limiting or characterising their legal quality as a loan, a subscription to capital, or the like. The promise was by purchaser to vendor to supply money to a third party known to the company, so that the third party could then do something with it. In our respectful submission, that would amount, as we say in our submissions, to consideration even if one were only looking at the simple contract sense of the word.
GLEESON CJ: Just come back to 21(1)(b). I realise it is not directly an issue in this case, but I would like to understand it a little better than I do at the moment. I just want to go back a step. You referred us earlier to a section that says that if you have paid duty on the contract, you only have to pay $2 on the transfer - - -
MR COLES: That was 18(2), your Honour, yes.
GLEESON CJ: Now, here we have two dutiable transactions in terms of 8(1)(b)(i), is that right?
MR COLES: Well, in our submission, not.
GLEESON CJ: Well, we have an agreement for the sale of dutiable property and we have a transfer.
MR COLES: I am sorry, yes. Section 8(1)(a) and (b)(i) – I am sorry, your Honour is right.
GLEESON CJ: So we have two dutiable transactions. Ad valorem duty is payable on the agreement and nominal duty of $2 is payable on the transfer if you pay the ad valorem duty on the agreement.
MR COLES: Yes, and if in conformity, yes.
GLEESON CJ: Now, how does section 21(1)(b) work if it is part of the agreement for the sale of property that in between the date of contract and the date of transfer some step will be taken that necessarily diminishes the value of the subject property?
MR COLES: Of course, we emphasise that all depends – whether one needs to answer the question, and I will attempt to, depends on whether one needs to ask the question.
GLEESON CJ: All right, well, let me give an example away from the facts - - -
MR COLES: It is our submission, of course, that one never asks that question here, because the consideration or what is said to be the monetary consideration - - -
GLEESON CJ: Let me give an example away from the facts of this case, just to explore the working of section 21. Suppose Blackacre has upon it growing crops, a crop of wheat ready to be harvested, and suppose the owner of Blackacre enters into an agreement today to transfer Blackacre to me at a time in the future, and it is a term of the agreement that in between now and the date of transfer the vendor may harvest the crop. Plainly, the value of Blackacre with the crop of wheat growing on it is greater than the value of Blackacre with the crop of wheat harvested. When you come to work out stamp duty on that transaction, do I, as purchaser, pay stamp duty on an amount calculated by reference to the value of Blackacre including the growing crop or the value of Blackacre excluding the growing crop?
MR COLES: Prima facie, in my submission, you pay it on the value of Blackacre at the date of the agreement, that is, the date on which it has the growing crop on it because that is it condition at the date of the agreement. If the valuer goes out and values it on that date that is the value he will come up with, in our submission.
GUMMOW J: But section 21(1) postulates the consideration may be greater than that unencumbered value because of some commercial consideration.
MR COLES: Yes, that is right, because the parties see attraction in the asset beyond its market value.
GUMMOW J: But here, instead of buying the assets of this electronic business from the Australian company they bought the shares from the owners of the company and that involved, in order for that to be done, the funding of the dividend.
MR COLES: Yes.
GLEESON CJ: In the example that I gave you about Blackacre the consideration will inevitably be less than the unencumbered value if you are right, will it not?
MR COLES: It may be, yes. It certainly will, I think, yes.
GLEESON CJ: It will certainly be because I would never pay a price for Blackacre in those circumstances that did not exclude the value of the crop of wheat.
MR COLES: No, it is assuming a purely rational market, yes.
GLEESON CJ: You were asked earlier whether something you said about (b) throws light on the meaning of (a). I am asking you whether something throws light on the meaning of (b). If, in the example that I have given you, it would inevitably be the case that the consideration would be less than what you say is the unencumbered value of the dutiable property, that produces a rather curious result, does it not?
MR COLES: I agree with that, your Honour. I agree with that. But, if that is the way the Act works that is just the way it works. That is the short answer, in our respectful submission. If that is what the Act charges it does so according to its terms, just as, for example, I pointed out to your Honours earlier, the Act is simply concerned with visiting the liability on one party only to the – under the terms of the sections we are concerned with – select one of the parties as liable for the relevant duty and does not require that that party has paid any or all of the consideration itself. It may have come from somewhere else.
GLEESON CJ: Does this form of statutory provision follow the scheme of the older Stamp Duties Act?
MR COLES: Not really, I do not think, your Honour. One sees the old – the 1920 Act is, of course, set out really in the judgments in Archibald Howie and also in Davis Investments.
GUMMOW J: You had really to go to the schedules in the old Act almost as the taxing sections.
MR COLES: Yes, in the rating or assessing division.
GLEESON CJ: The problem I have raised with you is really a question of principle that would always arise in relation to section 21(1) in a case where in between the date of agreement for sale of property and the date of completion of the sale of the property, pursuant to the agreement it is contemplated that something is going to happen that will necessarily reduce the value of the property.
MR COLES: Yes.
GLEESON CJ: That was not a problem that arose under the previous Stamp Duties Act?
MR COLES: I cannot tell your Honour I am aware of any decision of any court that - - -
GLEESON CJ: It is a very common practical problem, is it not?
MR COLES: Yes. It must be but I do not think we are able to point to any decided case where that issue came up, but the global answer, eventually, is probably really that described in Davis Investments. One can cast or throw one’s transaction into various forms and the duty consequences depend on really how one has cast a transaction, in some respects, so that if one has, for example, cast it in the form of a sale at a price well that will attract one set of consequences and if one has done it in the form, for example, of an authorised reduction in capital that will tell you another.
GLEESON CJ: There is not any suggestion in this case that this was done in this way to avoid stamp duty, is there?
MR COLES: It is not put that this is an evasion or an avoidance exercise. No, that is not put.
GUMMOW J: No section 24 point?
MR COLES: No.
CALLINAN J: Mr Coles, can I just ask you something about Justice Davies’ reasons for judgment and what seems to be the basis for his Honour’s different view. At page 120, paragraph 24 his Honour says that the shares were the shares as at the date of the agreement itself.
MR COLES: That is right.
CALLINAN J: That is in accordance with what
section 9, is it – and His Honour says the shares were
therefore the shares as they were:
at 10 April 2001 . . . not shares ex-dividend. That is why the shares were sold for $114,139,649.
Does it not seem to be the case that although the company had retained profits of 25 million or whatever it was, certainly as at that date, the date of the agreement, it did not have the capacity to pay that dividend?
MR COLES: Whether it had the capacity or not was not, of course, known or described, but the parties did not want to activate any other capacity it might have had. The parties did not want the - - -
CALLINAN J: May it not be inferred? It did not have that money available unless, for example, it sold some assets. That might be some way. So it would have diminished its assets by 25 million necessarily because it does not seem to have had that free money.
MR COLES: No. Importantly from the purchaser’s perspective, it would have diminished the assets which were deployed in the business.
CALLINAN J: Would not any rational valuation therefore be a valuation that took account of the fact that it just did not have those funds? Is that not the reality?
MR COLES: I could not exclude that as a relevant valuation.
CALLINAN J: Does that not, with respect, invalidate Justice Davies’ reasoning?
MR COLES: In our submission, no. The portion of the judgment to which your Honour directs my attention is his Honour’s recitation of the subject matter of the sale and one really needs to read it, in our submission, in the context of what precedes it in paragraph 23, “the shares were neither cum-dividend nor ex-dividend” and so forth.
CALLINAN J: No, but what any prudent purchaser is going to value the shares at is the asset backing for the shares. The asset backing in this case did not include 25 million, if you like.
MR COLES: Except that again, because no issue arose in these proceedings as to 21(1)(b), the unencumbered value of the property, the parties focused themselves on - - -
GUMMOW J: There would be a number of ways of valuing, would there not?
MR COLES: I am sorry?
GUMMOW J: Why would asset backing be the only way of valuing?
MR COLES: It would not be.
CALLINAN J: I am not suggesting - - -
MR COLES: It would no doubt be valued by a valuer on the basis the shares were being sold, namely very much a going concern.
CALLINAN J: I am not suggesting that it would be the only way. One would take into account goodwill and all sorts of things of that kind, but certainly the asset backing would be an important factor in any valuation.
MR COLES: I cannot disagree with that in principle, your Honour.
CALLINAN J: It may not be the conclusive factor but it would be a highly relevant factor.
MR COLES: I cannot disagree with that in principle but, as I say, the parties entered into a transaction in which they expressed that which is in dispute here, namely a consideration. Undoubtedly they did and the issue is how much it was but they did not really - no doubt subjectively in their own respective minds they had their own issues as valuation, but there is simply nothing one can point to that enables one to test the propositions in the case against some background determination of what otherwise was the unencumbered value of the property. One simply never got to 21(1)(b) in this case.
GLEESON CJ: Let us suppose that this had been a straightforward case of a sale ex dividend. In other words, to take the other side of the coin raised by Justice Callinan, suppose that the company had retained profits of 25 million and had $25 million in its bank account, ready to pay them any time a dividend was declared, and suppose that it was a term of the agreement that between contract and transfer the vendors could and would declare a dividend in their favour, or, more accurately, cause the company to declare a dividend in their favour. Undoubtedly, the purchase price would be $88 million, would it not?
MR COLES: Undoubtedly, yes.
GLEESON CJ: With no elaboration. And $88 million would be the consideration under section 21(1)(a), would it not?
MR COLES: It would.
GLEESON CJ: What do you say would have been the unencumbered value of the dutiable property?
MR COLES: Well, again, that would not be something one could answer from those facts, in our submission, because the unencumbered value of the dutiable property will be something that one would value on a range of criteria.
GLEESON CJ: But on your argument, the answer would be $114 million, would it not?
MR COLES: Yes, I expect so, your Honour.
GLEESON CJ: So, on your argument, the way section 21 works in a straightforward case of a sale of shares ex dividend is that the consideration will be $88 million and the unencumbered value will be 114 million.
MR COLES: In that simple example, yes. Now, if that produces a consequence that more duty is paid than would have been paid because the value was higher than the consideration, that is simply because of the workings of the Act, but here, of course, if one takes your Honour’s example – well, let me put it this way. What warrants the description of the $25 million in this case as part of the consideration is that the parties chose to structure the transaction so as to put on the purchaser the obligation to fund the payment of the dividend and, in effect, to put up money. That is just the consequence of the way they structured the transaction.
HAYNE J: But it leads to a point of apparent verbal quibble, which hides a real and radical distinction. To classify the sale as a sale of shares ex dividend characterises some, but not all, of the stipulations in the agreement.
MR COLES: Quite. It is an unnecessary description, in our respectful submission. One can let the agreement speak for itself.
HAYNE J: Well, necessary or unnecessary, sale ex dividend characterises some, but not all, of the stipulations, and here a stipulation was not only there would be a dividend, not only a dividend in this amount, but that the purchaser would supply the wherewithal to provide the dividend.
MR COLES: Yes, and that is really the transforming feature in this case.
HAYNE J: And thus, as I understand it, the drawing of an analogy with the simple sale of shares ex div is an analogy which may obscure the point for decision, which is a point about the significance, if any, to be attached to the purchaser’s obligation to fund.
MR COLES: Yes. In my submission, that is
so. I had read to your Honours relevant portions of clause 7.7. I
did want to just draw attention
– because we do rely on it – to what
appears in clause 7.8 on page 23 because 7.8, in our submission, locks
the obligations
in:
Neither the Vendors nor the Purchaser need complete the sale of any Shares unless the sale of all the Shares is completed simultaneously.
Well, that is understandable, but then
importantly:
Neither vendor is obliged to complete the sale of the Shares unless the Purchaser has performed, or is ready, willing and able to perform, its obligations under clause 7.7 –
which is to fund
the company. So that there has here been made a promise by the purchaser to the
vendor to perform an obligation
to pay a third party, the company, to ensure
that something advantageous to the vendor – albeit that it may be in its
capacity
as a then, but about to cease to be, company
member – can come about. The fact that, in our respectful
submission, it is so
expressed and the fact that the parties have thrown the
transaction into that form shows that the funding by the
purchaser - - -
GUMMOW J: They may well have had their own other reasons, to do with income tax and goodness knows what, for casting it in this form, but there it is. We have to ask what moved, in the Dixonian sense, which is concerned, in a way, with substance.
MR COLES: And it is very plain, in our submission, that what moved the transaction was not simply as might be the case if there were no funding obligations – there might be debate as to whether the vendor, having the matter in its own hands, causes the company to declare and pay a dividend. One might be able to debate whether or not that phenomenon itself moved a transfer when it is accompanied or features in the example your Honour gave me as part of a share sale transaction. But one does not need to resolve that type of question here, because it is not solely the receipt by the vendor of the dividend. Rather, it is the payment by the purchaser of the funding to the company – the anterior but discrete step – which enables the payment of the dividend to come about, which constitutes the obligation upon the purchaser without the performance of which the vendor would not have conveyed - - -
GUMMOW J: What moved was the discharge of the executory promises contained in the agreement. That is what they are doing – the executory promises had to be discharged as indicated in the various provisions we have been referring to. It is a case of executed consideration, in that sense.
MR COLES: Yes. In our submission, the contention we advance is correct, whether or not one simply looks at this in simple contract terms, without the perhaps overlay of the notion of consideration, in a stamp duty sense, in the fashion described by Sir Owen Dixon in Archibald Howie – I have set this out in the written submissions – but the proposition is uncomplicated in simple contract law.
If A and B have an agreement pursuant to which B pays money to C, in effect, at A’s request, then that will be consideration for the promise that A has made to do something. In other words, the difference between, perhaps, consideration in simple contract law and consideration under stamp duty law may be no more than that under simple contract law: the consideration must move from the transferee or promisee.
