Between: Davis Investments Pty Ltd
And: Commissioner of Stamp Duties (NSW)

Judges: Dixon CJ
McTiernan J
Webb J
Kitto J

Taylor J

Subject References:
Corporations
Share transfer
Consideration
Taxation and Revenue

Legislative References:
Stamp Duties Act 1920 (NSW) - s 41; s 66

SYDNEY

Judgment by:
Taylor J

The instrument which calls for our consideration in this case is an agreement whereby D. Davis & Co  Pty  Ltd  (hereinafter referred to as the company) undertook to sell to the appellant fifty-seven shares in three other companies, together with certain specified furniture fittings and motor vehicles.  The aggregate purchase price for the shares was expressed to be PD57 and, for the other items, PD1,914.  At the time of the agreement the appellant was the holder of the whole of the share capital in the company which had been issued, namely, 15,000 ordinary shares of PD1 each.  It had, in fact, acquired these shares by purchase immediately prior to the making of the agreement under consideration.  

Section 41 (1) of the Stamp  Duties Act 1920-1949 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 to be paid by the purchaser or person to whom the property is agreed to be conveyed as if it were a conveyance of the property agreed to be sold or conveyed and shall be stamped accordingly.  Pursuant to this section the respondent assessed the duty payable upon the agreement as if it were a "conveyance made upon a bona fide consideration in money or money's worth of less than the unencumbered value of the property conveyed" (s. 66 (3A)).  No question arises with respect to the sale of the chattels referred to, the only question being whether, having regard to the provisions of s. 41 (1), the amount of ad valorem duty chargeable is to be determined by reference to the provisions of the later section.  The critical question is, of course, whether the sale was made upon a consideration in money or money's worth of less than the unencumbered value of the subject property agreed to be sold.  As already appears the respondent, for the purposes of his assessment, resolved this question adversely to the appellant and upon a subsequent appeal to the Supreme Court the same view was taken.  This appeal is now brought from the order disposing  of the appeal to that court.  

For the purposes of the proceedings it was agreed by the parties that the fifty-seven shares in question were worth PD54,382 and, if there were nothing more in the case, it might readily be concluded that this further appeal should also be dismissed.  But it is contended by the appellant that the circumstances related in the case stated establish that consideration, additional to that expressed in the agreement, was provided by the appellant.  The argument, which commended itself to Kitto J., is expressed and discussed in his Honour's reasons and it is unnecessary for me to do more than briefly state the various steps which appear to be involved in it.  The argument assumes the existence in the hands of the company of distributable profits amounting to, or almost to, the value of the shares.  Then it is said that the appellant, as the sole shareholder in the company, had a personal right or interest in those profits and that it was in a position, if it so desired, to secure to itself payment of the amount of the distributable profits by way of dividend.  The next step is that by the sale the appellant's right or interest was discharged or satisfied or, perhaps, extinguished, and that, in this circumstance, is to be found full consideration in money's worth for the sale or conveyance.  

The argument of the appellant was founded substantially upon observations made in Archibald Howie Pty  Ltd  v  Commissioner of Stamp Duties (N.S.W.) ^[F22] in the course of considering whether certain transfers of shares made by that appellant company to its shareholders were dutiable under s. 66 (3A).  But it is of importance to notice that these transfers had been made pursuant to a properly authorized scheme for the reduction of capital and in discharge or satisfaction of the rights of the shareholders thereby created in accordance with the appellant company's articles.  The Court was unanimously of the opinion that the consideration for the transfers could not be said to be less, in money or money's worth, than the unencumbered value of the shares transferred and considered reasons were delivered by both Dixon J. (as he then was) and Williams J.  Both sets of reasons disclose that the decision rested upon an examination of the nature of the rights created by the issue of a share in the capital of a company and upon the conclusion that a distribution of assets upon a reduction of capital is directly and expressly in satisfaction, pro tanto, of the rights of the shareholders as such.  And since the distribution in that case was in partial satisfaction of rights for which full value was given at the time of their creation, that is, upon the issue of the shares themselves, there could be no ground for saying that the distribution was upon a consideration in money or money's worth of less than the unencumbered value of the property conveyed.  For himself, however, Dixon J. added what might be thought to be another ground for reaching the same conclusion though his Honour observed that the two grounds might "be, perhaps, two sides of the same thing".  It is upon the line of reasoning apparent in the observations concerning the second ground that the appellant primarily based its present contentions and it is as well that the relevant passage should be quoted in full.  The passage is as follows:

"(2)

