St. Helens Farm (A.C.T.) Pty. Limited v. Federal Commissioner of Taxation.

Judges:
Sheppard J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 5 April 1979.

Sheppard J.: These are five appeals against the disallowance by the Commissioner of Taxation of objections by the appellants to assessments of gift duty. The appeals are brought pursuant to the provisions of sec. 31 of the Gift Duty Assessment Act 1941 (hereinafter called the Act). The appellants requested the Commissioner to treat their objections as appeals and to forward them to the High Court. The matters were listed in the High Court but were remitted to this Court pursuant to the provisions of sec. 44 of the Judiciary Act 1903. Because the appeals involve some similar questions I acceded to an application that they be heard at the same time. Notwithstanding that course, and the fact that there are some similar questions involved, I have decided that it is appropriate to deal in this judgment with each appeal separately. If my decision on a question in one appeal decides that question for another appeal, it will be a simple matter to state that in the course of giving judgment in that appeal.

The parties were able to reach a large measure of agreement. Statements of agreed facts were filed and to these were appended a number of documents which were admitted by consent. The only oral evidence called was valuation evidence. Mr. Bagnall, Mr. Goddard and Mr. Young gave valuation evidence for the appellants and Mr. Laing and Mr. Robinson gave such evidence for the Commissioner. Each of these witnesses swore an affidavit upon which he was extensively cross-examined. Although the witnesses were not in agreement as to the value of shares in a number of companies, and it will be necessary for me, having decided matters of legal principle, to make up my mind which evidence I prefer, that choice will be made purely on grounds based upon my view of the proper approach to be adopted. Each of the witnesses gave his evidence impressively and did his best in my opinion to assist the Court in reaching conclusions in what are undoubtedly very difficult matters. There is more similarity between the cases of Ceedon Pty. Limited, Gwynedd Pty. Limited, Lucinda Investments Pty. Limited and Q.A.W. Pty. Limited than there is between any of those cases and St Helens Farm (A.C.T.) Pty. Limited. Nevertheless I propose to follow the same order as the parties and to deal with St. Helens Farm

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(A.C.T.) Pty. Limited (hereinafter referred to as St. Helens) first.

St. Helens Farm (A.C.T.) Pty. Ltd.

St. Helens was incorporated on 9th February, 1968, under the laws of the Australian Capital Territory. It had a capital of $10,000 divided into 10,000 shares of $1 each. On 12th February, 1968, one Ellen Federay Palfreyman became the holder of one share in the capital of the company by transfer to her from one of the subscribers to the Memorandum of Association. The other subscriber's share was transferred to Faris Addison Palfreyman. He held his share upon trust for Mrs. Palfreyman.

At a meeting of the company's directors held on 2nd March, 1968, it was resolved to borrow from Mrs. Palfreyman the sum of $80,000. Such loan was to be repayable on demand and to be without interest. Immediately after the meeting Mrs. Palfreyman delivered her cheque for $80,000 to the company. Her loan account was credited with that sum.

At a further meeting of directors held on 5th March, 1968, it was decided to borrow from Mrs. Palfreyman the further sum of $270,000 on similar terms and conditions to those upon which the sum of $80,000 had been borrowed. The amount was paid by Mrs. Palfreyman to the company. Also at the meeting of directors held on 5th March, 1968, it was resolved to purchase from Mrs. Palfreyman 138,000 one percent non-cumulative preference shares in the capital of an associated company, St Helens Estates Pty. Limited, for the price of $270,107. Completion of the purchase took place immediately following the meeting by the company handing to Mrs. Palfreyman its cheque in the sum of $270,107 and by Mrs. Palfreyman handing to the company a transfer in respect of the shares together with the relevant share certificates.

A further meeting of the directors of the company was held on 15th March, 1968. At that meeting the company resolved to borrow from Mrs. Palfreyman the further sum of $1,244,000 also to be repaid on demand and without interest. Immediately after the meeting Mrs. Palfreyman delivered to the company her cheque in the sum of $1,244,000 and her current account with the company was credited accordingly.

At the same meeting the company resolved to purchase from Mrs. Palfreyman 67,409 ordinary shares in the capital of The Broken Hill Proprietary Company Limited for the price of $1,193,139.30. Completion of the transaction took place immediately following the meeting. The company delivered its cheque to Mrs. Palfreyman in the required sum and Mrs. Palfreyman delivered to the company a transfer of the shares together with the share certificates.

On 24th June, 1968, at 11.30 a.m. an extraordinary general meeting of the members of the company was held. It was there resolved that the capital of the company be increased to $20,000 by the creation of 10,000 new shares of $1 each. At a directors' meeting held at 2.25 p.m. the following day, it was reported that Mrs. Palfreyman had called for payment to her of the sum of $1,200,000, portion of the loan moneys placed in her name with the company. A cheque for that amount was drawn in her favour. It was then resolved that 12,000 ordinary shares of $1 each in the capital of the company be allotted to Mrs. Palfreyman at a premium of $99 per share. She was entered in the Registrar of Members as the holder of such shares as from 25th June, 1968. She paid for the shares by delivering to the company a cheque in the sum of $1,200,000.

At 2.35 p.m. on 25th June, 1968 a further extraordinary general meeting of the members of the company was convened. All members of the company were present and agreed to waive the notice of the meeting to which they were entitled. At that meeting it was unanimously resolved that each of the 12,002 shares already issued in the capital of the company be converted into preference shares of $1 each. The rights, privileges and conditions attaching to the shares were to be as follows:

``(a) the said shares shall not confer any right to vote at any general meeting of the company. The holders thereof shall be entitled to notice of and to attend any general meeting of the company.

(b) the said shares shall carry the right to a fixed preference dividend at the rate of 4% per annum on the capital paid up thereon respectively but not including any premium in respect thereof.

(c) the said shares shall rank in a winding up and on a reduction of capital both as regards capital and dividend up to the commencement of the winding up in priority to all other shares in the capital of the company.

(d) the said shares shall not carry the right to any further participation in the profits or assets of the company or in any amount paid by way of premium upon any share subscribed for in the company.''

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At the meeting it was also resolved that the Articles of Association be altered by deleting the existing art. 3 and substituting the following article therefor:

``3.

(i) That the capital of the company is the sum of twenty thousand dollars ($20,000) divided into eighteen thousand (18,000) preference shares of one dollar ($1) ordinary shares of one dollar ($1) each and two thousand (2,000) ordinary shares of one dollar ($1) each.

(ii) Notwithstanding anything in these Articles contained the preference shares shall confer upon the holders thereof the following rights and privileges and shall be subject to the following conditions that is to say: -

...''

There then followed paragraphs in identical terms to those just set out.

At 2.40 p.m. on 25th June, 1968 a further meeting of directors of the company was held. At that meeting it was noted that applications had been received for five ordinary shares of $1 each at a premium of $99 per share from Mrs. S. Williams, Mrs. M.A. Holmes, the Trustees, Executors and Agency Co. Limited as trustee for the children of Mrs. S. Williams, the Trustees, Executors and Agency Co. Limited as trustee for the children of Mrs. M.A. Holmes and Miss Ellen Palfreyman. It was resolved that the five ordinary shares of $1 each be allotted at a premium of $99 per share to the aforementioned persons. It was reported that cheques totalling $500 had been received being the fully paid value of the shares and premium which was payable thereon. It was resolved that share certificates be issued under the common seal of the company in respect thereof and that appropriate entries be made in the share register of the company. At the same meeting it was noted that Mr. Palfreyman had transferred his single share to Mrs. Palfreyman. The transfer was accepted with the result that Mrs. Palfreyman became the holder of the entirety of the 12,002 preference shares which had been issued.

The balance sheet of the company immediately before the issue of the five ordinary shares showed that it had assets comprising land and buildings situated at 2 Ord Street, Forrest A.C.T., motor vehicles, shares in The Broken Hill Proprietary Company Limited and shares in St. Helens Estates Pty. Limited. Additionally it had cash at the Commercial Bank of Australia Limited and an unsecured loan at call. The total value of those assets was said to be $1,643,961. Its current liabilities were moneys owing to Mr. and Mrs. Palfreyman totalling $437,647 with the result that the shareholders' funds amounted to $1,206,314.

This case differs from each of the other four in that there is no power directly or indirectly vested in Mrs. Palfreyman pursuant to which she might in future reconvert her preference shares to ordinary shares.

By reason of para. (a) of the resolution passed at the extraordinary general meeting held on 25th June, 1968 Mrs. Palfreyman had no right to vote at any general meeting of the company. By reason of the provisions of para. (d) of the same resolution, her shares would not, in the event of a winding up, yield more than $12,002.

The result of the events which occurred at the meetings held in June 1968 was therefore to confer upon the five holders of the ordinary shares the major interest in the shareholders' funds of $1,206,314.

The Commissioner does not allege that any gift was made to the ordinary shareholders by Mrs. Palfreyman. He has regarded himself as bound in that respect by the decision of the High Court in
Gorton v. F.C. of T. (1965) 113 C.L.R. 604. He contends, however, that there has been made by the company a gift, within the meaning of the Act, to each of the ordinary shareholders. He relies upon the decision of the High Court in
Ord Forrest Pty. Limited v. F.C. of T. 74 ATC 4034; (1973-74) 130 C.L.R. 124. Amongst the many submissions which were made on behalf of the appellants is a submission that that case was wrongly decided and ought not to be followed. That is not a submission with which it is open to me to agree and I have not considered it, but I record it because it is intended if the matter goes to the High Court on appeal to make a submission to that Court that it should not follow its decision in Ord Forrest.

Thus the issues that have been litigated before me concern the value of the gift which the Commissioner says was made when the shares were allotted to the ordinary shareholders. Before I come to the evidence it is necessary that I should refer to a number of the provisions of the Act. Section 11 thereof provides that subject to the Act gift duty at

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rates declared by Parliament shall be levied and paid in respect of every gift made on or after the date of the commencement of the Act. The word ``gift'' is defined in sec. 4 of the Act to mean any disposition of property which is made otherwise than by will without consideration in money or money's worth passing from the disponee to the disponor, or with such consideration so passing, ``if the consideration is not, or, in the opinion of the Commissioner, is not, fully adequate''. ``Disposition of property'' is defined to include the allotment of shares in a company. That is the provision upon which the Commissioner here relies to bring to duty the allotment of the shares to the ordinary shareholders as gifts within the meaning of the Act. It is the Commissioner's submission that although there was consideration for the issue of the shares, the consideration was inadequate with the result that the transactions are within the second limb of the definition of ``gift''.

Section 18 of the Act, so far as it is relevant, is in the following terms:

``18. (1) For the purpose of computing the value of a gift -

(a) no allowance shall be made in respect of any contingency affecting the interests of the donees or any of them;

(b) subject to this Act, the value of a gift shall be taken to be the value thereof at the time of the making of the gift;

...

(2) Where the Commissioner is of the opinion that it is necessary that the following provisions should apply for the purpose of computing the value of a gift for the purpose of this Act, the following provisions shall apply -

(a) The value of shares or stock in any company, whether incorporated in Australia or elsewhere, shall be determined upon the assumption that, on the date when the gift was made, the Memorandum and Articles of Association or Rules of the company satisfied the requirements prescribed by the Committee or governing authority of the Stock Exchange at the place where the share or stock register is situate, for the purpose of enabling the company to be placed on the current official list of that Stock Exchange;

...

(c) Where a gift includes any shares or stock in any company the shares or stock of which are not or is not quoted in the official list of any Stock Exchange, the Commissioner may, in his discretion, notwithstanding anything contained in the last two preceding paragraphs, adopt as the value of any such shares or stock such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the date when the gift was made.''

Although I have set out certain of the provisions both of subsec. 1 and subsec. 2 of sec. 18 of the Act, it is only sec. 18(2)(c) which is relevant to the matters which arise for decision in the St. Helens appeal. In the other appeals substantial questions arise in relation to sec. 18(1)(a) by reason of the preference shareholders being able directly or indirectly to reconvert the preference shares to ordinary shares. In some of the other appeals there are also questions concerning sec. 18(2)(a). But in this appeal and in two others, Ceedon Pty. Limited and Lucinda Investments Pty. Limited, the companies were incorporated in the Australian Capital Territory where there is no Stock Exchange. It was agreed that that circumstance made sec. 18(2)(a) impossible of application in this appeal and in the two others which I have mentioned.

I deal then with the question of whether or not it is appropriate to apply sec. 18(2)(c) of the Act in this appeal. By reason of the provisions of sec. 18(3), the matter now being before the Court, it is a matter for me to determine whether I ought to be of the opinion that it is necessary for the provision to apply ``for the purpose of computing the value'' of the gifts which are involved.