In our respectful submission, if that is all that is required, here it does, because both forms of payment, both of the monetary elements to which we ascribe the words “consideration moved from the promisee, the transferee or the purchaser”, one to the vendor direct, the other to a third party, namely, the company, at the request and pursuant to an agreement with the vendor of the shares - - -
GUMMOW J: The phrase
Sir Owen Dixon used in Archibald Howie [1948] HCA 28; (1948)
77 CLR 143 at 152 was that consideration is:
the money or value passing which moves the conveyance or transfer.
HAYNE J: The reference to “passing” is not without its significance. Perhaps – perhaps not – it is looking to what the vendor is getting. At some point, I will be interested in the submissions your opponent makes about how, consistent with the decision in Howie, the case can be resolved in his favour.
MR COLES: Can I deal with that very soon, your Honour. In this respect, it is important to see what the parties themselves chose as the mechanism for giving effect to what they wanted. The vendor in this case exacted, as part of the price for transferring the shares, a promise from the purchaser to pay money to the company to fund the dividend. Now, it may not have needed to have done it that way, but the point is, it entered into a transaction which put the burden upon the purchaser to make that payment, and conditioned the vendor’s own performance on that payment having been made.
GLEESON CJ: That is why I put to you earlier that your argument must be that part of the consideration is the dividend.
MR COLES: No, part of the consideration is - - -
GLEESON CJ: Because that is why the vendor got, the vendor got the dividend plus $88 million.
MR COLES: We have, of course, sought to draw a distinction between each of the two stages. Stage one in that respect is the payment by purchaser to InterTAN, the company, of the money which necessarily InterTAN is going to be told by the vendors it must use to pay the dividend. Stage two is InterTAN declaring and then paying the dividend. In our respectful submission, it dangerous to ally the two - - -
HAYNE J: But come back to Howie. Howie was a reduction of capital. The amount received on reduction was observed to be part of the consideration.
MR COLES: Yes, importantly so.
HAYNE J: And the 19s 6d obtained on reduction was part of the consideration. Now, as I say, there is for the moment a lively question in my mind about what consequence, if any, that observation has for this case where the dividend paid to the shareholder is perhaps an element that is in issue, perhaps it is the element in issue. Now, what is the difference between the dividend paid or the amount paid on reduction?
MR COLES: Indeed, in Archibald Howie, as your Honours have noted, of course, all that there was was a transfer, there was no agreement and, indeed, the transfer was simply a transfer to the shareholders of shares in commutation of their rights as members of the company and because, done in accordance with approved reduction of capital, held to be for full consideration, therefore not a consideration less than the - - -
GUMMOW J: What was the stampable instrument in Archibald Howie?
MR COLES: The stampable instrument was the share transfer form itself in each case. Each transferee had a share transfer in his or her favour of the relevant assets of the company and because they gave up something of equal value, namely, their claims on the company in substance, that was held, in effect, to be a consideration at full value not a consideration as an undervalue which was, of course, the issue in the proceedings.
GUMMOW J: That was the issue, was it not?
MR COLES: Here, as we say, your Honour, the point of principle, however, is probably general or is taken to be general, in our submission, and that is, of course, the well-known passage that appears at page 152:
that the word “consideration” should receive the wider meaning or operation that belongs to it in conveyancing –
I have already put the point to your Honours that even without attributing to consideration the duties at 1997 any wider meaning than in simple contract, we can sustain the proposition for which we contend because that would be the amount of funding – at least in itself, the amount paid to the company by the purchaser is simply consideration and, of course, it does not - - -
GUMMOW J: What Sir Owen Dixon was doing at 152, a little Delphically, but he is distinguishing law school ideas of offer and acceptance and consideration, is he not? He is saying, here you are asking yourself, looking at the instrument, what is it which may be money or value that passed which moved the conveyance or the transfer?
MR COLES: Yes, and what he may be contemplating, your Honour, is the fact that duty charging statutes simply impose the duty on the transferee of the property and are not very concerned to look at who actually supplied the money, and that is why I referred to section 13 earlier on.
GUMMOW J: Yes, exactly.
MR COLES: The difference, I suppose, between Sir Owen Dixon’s proposition and the law of simple contract is that under the law of simple contract the consideration always must move from the promisee, even if it does not, for example, move to the promisor; whereas under conveyancing and, in particular, in the stamp duty context, the consideration may move from anybody under the sun, provided it is the value - - -
GUMMOW J: Looking at what ends up with the transferee.
MR COLES: Yes, looking at what - - -
GUMMOW J: Whether it is money or value.
MR COLES: Yes.
GUMMOW J: And, implicitly, from whom.
MR COLES: From wherever, in our submission.
GUMMOW J: Yes, from wherever.
MR COLES: Because this is a practical statute, one is justified in proposing a very practical test and really leaving it to the parties, howsoever they structure their transaction and record it, to be within or without the test, as the case may be.
GLEESON CJ: Is this current form of New South Wales legislation common throughout Australia?
MR COLES: In Victoria, Tasmania – in about five States, your Honour. I will just - - -
GUMMOW J: It was meant to be a uniform Act, but it has never happened.
MR COLES: No, it is not wholly uniform, your Honour. It would be wrong to say this is national scheme legislation in the strict sense, but it is very – I think, your Honour, the States that have substantially identical legislation are New South Wales, Victoria, Queensland, the ACT and I think now Tasmania.
GLEESON CJ: Did this form of legislation result from some kind of Law Commission report?
MR COLES: I do not know that for a fact, your Honour.
GLEESON CJ: In the course of argument, we have looked at what sound like some very elementary questions about the way that section 21(1) operates. Is there any background legislative history that throws light on that?
MR COLES: Well, I cannot tell your Honour that it throws light on it. There is background, there are the usual resources - - -
GLEESON CJ: Apart from - - -
MR COLES: Some of the matters we have been debating today, your Honour, of course, particularly the 21(1)(b) issues, of course, have not really loomed large in this case.
GLEESON CJ: Are there any decided cases on this or comparable legislation that throw light on the question that I raised with you, and that is how 21 operates in a case where the agreement for sale contemplates that between the date of contract and the date of completion an event will happen that inevitably will reduce the value of the property?
MR COLES: Pursuant to the contract, yes. We know of none at the moment, your Honour, so the answer is, there is not, but we will certainly make further inquiry. I was putting, anyway, by reference to Archibald Howie that Sir Owen Dixon, in our respectful submission, simply poses a simple and functional and practical test, which asks, what is the consideration which moves the conveyance or transfer? Or, as we would say, what is it without which the vendor might not have conveyed?
Now, we do not see that proposition as necessarily excluding the actualisation by a vendor in an appropriate case of some right it might otherwise have, even apart from the transaction, if it made the exercise of that entitlement a component of the motivation for the transfer. In other words, one does not – if one finds that that which moves the conveyance or transfer is something which, to some extent, the vendor might have been able to obtain for himself or herself by some other means, it is just not to the point. One simply says - - -
GLEESON CJ: What do you mean by “moves”?
MR COLES: Produces the result, causes. I think it probably means, your Honour, in the formulations – and there is a later one, your Honour, in effect adopting the same language of Mr Justice Kitto, which in effect has Sir Owen Dixon’s approval in Davis Investments - - -
GLEESON CJ: But it is a metaphor, is it not?
MR COLES: It is, indeed, but it must mean that value passing without which the vendor would not have transferred the property. For example, to take this case, the vendor might have had – and just to go away from my argument about the funding being the sufficient consideration, one could treat the dividend payment in this respect as a sufficient component of the consideration also simply for the fact that the vendor could not conveniently have the dividend out of the assets of the company without disrupting those assets away from the ordinary course of the company’s trade.
If, therefore, by arrangement with the purchaser or by some funder it was able to accelerate or vary the timing or the form or the amount or the like of the dividend, then there is some advantage to the vendor, quite apart from the legal right it had, in theory, to have the dividend. There is an advantage to the vendor without the performance of which it would not in a sale transaction case without which it would not have made the transfer of the shares so that one can accurately in that context say, although the vendor might have been entitled had he done things other ways to get his dividend, here the mechanism he adopted to obtain the dividend was to make it a component of the share sale transaction which was an advantage to the vendor because, without that transaction, it could not have got the dividend either in that amount, at that time or in that fashion and, therefore, one says, “Well, without the payment of that money the share sale transfer would not have occurred”.
If it answers that simple functional test then it is not to the point to inquire whether by some other means dehors the agreement or by activating some other basket of legal rights the vendor might have produced the same result.
GLEESON CJ: Does “moves” mean “motivates”?
MR COLES: Yes, I think so, your Honour.
GUMMOW J: Really. We are talking about a stamp duty - - -
MR COLES: I think it means not - - -
GUMMOW J: I thought you said it was 7.7.
MR COLES: I think it has more the meaning of produces or causes or something without the occurrence of which the transfer would not have happened, sine qua non.
GLEESON CJ: Suppose you owned a gold mine and you agreed today to transfer the gold mine to a purchaser, the sale to be completed in six months time and under the agreement you have the right to continue to mine the gold mine during that period of six months. The consideration that you will be paid for that will, of course, take into account the gold that you are going to mine between now and then.
MR COLES: Yes, that is right.
GLEESON CJ: So the consideration, on your argument, will be less than the unencumbered value of the gold mine at the date of agreement because something is inevitably going to happen that will reduce the value of what is to be transferred.
MR COLES: It is the same with the cow, for example, yes. That is undoubtedly so.
HAYNE J: Does not that then invite attention to the distinctions identified in Davis between giving effect or exercising rights that you have, independent of the agreement, the right of the gold mine owner to work the mine, the right of the owner of Blackacre to crop the land. That is one class of right to be considered, but separate issues arise where rights are created under the agreement as, for example, in this case a right to have a dividend declared. Now, the distinction may be difficult. It led to the division in Davis between Justice Kitto and Chief Justice Dixon, but there is a difference at least.
MR COLES: We do not of course, as your Honours will have observed, see Davis as an authority against us. Indeed, we embrace it because we say true it is the vendor might, for example, have obtained its dividend if it wanted one by means personal to itself. It had the capacity to do so but here - - -
HAYNE J: But the identification of what moves a transaction may differ according to whether the rights in question are rights which the vendor has in any event to work the mine or are rights which owe their origin to the agreement which is the dutiable instrument.
MR COLES: Yes, but it is our submission that ordinarily one will resolve these questions by looking at the agreement at least as a starting point itself. One may need to go outside it for other purposes if - - -
HAYNE J: I do not know about starting point.
MR COLES: Here, your Honour, of course the agreement itself tells us, particularly when one sees that the funding obligation is made a contractual component of what I have called the package, it tells us, your Honour, that the parties have decided that whatever value the vendor might have derived by other means, he is moved to make this transfer because he has - - -
GLEESON CJ: What was the source of the vendor’s right to declare a dividend?
MR COLES: The source of the vendor’s right to declare a dividend?
GLEESON CJ: Yes.
MR COLES: Subject to this agreement, it was simply no doubt the articles of association of the company. Here, of course, in one breath the vendor limited or sterilised for a time his right to declare a dividend and said that “Contractually, notwithstanding I’ve got the right under the constitution of the company to declare a dividend, I won’t exercise that right until I get funding from the purchaser to do it”.
GLEESON CJ: What the vendor said was and what the vendor promised the purchaser was, “I won’t declare a dividend except”.
MR COLES: “Except out of the money that I’m going to exact contractually from you”, that is right. So in a fairly straightforward sense, we would suggest, the provision by the purchaser of that money must qualify for the description of a component at least of that which moved the transfer of the shares because, after all, clause 7.8 made it very plain that if that did not happen then the vendor did not have to transfer the shares.
GUMMOW J: It was all off.
MR COLES: It would not be just all off. There would, in effect, be no doubt consequences of breach and non-performance.
GLEESON CJ: The vendor did not promise the purchaser that the vendor would declare a dividend and the purchaser had no capacity to permit the vendor to declare a dividend.
MR COLES: Certainly that is right.
GLEESON CJ: What the vendor promised the purchaser was that it would not declare a dividend except this one. Its right to declare dividends existed in the articles of association of the company.
MR COLES: Clause 7.7 does provide that the parties, that is both the vendor and the purchaser, shall procure the company to declare a dividend. So in a sense there was a promise by both the parties each to the other that in a sense each would do what they had to do to make sure the dividend was declared. In that sense the vendor undertook to procure the company to pay the dividend, something it could not have done, of course, without the interior declaration of it. So, in our submission, they put the bargain in Davis Investments terms. They threw the agreement into the form of an obligation for the purchaser in substance to pay consideration in two components.
In that respect the only distraction from that analysis is the use of the capitalised expression “Purchase Price” in the sale agreement itself but if one overcomes the tyranny of definitional provisions, the what I will call small “p” price can then readily be seen as having been cast by the agreement of the parties in the form of an obligation by the purchaser to pay two sums which together constitute the quid pro quo for the vendor’s obligation to transfer and are therefore without more, in our submission, the consideration for it.
Your Honours, I think, are familiar with - that is how we say Davis, in effect, comes about, comes into play.
KIRBY J: What was the point of Justice Kitto’s dissent in that case which I notice Chief Justice Dixon described as a difficult case?
MR COLES: Well, the point is in the last couple of paragraphs. Everything from about the middle of page 415 of 100 CLR is where Chief Justice Dixon and Justice Kitto parted company, right down to - - -
GUMMOW J: You had better take us to what was going on in Davis Investments. They served the special leave application. You people recite this to yourselves daily, we do not.