From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real.  The shareholder contributes the amount of the share to the capital of the company.  This contribution measures his right to any return of capital which the company may make either as a going concern or in winding up.  Subject to any regulation the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets.  Thus when the amount of the issued shares in the case of this company was reduced from PD1 each to 6d.  each, it meant that if any of the unissued PD1 shares were afterwards issued the proportion in which the respective holders of a share of the former issue and of one of the subsequent issue would in a winding up share in any funds exceeding the share capital would be as 1 is to 40.  This is but an illustration of the significance of the division of the share capital into shares, shares now of a different denomination.  The truth is, however, that the return of 19s. 6d.  of the amount paid up is the discharge pro tanto of a claim of the shareholder upon the assets of the company". ^[F23]

It is, it seems to me, unnecessary to do more than read this passage to perceive a vital distinction between that case and the present case.  In Howie's Case ^[F24] the Court was dealing with a set of facts which disclosed that the transfers had been made by way of return of capital to the shareholders.  Hence it is said "that the return ... is the discharge, pro tanto, of a claim of the shareholder upon the assets of the company". ^[F25]   But in the present case the sale, or conveyance, was not made in discharge of any such claim or, indeed, of any claim by the appellant, as a shareholder, upon the assets of the company; on the contrary the right of the appellant to receive the shares arose under the agreement for sale and not otherwise.  It is, no doubt, true that after the sale had been made the interest of the appellant, as the sole shareholder, became less valuable than previously, but this was not because it had participated in any distribution of the company's assets but because the parties had selected a transaction, both in form and substance, which resulted in the company exchanging some part of its assets for an agreed consideration of lesser value.  

Against this view, it is said, the expression "consideration", as used in s. 66 (3A), "should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts" but as Dixon J. pointed out after making this observation, "The difference is perhaps not very material because the consideration must be in money or money's worth". ^[F26]   But if there be a distinction of any significance in cases such as the present it is, according to the appellant's argument, necessary to have regard to "the money or value passing which moves the conveyance or transfer".  Of course in Howie's Case ^[F27] the Court had before it instruments which were, in fact, conveyances (see s. 65).  In the present case, however, the application of these observations involves the notional transmutation of the agreement into a conveyance and then requires us to attribute to the dealing a consideration which is foreign to that discoverable in the actual transaction.  I doubt whether s. 41 (1) requires us to invoke such processes but I am content to deal with this appeal on the assumption that the agreement should be regarded as a conveyance, that is to say, a conveyance in effectuation of the contractual rights created by the agreement.  

On this assumption the argument then asserts that it is not only perceivable but obvious that the consideration expressed in the agreement was but nominal, that the sale was merely made as a means of "liberating" assets of the company to the shareholder and that upon such "liberation" the interests of the appellant, as shareholder, in the assets of the company were pro tanto discharged or extinguished.  Therefore, it is said, the consideration which moved the sale, or conveyance, must be taken to be the surrender of some portion of the appellant's rights or interests as shareholder.  

The first thing that may be said about this argument is that although, immediately before the sale, the appellant may have been, by virtue of its shareholding, in a position to secure a distribution of the company's assets, it had no enforceable right to the fifty-seven shares in question.  They were in fact and in law the property of the company which was a distinct and separate entity and, subject to intervention by the appellant as the sole shareholder, entitled to make such legitimate use of its assets for the purposes of its business as it pleased.  In the second place, it is impossible to say that the transaction evidenced by the agreement was a mere step in the effectuation of the rights in personam with which the appellant, as such shareholder, was invested.  On the contrary, it created in the appellant a new and independent right to the shares in question.  The case is, of course, before us on the assumption that if the appellant desired to secure the fifty-seven shares in question it was in a position to determine the manner of their acquisition.  That is to say, it might have ensured that it should receive them either by way of dividend or in satisfaction of some new and independent obligation deliberately created.  But it seems clear that it chose the latter course.  And, indeed, on the assumption that the company held valuable assets representing distributable profits, it may have had good reason for preferring the acquisition to be by a purchase at an undervalue rather than by way of dividend since, if the assets were no longer required for the purposes of the company's business, it made little difference, except as regards the incidence of income tax, whether the company distributed its assets or sold them to the appellant for what may be regarded as a nominal sum.  But to say this is far from saying that the consideration for the sale was the extinction of any of the appellant's rights as shareholder, or, the satisfaction or discharge of any of those rights.

It is, in my view, erroneous to regard the sale as a conveyance in satisfaction or discharge of any of the rights of the appellant as shareholder or as a dealing which extinguished any of those rights.  As I have already said, the agreement created an independent right to the shares and if it is to be regarded as a conveyance it must be taken to be a conveyance upon the consideration expressed for the creation of that right.  Further, as a conveyance, it must be taken to be in satisfaction and discharge of the right created by the agreement itself.  No doubt the appellant's interest, as shareholder suffered a diminution in value, but this was just as much a consequence of the sale at an undervalue as if the sale had been made to a third party with a consequent reduction in the balance of the company's assets over its liabilities.  

In my view, the respondent correctly assessed the duty payable upon the agreement under s. 66 (3A) and the appeal should be dismissed.