Provisions similar to those contained in sec. 18 of the Act are to be found in the Estate Duty Assessment Act 1914 (sec. 16A) and in the death duty legislation of some of the States including New South Wales and Queensland. Before referring to some cases decided under that legislation it is convenient to mention shortly the opposing views of the two groups of valuers. The appellants' valuers approached the task upon the basis that each of the ordinary shareholders received one ordinary share which, leaving aside the preference shares, represented one-fifth of the capital of the company. Each such shareholder therefore was given a minority interest. It was that interest which had to be valued. It was wholly inappropriate in their view to place upon each

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of the ordinary shares the same value as would be placed on a roughly equivalent parcel of shares in The Broken Hill Proprietary Company Limited. Each of the shareholders would be locked in unless three others joined in resolving to wind up the company. It was true that two of the shares were held in the ownership by the Trustees, Executors and Agency Company, but they were held on trust for different family groups. It was wrong to suppose that four out of five would at any time in the foreseeable future combine and resolve to wind up the company. The problem of valuation was therefore rightly approached upon the footing that an earnings basis should be adopted; cf.
Crane v. F.C. of T. 75 ATC 4001; 49 A.L.J.R. 1. Mr. Bagnall and Mr. Goddard approached the matter in this way and concluded that the ordinary shares upon the relevant date were worth $200,000 or thereabouts with the result that each of the ordinary shares was worth a sum of the order of $40,000. Mr. Young obtained a lesser figure. Mr. Laing for the Commissioner agreed that if an earnings basis were adopted the figure of $40,000 per share was about right.

What affronted the Commissioner's valuers about this approach, however, was that it meant that in respect of assets worth $1.2 million a valuation was being given which placed upon them a value of about $0.2 million. The disparity was too great and led to the conclusion that another approach should be adopted. The valuers relied upon the situation being a family one. Notwithstanding that each shareholder was in a minority, the fact that the shareholders might combine and decide to wind up the company could not be overlooked. Nor could the fact that they certainly had power at any time to do so. It was therefore appropriate to adopt the winding up basis provided for in sec. 18(2)(c) of the Act. Twenty-fifth June, 1968 was the day upon which shares in The Broken Hill Proprietary Company Limited reached their all-time peak of $25 per share. Upon that basis a yield to a shareholder buying at that price was 0.8 per cent. That was another reason why the Commissioner's valuers thought an earnings basis was altogether inappropriate.

One of the Commissioner's valuers, Mr. Robinson, adopted an alternative approach. He saw that it might be thought that it was wrong to value the shares as if they really did represent an equivalent accessible parcel of shares in The Broken Hill Proprietary Company Limited. He therefore took what he believed to be the value of the assets of the company at the relevant date, but discounted them in an attempt to take into account the comparatively unfavourable position in which each of the ordinary shareholders was so far as concerns a realisation of capital.

Mr. Laing did not adopt that approach, nor was it regarded as appropriate by any of the appellants' valuers. Mr. Laing was impressed by the fact that this in reality was an implementation of a scheme designed to avoid death duty and his approach really was that the shareholders, if they chose, would have little difficulty in getting together and bringing about the winding up of the company. Mr. Robinson also thought that the family situation was not a matter to be left out of account. In each of his valuations, including that done in respect of the St. Helens shares, there is a paragraph which indicates his views in this respect. It is convenient to set out that paragraph from his valuation of the St. Helens shares. It is as follows:

``The first point arises in the area of the valuation principle which recognises that a true and fair value of any asset should be equal to the price which could be expected to be paid for it by a `willing but not anxious purchaser' to a `willing but not anxious seller' of the asset. A substantial proportion of valuations of shares in unlisted companies are made for probate purposes. In such cases the valuer is required to consider, purely as a notion, a sale of the shares from the owner (recently deceased) to a hypothetical person to be treated as a buyer. In the case with which this report is concerned - and this applies to each of the bases of valuation which you have requested me to adopt - I am not concerned with a notional sale or a notional allotment of shares. The allotment is an acknowledged fact and not a hypothetical fact and the allottee is an actual and not a hypothetical party. The point is of considerable significance because, contrary to the position which arises frequently in valuations for probate purposes, I am not confronted with the task of considering every possible type of buyer (or allottee) for the shares with all the doubts which automatically arise about the willingness of each type of hypothetical person to become the owner of the relevant shares in place of the recently deceased owner. In this case I am to consider the allotment of five ordinary shares by St. Helens Farm (A.C.T.) Pty. Limited, one share to each of three of the daughters of Mrs. E.F. Palfreyman and two to a trustee to hold in

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trust, one share for the children of one of Mrs. Palfreyman's daughters and the other share for the children of another of her daughters. Even if, despite the fact that this case involves an allotment of shares to known parties, it were held that the concept of value to be considered was still that determined by reference to the price to be paid by a hypothetical `willing but not anxious purchaser' to a hypothetical `willing but not anxious seller', then I point out that members of the Palfreyman family, who are the actual or beneficial allottees, would be the most likely class of interested `purchasers' of the ordinary shares in the company.''

I find the relevance of what Mr. Robinson has said difficult to follow because the transactions which in fact took place are transactions, upon the assumptions upon which I am proceeding, without adequate consideration. Within the meaning of the Act they are gifts. Although therefore the parties to the transactions are identified, those parties were prepared to accept shares in the company upon the basis that they obtained them at a price which was very much less than their true value, whatever that might have been. It does not follow that the prices which they would have been prepared to pay if no gift had been involved would have been prices of the order determined by Mr. Robinson. Notwithstanding the family relationship which there is, it seems to me to be very difficult to get away from the tests which have been applied in a variety of cases and which are summarised by Stephen J. in Crane (75 ATC at p. 4003; 49 A.L.J.R. at p. 2) in the following passage, ``The task of valuation involves the postulating of a hypothetical sale to a purchaser as at the date of death (he was dealing with a case under the Estate Duty Assessment Act) and in circumstances in which neither party is anxious but each is willing to become a party to such a sale; the value will be the price at which such a sale would, after proper negotiation between the parties, have been concluded''. I do agree, however, that the fact that it is a family situation which is being dealt with must be taken very much into account; cf. what was said by Dixon C.J. in
Jekyll v. Commr. of Stamp Duties (Qld.) (1962) 106 C.L.R. 353 in the passage I have later cited from his judgment (at p. 364).

The appellant relies very strongly upon the decision in Crane because of the close resemblance it has to the present case. I agree that there are similarities but the case is one upon its own facts. More importantly the Commissioner did not seek in that case to apply the equivalent of sec. 18(2)(c) in the Estate Duty Assessment Act (sec. 16A). It is to be noted, however, that his Honour did say that he acknowledged the unsuitability of any method of valuation concerned not with the capitalization of profits or dividends but instead with asset backing (75 ATC at pp. 4005-4006; 49 A.L.J.R. at p. 4).

Two cases in which the court has had regard to provisions similar to sec. 18(2)(c) of the Act are Jekyll v. Commr. of Stamp Duties (Qld.) (supra) and
Gregory v. F.C. of T. (1971) 123 C.L.R. 547. A case where it was not applied was the
Commr. of Stamp Duties (N.S.W.) v. Pearse (1951) 84 C.L.R. 490; (1953) 89 C.L.R. 51. The provision there in question was sec. 127(1)(c) of the Stamp Duties Act 1920 (N.S.W.). In a joint judgment McTiernan, Williams and Webb JJ. said (84 C.L.R. 490 at p. 520):

``To value shares in a company which is a going concern on the basis that the company is in voluntary liquidation at the date of death savours of unreality. The choice of such a mode is not calculated to produce a fair value. It is more likely to produce a false value. Scope for the use of the provision contained in sec. 127(1)(c) may be found in cases where a company's operations do not produce income which can be regarded as affording any measure of the value of the shares, as well may be the case with an assets company or a company whose earning capacity is restricted or diminishes temporarily or by accidental circumstances. Other special cases may be imagined.''

Although on another aspect of the case Dixon J. (as he then was) and Fullagar J. dissented, both judges agreed with the reasons expressed in the joint judgment to which I have just referred.

In Gregory, Gibbs J. was concerned with the valuation of shares held by a deceased person in two private companies, both of which held shares in a large company whose shares were listed on the Stock Exchange. He applied the provisions of the section in one case where the shareholding of the deceased in the private company had been in respect of all but 2,400 of its 39,165 issued shares. There were no particular rights attached to the shares not held by him. He thought it appropriate to apply the provisions of the section because the deceased could, if he had chosen to do so, have brought about the winding-up of the company and had

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the shares in the listed company sold (123 C.L.R. at p. 570). In the other company the deceased either held or controlled 13,280 of the 898,440 issued shares. His Honour thought (there was no contention otherwise) it inappropriate in that case to apply the provisions of the section. He also thought that a purchaser of the shares would have recognised that it was likely that for many years to come the company in which the shares were held would retain its shares in the listed company ``in good times and in bad and would not in relation to those shares pursue the policy that one would expect of an ordinary investment company of keeping a close watch on its investments and realizing them when it was propitious to do so.'' (123 C.L.R. at p. 573).

In Jekyll, the deceased was the holder of 154,574 one per cent non-cumulative preference shares in a company, New Bond Accord Pty. Ltd., which had been incorporated in Queensland on 1 September 1955. On that day the company purchased from the deceased for £143,680 a property near Dalby and certain other property. Subsequently the preference shares were issued to him. The deceased's wife subscribed the Memorandum of Association for one per cent second non-cumulative preference shares. His elder son subscribed it for one ordinary share and the deceased applied for one ordinary share as a trustee for a grandson. The shares so issued constituted the whole of the issued capital of the company. Before his death the deceased's shares, in addition to the one per cent dividend, carried the right to such further preference dividends as might be declared by the company on the recommendation of the directors. He was the permanent governing director for his life, with all the powers of a director. He had seventy-six per cent of the voting power of the company. After his death the dividend payable in respect of the shares was limited to one per cent per annum of their paid-up value. The shares carried no vote and conferred no means of forcing a winding-up as of right. Upon a winding-up they commanded a share in the capital.

The case originally came before Stable J. of the Supreme Court of Queensland, who upheld the Commissioner's valuation based upon a winding-up; (1961) Qd.R. 99. The case was heard in the High Court by a bench comprising Dixon C.J. and McTiernan and Kitto JJ. The executors' appeal against the decision of Stable J. was dismissed. The legislation in question was sec. 47 of the Succession and Probate Duties Act 1892-1955 of Queensland. A question which concerned the court was whether the application of that provision (the equivalent of sec. 18(2)(c) of the Act here) was a matter for the Commissioner exercising his discretion according to law or was a matter which was fully open to be examined by the Court, whether Stable J. or the High Court itself. There was no provision similar to sec. 18(3) of the Act here in question. The Court decided that the matter was open to complete review, although it would seem that Kitto J. thought the judgment of Stable J. should be treated by the High Court on appeal in the same way as discretionary judgments are treated and not disturbed unless there were revealed an error of law or a misunderstanding of the facts. That does not appear to have been the view either of Dixon C.J. or McTiernan J. At (1962) 106 C.L.R. 353 p. 364 Dixon C.J. said:

``Let it be supposed that the value of the first preference shares is to be determined by establishing a buyer willing to purchase as an assumed person, an automation equipped with relevant knowledge, due qualities of prudence and yet desirous of buying. How far would he go to obtain the shares? At what point would the assumed desire of the executors to sell be brought to a willingness to accept the price? Obviously a complicated situation faces these hypothetical reasoners. On the one hand it is a proposal to acquire property showing a very low annual return and a proportionate right to capital which while full may be unrealisable for a very long time. On the other hand there are the persons entitled to the other three shares. They have a strong interest, as it would appear on the assumptions which must be made, in excluding strangers from membership of the company. In strictness under the Articles of Association they control the company; for in virtue of their shares they command the voting strength and the distribution of the profits which ex hypothesi will not, except at their instance or with their consent, include more than one per cent upon the first preference capital. But ownership by strangers of the first preference capital gives the strangers an ultimate right to a proportionate share in the capital and that is necessarily represented by the land bearing the company's name and by some other assets. They cannot be excluded from the body of persons whence the hypothetical purchaser is to be drawn. He may be rightly described for the purposes of the law as `an intellectual automaton... without any sentiment' (cf. per Cussen J. in

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Melbourne Tramway and Omnibus Co. Ltd. v. Tramway Board (1917) V.L.R. 472), but his intellectual equipment will include a full knowledge of the position which would arise in a company constituted as this one is if a large body of shares with an extremely low yield were left to fall into the hands of strangers. When all the complications of the situation are looked at and all the difficulties of assessing any value that can be reasonably justified on some other footing, the case does seem one where sound reasoning authorises a resort to a value based upon the assets-backing. To apply the last paragraph of sec. 47 seems indeed to do exactly what the legislature contemplated in adopting that provision.''

The Commissioner in the present case seeks to use Jekyll as an indication that in a case of this kind an assets valuation is the only valuation which is satisfactory because of the enormous difficulties of postulating, in relation to a company which is a family company, what price a hypothetical purchaser would be prepared to pay. The appellants sought to explain the decision upon the basis of the particular facts of the case. The judgment of Stable J. was subjected to a close examination. One of the matters seized upon by the appellants was his Honour's refusal to believe one of the witnesses, who said that the company would never be wound up. The appellants said that the case was to be explained upon the basis that the deceased held substantially the whole of the capital of the company and that, notwithstanding the loss of voting rights immediately upon his death, it was well within the contemplation of those in control of the company that it would be wound up with the result that the estate would receive the moneys at a point in time which was within the foreseeable future. I do not pay regard to those considerations because they do not seem to me to have been considerations which had relevance to Dixon C.J. and thus McTiernan J. Moreover, the fact that Dixon C.J. had agreed with what had been said by the majority in Pearse is an indication that he would have been prepared to apply the section only with caution and was alive to the fact that an application of it might lead one away from a fair value of the shares in a given case. It is obvious from the judgment of Gibbs J. in Gregory that he was alive to the same considerations.