MR COLES: Quite, your Honour. What was being - - -
KIRBY J: Was Justice Kitto trying to vindicate something he had urged unsuccessfully on the Court in - - -
MR COLES: No, he was trying, I think, your Honour, to carry forward something he had successfully urged on the Court in the case in Archibald Howie but perhaps the easiest way to look at it, your Honours, if your Honours look at page 394 there is there set out the agreement in that case. It was a very simple agreement and it simply records that the vendor and the purchaser have an agreement and the vendor is to sell and the purchaser is to purchase a list of shares for, in effect, the price of £1 per share, together with some furniture.
So the proper construction of the agreement was simply that shares worth many tens of thousands of pounds were being sold for, in effect, their nominal value. There were 57 shares being sold for £57 when the value of the shares was very much more. What the Commissioner was saying is simply well, this is a sale or transfer at less than the unencumbered value of the assets in question and, therefore, attracts duty at a particular rate. What the persons interested in the acquisition of the shares were saying is no, this is a transfer at not less than the unencumbered value of the assets because if you look at the inspiration afforded by Archibald Howie, you can see, if you make certain commercial assumptions not readily apparent from the agreement itself, but if you make some commercial assumptions dehors the agreement, you can see really what was going on was the purchasers or those who were taking the shares, wholly owned the company that was transferring the shares to them.
GUMMOW J:
Mr Bowen makes the point in his argument at 397 about point 3
that:
Consideration under the Stamp Duties Act need not pass from the transferee to the transferor. It is quite sufficient if it passes to a third party, or there were a detriment, as long as it was a consideration.
MR COLES: Yes, indeed, and we, with
respect, have substantially adopted that proposition in our written outline and
I have not taken your Honours
to the basic contract law authorities but
similar expressions, your Honour, quite apart from stamp duty legislation,
of course, appear
in Chitty and Halsbury and other well-known texts and we say
we fall squarely within that even before one gets to the complications
of the
notion of consideration in the conveyancing sense or the wider meaning involving
what it is that moves the transfer in any
event.
So that was the transaction, it being therefore said that by analogy, at least, with Archibald Howie, the real consideration was not just the expressed consideration of £1 per share, but was the inevitable commercial consequential occurrence. The purchasers had, by taking the shares out of the company at £1 each, lost the corresponding value in terms of their investment in the transferor company, which, as a matter of commercial reality, no doubt they had.
The point of distinction, really, is a fine one. In Archibald Howie, of course, the reason why consideration was found was because what was being put into effect in Archibald Howie was the effectuation of, in effect, a court-approved scheme of arrangement. So that by explicitly lawful means, the assets of the company were being passed out of the company into the hands of the shareholders, with no other conclusion available than that there was an identical and reciprocal diminution in their interest in the company as a consequence – that consequence, however, being produced by law, by a legal matter, in that case, by a reduction of capital.
On the other hand, and in contrast, in Davis Investments what was done was simply to take the shares out of the company at a nominal consideration, and it was but a matter of practical commercial evaluation or view that therefore their interest in the transferor company was much less. In effect, the majority said, well, that is not a result of any legal consequence. The only legal aspect of the transaction is that there is a sale at a consideration of £1 per share.
GLEESON CJ: Justice Kitto seems to have departed from that at the bottom of 412 and the top of 413. As I understand him, what he is saying is that – well, he really comes right out at the top of 413 and says that it really is not helpful to analyse this as though it was a transaction of sale and purchase. This was in truth an agreement between a company and its only shareholder.
MR COLES: Yes, but he, of course, is in dissent. This is a dissenting judgment.
GLEESON CJ: Quite. You were asked, I think, what was the point of departure between the majority and the minority in this case.
MR COLES: I am sorry, that is precisely it, yes. It is captured – I was about to say, your Honour, it is picked up, I suppose, on page 415, in the last full paragraph on that page, continuing over the page. That is the point of departure.
GUMMOW J: Page 415?
MR COLES: Page 415 from about point 4 on the page over to 416 at about 3 on the page.
GLEESON CJ: In the middle of 415, he asks what moves the conveyance.
MR COLES: Yes, up to that point, could I add,
your Honour, Mr Justice Dixon is in agreement with him, according
to his Honour’s own
prior judgment. His expression is:
the money or money’s worth really moving the conveyance.
I am not sure,
really - - -
GLEESON CJ: “Conveyance” being the transfer of property from the conveyor to the purchaser.
MR
COLES: Yes. Perhaps at 416, where his Honour says, about six lines
down:
That question, in the circumstances of this case, is whether the conveyance of the shares comprised in the instrument to be stamped was moved by the appellant giving up a right as against the vendor company worth as much as the value of those shares. And the answer must be that it was. By the very act of executing it and thereby accepting the specific shares which it covered, the appellant destroyed his pre-existing right to a dividend of ₤54,325 out of the assets generally. That was no mere consequence of the operation of the instrument; it was part of the operation itself.
That was the
Justice Kitto view. The majority view was that that was, in effect, a
practical consequence, not a legal result.
The legal result, on the other hand, which produced the different conclusion in Archibald Howie was that that was a court-sanctioned reduction of capital, and so the legal result followed from the legal phenomenon, whereas the resulting Davis Investments follow from the practical phenomenon and the only legal phenomenon at play in Davis Investments was then seen to be no more or less than the three paragraph agreement which your Honour has seen, and that is what led their Honours, in our submission, to say the only legal consequence of the transaction was that in which the parties cast it, that is deciding the form of an agreement at a price, and there would be no other relevant legal principle operative. They had selected, in effect, a transaction - - -
GUMMOW J: But Justice Kitto emphasises at 413 that there does not seem to have been any unauthorised reduction of capital.
MR COLES: No, no, it was not there because all the same people were in control of the enterprise and they could, in effect, forgive or condone the disposition of the company’s assets at undervalue.
GUMMOW J: Yes. Did the majority deal with that point he was making, to refute it?
MR COLES: They did not really say it was otherwise, your Honour, no. There is no dispute about that proposition. The point is really that, and perhaps Sir Owen Dixon I think, puts it crisply, it follows from the way the parties cast the transaction that they really did intend the only relevant legal elements of the transaction to be a sale at a consideration which was an undervalue, because that is the only legal component of the consideration that they fixed their minds upon.
If they wanted some other legal component, then they might have done a reduction of capital, they might have declared dividends, and so forth, but rather they did it that way so the only interplay between the events of the case and the principles of law was a transaction as much apparently intended to be a sale as an undervalue as a sale for full value. That is, in our submission, why the conclusion was reached that the sale was for a consideration less than the unencumbered value of property.
Perhaps somewhat inconclusively, your Honour, their Honours do in a number of passages refer to the fact that the agreement in the first instance attracts dutiable consequences. Chief Justice Dixon noted that at 406 towards the middle of the page and the same topic seems to have been picked up towards the foot of the page in Justice Taylor’s judgment as to - - -
GUMMOW J: I see at 406 Sir Owen Dixon says it is a matter of characterisation.
MR
COLES: In the sentence commencing:
For s 41 provides that every agreement for the sale or conveyance of any property in New South Wales shall be charged with the same ad valorem duty –
et cetera.
GUMMOW J: Then he talks about the real effect of what was happening.
HAYNE J: But whereas here you have a holding company, a wholly owned subsidiary, no third party involved as Chief Justice Dixon notes at 407 point 3, there is no other stipulation, other agreement, other obligation other liability that is in play because of that relationship of all the parties, then you find - - -
MR COLES: Precisely, yes.
HAYNE J: - - -within the four walls of the agreement.
MR COLES: Yes. The only legal relation at play was the one they activated, which was the agreement they made, yes.
HAYNE J: Perhaps other considerations may have arisen if, as his Honour said at 407, the transaction had been accomplished by a means provided by the company law.
MR COLES: Yes.
HAYNE J: Or if there had been third party rights engaged because other obligations, liabilities and the like would then have been brought into play, but here none.
MR COLES: Your Honours, in the present case then we say, of course, simply that the parties, without any need to consider disabilities or legal impediments were, of course, free, in the case of the vendor, to sell the shares, and in the case of the purchaser to buy them, and they could work out the monetary obligations and work out those aspects of performance which the vendor required the purchaser to undertake in point of payment of money in any way they liked, and here they chose to do it in a way which exacted from the purchaser, the payment of two sums, pursuant to their agreement, and those two sums together comprised the totality of what it was that the vendor required to complete the agreement and, therefore, necessarily, on that view of things, amounts to the consideration.
In our submissions, your Honour, we have referred to – and because of the time I will not trouble your Honours to look at them, but we have referred elsewhere to a number of decisions where, in short, contractual arrangements which imposed upon purchasers of businesses obligations to make payments to a third party, were – when later on it became necessary to evaluate their revenue consequences - held not to be payments on revenue account, which was a character they would have otherwise enjoyed, but were held to be payments of, in effect, capital because treated as part of the purchase consideration for the acquisition of a business, and your Honours have references both to Watson’s Case and - - -
KIRBY J: They may just be instances of what Justice McHugh has said that is engraved on Mr Durack’s heart that he mentioned in the special leave. They are just decisions on their own particular facts.
MR COLES: Well, except that they do support recognition. Perhaps they may not be authority for the proposition specifically in terms, but they support the proposition that if under an agreement for the sale of a business by A to B, B is required to make a payment to C - in the cases to which we have referred, C being typically an employee of the old business, or of the vendor – and if later the purchaser makes the payment to the employee, that is to say C, then when one is coming to look at the proper characterisation of the payment which B makes to C, it is a payment regarded, without particular complication, as part of the consideration for that which motivated A to sell the business to B in the first place; therefore, being treated as part of such consideration, it is treated as a capital payment and, therefore, not brought to account as a revenue expense in the purchaser’s hands. Now, we have given your Honours a couple of references to cases like that - - -
KIRBY J: Where are they? Are these 24 or - - -
MR COLES: They are.
KIRBY J: Was there anything added by Justice Sheller in his reasons, in your submission, to what – he obviously had Justice Meagher and Justice Davies’ reasons for judgment, and he had to resolve the conflict. I did not read his Honour as adding anything substantive to the analysis of Justice Meagher, but was there, in your submission, any additional error on the part of Justice Sheller or not?
MR COLES: I think we have suggested – we do not complain of any additional error.
GUMMOW J: You complain abut paragraph 16 on page 104, do you not?
MR COLES: Paragraphs 16 and 17, in particular. We complain about many respects of 17, in ways I have really - - -
GUMMOW J:
The loan was not, in my view, money passing from the plaintiff in moving the share acquisition. It was money passing from the plaintiff to acquire the debt.
MR COLES: Yes. We have complained.....In
paragraph 17, well, there are probably perhaps four or five areas of
disagreement with what Justice
Sheller said. He said:
this ignores the fact that the vendors as shareholders were entitled to the dividend from the company –
The point is, they were not, at the time of the agreement, and
they would only become so in consequence of the agreement being performed.
Then
he goes on to say:
and that the loan by the purchaser was a loan to the company –
Of course, as we have several times put, it became a loan
because that is how the funding obligation was implemented –
and no doubt was or will be, repaid –
Well, there was nothing at all in the contract for sale which dealt with the terms of repayment by the party that became the borrower, not a party to the agreement. It may have been, and it was open to the parties under the share sale agreement to have, for example, a non-recourse loan, I suppose, if they wanted one. So his Honour was not justified in making any relevant inferences about the repayability of the loan.
GLEESON CJ: Have you turned up what exactly was the agreed fact before - - -
MR COLES: Only the one in paragraph 5 of Justice Gzell’s judgment, yes. We have not, I think, since your Honours began the hearing of the matter, found the transcript or the like, but it is that statement recorded in paragraph 5 of Justice Gzell’s judgment at the foot of page 99.
To
answer your Honour Justice Kirby’s question, the next complaint
we have about Justice Sheller’s reasoning –
he says:
The purchaser did not pay $25,584,097 to the vendors.
We have said that that is not to the point; they certainly
funded it to the company. He says:
The vendors became entitled to that amount from the company as shareholders –
We have said, well, no doubt they did, but that does not exclude
from the analysis the fact that they would not have transferred the
shares
otherwise. Then his Honour says:
The amount of the purchase price was dictated by the amount of the dividend not the amount of the funding provided. That the dividend and the loan were the same was coincidental –
That does not seem, with respect, to be right, as a matter of construction of the agreement.
GUMMOW J: It certainly was not irrelevant to the effectuation of the transaction.
MR COLES: No. We simply say that Justice Sheller took a different view of the transaction in paragraph 17 to that for which we have contended.
The cases
your Honour Mr Justice Kirby asked me that I have referred to
where the payments to third parties in consequence of agreements
between vendor
and purchaser being regarded as part of the consideration for the transfer of
the asset in question are Royal Insurance v Watson [1896] UKHL TC_3_500; [1897] AC 1 and
Commissioner of Inland Revenue v New Zealand Forest Research Institute
[2000] 1 WLR 1755, where Royal Insurance v Watson, although an 1897 case,
was applied. The relevant passage in the latter case is at 1758, where the
Privy Council said:
Leaving aside for the moment the provisions of section 41, the position was that the taxpayer, pursuant to the transfer agreement and as part of the consideration for the purchase of the assets - - -
GUMMOW J: What page is
this?
MR COLES: This is on page 1758:
the taxpayer . . . as part of the consideration for the purchase of the assets, accepted a liability under its employment agreements with former Crown employees not merely to remunerate them for services . . . but also to discharge obligations, either vested or contingent upon some future event . . . It seems to their Lordships plain that, viewed in this light, the payments were capital expenditure, being part of what was paid for the acquisition of the assets. There can be no doubt that the discharge of the vendor’s liability to a third party, whether vested or contingent, can be part of the purchase price. It does not matter that the payment is not made at once but pursuant to an arrangement whereby the purchaser agrees to be substituted as debtor to the third party.
That is, in our submission, not an exhaustive statement of the possibilities but as a matter of principle there is certainly no fetter on reaching a conclusion that vendor and purchaser may agree as part of the purchase consideration that the purchaser will pay money to somebody else which may assist in discharging the obligation which the somebody else has back to the vendor. Indeed, it is not to the point that by making such a payment the purchaser may itself obtain an advantage, either direct or indirect, as a result of doing so. The point is payments of that character justifiably have attributed to them the quality of consideration.
Again, because the facts are rather complicated, we would ask your Honours also to note the authority referred to additionally in the written outline of Central and District Properties Ltd v Inland Revenue Commissioners (1966) 2 All ER 433. Again, your Honours, in short what was necessary there was for the relevant revenue advantage to apply that there should be a payment of consideration not in excess of a certain amount. As an inducement to bring the sale about, the purchasers, in effect, in favour of a third party made some such expenditure and that was held necessarily to be caught up with the consideration.
Again, your Honours, we do not, of course, pretend otherwise than that these types of cases depend ultimately on their own facts, on their own contractual provisions, but they certainly do not serve to deny the proposition that one may find consideration taking a wide variety of forms and doing so in contexts where purchasers are seen to be making payments to third parties even in circumstances where there is no disadvantage ultimately to them in doing so and where those third parties are themselves in turn supplying some advantage back to the vendor. So there is nothing in principle, in our respectful submission, which would necessarily deny the quality of consideration to the funding and the purchase price as defined under this agreement.
I think, your Honours, particularly in view of the time, most of what we wanted to say in support of the appeal is as I have put and otherwise in the written submissions. Unless there are any other specific matters in which we could assist your Honours, those are our submissions.
GLEESON
CJ: Thank you Mr Coles. Yes, Mr Durack.
MR DURACK:
Your Honours, I had intended to deal with some preliminary matters but
because of the time and because I would like your Honours to
go away with
something ringing in your Honours’
ears - - -
GLEESON CJ: Gosh.
MR DURACK: - - - I will attempt to do this and say that in the respondent’s view there is a fundamental flaw in the appellant’s case, which if it is identified, and the right approach taken to the interpretation of the relevant legislation, in this case, section 21, will resolve the difficulties and apparent inconsistencies particularly the problem to which your Honour the Chief Justice has adverted about the value of the shares obviously only being 88 million at the time of the completion of the transaction and the difficulty that by the funding the purchaser acquires not only the shares, in my friend’s case, but also the loan.
In the respondent’s submission, those difficulties can be resolved by examining the legislation with which we are concerned and seeing that in these particular circumstances it has to be interpreted in a particular way and I should say, your Honours, that it appears that the legislation is not relevantly different from the legislation that was in the old 1920 Stamp Duties Act. But the appellant’s case, as the respondent understands it, is this. The promise to fund, as your Honour Justice Gummow noted twice to me during the course of the special leave application, and I confess I was not quick on the uptake enough to be able to answer the concern that your Honour obviously had arising out of that, but the promise to fund was given as part of the consideration for the purchase, that must be conceded. It was a promise made in terms which was designed, ultimately, to move the transfer.
The second point in the appellant’s case is that performance of that promise involved payment of $25 million. Therefore, says the appellant, the payment is part of the consideration for the purposes of section 21. Now, the problem with that argument and, in our submission, the problem was identified although I am not sure that the full implications of it were teased out by Justice Sheller in paragraph 16 of his judgment at appeal book, page 119, the problem with that argument is that in these circumstances both the promise to fund and the funding itself involved, as events turned out, something more than a mere monetary payment for the transfer. They involved the making of the loan.
Now, your Honour Justice Gummow also asked me whether I was not committing the heresy of looking other than to the agreement at the time of its execution when I said something similar to your Honour at the time of the special leave application. One of the reasons why the respondent put on more of the legislation as part of its written submissions than the appellant did was to include a couple of other provisions. Section 24 was one of them, the one that deals with the Commissioner’s ability to take action against arrangements which are intended to deflate the dutiable value. The other was section 49 which plainly envisages that there will be circumstances in which if the dutiable value is not apparent from the agreement itself it will be appropriate for the Commissioner to make an estimate of the duty payable on the agreement and when the full dutiable value is known, that is when the full consideration is known, to bring in a final assessment.
Now, in this case, according to the agreement, the purchase price depended on the amount of the dividend, and if my learned friend is right, then it also depended upon the amount of the funding. Now, the amount of the funding was not going to be known at the date of the agreement. It is quite possible that the company could have had $10 million sitting there in cash - - -
GUMMOW J: There was a mention, was there, as an estimate, was there not, of 25 million and that as an upper limit?
MR DURACK: The agreement simply capped the possible dividend payment - - -
GUMMOW J: Yes.
MR DURACK: By saying that it should not exceed 27 million, but the agreement did not specify what the amount of the funding would be. It just - - -
GLEESON CJ: Do you mean, the agreement does not contemplate one way or the other whether it would be necessary to fund the entire dividend?
MR DURACK: Quite, your Honour.
GUMMOW J: “Dividend amount” is the definition.
MR DURACK: Yes, there is a definition of “dividend amount”, but it is not a fair construction of the agreement to assume that the - - -
GLEESON CJ: What is the clause in the agreement again?
MR DURACK: I beg your pardon, your Honour?
GLEESON CJ: What is the relevant clause?
MR DURACK: The definition of “purchase price” is on page 15 of the appeal book.
GLEESON CJ: We start with 4.4.
MR DURACK: Yes, your Honour.
GLEESON CJ: Which is:
the Vendors shall ensure that the Company shall declare a dividend –
MR DURACK: Yes,
your Honour.
GLEESON CJ: So the vendors undertake an obligation to use their powers, no doubt under the articles of association, to have the company declare a dividend.
MR DURACK: Yes, your Honour.
GLEESON CJ: And then the obligation on the purchaser - - -
MR DURACK: Is in 7.7 on page 23.
GLEESON CJ: Is to fund it so that it is able to discharge the debt created by the declaration.
MR DURACK: Yes, your Honour, and it is not apparent from that, at the date of the contract, how much that funding might be. It does not necessarily follow that it will be the same as the amount of the dividend. So that, in our submission, it was always going to be necessary to look to what happened at the time of execution of the contract in order to work out the final dutiable value.
Now, if I
could take your Honours to section 21 again. Section 21 speaks
of:
the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration –
In our submission, that must be read to mean the amount of a
monetary consideration for the dutiable transaction –
or the value of a non-monetary consideration) -
again, in the respondent’s submission, to be read as meaning, or the value of a non-monetary consideration for the dutiable transaction. So for the dutiable transaction and not for something else.
Now, in that context, in the respondent’s submission, the funding has to be distinguished from what was obviously the monetary consideration for the transaction, which was the payment of what was defined to be the purchase price - that purchase price being $88 million.
HAYNE J: No, it was not. No, it was not. It was 114 minus the dividend.
MR DURACK: I am sorry, your Honour. As events turned out, the definition of “purchase price” would have produced the result of 88 million, but, of course, your Honour is quite right.
My learned friend referred to the funding as an advantage to the vendor. Now, indeed, it obviously was, because it relieved the vendor of the obligation - - -
GUMMOW J: How are you helped by this futurity or uncertainty element you are introducing, when the starting point is 114? What is uncertain is the subtraction from it at the time of the instrument’s execution.
MR DURACK: The uncertainty in relation to the amount to be subtracted is the amount of the dividend that has not yet been established, but, on my learned friend’s case, part of the consideration which the funding. In our submission, even on my learned friend’s case, it is necessary to find out how much the funding turned out to be. That was not simply going to be the same as the amount of the dividend.
GLEESON CJ: Is there any other provision of the agreement that throws any light on the meaning of this word “fund”?
MR DURACK: No, your Honour.
GLEESON CJ: Is that the only place it appears, 7.7?
MR DURACK: Yes, your Honour. I will check during the luncheon adjournment, but I believe that is the only place where it appears.
GLEESON CJ: It is a verb, to “fund”.
MR DURACK: Yes, your Honour, and it is - - -
GLEESON CJ: What were the possible ways in which you could go about funding?
MR DURACK: We would suggest only reasonably by way of a loan or by way of subscription for shares. A gift is conceivable, but hardly likely in the context of - - -
GLEESON CJ: What about arranging for a loan from a bank which the purchaser guarantees, for example?
MR DURACK: Your Honour, the respondent would certainly like to suggest that was something that could have been comprehended by the idea of funding, but I apprehend that my learned friend will say “fund” means fund by the purchaser and what your Honour has suggested involves funding by someone else and that there is a difference between funding and arranging funding.
GLEESON CJ: Mr Coles suggested as one possibility, equity capital rather than loan capital.
MR DURACK: Yes, your Honour, we concede that is a possibility.
CALLINAN J: That would dilute the value of the shares though.
MR DURACK: It would, your Honour, except that the infusion of the equity capital would also - - -
CALLINAN J: Offset the dilution.
MR DURACK: Yes, it would depend on the number of shares that are issued but it would not alter the purchaser’s economic position.
GLEESON CJ: It would not affect the vendors because they would still be entitled to the purchase price as defined.
MR DURACK: They would be, but the point that I am endeavouring to leave your Honours with before lunch is that what is involved in the funding when you construe section 21(1)(a) in the way it should be construed in the circumstances of a case like this, is non-monetary consideration constituted by the advantage which is conferred by the purchaser on the vendor, in that it makes it convenient for the vendor to get its dividend. That such an advantage could have a value, and quite possibly a significant value in particular circumstances could be conceded because if, for example, and it is hardly likely in circumstances where presumably the company has profits from which to pay the dividend, but if the company were in fact insolvent and the difficulties facing the vendor in getting the dividend to which it was entitled were substantial and if the making of a loan to the company involved a significant risk for the purchaser, then the value of that funding could be significant.
GLEESON CJ: Well, let me leave you with this ringing in your ears. Does not the word “or” in (a) mean “and”? If the consideration is partly monetary and partly non-monetary, do you not just add them both together?
MR DURACK: Yes.
GUMMOW J: How is the advantage then valued?
MR DURACK: By reference to the financial circumstances of the company.
GUMMOW J: Has it ever been valued, I suppose?
MR DURACK: No, it has not been valued, except that we know that this was an arm’s length transaction which my friend accepts as genuine. We know that at the very least the amount that an arm’s length purchaser was prepared to pay for this company was 88 million.
HAYNE J: No, we do not. Why do we know it is 88? We know it is 114. That I know.
MR DURACK: I am sorry, your Honour, we know that at the very least it is 88 million.
HAYNE J: But why do we know it is any sum? We know that it is cast in terms of 114 minus whatever you can pay by way of dividend. The value passing – and this is the thought that I would leave you ringing with – why is that not 114?
MR DURACK: Whether it is 114 or 88, your Honour, it is clear that this company was a company of substance, with no shadow of a doubt hanging over its financial solvency.
HAYNE J: I know. CGT bore on the way the purchase price was structured and so, no doubt, did franking requirements, but there.
MR DURACK: The submission of the respondent then is that in those circumstances the value to be attributed to a funding of the company, whether by way of loan or by way of a subscription for share capital, from the point of view of the detriment to the purchaser and the advantage to the vendor, would be no more than a very modest sum and certainly not the 25 million which is suggested by my learned friend.
GUMMOW J: Why do you say it is not 25 million?
MR DURACK: Because - - -
GUMMOW J: You say it is a modest sum?
MR DURACK: Because it is obvious that the company is in a sound financial position. So that making a loan to the company involves no significant detriment to the purchaser. So that from the point of view of the purchaser - - -
GUMMOW J: You are talking about risk of non-payment, in effect.
MR DURACK: Yes, your Honour, but also looking at it from the point of view of the vendor there is certainly convenience to the vendor in that they get their dividend without a squabble, but in the circumstances where the company was obviously well able to pay the dividend, the amount of the advantage – and my friend called the funding “an advantage” – the amount of the advantage to the vendor, is a relatively modest sum.
It is whatever value would be put on saving it the trouble of getting recovery of the dividend from the company because if my friend is right, your Honours, then if a condition of the purchase agreement had been that the purchaser, at the time of completion, make a loan to some other third party, then the amount of that loan would also be part of the purchase consideration, because as part of the agreement, as part of the consideration provided for the agreement to transfer the shares, the purchaser would have agreed to make a loan to a third party – this is not to pay a dividend or anything, just a loan to a third party.
In those circumstances, if my friend’s argument is correct, because the agreement to make that loan was a condition of the purchase agreement, because it is therefore part of the consideration, then the making of the loan itself, in effectuation or discharge of the obligation undertaken in the purchase agreement, would necessarily involve the inclusion of the amount of the loan in the dutiable value and in the consideration.
GUMMOW J: Does this not involve reading into this definition in 21(1)(a) not only the words “for the dutiable transaction” but also words indicating the transferee is what you are looking at?
MR DURACK: I am sorry, your Honour, I - - -
GUMMOW J: Including the word “transferee”?
MR DURACK: No, your Honour. I am not even suggesting that it should be read as needing the words “for the dutiable transaction” included, but that that is the ordinary way you would understand it. You would look at and see it is the amount of the monetary consideration - - -
GUMMOW J: What I am trying to get at is the accommodation within the definition of the notion of a payment to a third party.
MR DURACK: Well, it is the whole part of my friend’s case that consideration can be provided by payment to a third party. That is was all those - - -
GUMMOW J: I know, but the question is then how do you accommodate or reject that in terms of the definition?