I think that in the present case one has to bear very much in mind that the substantial asset of the company was shares in a well-known company listed on the Stock Exchange. To my mind the case has similarities not only to Crane but also to Gregory insofar as that case dealt with a minority shareholding in a private company, the main asset of which was also shares in a listed company. The same considerations moved Mr. Bagnall, Mr. Goddard and Mr. Young in relation to the evidence which they gave in the present case. In my opinion, to apply sec. 18(2)(c) to the case would bring about a situation, as I have earlier said, in which each of the minority shareholders was to be regarded as having an asset worth precisely the same as a proportionate part of the shareholding of the company in The Broken Hill Proprietary Company Limited.

It is true that by reason of the very high price at which B.H.P. shares were being traded on the day in question the yield was extremely low, but it was not within the contemplation of anyone that the shares would be sold on that day or about that time. The shares had been held firstly by Mrs. Palfreyman and then by the company as an investment. The shares would in the course of the years at times be at a peak and at others in a trough. But the intention was to continue to hold them; value on a given day was not of great consequence; cf. Gregory (123 C.L.R. at p. 573). The fact that the yield was extremely low is not therefore to the point.

The considerations I have mentioned lead me to the conclusion that this is not a case for the application of sec. 18(2)(c) of the Act. If I had decided that it was such a case, it would have been necessary to have considered a further submission made by the appellant, namely that that section was not appropriate to be applied where a gift was not a gift at common law but only a gift as a result of the operation of the Act which constituted the transaction a gift by reason of the inadequacy of the consideration moving from the disponee.

On the basis that sec. 18(2)(c) is not applied, is it then appropriate to adopt Mr. Robinson's alternative of an assets basis, of valuation less a discount? The discount selected by him is twenty per cent. If it were appropriate to adopt that course, I would myself have thought that a much larger discount was called for. But no other valuer has approached the matter in this way and Mr. Robinson himself was not prepared to countenance a discount greater than twenty-five per cent. Yet he selected a value of $24 per share for the B.H.P. shares and does not seem to have made any particular allowance for the sale at the relevant time of such a large parcel of shares. In my opinion the notional exercise which is being contemplated

ATC 4173

must involve the sale of the entirety of those shares on the one day and it seems unlikely, if they had all then been put on the market, that the market price would have been maintained. The matters I have mentioned are not reasons of themselves why I should not adopt Mr. Robinson's discounting approach, but they certainly mean that I should be most cautious about adopting such a course.

Is it then more appropriate to adopt an earnings basis? If one does, there is unquestionably the disparity between the value of the B.H.P. shares (in round figures $1.2 million) and the value arrived at of about $0.2 million. The disparity will not be so great perhaps if one concentrates a little less on the very high value of the shares on 25th June, 1968. But even if that value be discounted, the disparity is still great. Ought then the earnings approach be adopted but with a substantially lower capitalisation rate than any selected by the valuers? - five per cent was the lowest. The difficulty I have about this, although it is open to me to select a lower rate, is that no other valuer has thought it appropriate to do so. As earlier said, Mr. Laing considered this approach as an alternative but arrived at a result similar to that arrived at by Mr. Bagnall and Mr. Goddard.

One thing that needs to be taken into account in deciding whether to adopt a lower capitalisation rate or to approach the matter upon the basis of an assets valuation with a substantial discount is, as I have said, the family relationship. Members of the family must be included within the body of persons from which the hypothetical purchaser is to be drawn. They, or at least some of them, would have a real interest in maintaining a reasonably high price in order to keep strangers out of a family company. That is a matter which I think flows from what Dixon C.J. said in Jekyll (supra) although it is true to say that there may have been in Jekyll more substantial reasons than there are in the present case for taking that view, because the main asset of the company was the property upon which it carried on business. Here the main asset is shares in a public listed company; nevertheless, I think that is a matter which ought to be taken into account. Mr. Bagnall's capitalisation rate was low, notwithstanding the fact that interest rates in 1968 were substantially lower than they now are. He selected a rate of five per cent. Mr. Goddard adopted a capitalisation rate of six per cent. Mr. Young's rate was ten per cent, but he approached the calculation of the yield which an investor could expect differently from Mr. Bagnall and thereby achieved an ultimate result which was approximately three-quarters of that of Mr. Bagnall and Mr. Goddard rather than half, which is what might have been expected.

Having considered the whole of the material before me, I have decided that I should reject any method of valuation which involves the taking into account of the value of the assets of the company and the discounting of that value. I have reached that conclusion because such a method is not strongly supported by the evidence and is not a method adopted in any of the cases to which I was referred. In reaching that conclusion I have borne in mind that the situation is a family one and that the substantial asset of the company is a marketable parcel of shares in a listed company. But I have also taken into account that the shares in the listed company were obviously regarded by members of the Palfreyman family as a desirable and worthwhile investment. Certainly there has been no substantial sale of the shares since the transactions in question took place. The holding is, I gather, or, at least was at the hearing, now greater than it was at the time the transactions were entered into.

The method which must be adopted then is an earnings basis. I prefer the approaches of Mr. Bagnall and Mr. Goddard to that of Mr. Young. Mr. Bagnall and Mr. Goddard differed as to what the dividend available to an ordinary shareholder might, at the relevant time, have been expected to be. In Mr. Bagnall's view it was $2,141. In that of Mr. Goddard it was $2,436. The capitalisation rates selected by the two witnesses were, as I have mentioned, five per cent in the case of Mr. Bagnall and six per cent in the case of Mr. Goddard. In Crane 75 ATC at p. 4006; 49 A.L.J.R. at p. 4 Stephen J. said:

``... what does clearly enough emerge, in the rather special circumstances of the present case, is that it may be misleading to seek to refine the process of valuation by the adoption of methods and calculations suggestive of an ability to arrive at any high degree of accuracy of result; the shares here being valued are exceptional in character and their value is necessarily very much a matter of speculation.''

Those words are as apt for this case as they were for the one being decided by the learned judge.

In the result I have decided that the earnings figure which it is appropriate to select is $2,400 and that a proper capitalisation rate is four per cent rather than either of the rate selected by the

ATC 4174

two valuers. Accordingly I conclude that the value of each share on the day in question was $60,000.

There were some other matters relied upon by the appellant with which I now deal. Firstly, it was said that there was no gift to Miss Ellen Palfreyman because the issue of shares to her was made pursuant to a binding contract. She gave adequate consideration for the shares because of the existence of the pre-existing contract. To the extent that there was an inadequacy of consideration, it was in respect of the contract to take up the shares which was not a disposition of property within the meaning of the Act. Although it is convenient to deal with the submission here it should be said that it has more significance in relation to some of the other appeals where the evidence establishes that each of the ordinary shares was issued pursuant to a binding contract between the company and the ordinary shareholder.

Counsel for the appellants commenced his development of the submission with an examination of the majority judgments (including that of Stephen J. at first instance (73 ATC 4022)) in Ord Forrest 74 ATC 4034; 130 C.L.R. 124 for the purpose of showing that the judges in that case had used the words ``allot'' and ``issue'' interchangeably. It was said that what the Act really made a gift was not the allotment of shares but the issue of shares to the shareholder and that the issue was not complete until the shareholder was notified that particular shares had been allotted to him; Palmer's Company Law, 21 ed., p. 179;
Central Piggery Co. Limited v. McNicoll (1949) 78 C.L.R. 594. At the page referred to the authors of Palmer say, ``While the application for shares is normally an offer to take the shares, acceptance is achieved by allotment notified to the applicant. The allotment itself does not constitute acceptance; it must be notified to the applicant....'' So it was submitted that until notification to the shareholder of the shares actually allotted to him, the matter remained in contract only. There was no disposition of property until notification occurred.

It was submitted that the evidence showed (and I agree that it does) that Miss Palfreyman alone of the ordinary shareholders was present at the meeting at which it was decided to issue the ordinary shares. She must therefore be taken to have been party to a contract between the company and herself, whereby it agreed to issue, and she agreed to take, for a consideration of $100, the ordinary share with which she was subsequently issued. That contract was complete when the company resolved, in her presence, to allot her the shares. No such contract was established, so it was said, in the case of the other ordinary shareholders because they were not present at the meeting. Accordingly, the shares issued to them without a pre-existing contract with the result that in their case the submission was not available. But in the case of Miss Palfreyman, the shares were issued pursuant to that contract. There was no inadequacy of consideration because there moved from her, not the sum of $100 which she had paid in respect of the share, but the discharge of the company's obligation to issue the share to her.

If it were not for the provisions of para. (a) of the definition of disposition of property in sec. 4 of the Act, it seems unlikely that it would have occurred to anyone that an allotment or an issue of shares could constitute a gift. That is because the allotment or issue brings into existence the property which is in question. Until the share is issued there is no property in existence and therefore nothing which could be the subject of a gift at common law. Paragraph (a) of the definition refers, therefore, to a class of transaction which is different from each of the other transactions dealt with in the definition. The definition thus creates a most artificial situation. But it is because of the fact that the Act is dealing in dispositions of property (whether made without consideration or without consideration which is adequate) that the appellants seek to say that the word ``allotment'' should be treated as if it were the word ``issue''.

However, one must have regard to the words of the Act and I do not find within its terms any warrant for reading ``allotment'' as ``issue''. Support for that view is, in my opinion, to be found in the judgment of Mason J. in
Grant v. F.C. of T. 76 ATC 4468 at p. 4472; (1976) 135 C.L.R. 632 at p. 640. His Honour was concerned with a case where the consideration moving from the company which had allotted shares was inadequate. In other words the Commissioner alleged that there was a gift because the allottee of the shares had received insufficient value for the money which was paid. But Mason J., in the passage from his judgment to which I have referred, drew attention to the words in the definition of ``gift'', without consideration in money or money's worth passing from the disponee to the disponor, or with such consideration so passing if the consideration is not... fully adequate. His Honour said:

ATC 4175

``However, the argument is in my view misconceived. The words `passing from the disponee to the disponor' relate back to the word `consideration'. They are not used in association with the word `property'. Consequently they do not express the notion of title to property being divested from one person and vested in another. Instead their sense is to indicate the existence of a consideration, whether it be property, a promise or some other form of consideration, moving from, or provided by, the disponee to the disponor. It may be that the words have been carefully chosen with a view to ensuring that there is necessarily a gift when the consideration for the disposition of property is provided not by the disponee but by a third party, notwithstanding that the consideration received by the disponor is wholly adequate. But this is not a question I need stay to examine. For present purposes I have said enough to indicate that a consideration may be said to pass from a disponee to a disponor, whether it be property or a promise, so long as it moves from, or is provided by, the disponee for the benefit of the disponor.''

It follows, in my opinion, that there were dispositions of property which were gifts within the meaning of the Act once the directors of the company had resolved that the shares be allotted. No notice to the applicant for shares was necessary in order to constitute the transactions dispositions of property which might be affected by the Act either because they were without consideration or for a consideration which was inadequate.

There is an alternative way of approaching the matter. It is no doubt right to say that ``consideration'' is used in the legislation in the conveyancing sense and not the sense in which it is used in simple contract; cf.
Archibald Howie Pty. Limited v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143 at pp. 152-3 and 157-9. But in my opinion that means no more, when one is speaking of a conveyance, than that the consideration which moves the conveyance is the money which the conveyee has agreed to pay under the pre-existing contract. It is correct to say that the conveyance is given and taken in mutual discharge and satisfaction of the rights and obligations to which the contract of sale has given rise; but I was referred to no case in which it was decided that the whole of the consideration given for moving a conveyance was to be regarded as the discharge by the purchaser of the vendor from his obligations under the contract. That is a concept which I confess to having had difficulty in grasping.

Furthermore, in his judgment in Ord Forrest, Stephen J. said (73 ATC 4022 at p. 4025; (1973-74) 130 C.L.R. at p. 128):

``... to regard the full extent of the actual contractual obligation of a contracting party as necessarily constituting a fully adequate consideration is erroneous; yet this is, in effect, what the company's submission amounts to.''

It may be that the precise submission now made was not made to the Court in Ord Forrest, although an examination of the record reveals that the facts surrounding the issue of shares in that case were similar to those of the present case. But whether the submission is precisely covered or not, I do not myself believe that it could stand along with what his Honour has said in the sentence I have just cited from his judgment. That circumstance and my own view of the submission lead me also to the conclusion that the submission should be rejected.

In reaching that conclusion I have taken into account the provisions of sec. 12(1) of the Act which is in the following terms:

``A disposition of property made or taking effect in pursuance of or in performance or satisfaction, whether wholly or in part, of a contract or agreement entered into (whether before or after the commencement of this Act and whether with or without an instrument in writing) without adequate consideration in money or money's worth shall, for the purposes of this Act be deemed to be a gift so soon and so far as the disposition has affected the property or any of the property to which the contract or agreement relates.''