MR DURACK: The respondent does not argue that consideration has to be provided to a transferor, it accepts. The written submissions sought to clarify that, where, in the respondent’s written submissions, they said at the outset – I will take your Honour to them.
GUMMOW J: I am sorry, I am taking you past time.
GLEESON CJ: I think we understand that you acknowledge that in a particular case an obligation to make a payment to a third party can be - - -
MR DURACK: Could be part of the consideration.
GLEESON CJ: - - - part of the consideration, but is it your argument that if the obligation is to make a loan to a third party, then what you take as the consideration – you treat that as non-monetary consideration and you value it?
MR DURACK: You do. And if the party to whom the loan is to be made is impecunious, or if the loan is to be, for example, a term loan on interest-free terms, then obviously the loan itself will have a value and that will mean that the value of that non-monetary consideration will have to be included in the dutiable value. So that if the vendor, as part of an agreement to sell shares, insists upon a loan being made to some related company which is insolvent, then it will be obvious that in those circumstances the value of the loan, whatever it might be – and that would depend on an examination of the circumstances of the insolvent company – the value of the loan will be part of the purchase consideration.
GLEESON CJ: I might have overlooked it, but I do not see any discussion of this topic in any of the judgments below.
MR DURACK: No, your Honour, and that is not because, with respect, this involves a new point. It involves the respondent in finally understanding, if I can put it - - -
GUMMOW J: It is a response to the turbulent special leave application.
MR DURACK: Not just that, your Honour. No, it is a response to what the respondent now perceives to be the way in which the appellant justifies its case, and it does it in the way set out by Justice Sheller in that paragraph 16 or 17 of his Honour’s judgment.
GLEESON CJ: All right. Well, we will adjourn now and we will come back at 2.15.
MR DURACK: Thank you, your Honours.
AT 12.52 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.18 PM:
GLEESON CJ: Yes, Mr Durack.
MR DURACK: I think your Honour the Chief Justice asked my learned friend before the adjournment whether there might have been something in the exposure drafts of the legislation with which this Court is now concerned which might have assisted us with the problem we have today. My learned junior and I have combed through the exposure drafts without - - -
KIRBY J: That must have been a great pleasure for you.
MR DURACK: It was, your Honour, and I hope that the Court will not consider it discourteous of me to comment, in view of the young people who are in the Court today, that although this case is about stamp duty, and although that might seem a very dry subject, stamp duty has been with us for nearly four centuries, and it was in fact an argument about stamp duty which started the American War of Independence. So that - - -
KIRBY J: What are you suggesting?
MR DURACK: Just that it is not - - -
HAYNE J: Dick Smith is going to secede.
MR DURACK: Just that it is not surprising that we should still be arguing about it today. Your Honours, there is a brief commentary on the background to the Stamp Duties rewrite, which commenced apparently in 1994, in the first chapter of Justice Hill’s book on duties legislation, which is published by the Lawbook Company. His Honour refers to a joint venture between New South Wales, Victoria, South Australia, Tasmania and the ACT that had been involved in the rewrite since 1994, with an exposure draft first being released in 1995, and then another in September 1997, culminating in the current version of the Act, the aims of which Justice Hill records as being that the rewrite would be contemporary in language and presentation and be simple, clear and equitable.
GLEESON CJ: Are the expressions “monetary consideration” and “non-monetary consideration” new expressions for this Act?
MR DURACK:
Not quite, your Honour. The former legislation in the 1920 version of the
Stamp Duties Act (NSW), which I notice is on my learned friend’s
list of authorities and I do not know whether that means that your Honours
have it or not but it is not necessary that your Honours do because
section 66 which was referred to in my learned friend’s
list of
authorities provides that:
A conveyance on sale of any property is to be charged with ad valorem duty on the amount or value of the consideration for the sale.
So that the expression “amount” seems to be the predecessor of the expression “monetary consideration”.
HAYNE J: Is that right, or is rather the predecessor of that composite expression “money or money’s worth” which we find in 66(3A) of the 1920 Act?
MR DURACK:
I was just going to take your Honours to that also. Section 66(3A)
refers to:
A conveyance of property made upon a bona fide consideration in money or money’s worth of less than the unencumbered value –
So that there are two expressions, one referring to “the amount or value” in subsection (2) and one referring to “money or money’s worth” in subsection (3A) of the section which is nearest, if you like, as a predecessor of section 21 or perhaps of Chapter 2 of the current Act.
GLEESON CJ: Have any of the four judges who have so far considered this matter addressed their minds to the question whether, if the promise in clause 7.7 was part of the consideration, it was non-monetary consideration and therefore required to be valued?
MR DURACK: No, your Honour, and I do take your Honour’s point that the way in which the respondent puts the argument before this Court has not been put below, but it does arise out of the concern expressed, in particular by your Honour Justice Hayne, and also by the way in which your Honour Justice Gummow earlier today put the consideration. I think your Honour is aware that the consideration is the amount paid to satisfy the executory promises in the contract.
The reason why the respondent feels obliged, in answer to my learned friend’s submissions and in answer to the concerns expressed by your Honours, to seek now to justify its position by reference to a matter which was not expressly argued below, is that it is clear that the consideration for this contract included the promise to fund. The question then is what flows from that.
Now, it may be – and it is possible that your Honour the Chief Justice is disposed, from encouraging words which fell from your Honour before the adjournment, to view the transaction in this way, it may be that it is possible by seeing the fact that what is involved is a disposal of shares to be ex dividend, at least at the time of completion, and also by recognition of the fact that if my learned friend is correct then the assets which the purchaser will have in its balance sheet, under the titles $88 million for the purchase of the shares and $25 million for debt due by InterTAN, it is possible that those considerations alone are enough to show that the appellant’s argument must be faulty. But in the case that is not so, then it seems to the respondent that it is necessary to suggest that section 21(1)(a) must be read in the way that we have suggested, because if it is not then it is difficult to overcome the consequences of the approach that your Honour Justice Gummow has suggested and to say that if the consideration for the contract includes the promise to pay then the payment - - -
GLEESON CJ: You mean the promise to fund.
MR DURACK: I am sorry, the promise to fund - then the funding itself is part of the consideration. The way, of course, the respondent would approach that matter would be to say that there is a difference between a promise to pay and a promise to fund. The latter involved something other than a mere payment and it is that that requires you to look at what the advantage conferred on the vendor by funding of that kind might be, which as we have suggested in this case would be very little.
I should also say, your Honour Justice Kirby asked the question whether, in effect, if the respondent were right in this case it would open up any opportunities for tax minimisation or avoidance which might not be covered by section 24. I think my learned friend made no such suggestion, but it is certainly the case from the point of view of the respondent that if the legislation should be interpreted in the way in which my learned friend urges upon your Honours, then the result must be that the purchase price which the respondent paid for the shares in InterTAN will be $114 million because that is what your Honours will have found is the consideration for it.
Now, if that is the case then the purchaser could go off and sell the shares for $114 million and claim to have made no capital gain, when in fact, leaving only your Honours – assuming that my learned friend is right, that will be the amount of the consideration when the balance sheet will record two assets, one of which has a purchase price of $88 million which in the respondent’s submission is the proper purchase price for their shares and a loan. The result will be that the decision will expose an anomaly in that something is both a purchase price of shares and the consideration for a loan - - -
HAYNE J: Now, does this not point to an underlying question namely, do you construe consideration where it appears in 21(1)(a) as referring to that which is consideration for the contract?
MR DURACK: I think the answer must be yes, your Honour, but - - -
HAYNE J: Why should you do that where the transactions brought to duty may include transactions which are not transactions of contract, for example, the transaction considered in Howie?
MR DURACK: I am sorry, your Honour, I am - - -
HAYNE J: Howie concerned a reduction, did it not?
MR DURACK: Yes, your Honour.
HAYNE J: The question in Howie was whether the transfers made in satisfaction of the obligation arising on reduction to distribute assets in specie were to be brought to duty according to one or other of three possible provisions.
MR DURACK: Which depended on whether or not the value of the shareholders’ rights were part of the consideration.
HAYNE J: Well, depended upon whether the transfer was a conveyance without consideration in money or money’s worth, was a conveyance made upon bona fide consideration in money or money’s worth of less than unencumbered value or was a conveyance on bona fide consideration in money or money’s worth of not less than unencumbered value.
MR DURACK: Yes.
HAYNE J: Now, there was no contract, was there, which lay behind the transfer?
MR DURACK: Not as far as I am aware, your Honour. There was simply a transfer and it was - - -
HAYNE J: There was a transfer in satisfaction of the obligation arising on reduction.
MR DURACK: Yes, your Honour.
HAYNE J: And “consideration” had to be given work to do in that context.
MR DURACK: Yes.
HAYNE J: And it could not be given the work of simply identifying the consideration to support a bargain as “consideration” would be understood in the law of contract?
MR DURACK: No, your Honour.
HAYNE J: If that is right, and it seems at the moment to me to follow, why then do we read “consideration” in 21(1)(a) as focused – even focused exclusively, as I understand your argument, upon that which would support a bargain for the law of contract.
MR DURACK: Your Honour, I must confess that I thought that it was my learned friend’s argument that depended on that proposition.
HAYNE J: The arguments you have just been making have been concerned to identify the consideration for the transfer of shares in terms that seemed to me – correct me if I am wrong – to focus only upon what the contract lawyer would identify as the consideration.
MR DURACK: With respect, no, your Honour. They certainly focus on the terms of the contract but my learned friend does not suggest that consideration is to be found outside of the contract anyhow. The reason that the respondent formulated the argument that I put to your Honours just before the adjournment was the perception that when looking at the contract and seeing that part of the consideration was the promise to fund and accepting what your Honour Justice Gummow had to say about what the consideration should be in those circumstances, that is the payments to give effect to the promises, the executory promises, then the respondent’s argument was that if the anomalies to which I have referred as flowing from interpreting section 21 in those circumstances as picking up not only the amount of the purchase price as defined in the contract, the $114 million minus the dividend amount, but also the funding, that the way in which that should be done was to read section 21 in the way it was suggested it should be read and to treat a promise to fund as being different from a mere promise to make a monetary payment.
HAYNE J: Because part of the case against you, it seems to me, is that the value passing which moved the conveyance, to adopt Sir Owen Dixon’s words, that the value passing was all of what you got, namely, the 114 million.
MR DURACK: Yes, your Honour.
HAYNE J: Now, what is the answer that you make to that analysis of the case?
MR DURACK: Well, the answer is that obviously 88 million of it is the value passing. I am sorry, your Honour, but I think when your Honour makes a reference to passing your Honour is recalling a comment made earlier when considering what Sir Owen Dixon had to say, that perhaps that means you look at what the vendor received. But even on my learned friend’s submissions, the dividend is not part of the sale proceeds which the vendor receives. On my learned friend’s submissions, it is what the company receives, that is, by way of funding, which is part of the purchase consideration.
So even my learned friend does not put it – and I am sorry, my learned friend does say in paragraph 31 of his written submissions that the purchase price includes the dividend amount, but I think my learned friend eschewed that submission earlier this morning. Indeed, it would not be consistent with submissions made below. It has always been my learned friend’s submission that the consideration included the amount of the funding, not, as I understood it, the amount of the dividend. Now, I am sorry, your Honour, but I think that in taking that sidetrack I have failed to answer your Honour’s question.
HAYNE J: No, I have delayed you long enough.
GUMMOW J: Mr Durack, in the 1920 Act, do you remember section 17, which talked about several distinct matters?
MR DURACK: Yes I do, your Honour.
GUMMOW J: Is that reproduced in the 1997 - - -
MR DURACK: I do apologise, your Honour.
GUMMOW J: I cannot find it.
MR DURACK: I do not know the answer to that, but I doubt if it is.
GUMMOW J: Yes.
MR DURACK: I certainly do not recall seeing it. The rewrite is a very significant rewrite. In the case that your Honours were endeavouring to recall this morning, Pioneer Concrete, your Honours made the comment that the previous version of the legislation was, of course - - -
GUMMOW J: Justice Hayne points out, does section 25 bear on it in any way, the present section 25? Part of the trouble about the new Act, it is talking about transactions, not instruments.
MR DURACK: Yes, your Honour. I was going to say that in Pioneer Concrete your Honours made a point of saying that it was fundamental to the decision which your Honours reached in that case that it was a tax on instruments and not transactions, whereas this legislation, of course, attracts on transactions, but although section 25 - - -
GUMMOW J: It is not the same idea, I think, as the old section 17.
MR DURACK: I do not think it is the same idea as the old section 17.
GUMMOW J: No. Thank you.
MR DURACK: My learned friend has just drawn
my attention to section 294 which is, I think, similar to section 17 in
saying that:
An instrument that contains or relates to several distinct matters for which different duties are chargeable . . . is to be separately and distinctly charged - - -
GUMMOW J:
Yes, that is it.
MR DURACK: I do not think there is any suggestion in this case that there is any matter which is subject to charge under the current version of the Duties Act other than the transfer of the shares, or perhaps the agreement for the transfer of the shares treated as a transfer of shares.
GLEESON CJ: Mr Durack, I asked Mr Coles this question before lunch but I would like to get your comment on it also. I am not suggesting it goes directly to the resolution of the present case, but how does section 21(1) operate in what I would have thought is an extremely common case, that is an agreement to transfer Blackacre on which there is a growing crop where one of the terms of the agreement is that the crop will be harvested by the vendor prior to completion? In such a case I would have thought it is obvious that the consideration payable by the purchaser will exclude the value of the growing crop one way or another.
MR DURACK: Yes, your Honour.
GLEESON CJ: Yet subsection (1)(b) on one possible approach seems to refer to the unencumbered value of Blackacre at the date of the contract.
MR DURACK: Your Honour, that was very close to the question which was considered by your Honours in the Pioneer Concrete Case which involved a transfer of land in relation to which the vendor was retaining mining rights, which mining rights were transferred by a separate contract to a company associated with the purchaser. The argument was that the mining rights affected the value of the land. It was particular legislation in that case which required the Commissioner to do a valuation of the land for the purpose of calculating the duty and the question was whether the existence of the mining rights should be taken into account in valuing the land. Your Honours held that they should not.
The question which your Honour has asked raises the question which your Honour also asked earlier today, which was at what point should the valuation of the property the subject of the transfer be undertaken? Should it be at the date of the agreement or some later date?
GLEESON CJ: Where it is a term of the agreement that something will happen between contract and transfer, that will reduce the value of the property.
MR DURACK: Yes. Your Honour, in the respondent’s submission, the answer to the question is at the date of the agreement, but on the basis that the agreement will take effect in accordance with its terms, which would include in that case the cropping of the land by the vendor. In our submission, the situation before your Honours in this case is not terribly different. In my learned friend’s submissions on at least two occasions – and they are referred to in the respondent’s written submissions, my learned friend concedes that the transfer should be taken to have been performed in accordance with its terms.
GLEESON CJ: If that is right, that reconciles (a) and (b) because if the alternative is correct, then in the ordinary case that I mentioned there will always be a difference between (a) and (b).
MR DURACK: Yes, your Honour, there would often be a difference between (a) and (b) and (b) could often be higher, that is the value could often be higher than the price in a non-arms length transaction.
GLEESON CJ: I am putting that to one side.
MR DURACK: Certainly. Then in the arms length circumstances where one might assume that only the value of what is to be transferred will be paid by the arms length purchaser, it will reconcile those provisions.
GLEESON CJ: Let me take what again must be a very, very common case: a contract for the sale of a dwelling house that provides for an extended completion. In other words, A, the owner of a dwelling house, agrees to sell it to B but on terms that completion will not take place for 12 months and that in the meantime A will remain in occupation of the dwelling house. Plainly the price that B is willing to pay will take into account the fact that A is going to stay in it rent free for a year.
MR DURACK: Yes, your Honour, and would ordinarily equate to the value at the date of the contract, on the basis that the contract will be implemented in accordance with its terms. That is the way the respondent says that the section should be interpreted in this case.
CALLINAN J: It is merely taking into account the likely contingencies, and the inevitable contingency to be taken into account here is that it will be completed. The prudent vendor and the prudent purchaser fix the price, which is also the value, on that basis.
MR DURACK: And that it will be completed in accordance with its terms, including the payment of the dividend, with the result that what the purchaser receives is not going to be – assuming that because they are dealing at arm’s length, that is as good an indication of the value of the shares as you are likely to obtain, but it will mean that the value of the shares will not be any greater than the amount of the 114 million less the dividend paid out of the company, because that will deplete the value of the company.
Again, with respect to my learned friend, his argument necessarily involves the consequence that duty will be payable in respect of a consideration on this transaction which is considerably higher than the actual value of what comes into the possession of the purchaser. That is the kind of inconsistency which, with respect to my learned friend, would cause this Court to be sceptical about the interpretation of the legislation and the construction of the transaction which brings it about.
It is also not insignificant, your Honours, that my learned friend eschewed a fallback argument, and there never has been a fallback argument. In other words, the Commissioner has never argued that this assessment can be supported by reference to a value of 114 million for what is transferred under section 21(1)(b), for the very good reason that the value of what is transferred is not going to be any more than 88 million.
KIRBY J: Well, that is one inference. There are other inferences available. We were told in the special leave hearing that the duty which is in issue is about $150,000 - - -
MR DURACK: Yes, your Honour.
KIRBY J: So it is not a huge amount, and therefore one infers that it may be that this has been advanced to test this proposition under the new Act and to elucidate whatever tensions exist in the earlier case law of this Court.
MR DURACK: I accept that that is an inference, your Honour, but even if that were the explanation, one might have thought that in support of its case that the consideration must be 114 million under paragraph (a), the appellant might also have argued that, “Anyway, that is what the shares were worth”, but, on any economic analysis, the shares could not have been worth more than 88 million.
GUMMOW J: You keep sliding from price to consideration and then back again.
MR DURACK: I am sorry, your Honour, it was not deliberate.
GUMMOW J: The statute does not talk about price.
MR DURACK: I am sorry, I - - -
GUMMOW J: I understand why you do it. In fact, the statute does not talk about price.
MR DURACK: No, that is quite right, your Honour, I accept that, and I did not mean to be slippery.
GUMMOW J: It.....only in consideration.
KIRBY J: Sometimes it is part of the high art of advocacy to do a little slipping.
MR DURACK: Not a lot of my advocacy has that kind of characterisation applied to it, your Honour.
Your Honour, I mentioned section 49 this morning as being relevant to the conclusion that you could look to circumstances which occurred after the date of the contract if it was necessary to do so to determine the dutiable value. In this case, it is the respondent’s submission that the Commissioner needs to do so in order to establish what the funding amount ultimately came to be because the funding amount is not specified in the agreement and although as events transpired, it happened to be equal to the amount of the dividend, that was not a requirement of the agreement. I am sorry, your Honours, I have covered quite a bit of what my notes had covered before earlier.
Your Honours, this is not a case where a vendor directs that portion of an agreed purchase price should be paid to other parties. The vendors for themselves received the whole of the $114 million but the amount received was in part sale proceeds and, from its point of view, in part a dividend. Now, we accept that might not be conclusive against the appellant’s argument in a case where the company was otherwise unable to pay the dividend, in which case, the promise to fund the payment of the dividend and the funding arrangement itself might have a significant value.
But in the present case, there had been no suggestion that the company was otherwise than solvent, then the value of that promise and the value of the funding cannot have been more than a modest value. To treat the amount of the funding provided by the purchaser to the company as if it represented part payment of the purchase price, which is what my learned friend’s submissions involved, would be to ignore both, in our submission, what is the legal form and the economic substance of the transaction. It would expose the kind of anomaly which – again going back to your Honour Justice Kirby’s point - which taxpayers are quick to seize upon as they did following Curran’s Case when this Court had found that bonus shares have a cost. It was that decision which gave rise to a multitude of Curran schemes and they did not come to an end until that case was finally overruled in John’s Case.
So if there is a tax avoidance question arising out of the matter before the Court, in our submission – and if it has a bearing on the way the Court should view the legislation in this case, then it should tend to be more of a warning against the application to the transaction of an analysis which is not in accordance with its economic substance.
GLEESON CJ: What are the provisions of the income tax legislation that would produce the consequence that if the Commissioner’s argument is correct the cost base to Dick Smith of these shares would be $114 million?
MR DURACK: I am sorry, your Honour, but I do not have the section in front of me. I can give your Honour a note of it.
GLEESON CJ: Thank you.
MR DURACK: But the expression used is, in speaking of the cost base, the amount of the consideration in respect of the acquisition. So that if the High Court has found that the consideration for the purchase of the shares is $114 million it would be surprising if that did not answer the expression “consideration in respect of the acquisition” with the consequences to which I have referred.
GLEESON CJ: Can you give us a note of those provisions then?
MR DURACK: I will, your Honour.
GUMMOW J: Mr Durack, can you just look at section 9(1) of the 1997 Act? I am trying to work out how the Act copes with this distinction between, as it were, conveyance and agreement.
MR DURACK: Yes, not terribly well, I think, your Honour, despite all the effort.
GUMMOW J: No. What is
9(1) doing? It is saying:
The duty charged . . . on a dutiable transaction . . . in section 8(1)(b) –
which is an
agreement –
is to be charged as if [the agreement] were a transfer -
That is what it is saying, is it
not?
MR DURACK: Yes, your Honour.
GUMMOW J: How do you perform that transmutation where at the time of the agreement you cannot entirely quantify what is to be the state of affairs at the time of the transfer, other than through 49, the interim system?
MR DURACK: Your Honour, I do not think it can be done otherwise than through section 49 and I think section 49 is in part there to recognise that it is not always possible to calculate what the full amount of consideration will be from looking at the agreement.
HAYNE J: So, the standard form of sale agreement which said $X plus stock at valuation, for example.
MR DURACK: Yes, your Honour, and if there had been no provision as to funding in this agreement, but there had simply been a provision where the purchase price was calculated 114 million minus the dividend amount, then obviously you would have needed to know what the dividend amount was to know what the purchase price was. That is quite apart from the other aspects of the transaction with which we are concerned. I am sorry, your Honour, but I cannot take your Honour any further with that. There is always a problem when legislation deems something to be what it is not and section 9 though, in the respondent’s submission, must be read to treat the dutiable transaction as a transfer of dutiable property but in accordance with its terms, deemed to have taken place when the agreement is entered into.
Your Honours, in our submission, it is not enough
to say, as Sir Owen Dixon said in Archibald Howie:
that the word “consideration” should receive the wider meaning or operation which belongs to it in conveyancing - - -
GUMMOW J: He did
not have to cope with the section 9 problem because of the nature of the
dealing in Archibald Howie.
MR DURACK: Quite so, your Honour. Saying that the consideration is what moves the transfer begs the question, really, because the question here is, what does move it? In our submission, what moves the transfer is the promise to pay the defined purchase price, that is, the 88 million, and the promise to advantage the vendor by means of funding the company. Again, we say that that will have to be treated, in order to make the legislation work, as non-monetary consideration.
GUMMOW J: And if it is?
MR DURACK: And if it is, in this case, the Commissioner never having put his case on any basis other than that the value of it is the full 25 million, that case should be rejected on the basis that, if it has a value, it would be a modest value only, in these circumstances.
GUMMOW J: A modest value because?
MR DURACK: A modest value simply because of the obvious financial strength of the company, which means that whatever form the funding took, whether by way of loan or whether by way of subscription for share capital or even if the purchaser made a gift to the company, it would increase the value of the shares that it was to receive. Whatever form it took, the detriment suffered by the purchaser, in terms of value, would be relatively modest and the advantage to the vendor would also be relatively modest. Because of the financial strength of the company, it was going to get its dividend anyway.
HAYNE J: I am sorry, what do you mean by that?
MR DURACK: Simply that if the company was worth at least 88 million, then it must have been in a position to pay a dividend of 25 million, even if it had to sell assets first. There might have been some - - -
HAYNE J: That is hypothesising a radically different agreement. Why should we do that?
MR DURACK: I am not suggesting you should do that, your Honour, but this Court has had a submission from the appellant that the consideration is the 25 million. The submission from the respondent is that the consideration is only the advantage, and that, in circumstances like this, and particularly where the appellant has never put the argument in terms of a value of non-monetary consideration, it is sufficient that the respondent has demonstrated that the appellant’s main submission should be rejected.
GLEESON CJ: But the appellant does not suggest an argument here that the value of non-monetary consideration involved in clause 7.7 is $25 million.
MR DURACK: No, it does not, because it does not recognise that that is even an issue.
GLEESON CJ: Well, it does not recognise that that is non-monetary consideration.
MR DURACK: That is so, your Honour.
GLEESON CJ: That is why I asked the question earlier, after lunch. This distinction between monetary consideration and non-monetary consideration, which seems to be new to this legislation but to have its basis in an earlier distinction between money and money’s worth, means exactly what, in a context like the present?
MR DURACK: In a context like the present, it means that there is a difference between a payment of a cash sum as a purchase price, that is, in the words of section 21 - - -
GLEESON CJ: Well, the distinction drawn by section 21 is between an “amount of a monetary consideration” and “the value of a non-monetary consideration”.
MR DURACK: Yes.
GLEESON CJ: Now, if this is to be identified as monetary consideration, your opponent says the amount is $25 million.
MR DURACK: Yes, your Honour.
GLEESON CJ: But if it is to be identified as non-monetary consideration he does not suggest the value is $25 million.
MR DURACK: No, he does not, your Honour.
GLEESON CJ: No one has ever suggested that.
MR DURACK: No, he has not, your Honour.
HAYNE J: But does that analysis focus only upon the position of the purchaser? Is that identifying what the purchaser has given up?
MR DURACK: No it does not, your Honour, because it recognises that the vendor has received two things: The cash amount of $88 million, the defined purchase price in the agreement, and an advantage - the advantage of not having to go to the trouble of collecting its dividend, which might have been no more than asking for it, but - - -
HAYNE J: And it is right to the dividend is derived wholly from the consequences of the obligations undertaken in the agreement?
MR DURACK: Well, with respect, no, your Honour. It is right to the dividend is derived from its rights under the articles of the company as a shareholder. It will be the shareholder, which was responsible for the declaration of the dividend. It is true – and I understand that this troubles your Honour – that the provisions relating to the declaration and payment of the dividend are in the agreement, but those rights spring, as the rights of the purchaser, or the transferee in the Archibald Howie Case, sprang from the contract between the company and the shareholder arising at the time of the allotment, or when the shareholder became registered on the register of shares.
GUMMOW J: Those rights have been burdened in a way by the contract, stipulations controlling their exercise.
MR DURACK: They have, your Honour, but that does not mean that the right to the dividend which is actually received by the vendors does not - - -
GUMMOW J: There is a negative covenant.
MR DURACK: There is.
CALLINAN J: Clause 4.1(d).
MR DURACK: But that negative covenant did not prevent the company – indeed, it expressly excluded any restriction of the right of the company to declare and pay the dividend which it was envisaged would be paid, depending on the amount of the available profits. That right, in our respectful submission, is properly to be described as flowing from the shareholder’s original contract with the company when it became a shareholder, in the same way that in Archibald Howie the transfer of the shares, although it was a simple transfer, expressed to be for an amount of 19s 6d, because that was the amount of the capital reduction of the shares, but the court recognised that the right to what that shareholder got in Archibald Howie flowed from the shareholder’s contract with the company as a shareholder. The transfer of the shares was in effectuation of those rights. In our submission, the dividend which the vendor received in this case is properly to be regarded as flowing from its rights as a shareholder and not from its rights under this agreement.