It was submitted - and I agree with the submission - that the section could have no application to a disposition of property which was an allotment of shares. That was because, as I have previously mentioned, the property was not in existence prior to the disposition taking place - see the last words of the subsection. The appellant sought to say that the presence of sec. 12(1) in the Act was a recognition by the legislature of its submission that there was full consideration moving from the disponee where there was a previously existing contract even though the consideration for the contract itself may have been inadequate. In other words, the presence of the

ATC 4176

section in the Act showed, so it was submitted, that the legislature thought that without it a disposition of property made pursuant to a contract entered into for an inadequate consideration would not be a gift because the existence of the contract would mean that there was inadequate consideration for the contract as distinct from the conveyance itself. In my opinion the submission is overcome once one gives to the word ``allotment'' the meaning I have ascribed to it. The allotment is the disposition. It is the act by which the company accepts the offer made by an applicant for shares. The fact that sec. 12(1) has no application to a disposition which is an allotment of shares has no significance. In any event such significance as the section has is, in my opinion, overcome by what has been said by Mason J. and Stephen J. in the dicta I have cited from their judgments in Grant and Ord Forrest.

The next submission made was that in computing the value of the shares it was necessary to take into account the amount of gift duty to be levied in respect of the transactions. At first sight it might appear that that would be a task which was impossible because of the impossibility of calculating the amount of duty for the purposes of that exercise, but a calculation which was tendered by agreement of the parties (Exhibit AE) persuades me that this is not so.

In the appellant's submission the property the subject of a gift had to be considered, for the purpose of valuing it, at the moment of time - the instant - when it came into the hands of the donee. Since the property must exist, however, the position must be looked at upon the basis that the share had in fact been issued. Its very issue was said to attract the payment of gift duty. Its value depended, no matter what basis of valuation was selected, upon the assets and liabilities of the company. In those circumstances no valuation of it could be made without taking into account one of the company's liabilities, namely, gift duty. That proposition was qualified by reason of the provisions of sec. 25(2) of the Act, which provides that gift duty shall constitute a debt jointly and severally due by the donor and donee to the King on behalf of the Commonwealth. The appellant was prepared to concede that it was appropriate to take into account, except in cases where the donee was a trustee, only half the amount of the duty. A separate submission was made in respect of gifts to trustees. That submission was based on sec. 25(7) of the Act. I shall deal with that submission in due course. It is first necessary to consider whether the principal submission is sound.

In my opinion it is not. What I have said in relation to the previous submission shows that it is the allotment and not the issue of a share which is constituted a disposition of property for the purposes of the Act. The very fact that the word ``allotment'' is used is, I think, an indication that the legislature intended the position to be looked at immediately before, rather than immediately after, the share became vested in the allottee. If that be the correct approach, as I think it is, then it is inappropriate to take the amount of gift duty into account. In my opinion such a conclusion is in accordance with the general approach and policy of the Act, which in all other cases would operate so as to value what was given without regard to the amount of duty which was payable in respect of the gift. The appellant's submission is therefore rejected.

If I had accepted it, I would have rejected the appellant's submission based upon sec. 25(7) of the Act. In my opinion that section deals only with the extent to which a trustee may be personally liable for gift duty. Section 25(6) empowers him to raise moneys for the purpose of paying gift duty and thus envisages that the gift duty which he, as trustee, is liable to pay by reason of the operation of sec. 25(2) will be paid out of trust property. He will not, however, be personally liable except in the circumstances provided for in sec. 25(7).

For the reasons I have given, the appeal in St. Helens is allowed. I determine the value of each of the ordinary shares as $60,000.

Ceedon Pty. Limited

Ceedon Pty. Limited (hereinafter called Ceedon) was incorporated on 23 February 1972 in the Australian Capital Territory. Article 69 of its Articles of Association provides that one Charles Archibald Donald shall be the governing director of the company during his lifetime or until he becomes disqualified pursuant to the provisions of art. 83. Whilst he retains office as governing director he is to have authority to exercise all the powers, authorities and discretions vested in the directors generally, and all other directors for the time being of the company, in regard to the conduct of the company's business, are to be under his control and bound to conform to his directions. Article 58 provides for voting rights. On a poll during the lifetime of the aforementioned Charles Archibald Donald every member is entitled to one vote for every share held by him. The

ATC 4177

article provides that after his death there is to be a sliding scale of voting rights, the detail of which need not be referred to. Article 6 provides that the shares of the company shall be under the control of the directors. Article 7 of the Articles of Association is in the following terms:

``(a) During the lifetime of Charles Archibald Donald and subject to the provisions (if any) in that behalf of the Memorandum of Association the shareholders may from time to time by Special Resolution vary the rights conferred on the holders of any of the issued shares and any issued shares may from time to time by Special Resolution be converted into shares with such preferred deferred or other special rights or such restrictions whether in regard to dividend voting or return of share capital as the Company may from time to time by Special Resolution determine. The power hereby conferred shall extend to the extinguishment removal or variation of any preferred deferred or other special rights or restrictions conferred or imposed pursuant to the provisions of this Article or Article 6.

As from and after the death of the said Charles Archibald Donald if at any time the share capital is divided into different classes the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied with the consent in writing of the holders of three fourths of the issued shares of that class or with the sanction of a Special Resolution passed at a separate general meeting of the holders of the shares of the class. To every such separate general meeting the provisions of these regulations relating to general meetings shall mutatis mutandis apply, but so that the necessary quorum shall be two persons at least holding or representing by proxy one third of the issued shares of the class and that any holder of shares of the class present in person or by proxy may demand a poll.

(b) On the conversion of any issued shares pursuant to the provisions hereof the holders of such shares shall deliver up to the Company their share certificates for endorsement or in exchange for fresh certificates.''

Charles Archibald Donald remains the governing director of the company. It is agreed that, at the time the transactions here in question were entered into, his life expectancy as shown on the tables was 14.94 years.

The first meeting of the directors of the company was held on 19 April 1972, at 10 a.m. At that meeting the company resolved to purchase from Mr. Donald a property known as No. 392 Bobbin Head Road, Turramurra, a residential flat property known as No. 96 Sproule Street, Lakemba, the right title and interest of Mr. Donald in the balance of moneys secured by a traders bill of sale and certain shares and stock units, a list of which was attached to the minutes of the meeting.

Completion of the purchases by the company took place immediately after the meeting by the company crediting the sum of $273,376.14 to the current account maintained by Mr. Donald with the company and Mr. Donald delivering to the company appropriate transfers and assignments and documents of title.

A second meeting of the directors of the company was held on 19 April 1972 at 10.30 a.m. At that meeting Mr. Donald said that he desired to take up 2,698 ordinary shares of $1 each in the capital of the company and that he was prepared to pay a premium of $99 for each of the shares applied for. It was resolved that 2,698 ordinary shares of $1 each at a premium of $99 be issued and allotted to Mr. Donald pursuant to his application and on the terms requested. It was also revealed that Mr. Donald's current account with the company be debited with the sum of $269,800 being the amount payable on the issue and allotment of the shares. Finally Mr. Donald gave notice of a proposal to convene an extraordinary general meeting of the shareholders of the company to pass a special resolution to convert all the issued ordinary shares of the company into cumulative preference shares and to make consequential amendments to the Articles of Association.

Immediately after the second meeting of directors on 19 April 1972, 2,698 ordinary shares were issued to Mr. Donald at a premium of $99 per share. He was subsequently shown in the register of members of the Company as the holder of those shares from 19 April 1972.

As foreshadowed, an extraordinary general meeting of the company was held on 19 April 1972 at 11 a.m., at which all members of the company were present. Each waived his right to twenty-one days' notice of the meeting. Resolutions attached to the notice convening the meeting were passed as special resolutions. Those resolutions had the effect of converting the whole of the issued shares of the company into cumulative preference shares which, in accordance with the terms of the resolution, had a number of rights attached to them. They were as follows:

ATC 4178

``(i) The right to receive out of the profits of the Company and as a first charge thereon a fixed Cumulative Preference dividend at the rate of 6% per annum payable half yearly on the amount for the time being paid up thereon calculated from the 19th day of April, 1972. Such Cumulative Preference Shares shall rank both in regard to dividend and return of capital in priority to all other shares for the time being of the Company.

(ii) The right to receive Notices of General Meetings, Reports and Balance Sheets and to attend General Meetings and to vote at such General Meetings (either in person or by proxy who need not be a member of the Company) during the lifetime of Charles Archibald Donald but as from and after the death of the said Charles Archibald Donald the holders of Preference Shares shall by virtue or in respect of their holding of Preference Shares only have such right if the Preference dividend should remain unpaid for six months after any half yearly date fixed for payment thereof or if a resolution is proposed affecting the rights or privileges of the said shares.

(iii) On any reduction of capital of the Company the right to payment not exceeding capital paid up on the Cumulative Preference Shares. No such repayments of capital shall affect the right of the holders of the Cumulative Preference Shares to any arrears of dividend.

(iv) Upon the winding up of the Company the right to payment of all capital paid up on the Cumulative Preference Shares and of all arrears of dividend (whether earned or declared or not up to the date of commencement of winding up) in priority to all other shares. The holders of such Cumulative Preference Shares shall not be entitled to any participation in the Company's profits or assets other than to the extent expressly provided for in subclauses (i) and (iii) hereof and in this subclause.

(v) Except with the consent of the holders of not less than three-fourths of such Cumulative Preference Shares no further shares shall be issued by the Company ranking prior to or pari passu with the abovementioned Cumulative Preference Shares nor shall the capital of the Company be reduced nor the rights and privileges of the holders of such shares be altered without such consent.''

The resolution also made consequential amendments to the Articles of Association.

A third meeting of directors was held on 19 April 1972 at 11.30 a.m. An application for six ordinary shares of $1 each at a premium of $99 per share was received from Nodeec Pty. Limited (hereinafter called Nodeec). The application was accompanied by a cheque for $600. There was also tabled an agreement made between Nodeec and Ceedon. It was resolved that six ordinary shares of $1 each be allotted to Nodeec, that Nodeec be entered as the holder of such shares in the share register of the company and that Ceedon enter into the agreement. The agreement recited the application for the shares by Nodeec. It continued:

``AND WHEREAS the Applicant (Nodeec) is desirous of making provision for the payment of a greater sum by it for the allotment of the said shares in the event of the amount of the application moneys being inadequate

NOW THIS DEED WITNESSETH that the Applicant hereby agrees with the Company (Ceedon) that if, but for this Agreement, the allotment of the shares at a premium of $99.00 each would constitute a gift within the meaning of the Gift Duties Assessment Act 1941 (as amended) then the Applicant agrees to pay to the Company the quantum of the difference between the true value of the shares as calculated by the Deputy Commissioner of Taxation for the Commonwealth of Australia and the amount of the application moneys to be paid by the Applicant for the allotment of the shares as a debt due and payable by the Applicant to the Company on demand.''

Nodeec holds, and at all material times has held, the six shares upon trust pursuant to a number of declarations of trust which are in evidence. The trusts are discretionary trusts and are known as the Donald trusts. They are numbered 1 to 6 inclusive.

Prior to the issue of the six ordinary shares the assets of the company comprised the land, buildings, stocks and shares and loan earlier referred to. There was an unsecured loan to Mr. Donald of $3,576.14 with the result that the shareholders' funds stood at $269,802.

The essential difference between this case and that of St. Helens is that there is power in the company to reconvert the preference shares held by Mr. Donald to ordinary shares. Since Mr. Donald during his lifetime retains control of voting rights he can effectively control the meeting at which any proposal to reconvert the shares is made. In other words, by reason of his

ATC 4179

voting power he could bring about a situation in which his preference shares were reconverted to ordinary shares. Since the shares are under the control of the directors he could, by reason of his position as governing director, prevent the issue of any further shares. There were submissions made on behalf of the Commissioner that the powers conferred by the first paragraph of art. 7(a) earlier set out were invalid. I reject that submission. Whether one has regard to the earlier words of the paragraph or to the power of extinguishment in the last sentence thereof, I am of opinion that the shareholders could, during the lifetime of Mr. Donald, reconvert the preference shares which he had to ordinary shares. In fairness it is probably correct to say that the submission made by the Commissioner was not designed so much to achieve the invalidation of the power but to say that it could never be exercised by Mr. Donald only for his own benefit rather than for the benefit of the company as a whole. That is a separate submission with which I shall later deal.

Another difference between the two cases is that there here has to be considered the provisions of the agreement of 19 April 1972, which, in the language of the parties, contains an escalator clause. Yet a further difference in the present case is that the six ordinary shares were all taken up by one person, Nodeec Pty. Limited. It is true that it holds each share upon a different discretionary trust, but there is not here a situation, as there was in St. Helens, pursuant to which the shares are held by five, or perhaps four, minority interests.

Two of the submissions which have been made by the appellants are disposed of unfavourably to them by reason of conclusions which I have reached in St. Helens. Those submissions are that there was no gift because the issue of the shares was made pursuant to a binding contract and that any gift duty payable had to be taken into account in valuing the shares.

Again the Commissioner has sought to rely upon the provisions of sec. 18(2)(c) of the Act. But before I come to deal with that question, I should deal with submissions made by him that the provisions of sec. 18(1)(a) of the Act applied because Mr. Donald's ability to effect a reconversion of his shares to ordinary shares was to be regarded as a contingency for the purposes of that provision. It is to be observed, however, that if, because of the acceptance of that submission, his ability to effect a reconversion were ignored, he would still retain voting rights during his lifetime and thus control of the company. It was originally submitted by the Commissioner that his voting rights were also to be regarded as a contingency but that submission was subsequently withdrawn.

The Commissioner submitted that I was bound in relation to his submission by what had been decided by McTiernan J. in Gorton, notwithstanding that the decision of McTiernan J. was reversed on appeal. It was said that his decision was not reversed upon that point. It was not a point with which the majority dealt and Windeyer J. expressly put it aside because he was in a minority and it was unnecessary for him to deal with it. He said ((1964-65) 113 C.L.R. at p. 627) that he expressed no opinion as to the amount of the duty payable. McTiernan J. said (113 C.L.R. at p. 615):

``It is said that as Mrs. Abel's power to effect a reconversion is contained in the articles of association it, and the possibility of its exercise, should be regarded as something in the nature of an encumbrance, inherent in the shares which reduces their value rather than as a contingency. I cannot accept this view. While the power of reconversion is always there, the mode of distribution of the assets and thus the amounts to be distributed can only be altered by an actual exercise of the power. Mrs. Abel may or may not choose to exercise her power. Thus whether or not the mode of distribution of capital on a winding-up is changed depends on an uncertain occurrence. It was something contemplated by Mrs. Abel as affecting or modifying the value of the shares and the effect is dependent on an event which may or may not happen in the future. Therefore I would regard it as a contingency falling within the subsection which I cannot take into account in computing the value of the shares.''

In
Bray and Anor. (No. 2) v. F.C. of T. 71 ATC 4060; (1971) 123 C.L.R. 348, Gibbs J. dealt with a case where a person lent a company £88,000 repayable on demand. A month later the parties entered into a written agreement providing that the amount should be repayable at the rate of £2,200 per annum without any right to interest unless the lender gave 90 days' notice that the amount should become repayable in full, whereupon it was to become so repayable. The Commissioner assessed gift duty on the basis that the value of the promises to repay which were contained in the agreement

ATC 4180

was £22,350. The amount of the gift was therefore £65,650. The Commissioner arrived at this result by treating the consideration for the repayment as being the right to have the sum of £88,000 repaid by annual instalments of £2,200 commencing 31st December, 1961, without interest, and assessed the present value as at 3rd May, 1960 of that right, based on an interest rate of nine per cent per annum compound interest, at £22,350 and deducted that sum from the face value of the debt (71 ATC at p. 4063; 123 C.L.R. at p. 352). The appeal was upheld except as to the amount of £1,283, which was a sum calculated at the rate of six per cent upon the amount repayable for 90 days. It was held that sec. 18(1)(a) of the Act did not apply since the possibility that the lender might call for repayment of the total amount lent did not affect the interest of the company within the meaning of the subsection. At 71 ATC p. 4066; 123 C.L.R. p. 357 Gibbs J. said that the phrase ``the interests of the donees'' in the subsection must refer to their interests in the property the subject of the gift. He continued (71 ATC at p. 4066; 123 C.L.R. at pp. 357-8):

``Whether in a case like the present the interest of the donee should be regarded as an interest in the entire sum lent, or as an interest in the amount by which the consideration is inadequate, it is impossible to say that any interest of the company would be affected by the giving of written notice under cl. 2 of the loan agreement. The company had received the amount of the loan and the giving of such notice would not divest it of its interest in the money which it had received or in any part of that money. On the other hand, whether or not the notice was given, the company was obliged to pay the debt in full and the giving of the written notice would affect only the time of repayment and not the existence of the obligation to repay. Section 18(1)(a) has no application to the present case and did not require the promise contained in cl. 2 of the loan agreement to be disregarded or treated as worthless for the purpose of making a valuation of the consideration for the loan.

In advancing their submissions as to the effect of sec. 18(1)(a), counsel for the respondent relied on some remarks in Gorton v. F.C. of T., the authority of which it was said was not affected by the fact that they appear in a judgment that was reversed and a dissenting judgment. Those judgments were concerned with the possibility that a shareholder might exercise her overwhelming voting power and convert her cumulative preference shares to ordinary shares and thus affect the amount which other shareholders would receive on a winding up. The circumstances of that case are quite unlike those of the present, and the passages to which counsel referred do not assist in determining the present question.''

Both parties relied upon what his Honour has said in this passage. The Commissioner relied upon it to show that what had been said by McTiernan J. in Gorton remained unaffected by anything that had occurred in Bray and further as an indication that Gibbs J. thought that what McTiernan J. had said remained authoritative notwithstanding that his decision was reversed on appeal. The appellant relied upon it because it said that the decision of Gibbs J. was more in point as regards this case than was the decision of McTiernan J. in Gorton. That was because he was concerned with para. (f) of the definition of ``disposition of property'' in sec. 4 of the Act. That paragraph includes in the definition any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his property and to increase the value of the property of any other person. The other paragraphs, so it was submitted, apply in the case of transactions which more specifically than that described in para. (f) have the effect of disposing of property. Thus para. (b) deals with the creation of a trust, para. (c) with the creation of any lease, mortgage, charge or interest in property, and para. (d) with the release of any debt; and para. (a) deals with the allotment of shares in a company. It was submitted that this was a distinguishing feature between Bray and Gorton and enabled Gibbs J. to say what he did about Gorton.

There was then a general submission that on principle the power of Mr. Donald in the present case was not a contingency within the meaning of the provision because although it was a contingency in ordinary language it was not a contingency which affected ``the interests'' of the holder of the ordinary shares. The interests of Nodeec Pty. Limited remained full and unfettered. The only effect that the power had was that its exercise might affect the value of the shares. Certainly they would become less valuable if it were in fact exercised.

I do not feel able to distinguish in any material way the facts of the case dealt with by Gibbs J. (Bray) and those of the present. I am also in agreement with the general submission

ATC 4181

made by the appellant which, to my mind, flows from what Gibbs J. said. I am therefore of opinion that this is not a case where sec. 18(1)(a) of the Act applies, with the result that the position is to be looked at as if the Articles did contain, as in fact they did, the power of reconversion which is there provided for and that this was and remains a power of which Mr. Donald could and can procure the exercise during his lifetime.

It was submitted on behalf of the Commissioner that such a power would need to be exercised for the benefit of the company as a whole and not merely for the benefit of one particular shareholder, namely Mr. Donald. Reference was made to a number of authorities and to Ford on Company Law 2nd Ed. pp. 404 and following. I agree that there may be a question about it but the task which I have is to fix a value. The traditional approach is to inquire what a willing but not anxious purchaser would be prepared to pay and for what price a willing but not anxious vendor would be prepared to sell. In my opinion no hypothetical purchaser, whether a member of the family or not, ought to be presumed to be a person who would put the power aside on the basis that he could always restrain its exercise; it should be presumed that he would approach the matter upon the basis that the power might be validly exercised and determine what price he was prepared to pay accordingly.

If I be wrong in the view which I have expressed concerning the application of sec. 18(1)(a) the position remains one in which during the lifetime of Mr. Donald the ordinary shares will not confer upon their holder control. Control will remain with Mr. Donald notwithstanding that it may be correct to ignore for the purposes of the Act any power he has to bring about the reconversion of his shares to ordinary shares.

The next matter with which I should deal is the significance of the escalator clause contained in the agreement which I have earlier set out. The essential words are:

``The applicant... agrees with the Company that if, but for this agreement, the allotment of the shares at a premium of $99 each would constitute a gift within the meaning of the... Act... then the applicant agrees to pay to the Company the quantum of the difference between the true value of the difference between the true value of the shares as calculated by the Deputy Commissioner of Taxation for the Commonwealth of Australia and the amount of the application moneys to be paid by the applicant for the allotment of the shares as a debt due and payable by the applicant to the Company...''

The appellant submitted that either the deed operated in its terms with the result that there was no gift or the promise made by the applicant was void either for uncertainty or impossibility of performance, with the result that the consideration for the allotment of the shares failed in part so that the transactions were void. Insofar as the first submission involved there being a liability to the company which the company was unlikely ever to enforce, that was said to be not a matter of concern to the Commissioner. The only question was whether the consideration was inadequate. The second submission involved the dispositions in question being avoided, notwithstanding that the shares many years ago passed to Nodeec Pty. Limited and have since been held by it upon the discretionary trusts earlier referred to.

The Commissioner agreed with the second submission of the appellant. In his submission the deed was of no effect for two reasons. The first of these was that the difference between the true value of the shares and the amount of the application moneys was to be calculated by the Deputy Commissioner of Taxation for the Commonwealth of Australia. It was submitted that there was no obligation upon any Deputy or the Commissioner himself to carry out that calculation because, upon the hypothesis upon which the matter was being dealt with, there was no gift. Section 11 of the Act provides that gift duty at rates declared by Parliament shall be levied and paid in respect of every gift made after the commencement of the Act by the persons therein specified. Section 19 provides for the circumstances in which a return is to be made and sec. 21 for the assessment to be made ``from the returns and from any other information'' in the Commissioner's possession. Section 25 provides that gift duty is due and payable on the making of the gift and constitutes a debt jointly and severally due by the donor and donee to the Queen on behalf of the Commonwealth. Section 39 empowers the Commissioner to require any person to provide information. Sections 17 and 18 are provisions dealing with the way in which gifts of certain types are or may be valued.

It is plain, upon the basis of the provisions of the Act, that the Commissioner would not proceed to issue an assessment unless there were a gift or a disposition of property for inadequate consideration. It would only be in

ATC 4182

these circumstances that the Commissioner would have the power, let alone be prepared, to value property passing pursuant to a disposition. The parties have selected the Deputy Commissioner of Taxation as the person who is to determine the difference between what is described as the true value of the shares and the amount of the application moneys to be paid by Nodeec Pty. Limited. In
George v. Roach (1942) 67 C.L.R. 253 a contract for the sale of an agency provided that it should be purchased at the value placed on it by a named valuer. The valuer refused to value. It was held that the provision for valuation was not for the sole benefit of the vendor and could not be waived by him. It was further held that the purchaser was entitled to recover moneys paid by him on account of the price. Rich J. (at p. 261) said that there was no existing contract until the price was ascertained. Starke J. (at p. 263) said that the provision for valuation was an essential term of the agreement and that it was clear that in the case of an agreement to sell at a price to be fixed by some valuer, the agreement was not enforceable unless the price had been fixed; the agreement to sell was made subject to a condition precedent that the price should be so fixed and unless the condition were performed the agreement was not effective. Latham C.J. dissented but only on the basis that he thought the vendor was entitled to waive the valuation provision.

The present case is different from George v. Roach in a number of respects. The agreement in question is only one of the agreements between the parties as to the consideration to be paid. Secondly, the contract here has long since been completed. In George v. Roach the matter was still in contract when it came before the Court. Thirdly, the valuer in that case was able to make the valuation but declined to do so; here the person designated to assess the difference between the true value of the shares and the amount of the application moneys is a statutory office-holder designated in his official capacity who not only refuses to do what is asked of him but has, so it appears to me, no power to do so. Despite these differences, I think that George v. Roach does provide some guidance as to what the outcome of the competing submissions of the parties in this case should be.

In my opinion the agreement of the parties involved them in agreeing to what was an impossibility. For that reason the agreement under consideration was always void and of no effect. Does it follow that the disposition of property which has taken place should also be regarded as being void and of no effect? In my opinion it does not. The only consideration moving from Nodeec Pty. Limited was the sum of $600 payable by way of application moneys and premium. The position is otherwise as if the deed in question had never been executed.

Strong submissions were made on behalf of the appellant that the provisions of the agreement must be taken into account as a fundamental part of the agreement which was made between the parties on 19th April, 1972, but I do not agree with this. By analogy it is not unhelpful to have regard to cases upon severance of promises in agreements which are void for unreasonable restraint of trade. In
Amoco Australia Pty. Limited v. Rocca Bros. Motor Engineering Co. Pty. Limited (1975) A.C. 561, Lord Cross said (at p. 578):

``As Kitto J. remarked in
Brooks v. Burns Philp Trustee Co. Ltd. (1969) 121 C.L.R. 432, 438: `Questions of severability are often difficult'. The answer depends on the intention of the parties as disclosed by the agreement into which they have entered; but generally, of course, they have not foreseen that one or more of the provisions in their agreement will be unenforceable. Various tests have been formulated which might not in every case lead to the same result - e.g., is that which is unenforceable `part of the main purport and substance' of the clause in which it appears? (per Lord Moulton in
Mason v. Provident Clothing and Supply Co. Ltd. (1913) A.C. 724, 745); does the deletion `alter entirely the scope and intention of the agreement?' (per Lord Sterndale M.R. in
Attwood v. Lamont (1920) 3 K.B. 571, 580); does the deletion of the covenant in question `leave the rest of the deed a reasonable arrangement between the parties?' (per Denning L.J. in
Bennett v. Bennett (1952) 1 K.B. 249, 261); does what is left constitute an `intelligible economic transaction in itself,... even though it furnished the occasion for the unenforceable restraint?' (
Kelly v. Kosuga (1959) 358 U.S. 516, 521).''