GUMMOW J: When you say “properly”.
MR DURACK: Principally, if you like, your Honour. To suggest that that right sprang from the agreement between the vendor and an intending purchaser, rather than from the vendor’s rights under its contract with the company, is, in our submission, to mischaracterise the rights and how they came to be effectuated.
GLEESON CJ: There are two different kinds of rights involved, are there not? There is a right as against the company to a dividend and there is the right as between the vendor and the purchaser for the vendor to exercise its power as a shareholder, in between the date of agreement and the date of transfer, to do something that will strip the company of part of its value.
MR DURACK: Yes, that is so, your Honour, but, in a sense, all the contract did was allow the vendor to – was not to impose any restriction on the vendor’s exercise of its rights so far as that dividend was concerned, and they were its rights as a shareholder in a company, not as a party to this agreement.
GLEESON CJ: Dick Smith could not confer upon the shareholder of this company a right to a dividend.
MR DURACK: No. I am sorry, your Honour, I should have put it that way right at the beginning. That – and I thank your Honour – is the point. The contract, the agreement to sell the shares, did not confer the right to this dividend, so that when it was received, it was received as a dividend – or, perhaps more accurately, the amount it received was received in discharge of the debt which became due to it by the company when the dividend was declared.
GUMMOW J: I know that, but we have to work out what the consideration was that moved the transfer of the shares.
MR DURACK: Yes, your Honour, and, in our submission, unless - - -
GUMMOW J: In this telescoped situation where you are deeming something.
MR DURACK: Yes, your Honour. The respondent suggests that unless your Honours examine and read section 21(1)(a) in the way the respondent suggests that it should be read, then it will give rise to the anomalies which I know have given concern to some members of this Bench, which, of course, were the basis for the decisions in the courts below, or at least by the majority in the court below.
It seems to the respondent that what the appellant’s case really comes down to is an assertion that because the vendor walked away with 114 million in circumstances where the purchaser had assisted it to receive it, the whole of the 114 million must be consideration for the transfer. No doubt I am oversimplifying the way my friend puts that argument but, in our respectful submission, it is too simple an argument, which ignores the real nature of the transaction. My friend does not now talk about substance and reality, as I think was mentioned before Mr Justice Gzell at first instance, but, in our submission, both the legal form and the economic reality or substance of this transaction accord with the way the respondent would put the submissions to this Court.
I am sorry, but I should direct your Honour’s attention back to section 21 again and remind your Honours that in paragraph (a) it is the consideration for the dutiable transaction. Now, the dutiable transaction is, of course, the agreement, but it is taken by that alchemy which may not be entirely effective alchemy of section 9 to be a transfer, but it certainly, in this case, should be read as the consideration for the transfer so that it focuses attention on what the consideration is for and the amount of the $88 million, the purchase price as defined in the agreement, is an amount of monetary consideration. The funding of the company is not done for the transfer but in order to confer the advantage on the vendor which will flow from the convenient payment of the dividend.
GUMMOW J: It is for the transfer in the sense that without it there is no contractual obligation to transfer.
MR DURACK: That is true, your Honour.
GUMMOW J: Is that not enough to make it for it?
MR DURACK: Only if the Court is prepared to recognise the anomalies and inconsistencies that would flow from interpreting it in that way. It could be interpreted in that way, your Honour, but if it is then the consequences to which I have adverted and which troubled some of the members of the courts below will flow because you will have duty being payable on an amount of consideration which is higher than the value of the shares in the company, you will have an amount being treated at the one and same time as a loan and also as a purchase price.
GUMMOW J: It may be higher than the value for the shares. It still has a value to it, but just that that particular incident of what was happening is not a dutiable transaction. That might be so, might it not? This dividend funding arrangement was not a separately dutiable transaction, was it?
MR DURACK: No, it is not separately dutiable, but it does not – the funding arrangements - - -
GUMMOW J: They have been yoked together by the parties.
MR DURACK: They have been, but the funding arrangement does not add to the value of what the purchaser receives. If the loan were to be repaid by the company a week after completion so that the purchaser’s position was restored to the position where it had simply paid $88 million for the shares and the loan had been advanced and then repaid by the company then you would see that what the purchaser had acquired were shares that could only have been worth $88 million.
That is not the only anomaly or inconsistency that would flow from interpreting section 21 in the way for which my friend contends. The other anomaly or two anomalies are that the payment of the loan amount will also acquire both the loan and the shares, but the more disturbing aspect of accepting that argument is that any loan to a third party – and I said this before lunch, your Honours, I am just repeating myself – but any loan to a third party made to fulfil a promise in a purchase agreement, no matter what the terms or circumstances of the loan, will be part of the purchase consideration and hence part of the dutiable value if this argument is accepted.
Although I would have to concede, your Honour, that section 21(1)(a) could be read in the way your Honour suggests, the consideration or the consequences of reading it in that way would incline this Court not to do so. Your Honours, I think that if I were to go on, I would be repeating myself.
GLEESON CJ:
All right, thank you, Mr Durack. Yes, Mr Coles.
MR
COLES: The appellant takes issue with a submission the respondent made to
the effect that the obligation to fund was only to fund to the
extent, I think
the expression was, that the company may only have been able to discharge the
debt arising from the declaration of
the dividend out of the pre-completion
assets. That, in our respectful submission, does not seem to accord with the
agreement as
we would understand it. Your Honours will recall that the
expression “dividend amount” is, firstly, all of the retained
profits of the company, and if your Honours then would
look - - -
GLEESON CJ: The declaration of dividend was to take place 24 hours before completion. Is that right?
MR COLES: Yes, that is right, and your Honour
correctly draws my attention to the clause which I wanted to point to. If
your Honour looks at
4.4(b):
The First Vendor - - -
GUMMOW J:
Page?
MR COLES: I am sorry, page 19, if
your Honours please. Your Honours will see 4.4(a):
The parties agree that prior to Completion, the Vendors shall ensure that the Company shall declare a dividend –
4.4(b) requires
that:
The First Vendor –
in effect, on behalf of both the vendors, we would suggest
–
shall notify the Purchaser of:
(i) the amount of the Dividend Amount - - -
GLEESON CJ: Now, when it declared a dividend on the day prior to completion, did it then thereby incur a liability to the vendors? The company, I mean.
MR COLES: As a matter of contract law, it did, because declaring a dividend creates a debt due from the company to the shareholder.
GLEESON CJ: So if you drew up a balance sheet of the company on the date of completion, you would have various assets and various liabilities, and one of the liabilities would be a debt to the vendor company of $25 million. Is that right?
MR COLES: Just so, yes. The submission we – I am sorry, I may have interrupted your Honour?
GLEESON CJ: When you came to value the shares in the company on the date of completion, you could not disregard the liability of $25 million, could you?
MR COLES: If the question in issue was, “What was the value determined by usual means of the shares in the company?”, that is so. We emphasise, of course, your Honour, no concern attaches in this case to anybody forming a value on anything, because the matter has proceeded on the basis of what is the identifiable consideration for the transfer.
If I could just shortly finish the point I was seeking to respond upon, the point is that the obligation under 4.4(b)(i) is on the part of the first vendor to notify the purchaser of the amount of the dividend amount, that is to say, the amount of all retained earnings. There is, in other words, no median or midway course that supposes that the vendor, or one of them on behalf of all of them, is going to proffer a figure which is otherwise than the totality of the retained earnings up to the relevant date.
In other words, it is not being suggested in the content of the agreement that there is some sum, for example, that amount of money which, when aggregated with the spare cash floating around in the bank, will be necessary to make up the dividend after taking into account the free assets of the company whose shares are attracting the dividend. Indeed, to so envisage it would, in our submission, involve a contravention of 4.1, particularly – well, certainly, (d). It would constitute a disposal of assets otherwise, in effect, than trading, I suppose.
The main point we make in this carefully drawn up and elaborate agreement no provision is made for the vendors to notify the purchaser of any other amount other than the totality of the retained earnings and not some lesser sum which when aggregated to cash in hand, as it were, in the company’s account would go to make up the difference. In our submission it is therefore not appropriate to say that the ascertainment of the totality of the funding is left at large until some future date. There is a time at which the amount is to be notified but it will be an amount which will be capable of ascertainment.
GUMMOW J: Yes, but it could not be ascertained at the date of the agreement.
MR COLES: No, perhaps because, it has to be fairly said, the trading fortunes of the company might allow a dividend, perhaps.
GUMMOW J: How does one join together 8(1)(b)(i), which you took us to, 9(1) of the Act and 21(1) when you are looking for, and you say we find, an amount of monetary consideration? There is no question, I think, on your case, of value anything.
MR COLES: No, none at all. The reality is, of course, by the time the - - -
GUMMOW J: But we are taxing this agreement.
MR COLES: Yes, but the relevant integers are known by the time the assessment process comes about. The material is presented to the Commission for assessment at a time when it transpires that the – and your Honours can see this in the earlier material in the appeal book – the actual sums are known at the time of the assessment process so that, in effect, events have demonstrated what the position came to be.
GUMMOW J: I did not quite follow that.
HAYNE J: What period elapsed between the share acquisition agreement and completion?
MR COLES: Unfortunately, your Honour, I do not think the evidence makes that wholly plain. There is a certain – if your Honours have the chronology at the back of the submissions it is not - - -
HAYNE J: It was so much more fun doing these things in the dark. As to the facts, Mr Coles - - -
MR COLES: One of the notable peculiarities of this case, your Honour, that there was nowhere in evidence the date of the completion of the agreement.
GUMMOW J: It all seems a bit hush-hush.
MR COLES: I can neither apologise for nor explain that factual omission, your Honours. That just was not a fact that the person seeking assessment of the instrument - - -
GUMMOW J: Has the agreement got a date on it?
MR COLES: The agreement is 10 April 2001. The next date we know in the facts is that on 10 July 2001 it was submitted for assessment and stamping so that the point being that by the time the process of working out what the monetary consideration for the agreement - - -
GUMMOW J: What was submitted though, the agreement, not a transfer?
MR COLES: The agreement and, I think, the transfers with it.
GUMMOW J: As well.
MR COLES: I think they all came in together.
GUMMOW J: Yes, that would make sense.
GLEESON CJ: Are you allowed to guess that something happened before 30 June?
MR COLES: I rather think not, unfortunately, your Honour, although it is maybe a surmise that it did.
GLEESON CJ: Or maybe just after 30 June?
HAYNE J: All those warranties about franking credits and the like.
MR COLES: Yes, indeed. There is a basis for a supposition.
HAYNE J: All those hours of work by associates.
MR COLES: But the point being, of course, when the time came, that is to say, when the documents were submitted to assessment, of course the consideration for the dutiable transaction - - -
GUMMOW J: That is not really an answer, if I may say so. That is an answer on this case. It is not an answer on how the Act would work. Assume they rushed up there the day after they executed it to get it stamped.
MR COLES: Well, if one posed the question, what is the – in effect the question then becomes, was the funding obligation, or was the supply of the funding, if one is looking at that part of it, consideration - - -
GUMMOW J: Well, the promise to supply it would have to be.
MR COLES: The promise to supply, was that monetary consideration. If it was, then the only question that arises is what amount was it and that is a bare bones and fairly uncontentious fact. If the parties have chosen to do their bargain in terms of a consideration which is monetary, one looks at no more than the amount. If the parties have chosen to cast the consideration in terms of a non-monetary consideration, then one has to go a step further and look for the value. Again, we would invoke the support of Davis Investments for this line of reasoning even if the words of the subsection did not support it in any event. Where the consideration is a monetary consideration then one looks to the amount that it can be discerned the parties settled upon.
Now, an obligation to fund was nonetheless a monetary consideration, in our respectful submission, because involving the payment of a sum of money, namely, the amount of all of the retained earnings of the company which were to be the subject of the notification within a day or so of completion.
GLEESON CJ: What do you say that word “fund” means?
MR COLES: Supplying money.
GLEESON CJ: To whom?
MR COLES: To the company, to which we say, your Honour, of course, that when it said this was a sale of shares ex dividend, in effect, that was, on our argument, your Honours, only so because the purchaser performed the payment obligation or the funding obligation that made or allowed or permitted that to happen so that your Honour is right when your Honour says to my learned friend Dick Smith could not confer a right to a dividend on the vendors, but on the content of the agreement, what Dick Smith could and did confer was a means whereby the company could make the payment and, therefore, of course, the shares became shares which when transferred were shares upon which a dividend had been paid because, and in our submission, only because the purchaser had performed its payment obligation and enabled the company to have the means to allow that to happen, and that is a payment - - -
GLEESON CJ: It was a promise to supply money to InterTAN Australia Ltd.
MR COLES: Yes. A promise to the vendor to supply money to InterTAN Australia.
GLEESON CJ: Yes, and the question of on what terms and conditions, and even by what means, was left open.
MR COLES: Absolutely. May we go on to add, your Honour, it is said against us that but for that consideration, for the payment of that money, for that funding, in the events that happened, at least – whether one can take them into account or not is another issue – that resulted in there being another asset, that is to say, a debt, available to or as an asset of the purchaser, being a debt by InterTAN to Dick Smith.