In a true commercial situation one might take the view that the consideration provided for in the agreement was of fundamental importance to the company allotting the shares. But this is not a true commercial situation. The parties entered into the various agreements as part of a scheme to avoid, not gift duty, but death and estate duties. I am entitled to take into account the whole of the surrounding circumstances. If the matter relied upon by the Commissioner

ATC 4183

had been put to the parties immediately before their signatures were appended to the agreement, there can be little doubt that the scheme would have gone ahead. It may be that the wording of the agreement would have been changed but that is not a matter which concerns me in resolving the present problem. The fact is that the shares were allotted for a consideration which amounted to $600 and a promise impossible of performance. In those circumstances it is correct to say that the consideration moving from Nodeec Pty. Limited for the allotment of the shares to it was the sum of $600.

My conclusion makes it unnecessary to deal with a second basis contended for by both parties (the appellant in the alternative) on which it was said that the agreement was of no effect but I propose to deal with it. In the course of the argument a document was tendered (Ex. AF) upon the basis of which it was sought to show that the promise made by Ceedon Pty. Limited could never be performed because the amount of money (the number of dollars) required to fulfil it was infinity. The conclusion of the document was as follows:

``Let the surplus assets before allotment equal A and the amount paid on allotment equal B. After allotment, since the share allotted is the only share which participates in surplus assets, that share will be worth A + B. If the amount paid for the share is therefore to equal the value of the share, then the following formula is obtained: B = A + B. Since the surplus assets are not zero it follows that B must be infinity since this is the only number to which it is possible to add any other number so that the result remains constant.''

The matter was touched on in the judgments of Gibbs and Mason JJ. in Ord Forrest. Their Honours were not concerned with an escalation clause but only with the significance of a premium paid on the issue of a share. Gibbs J. (74 ATC at pp. 4044-45; 130 C.L.R. at pp. 153-4) said:

``The further submission of the appellant was that since any premium paid on the issue of a share becomes an addition to the assets of the company, it would never be possible for a person to whom shares are issued to pay full value for them. Any increase in the amount of the premium would simply increase the value of the assets of the company, and therefore the value of the share, so that an attempted calculation of the amount of full consideration would result in infinity. This submission, if correct, would support the view that notwithstanding the apparently clear words of para. (a) of the definition of `disposition of property', the legislature could not have intended that an allotment of shares could amount to a gift by the company making the allotment. The submission proceeds on the assumption that the shares should be valued by reference to the amount which the assets of the company would realize upon a liquidation, and on that assumption has some plausibility when directed to a case in which, under the articles of the company, the shareholder who has paid the premium is in a specially favourable position when assets are distributed. However, this argument would obviously be untenable when applied to the case of a public company whose shares are listed on a stock exchange. In such a case the value of a share in the company is normally its market value, which is readily ascertainable.... However, it hardly requires a reference to authority to establish that in the case of an allotment of a share which is listed on the stock exchange, full consideration will be provided if the market value is paid. It is therefore not right to say that it is never possible for an allottee to pay full consideration for the shares allotted - that statement is plainly not true where the shares are listed on the stock exchange. The provisions of the Act can apply sensibly to such an allotment at least.

Once this conclusion is reached it is difficult to discern any justification for placing on the words of the Act an unnatural meaning that would prevent them from applying to an allotment of shares in a private company.''

Mason J., after discussing
Archibald Howie Pty. Limited v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143 and the situation of a shareholder to whom bonus shares are allotted, continued (at pp. 157-8):

``One further argument was advanced by the appellant with the same end in view. It was said that it is impossible in the case of a company whose assets exceed its liabilities to charge a premium on the issue of a share which will bring the value of the share and the amount payable in consideration of its allotment into equilibrium. The higher the premium the more it will swell the assets of the company and increase the value of the share.

ATC 4184

The argument overlooks several considerations. First, the valuation of a share by reference to its `assets backing' is not the normal mode of valuing a share in a company. Where resort properly can be had to market valuation or valuation on an income basis, a company making a new issue may be able to exact a premium which will dispel any suggestion of a gift. Secondly, so long as the new shares are not given preferred rights to participate in a distribution on a winding up, the accretion to the company's assets brought about by a premium will go to augment the value of the existing shares. It follows that if the premium is fixed at a sufficient high level the consideration payable for the share can be equated to the amount that it would bring on a winding up.''

The dicta which I have cited would suggest that the learned judges were not in complete agreement as to what the position was, but both found the argument of uncertainty answered in relation to a case where there was in fact a market for the shares, whether the Stock Exchange or otherwise. In other words, the matters relied upon by the appellant in that case only became a problem if a valuation were to be made upon a winding-up or assets-backing basis. For reasons which hereinafter appear, I do not propose in the present case to adopt a winding-up basis of valuation. But that does not overcome the submissions which are here made in relation to the uncertainty of the promise made by Nodeec Pty. Limited in the agreement. That is a different question from any which was considered by the judges in Ord Forrest. In my opinion the calculation put in by the parties does disclose that the quantification of the amount to be paid by Nodeec Pty. Limited pursuant to the agreement does result in a figure which is infinity, whether the valuation is made upon a winding-up or an earnings basis. Although, because of the conclusion which I have reached on the first argument, it is unnecessary for me to decide the point, I express the opinion that the agreement is ineffective for this reason also. The consequence is the same as it was in relation to the first submission. The promise made in the agreement provides no additional consideration for the shares which were allotted and may therefore be ignored. The appellant's submissions based upon the escalation clause in the agreement are therefore rejected.

The next question is to determine whether this is a case where it is appropriate to apply the provisions of sec. 18(2)(c). In my opinion it is not, nor would it be such a case if sec. 18(1)(a) applied. That is because of Mr. Donald's voting power, the effect of which I have explained. I do not need to develop reasons for this view. It is enough to say that the case is a much stronger one against the application of the provisions of sec. 18(2)(c) than was St. Helens. As I have mentioned, Mr. Donald had a life expectancy of almost fifteen years at the relevant date. The value at that date of one dollar payable on his death at a discount rate of twelve per cent was eighteen cents. I agree with the submission made on behalf of the appellant that if one were to approach the matter by taking the value of the assets of the company, that value would need to be discounted by eighty-two per cent to take account of the powers which Mr. Donald had. I agree also that other discounts would need to be taken into account because of the lack of ready negotiability of the shares.

Yet another reason for not applying the provisions of sec. 18(2)(c) arises from a consideration of art. 112 dealing with what may occur upon a winding-up. So far as it is relevant, it provides that if the company be wound up, the liquidators may, with the sanction of a special resolution, make a division of the property otherwise than in accordance with the legal rights of the contributors to the company. Any class thereof may be given preferential or special rights or may be excluded altogether or in part. Thus Mr. Donald could, by bringing about a situation immediately prior to a winding-up whereby his shares were converted, direct the substantial assets of the company away from Nodeec Pty. Limited to himself. An assets-backing basis of valuation would for that reason alone not give any true indication of the real value of the shares.

All those considerations provide reasons why the application of sec. 18(2)(c) of the Act would lead to an unfair and unreal result. In my opinion the method of valuation to be adopted is that of an earnings basis subject to an appropriate discount. That is how the problem was approached by Mr. Bagnall and Mr. Goddard. It is their approach which I prefer. But, although they were similar, their approaches led them to substantially different results, as a reference to their evidence shows.

Mr. Bagnall came to the conclusion that ``the after-tax maintainable profits'' amounted to $8,546. He thought a return of 10.5 per cent was appropriate. On that footing the six ordinary shares would have a value of $71,700. Mr. Bagnall added that if the preference shares were converted to ordinary shares the value would be reduced to $162. Paragraphs 24 and 25 of his affidavit were as follows:

ATC 4185

``24. In resolving which value to opt for within this range I am influenced by the following matters:

(a) The right of the preference shareholder to convert its shares throws doubt on the length of time the ordinary shareholder can expect to receive the higher level of income;

(b) If the higher valuation is adopted, the ordinary shareholder could expect to receive much the same return elsewhere on the amount of $71,700 without the risk of losing most of his investment if the preference shares are converted;

(c) The uncertainty of the period that might elapse before the preference shares are converted, if ever, is such that I do not think a subscriber or purchaser of the ordinary shares would pay a high price for them. However, it is not an unreasonable inference that the preference shareholder will not convert his shares in the short term; were it otherwise, he would scarcely have involved himself in a corporate structure of this kind. Possibly the ordinary shareholder could count on a period of five years before conversion of preference shares would take place;

(d) If the preference shares were converted, the ordinary shareholder could then exercise its rights and require the Appellant to be operated in the interests of all members; in practice, the ordinary shareholder would probably seek to be bought out by the erstwhile preference shareholder.

25. Having regard to the foregoing and in particular giving full effect to the assumption in para. 24(c) a maximum value in the order of $12,000 could be justified. However, the uncertainties are such that I cannot envisage a willing but not anxious buyer who will be prepared to pay as much as this for the shares. I believe the most that such buyer would be prepared to pay is $5,000 and accordingly I value the ordinary shares at that amount on the footing that the preference shares may at the option of the holder be converted into ordinary shares. The valuation would be materially different if this assumption is incorrect.''

Mr. Goddard arrived at the conclusion that the estimated net profit after taxation was somewhat more than Mr. Bagnall's figure. He thought $9,216. Paragraphs 14, 15 and 16 of his affidavit are as follows:

``14. I consider that a willing but not anxious buyer of the six ordinary shares would take into account, in particular, the following matters when determining the appropriate capitalisation rate to be used in valuing those shares:

(a) The expected maintainable ordinary dividend can be significantly reduced if the preference shares are converted into ordinary shares during Mr. Donald's lifetime;

(b) The preference dividend rate may be varied during Mr. Donald's lifetime without first obtaining the approval of the ordinary shareholder;

(c) The probability that the right under art. 7 to convert preference shares into ordinary shares (para. 6(e)) or to vary the rights attached to the preference shares (para. 6(f)) prevents the existing ordinary shareholder from successfully objecting to such conversion or variation by taking Equity Court action;

(d) During Mr. Donald's lifetime the six ordinary shares have insignificant voting rights and are a minority holding;

(e) The non-negotiability of the ordinary shares;

(f) The existence of a lifetime governing director (Mr. Donald);

(g) The considerable actuarial life expectancy for Mr. Donald of 14.69 years at valuation date.

15. In my opinion, a willing but not anxious buyer would apply a capitalisation rate of at least 25% in light of the matters set out in para. 14 and that a willing but not anxious vendor would recognise the need for such a rate in determining the value of the six ordinary shares.

16. Based on the foregoing I am of the opinion that the value of each ordinary share as at valuation date was not greater than $5,421 calculated as follows:
      Estimated maintainable
         dividends (para. 11) ................  $ 8,132
      Capitalisation rate of at least ........   25%
      Maximum value of ordinary
         shares ..............................  $32,528
      Maximum value for each
         ordinary share ......................  $ 5,421''
              

Thus Mr. Goddard thought that the six ordinary shares were worth $32,528 whilst Mr. Bagnall thought they were worth $5,000. The

ATC 4186

question is whether I adopt one or other of their opinions or substitute a figure of my own. Having reflected on the matter, I find the conclusion reached by Mr. Bagnall more persuasive than that reached by Mr. Goddard. Accordingly, I find the value of the six ordinary shares in the company on the relevant date to have been $5,000.

Gwynedd Pty. Limited

Gwynedd Pty. Limited was incorporated as a company on 3rd September, 1971 under the laws of New South Wales. Article 7(a) of the Articles of Association of the company provided for the variation by the shareholders by special resolution of the rights conferred on the holders of any of the issued shares of the company. Any of those shares might from time to time by special resolution be converted into shares with such preferred, deferred or other special rights or restrictions, whether in regard to dividend, voting or return of share capital, as the company might from time to time by special resolution determine. The power so conferred extended to the extinguishment, removal or variation of any preferred, deferred or other special rights or restrictions conferred or imposed pursuant to the provisions of that article or art. 6, which provided that the shares should be under the control of the directors.

The provisions I have mentioned were to apply only during the lifetime of one Isabel Rebecca Rawlings. From and after her death the article provided that if at any time the share capital were divided into different classes of shares, the rights attached to any class might be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or with the sanction of a resolution passed by the holders of three-fourths majority of the shares at a separate general meeting of the holders of the shares of the class. Article 64 provided for the manner in which votes were to be counted on a show of hands. Every member present in person or by proxy was to have one vote. On a poll taking place during the lifetime of Mrs. Rawlings, every member was to have one vote for every share held by him. As from her death, upon a poll, every member was to have one vote for every five shares up to one hundred, and there followed a sliding scale reducing the votes rateably as the holding increased. Originally only two shares were issued, they being the subscribers' shares. They were held on trust for Mrs. Rawlings. On 18th November, 1971 one of the subscribers transferred the share subscribed for by him to her. Previously on 16th September, 1971 the subscribers had met and appointed Mrs. Rawlings, and one Keith Frank Rawlings, directors of the company.