Your Honours, our short response to that, if I may say so, is this. A payment, if truly a consideration, is nonetheless consideration because the payer receives something or some things of value for it. Indeed, one only has to state the proposition to recognise its obviousness. The general and expected result of the payment of most considerations is the accrual to the payer of something of value, if it turns out, having regard to the nature of the transaction, the payer obtained either directly or indirectly other items of value – in this case perhaps because of the way the transaction was implemented, also a debt, which it could call up if it wanted to, in addition to the shares which were transferred to it.
That simply describes what it received by way of quid pro quo for the consideration it paid, but it cannot be a negation of the notion of the consideration that the person who paid it received something of advantage in consequence of the payment. That is the very idea of consideration, in our respectful submission.
GLEESON CJ: Now, if that debt of 25 million is repaid tomorrow, and the day after tomorrow Dick Smith sells its shares in InterTAN Australia for $113 million, will it be liable to pay capital gains tax?
MR COLES: I do not know the answer to that, your Honour. I would be very hesitant to offer your Honours a considered or responsible view about that question.
Can I say this, your Honours, because it does really bring me to the last point, the last but one observation I wanted to make about what my learned friend said, in particular, in relation to what he described to your Honours as, in effect, one of the anomalies. It is said by our learned friends that this transaction must mean that if by the mechanism implementing the transaction the purchaser, Dick Smith, obtained a debt of 25 million, it is then said that the shares therefore cannot have been worth more than $88 million. We do not accept that proposition and we say, your Honours, whether the shares were worth $88 million or some other figure is a matter of valuation appraisal, not a matter of, in effect, arithmetic of the kind our learned friend says.
That is because, in our respectful submission, firstly, the Act, as we have said, charges duty on the actual consideration, and, that is to say, regardless of any question of value at all, or regardless of, for example, whether the unencumbered value of the dutiable property may be very considerably less than that which is identified as the amount of monetary consideration in question.
Secondly, we say that there simply is no evidence in this case that the unencumbered value of the shares on 10 April 2001 or whatever – well, that is the date of agreement – there is simply no evidence, whether or not one takes into account the availability, if that is the way it was done, of the debt payable by InterTAN to Dick Smith, no evidence that $114 million was not – after even making allowance for the creation, as it turned out, of that debt – $114 million or any less or other sum. In other words, one - - -
HAYNE J: There is a point in there about Spencer’s Case.
MR COLES: Yes, indeed, and there is a question of - - -
HAYNE J: Let me finish, Mr Coles. The point being that the vendor under this transaction received in hand 114 million. The vendor was in a position where the vendor could control declaration of dividend. The vendor receiving 114 million, did the vendor receive more than Spencer’s Case would suggest was the market value for the shares?
MR COLES: Again, it is a complex question.
HAYNE J: I thought it was startlingly simple, Mr Coles, but if you wish to complicate it, do.
MR COLES: Not unnecessarily so, your Honour. The more limited point we were seeking to make was merely that one cannot say without knowing, for example, what premium value that Dick Smith might have attached to the acquisition of shares, that they were necessarily worth less than $114 million merely because their resolve on implementing the transaction caused, because it was done as a loan, the accrual to the purchaser of another asset in the form of that chose in action from the company itself. One could contemplate the concepts that have been discussed without really coming necessarily to any concluded answer about it. In our submission, the area of inquiry is more limited. One is really looking from first to last at what was the consideration. If it was a monetary consideration, what was its amount?
There were two other small matters I wanted to mention, if your Honours please. One was by reference to - - -
GUMMOW J: The significance of 30 June is apparent from the conditions in 2.3 on page 17. There was a right of termination if conditions were not satisfied by 30 June.
MR COLES: Yes, indeed. In 2.3(c). Yes, your Honour is right. The only observation we wished to make about the reference that was made to section 49 of the Act, we would suggest that section 49 does – although it enables the process that it describes to be undertaken, it does not itself authorise determining the consideration at any date other than the – in this case the 10 April date – that is the date of the agreement.
CALLINAN J: You determine the consequences by looking to what the agreement provides for and how the agreement will be carried out. You do not disregard the future consequences.
MR COLES: No. In the limited context, your Honour, of section 49, because section 49 - - -
CALLINAN J: You use section 49 to come back with hindsight to see exactly what did happen.
MR COLES: Yes. In other words section 49 is premised on the Chief Commissioner having a certain view of things. Now, of course, necessarily after the event the material is presented to him by the taxpayer for assessment, well, of course, he does not need to avail himself – he is under no compulsion, of course, to activate the processes of section 49, it is there as a facility rather than an obligation.
So that, really, in our respectful submission, nothing particularly turns upon section 49, there being no occasion – in the events that happened in this case – for the Chief Commissioner to take that view of things and, in any event, there being nothing, in our submission, in section 49 which authorises or subtracts from the apparent requirement for the consideration to be determined as at the date of the agreement itself.
CALLINAN J: But on the respondent’s case, would not the Commissioner have to invoke section 49? Because the respondent says you look at the way in which the agreement has to be carried out and what the consequences will be. For example, you cannot ascertain what the retained profits were and the dividend was until it is declared, and that is 24 hours before completion and a long time after 10 April, when it is made. So on the respondent’s case, it would be unreasonable for the Commissioner not to be using section 49.
MR COLES: Well, except that – I can only emphasise - - -
CALLINAN J: On your case, you do not look at it. You just say, “114 million, game, set and match”. But on the respondent’s case, that is not so.
MR COLES: But there was always to be paid a purchase price of $114 million, subtracted from by whatever may have been the amount of the retained – that is right.
CALLINAN J: That is the respondent’s case, but your case is: $114 million, that is the amount in the agreement, full stop.
MR COLES: Yes, your Honour. On our case, one never has occasion to resort to any process of estimate.
GUMMOW J: Why is that?
MR COLES: Because you know that the amount of money that is going to be paid will always add up to $114 million.
GUMMOW J: Why?
MR COLES: It cannot be any other sum. What you do not know is how as between what is described contractually as the purchase price – that is to say, 114 million less the dividend amount – you do not know how that will be internally allocated, but you always know that the amount of the monetary - - -
GUMMOW J: So you are saying there is a fluctuation between the two components, but the entirety is fixed?
MR COLES: There is a fluctuation between integers which necessarily produces the one aggregate sum, yes.
GLEESON CJ: Mr Coles, just coming back to that general matter that Justice Callinan raised, I asked Mr Durack and he put one particular point of view about the way 21(1)(b) works. I realise this is not a case about 21(1)(b). He says that where there is an agreement to transfer at a future date property, real estate, and it is a term of the agreement that something will happen between the date of the contract and the date of the transfer that will necessarily reduce the value of the property, you value the property, for duty purposes, as at the date of the agreement, but you take account of the terms of the agreement in arriving at the value. Do you agree with that?
MR COLES: As a valuation proposition, yes, I do, your Honour, if one is looking at value.
GLEESON CJ: As a proposition relating to valuation for assessment of duty.
MR COLES: Well, if you said to the valuer, “What is the value of the dutiable property, being a contract under which the vendor is to harvest a crop?” – in other words, the condition of the property, although it has the crop on it, it may well be that the valuer comes to the conclusion that he has to make a substantial – it might not be 100 per cent, because other things might happen, the contract might go off on something, but, in our respectful submission, it just simply falls to be absorbed in the processes which attend valuers.
GLEESON CJ: So when your client values Blackacre for duty purposes, for the purpose of assessing duty on an agreement to sell Blackacre, your client takes into account the fact that it is a term of sale that the vendor may harvest the crop before completion?
MR COLES: I do not know whether that is so, your Honour. I was really answering your Honour’s question in the sense of what, I suppose, a valuer would do if he was asked to do that.
GLEESON CJ: What do you say is the true construction of section 21(1)(b)?
MR COLES: The true and literal construction is that if the unencumbered value of the dutiable property at the date of transfer is the property with the crop on it, in that instance - - -
GLEESON CJ: Let me make the question clear. There is an agreement to sell Blackacre, which, at the date of the agreement, has a crop of wheat on it. It is a term of the agreement that between the date of contract and the date of completion, the vendor may harvest the crop of wheat.
MR COLES: Yes.
GLEESON CJ: When you come to work out the unencumbered value of the dutiable property for the purpose of section 21(1)(b), do you take account, in favour of the purchaser who is liable to pay stamp duty, that the crop will have gone by the time of completion?
MR COLES: One would be inclined to think that one probably would, your Honour, I must say.
CALLINAN J: It is accepted from the sale. It does not pass.
MR COLES: It seems to be – because the purchaser is never going to have the crop. He is only ever going to have the property shorn of the crop, pursuant to the express arrangements of the parties.
CALLINAN J: And why would you not ascertain consideration under 21(a) in the same way, by taking account of the provisions of the contract, which is to say the financial consequences to the parties of the performance of the contract by both sides.
MR COLES: I think there are two answers I put to that. One is that generally speaking, in the usual course where, for example, there may be things that happen which cause the property to increase or decrease after the contract is entered into, the value of the dutiable property for duty purposes remains the value at the contract date, even though, for example, the property may increase by the transfer date. The Commissioner is not entitled to say, “Well, this property has gone up in value after the contract. Therefore, I’m going to charge duty at the value it had on the contract date.” Indeed, apart from anything else, that is probably supported by the decision of this Court in – and I will just give your Honours the reference – The Crown v The Bullfinch Proprietary (WA) Limited [1912] HCA 71; (1912) 15 CLR 443.
The second answer, or the second suggested response we would make is that it is our submission that if one finds a dutiable transaction for which there is a monetary consideration, then one is neither authorised nor required to go beyond any deeper inquiry than what is that amount of that monetary consideration.
CALLINAN J: Except, as you acknowledged to the Chief Justice earlier, “or” should be read as “and”.
MR COLES: I think my learned friend certainly agrees with that, and I certainly agree with it also. That is obviously in a case where you have both elements.
CALLINAN J: Why can you not regard this transaction as, for example, consisting of both elements, the monetary consideration being 88 million approximately and the value of the non-monetary consideration being the value of an assurance that the dividend will be funded 24 hours before the completion. Not the dividend itself but an assurance that it will be funded.
MR COLES: Our answer to that is really that one always knows that whatever it is, the total of the two amounts, on our submission, the consideration being the total is always going to be $114 million.
CALLINAN J: Well, the second is not though, it is only an assurance. You get the 28 million as a dividend to which you are entitled, but as a result of the dutiable transaction you get an assurance that it will be funded 24 hours before completion date and that is a non-monetary consideration, as Mr Durack would submit not worth very much.
MR COLES: Well, he says that, your Honour, but our submission is that we have always known from the moment the agreement was made that the amount of monetary consideration passing was a sum certain to be made up of the respective integers and one is not – when one is assessing the duty on the dutiable transaction, one does not need to segment or divide up the consideration, one can see - - -
CALLINAN J: You do not get the 25 million from Mr Durack’s client.
MR COLES: The vendor does not.
CALLINAN J: No, you get it from InterTAN.
MR COLES: The vendor gets the money – well, directly that is so, indirectly it is made available because the purchaser necessarily funded - - -
CALLINAN J: It is assured by the respondent, but you do not get it from the respondent.
MR COLES: That, in our submission, is not really to the point because it is not necessary for the purchaser to be the sole or - - -
CALLINAN J: I know it is not, but we have to ascertain the consideration here and that does not mean just looking at one figure or one clause in the agreement. It means looking at the whole agreement, does it not?
MR COLES: I agree with that and I say when you ask what is that which, again to use the expression, “moved the vendor to transfer the shares”, it was the receipt by it by the various means described in the agreement of the global sum of $114 million and in that view of the case, as straightforward as that. One does not, indeed, ever get to an exercise of valuing separately the promise to fund and then making a credit against it of the value of some other consideration for the performance of that promise. One simply says, what is the value of the money passing and it turns out in this particular case, although it need not be universally so, it turns out symmetrically that what the purchaser paid out happened to be what the vendor required and - - -
CALLINAN J: That seems to me to lead to a possible disconformity and it may be that the Act provides for that, but a possible disconformity in the approach that you adopt to each of the subsections, (a) and (b), because you acknowledge that for the purposes of (b), you look at all of the terms of the contract.
HAYNE J: That must be where it is (a) or (b), whichever is the greater.
MR COLES: Indeed, there must be a disconformity because the section proceeds on the premise that - - -
CALLINAN J: Yes, but I said in approach, I did not say in consequence. I am talking about approach. You cannot ignore all of the terms of the contract for the ascertainment of consideration, whether it is simply monetary or it is monetary or non-monetary or whether it is both.
MR COLES: With respect, I think your Honour and I are in a furious agreement about that. What we wish to say is – and again, I suppose at the end of the day, Davis Investments becomes on this limb of the argument our best authority. We say where the parties have, in effect, chosen to cast their bargain in the form of a monetary consideration, as we submit on the true construction of the agreement, they have, then it is that monetary consideration that one takes into account for duty purposes. I think I have put submissions directed to that end already.
My learned friend has indicated to me, your Honour, he has a further matter which he believes will be of assistance to the Court and I certainly have no objection to his imparting that to the Court which he will undoubtedly do so in a more intelligible way than I think I could do reading his note.
GLEESON CJ: Thank you, Mr Coles.
MR DURACK:
I am sorry, your Honour, I merely wanted to tell the Court that the section
dealing with the amount of consideration in the capital
gains tax cost base is
section 110.25 of the 1997 Income Tax Assessment
Act.
KIRBY J: Is that read with any provisions in the 1936 Act, given that the 1997 Act is this curious - - -
MR
DURACK: I think I can say not in any matter that is relevant to this
issue, your Honour.
GLEESON CJ: Thank you, Mr Durack.
We will reserve our decision in this matter and we will adjourn until
10 o’clock tomorrow morning.
AT 3.47 PM THE MATTER
WAS ADJOURNED
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