On 18th November, 1971 there was a meeting of the directors of the company at which the company resolved to purchase from Mrs. Rawlings properties known as 25 Coolawin Road, Northbridge, and 223 and 225 Whale Beach Road, Whale Beach, upon the terms and conditions contained in contracts for sale which are in a usual form. Completion of the contracts took place immediately after the meeting by the company crediting the loan account, established by Mrs. Rawlings with the company, with the sum of $122,500, being the total of the purchase prices provided for in the contracts and Mrs. Rawlings delivering to the company a memorandum of transfer of the lands referred to in the contracts, together with the certificates of title therefor.

A little later on the same day there was a further meeting of the directors at which the secretary presented an application by Mrs. Rawlings for 6,848 ordinary shares of one dollar each in the capital of the company. The application said that Mrs. Rawlings was prepared to take up the shares at a premium of $19 each. It was resolved that the shares be allotted to Mrs. Rawlings. The consideration was $136,960. It was resolved that Mrs. Rawlings' loan account with the company be debited with that sum. It was resolved also that an extraordinary general meeting of members of the company be convened for the purpose of passing special resolutions to convert the ordinary shares issued to Mrs. Rawlings, and the two subscribers' shares, into six per cent cumulative preference shares. In fact 6,848 shares of one dollar each were allotted to Mrs. Rawlings at a premium of $19 per share and she was recorded in the register of members of the company as the holder of those shares from 18th November, 1971. Her loan account was debited with the sum of $136,960 being the amount she was required to pay for the allotment of the shares.

The extraordinary general meeting of the company to which I have referred was held a little later on 18th November, 1971. All members of the company were present and waived the notice of meeting to which they were entitled. At the meeting it was resolved that the shares which had been issued to Mrs. Rawlings and the subscribers' shares be converted into cumulative preference shares which should confer on the holders thereof the following rights:

ATC 4187

``(a) The right to receive out of the profits of the company and as a first charge thereon a fixed cumulative preference dividend at the rate of 6% p.a. payable half-yearly on the amount for the time being paid up thereon calculated from the 1st day of November 1971. Such cumulative preference shares shall rank both in regard to dividend and return of capital in priority to all other shares for the time being of the company.

(b) The right to receive General Meetings Reports and balance sheets and to attend General Meetings and to vote at such General Meetings (personally or by proxy).

(c) Upon the winding up of the company the right to payment of all capital paid up on the cumulative preference shares and of all arrears of dividend (whether earned or declared or not) up to the date of commencement of winding up in priority to all other shares. The holders of such cumulative preference shares shall not be entitled to any participation in the company's profits or assets other than to the extent in subcl. (a) hereof and in this subclause.

(d) Except with the consent of the holders of not less than three fourths of such cumulative preference shares no further shares shall be issued by the company ranking prior to or pari passu with the abovementioned cumulative preference shares nor shall the capital be reduced nor the rights of the holders of such shares be altered without consent.''

There was also an alteration to the Articles of Association substituting a new capital article which provided that the shares in question had the rights attached to them specified in the paragraphs above set out.

Still later on 18th November, 1971 a further meeting of the directors of the company was held. At the meeting agreements, each dated 18th November, 1971 and made between the company and Gilian Pty. Limited, Camurra Pty. Limited and one John Arthur Rawlings, were tabled. Each of the three agreements is in a similar form. That to which Gilian Pty. Limited was a party provided that that company applied for five ordinary shares in the capital of the company and that the company agreed to allot those shares within one day of the date of the agreement, that is 18th November, 1971. The consideration for the allotment was to be one dollar per share, together with a premium per share of $19 ``or such if any greater sum as will constitute the consideration passing from the said Gilian Pty. Limited to the company in respect of the said allotment fully adequate within the meaning of that expression as used in the definition of `gift' in sec. 4 of the Gift Duty Assessment Act 1941 (as amended)''. Clause 4 of the agreement provided that the sum of $1 per share and $19 per share payable by way of allotment moneys and premium were to be paid forthwith upon the execution of the agreement; the balance, if any, of the premium agreed to be paid was to be paid as soon as the amount thereof was ascertained.

On 18th November, 1971 Gilian Pty. Limited, Camurra Pty. Limited and Mr. J.A. Rawlings each delivered to the company its or his cheque for the sum of $100 in payment of the allotment and premium moneys. On the same day five ordinary shares were allotted to each of those persons.

The assets and liabilities of the company as at 18th November, 1971, immediately prior to the issue of the 15 ordinary shares, are set out in a balance sheet which is in evidence. It shows that the shareholders' funds were $136,962 after taking into account the fact that Mrs. Rawlings was owed $540 in respect of her loan account.

Mrs. Rawlings is the mother of Mr. J.A. Rawlings. The shareholders of Gilian Pty. Limited are Mr. and Mrs. S.S. Rawlings who hold the shares issued to them in that company in trust for their children. Mr. S.S. Rawlings is another son of Mrs. Rawlings and the beneficiaries of the shares in Gilian Pty. Limited are therefore her grandchildren. The position is the same in relation to Camurra Pty. Limited. The beneficial interest in the shares in that company is held on trust for other grandchildren of Mrs. Rawlings, senior.

It was agreed that at the date of the allotment and issue of the ordinary shares, Mrs. Rawlings, senior, had a life expectancy of 10.31 years.

The substantial differences between this case and Ceedon Pty. Limited are firstly in the form of the escalation clause, secondly in the fact that the company was incorporated in New South Wales with the result, there being a Stock Exchange in Sydney, that the provisions of sec. 18(2)(a) are capable of applying and thirdly, in the fact that no governing director was appointed. But the fact that Mrs. Rawlings was not appointed governing director can make no material difference. By reason of the number of preference shares she held and the full voting rights attached to them, she could always exercise ultimate control, notwithstanding that, because of art. 6, the shares were under the control of the directors.

ATC 4188

I deal next with the Commissioner's submission that sec. 18(2)(a) of the Act should be applied in valuing the shares.

The listing requirements of the Sydney Stock Exchange at the relevant date are in evidence (Ex. AB). During the course of argument, counsel for the Commissioner handed up a list of provisions which he contended were relevant and ought to be regarded as applying pursuant to the subsection in question when the task of valuation was being undertaken. I do not go to the detail of that list which I have left with the papers. It is enough for my purposes to say that counsel relied on a number of provisions which, so he claimed, would have made the Articles of the company unacceptable to the Stock Exchange.

There was argument on the part of the appellant as to whether the listing requirements would, if the company were to be listed on the Stock Exchange, require the alteration of the Articles in the way contended for by the Commissioner. I do not find it necessary to go to the detail of these submissions because I am of opinion that it is not appropriate to apply the provisions of sec. 18(2)(a) to the problem. My task, as I have previously said, is to ascertain the real value of the shares at the date of the gift; cf. Gregory v. F.C. of T. 71 ATC at pp. 4042-43; 123 C.L.R. at p. 564. Earlier his Honour had said in relation to the comparable provision contained in sec. 16A of the Estate Duty Assessment Act that those provisions do not require the Court to assume that the Articles of the company in question satisfy the requirements of the Stock Exchange if that assumption would not lead to a fair valuation (71 ATC at pp. 4042-43; 123 C.L.R. p. 564). In my opinion the application of the provisions of the subsection would not lead to a fair valuation or the ascertainment of the real value of the shares. On the contrary, if applying it would have the effect contended for by the Commissioner, its application would lead to an unfair and unreal result. The considerations are not different from those which led me to the conclusion that it was inappropriate to apply the provisions of sec. 18(2)(c) in the case of Ceedon Pty. Limited. The Commissioner's submissions based upon sec. 18(2)(a) are therefore rejected.

The escalation clause in the present case provides for the payment by each of the allottees of the allotment and premium moneys ``or such if any greater sum as will constitute the consideration passing from'' the allottee to the company in respect of the said allotment fully adequate within the meaning of that expression as used in the definition of ``gift'' in sec. 4 of the Act. The first submission made by the Commissioner was that the consideration to be paid was alternatively the allotment and premium moneys or the amount provided for in the second limb of the clause. But the appellant submitted that the word ``or'' should read ``and''. I agree with this submission which I think must be correct by reason of the provisions of cl. 4 of the agreement which provides that the allotment and premium moneys are to be paid forthwith upon the execution of the agreement; the balance agreed to be paid is to be paid as soon as the amount is ascertained. Clause 4 is a clear indication that the parties intended the payment to be made pursuant to the second limb of cl. 3 to be additional to the allotment and premium moneys. The Commissioner's submission is therefore rejected.

But that leaves what I may call the surplus assets argument or the infinity argument dealt with in Ceedon Pty. Limited. The considerations are precisely the same, notwithstanding the different wording of the agreement. Upon that basis I reject submissions made by the appellant that either there was no gift because of voidness of the agreement or that the agreement operated with the result that there was an adequate consideration.

Other submissions made in this case involved questions which I have already decided. In summary they were:

(1) Section 18(1)(a) does not apply;
(2) Section 18(2)(c) ought not to be applied;
(3) There was no gift because the issue of shares was made pursuant to binding contracts;
(4) The gift duty payable in respect of the gift had to be taken into account in arriving at a valuation.

The submissions I have stated were the appellant's submissions. For the reasons earlier given, the first two are resolved in its favour; the second two are resolved in the Commissioner's favour.

I proceed then to the task of determining the value of the shares.

The company has only earned sufficient in the years which followed its incorporation to pay the dividends due on the preference shares. As Mr. Bagnall said, the company appears to have been established as a repository for freehold property previously owned by the preference shareholder, Mrs. Rawlings. Mr.

ATC 4189

Bagnall likened the position here to that which exists under a will during the lifetime of the testator. He said the position was little different. The potential beneficiaries were the ordinary shareholders but that potential might never be realised because Mrs. Rawlings might withhold it by converting her shares before she dies. In Mr. Bagnall's view the potential could not be said to have any present significant value. By ``present'' he meant at the time of the transactions in question. His conclusion was that the shares were worth no more than $20 each, that being the amount paid by way of allotment and premium moneys for them. Mr. Goddard approached the matter somewhat differently and reached the conclusion that the value of the shares was a nominal $5 each. In the circumstances I have reached the conclusion that I should adopt Mr. Bagnall's valuation of $20 per share. That means that in this case there was no inadequacy of consideration with the result that no duty is payable. It follows that if a view contrary to the one I have arrived at were taken as to the meaning and effect of the escalation agreement, there would be no difference in the result because there is here no inadequacy of consideration.

Lucinda Investments Pty. Limited

Lucinda Investments Pty. Limited was incorporated as a company on 7th July, 1964 under the laws of the Australian Capital Territory. The subscribers to the Memorandum of Association were Messrs. T.A. Field, R.A. Field, C.W. Hodgson and J.E. Thomson. The shares held by the persons other than Mr. T.A. Field were in each case held upon trust for him. In April, 1966 Mr. Hodgson transferred his share to Mr. A.S. Hume but the share continued to be held on trust for Mr. T.A. Field.

A meeting of the directors of the company was held on 29th June, 1967. On that day one ordinary share was transferred from Mr. R.A. Field to Mr. T.A. Field. The share previously held by Mr. Hume was similarly transferred to Mr. T.A. Field on that day.

On 26th July, 1967 the company agreed to borrow from Mr. T.A. Field the sum of $42,650 on terms that the loan was to be repayable interest-free on Mr. Field's demand. Mr. Field delivered his cheque for that amount and his loan account with the company was credited with it. At a directors' meeting held on 23rd August, 1967 it was resolved to convene an extraordinary general meeting of the company on 1st September, 1967 for the purpose of considering, and if though fit passing, a special resolution by which a number of amendments were to be made to the Articles of Association. The first amendment had the effect of adding a new art. 4A to the Articles of Association. The article is similar to art. 7 of the Articles of Gwynedd Pty. Limited earlier referred to, except that the person whose life is mentioned is Mr. T.A. Field. It is unnecessary to refer to each of the other amendments. There was a similar amendment to that made in Gwynedd Pty. Limited in relation to the manner in which votes of members were to be counted. The new art. 87 provided for Mr. T.A. Field to be governing director of the company during his lifetime or until he became disqualified pursuant to the provisions of art. 106. The article continued, so far as it is material, as follows:

``Whilst he shall retain the office of Governing Director he shall have authority to exercise all the powers authorities and discretions by these presents or by Statute expressed to be vested in the Directors generally and all the other Directors for the time being of the Company shall in regard to the conduct of the Company's business be under his control and bound to conform to his directions and in exercising such authorities and discretions as aforesaid it shall not be necessary for him to describe himself as being or as acting in the capacity of Governing Director.''

An extraordinary general meeting of the company was held on 1st September, 1967 at which all members of the company were present. The proposed resolution was passed, the members waiving their right to 21 days' notice of the meeting.

On various dates between 4th October, 1967 and 24th June, 1969 the company borrowed further sums of money from Mr. T.A. Field, all of which were credited to his loan account. At a meeting of the directors of the company held on 24th June, 1969, the company resolved to purchase from Mr. T.A. Field 108,483 stock units in T.A. Field Holdings Limited for the price of $55,326.33. His loan account was debited with the purchase price and he delivered to the company a duly executed transfer and the relevant stock scrip.

At a meeting of directors held on 30th June, 1969 the company resolved to borrow from Mr. T.A. Field the further sum of $1,081,800 on terms that the loan be repayable to him without interest and on demand. Immediately after the meeting he delivered to the company a cheque for that sum and his loan account with the company was credited accordingly. At a

ATC 4190

meeting of directors also held on 30th June, 1969, but at a time later than that on which the meeting of that day already referred to was held, the directors of the company resolved to lend to a company Tafam Pty. Limited the same sum, namely $1,081,800, on terms that the loan be repayable to the company, interest free, and on demand. A cheque was delivered to Tafam for the sum so lent and its account with the company was debited accordingly. Still later on 30th June, 1969 there was held a further meeting of directors. At that meeting it was resolved that 14,500 ordinary shares of $2 each be allotted to Mr. T.A. Field at a premium of $98 per share. The shares were allotted to him accordingly and his loan account with the company was debited with the sum of $1,450,000, being the amount which was payable in respect of the shares. At a further meeting of directors held on 30th June, 1969 it was resolved that the secretary of the company convene an extraordinary general meeting to consider, and if thought fit pass, with or without modification, as a special resolution, a resolution providing for the conversion of the whole of the issued shares of the company, that is to say the 14,500 shares just issued to Mr. Field, and the subscribers' shares, into cumulative preference shares conferring on the holders thereof the following rights:

``(i) The right to receive out of the profits of the Company and as a first charge thereon a fixed Cumulative Preference dividend at the rate of 6% per annum payable half yearly on the amount for the time being paid up thereon calculated from the thirtieth day of June 1969 or at such other rate as may from time to time be determined by the Directors. Such Cumulative Preference Shares shall rank both in regard to dividend and return of capital in priority to all other shares for the time being of the Company.

(ii) The right to receive notices of General Meetings, Reports and Balance Sheets and to attend General Meetings and to vote at such General Meetings (either in person or by proxy who need not be a member of the Company) during the lifetime of Thomas Alfred Field but as from and after the death of the said Thomas Alfred Field the holders of preference shares shall by virtue or in respect of their holdings of preference shares only have such right if the preference dividend should remain unpaid for six months after any half-yearly date fixed for payment thereof or if a resolution is proposed affecting the rights or privileges of the holder of such shares.

(iii) Upon the winding up of the Company the right to payment of all capital paid up on the Cumulative Preference Shares and of all arrears of dividends (whether earned or declared or not up to the date of commencement of winding up) in priority to all other shares. The holders of such Cumulative Preference Shares shall not be entitled to any participation in the Company's profits or assets other than to the extent expressly provided for in subcl. (i) hereof and in this subclause.

(iv) Except with the consent of the holders of not less than three-fourths of such Cumulative Preference Shares no further shares shall be issued by the Company ranking prior to or pari passu with the abovementioned Cumulative Preference Shares nor shall the capital of the Company be reduced nor the rights and privileges of the holders of such shares be altered without such consent.

(v) During the lifetime of the said Thomas Alfred Field and whilst he holds any Cumulative Preference Shares he may be a notice in writing left at the registered office of the Company together with the Certificate for the shares therein referred to, elect to convert his Cumulative Preference Shares referred to in such notice into ordinary shares whereupon such shares shall from the date of delivery of such notice become ordinary shares and shall rank in all respects pari passu with the ordinary shares of the Company and shall cease to have any preference or priority as abovementioned and a new Certificate relating to such converted shares shall be issued to the said Thomas Alfred Field free of charge.''

The proposed resolution also provided for a substituted article (art. 4) dealing with the capital of the company which was in line with what was provided for in the paragraphs specifying the rights of the holders of the preference shares. It is to be observed that this case differs from Ceedon Pty. Limited, Gwynedd Pty. Limited and Q.A.W. Pty. Limited because there is vested in Mr. Field, by virtue of para. (v) of the rights attached to the preference shares, power directly to convert the shares into ordinary shares by a notice in writing left at the registered office of the company. No meeting is required in order to enable the reconversion of the shares to take place. It was submitted on behalf of the Commissioner that the power so vested in Mr. Field was void and of no effect but I reject that submission.

ATC 4191

The extraordinary general meeting was held on 30th June, 1969, the members of the company all being present and waiving their rights to longer notice of the meeting. The resolution to which I have referred was passed.

The final of the meetings arranged for 30th June, 1969 was a further meeting of directors at which it was resolved that three ordinary shares be allotted to a company, Springfield Pty. Limited, at a premium of $98 per share. Springfield Pty. Limited was recorded in the register of members of the company as the holder of those shares as from 30th June, 1969. The shares allotted to Springfield Pty. Limited have at all material times been held upon trust for certain beneficiaries pursuant to the provisions of a deed of trust dated 26th November, 1969, and Sydney John Field. The assets, the subject of the trust, are described in the deed as the trust fund. It is provided that the trust fund be held upon discretionary trusts for members of the Field family, including Mr. T.A. Field himself. It is unnecessary to refer further to the terms of the trust deed except to say that the trust may, depending upon events which are yet to happen, extend for the benefit not only of the immediate family of Mr. T.A. Field but also for the benefit of cousins, brothers and sisters, nephews and nieces and some who may be in a remoter degree.

The assets and liabilities of the company as at 30th June, 1969, immediately prior to the issue of the three ordinary shares to Springfield Pty. Limited, are set out in a balance sheet which is in evidence. It shows that the shareholders' funds at that time amounted to $1,449,203.77 after allowing for the balance of Mr. Field's loan account which was then $22,766.33.

It was agreed that at the date of the allotment and issue of the ordinary shares, Mr. T.A. Field had a life expectancy of almost 20 years.

The company was incorporated in the Australian Capital Territory so that no question of the application of sec. 18(2)(a) arises. There is no escalation agreement to be considered. Other submissions made in this case which are disposed of in appeals already dealt with were:

(1) Section 18(1)(a) does not apply;
(2) Section 18(2)(c) ought not to be applied;
(3) There was no gift because the issue of shares was made pursuant to binding contracts;
(4) The gift duty payable in respect of the gift had to be taken into account in arriving at a valuation.

The first two submissions are resolved in the appellant's favour; the second two are resolved in the Commissioner's favour.

It remains to arrive at a method by which the shares are to be valued. Having considered the evidence of the valuers, I have reached the conclusion that I should adopt the approach of Mr. Bagnall and the value arrived at by him. I find it useful to refer in some detail to his affidavit. Paragraphs 8 to 14 are as follows:

``8. Although the whole of the issued ordinary capital of the Appellant comprised the ordinary shares being valued, nevertheless the interest was a minority so far as control is concerned as the preference shareholder enjoyed overwhelming voting rights (art. 4 and 74) and so far as equity is concerned as his shares could at any time until his death be converted into ordinary shares upon written notice being left at the registered office of the Appellant (art. 4(v)). On the death of the original preference shareholder, the voting rights attached to the preference shares will lapse, except in certain restricted circumstances which have no bearing on this valuation (art. 4(ii)). Consequently, the ordinary shareholder will then control the Appellant and its ordinary shares will be worth generally the realisable value of the Appellant's assets less all liabilities, costs of liquidation and the nominal value of preference capital (art. 4(iii)).

9. Doubt has been expressed whether art. 4(v) does in fact authorise the preference shareholder to exercise the power to reconvert his shares into ordinary shares. Whether or not the power can be exercised is critical in ascertaining the value of the ordinary shares. However, in the absence of a definitive opinion on the point, I believe that the reasonable investor would take the conservative view and assume that the preference shareholder's power of conversion was valid. Accordingly, I have adopted such assumption.

10. A minority interest in a company is normally valued with regard to the income that might be expected therefrom. The interest under examination differs from the usual minority interest in that it will ultimately become a controlling interest, if the preference shareholder does not elect to convert his investment into ordinary shares before his death. To what extent should this contingency affect the usual basis of valuing a minority interest, having regard to the very high value of the Appellant's net assets?

ATC 4192

11. The Appellant does not appear to have been established for the purpose of providing income for the shareholders; out of assets amounting to approximately $1.5 Million transferred to the Appellant, only assets costing $56,871 were likely to be productive of income. The prime purpose of the Appellant appears rather to have been a repository for assets previously owned by the preference shareholder; on his death, the ordinary shares are evidently intended to be the mechanism whereby benefits will be conferred on certain individuals who might otherwise have received them under the terms of the preference shareholder's will. In the meantime his voting power enables the preference shareholder to retain indirect but effective control of his former assets, and just as he may at any time change the terms of his will, so he may divert those benefits away from the persons he had in mind in 1969 to others. He could for example achieve this by converting his preference shares into ordinary shares, liquidating the Appellant and re-possessing his former assets. These could then be transmitted by the more orthodox means of a Will.

12. The position of the ordinary shareholder as the holder of a minority interest is much weaker than is usually the case. It has the usual right to seek redress against repressive conduct by recourse to the courts; it could presumably seek an order requiring the directors to act in the interests of the Appellant as a whole by employing the assets for income producing purposes or even seek a winding up order on the grounds that the Appellant is not being properly conducted. One could not imagine behaviour more likely to cause a testator to drop a potential heir from his will, or in the present case to cause the preference shareholder to convert his shares, thus removing from the ordinary shareholder the prospect of ultimately obtaining valuable assets from the Appellant. Effectively, therefore, the ordinary shareholder is unable to protect its rights except in a very limited sense during the lifetime of the preference shareholder.

13. I find it difficult to envisage circumstances in which a prospective bequest (without any rights in equity), made under the terms of a Will, could be said to have any value to the beneficiary while the testator lives. Similarly, although the ordinary shareholder holds rights of great potential value, that potential may never be realised because the preference shareholder may withhold it by converting his shares before he dies; accordingly it cannot be said to have any present significant value.

14. Having regard to the foregoing, I am of the opinion that the earnings basis of valuation of the ordinary shares should not be varied to take account of the assets held by the Appellant and not productive of income in 1969.''

Mr. Bagnall then came to the conclusion that the ordinary shareholder, Springfield Pty. Limited, might expect to receive $2,720 each year by way of dividend. He thought that a capitalisation rate of 10.5 per cent would be appropriate and said that on that footing the ordinary shares would have a value of $16,400 but added that if the preference shares were converted to ordinary shares, the value would be reduced ``to, say, $7''. His conclusion was that the shares should be valued at the sum of $3,000. I find their value to have been that sum on the day in question, 30 June 1969.

Q.A.W. Pty. Limited

Q.A.W. Pty. Limited was incorporated as a company on 14 April 1970 under the laws of New South Wales. Article 69 of the Articles of Association provided that the governing director of the company should be one Owen Delpratt Wright who should hold office during his life or until he became disqualified pursuant to the provisions of art. 83. The article further provided that whilst he retained the office of governing director, he should have authority to exercise all the powers and authorities and discretions vested in the directors generally, and that all the other directors for the time being of the company should, in regard to the conduct of the company's business, be under his control and bound to conform to his directions. Article 58 of the Articles of Association provided for the manner of the counting of votes and is in terms similar to that earlier referred to in relation to Gwynedd Pty. Limited. Article 7 provided for the variation of rights conferred on the holders of any of the issued shares and for the conversion of the shares into shares with preferred, deferred or other special rights. That provision was to remain in force during Mr. Wright's lifetime. Originally the issued capital of the company consisted of the two subscribers' shares, one of which was issued to Mr. Wright and the other held on trust for him. At a meeting of directors held on 6 May 1970 the company resolved to purchase from Mr. Wright a property known as ``The Dough

ATC 4193

Boys'' upon terms and conditions contained in a contract for sale which was in a usual form. The purchase money provided for therein was $133,000. Immediately after the meeting the company delivered its cheque in the sum of $133,000 to Mr. Wright and on 16 July 1970 he delivered to the company a memorandum of transfer of the lands referred to in the contract, together with the certificate of title in respect thereof.

On 6 May 1970 there was a further meeting of directors of the company at which it was resolved to allot to Mr. Wright 6,650 shares of $1 each in the capital of the company at a premium of $19 per share. It was also resolved to convene an extraordinary general meeting of the members of the company for the purpose of considering, and if thought fit passing, a special resolution providing for the converting of the shares just issued and the subscribers' shares into cumulative preference shares conferring upon the holders thereof the following rights:

``(i) The right to receive out of the profits of the company and as a first charge thereon a fixed Cumulative Preference dividend at the rate of 7% per annum payable half yearly on the 30th day of June and the 31st day of December in each year on the amount for the time being paid up thereon the first payment calculated from the 6th day of May, 1970 to be made on the 31st day of December, 1970. Such Cumulative Preference shares shall rank both in regard to dividend and return of capital in priority to all other shares for the time being of the company.

(ii) The right to receive notice of General Meetings Reports and Balance Sheets and to attend General Meetings and to vote at such General Meetings (either in person or by proxy who need not be a member of the company) during the lifetime of Owen Delpratt Wright but as from and after the death of the said Owen Delpratt Wright the holders of Preference shares shall by virtue or in respect of their holding of Preference shares only have such right if the Preference dividend should remain unpaid for six months after any half yearly date fixed for payment thereof or if a resolution is proposed affecting the rights or privileges of the holders of such shares.

(iii) On any reduction of capital of the company the right to payment not exceeding capital paid upon the Cumulative Preference shares. No such payment of capital shall affect the right of the holders of the Cumulative Preferences shares to any arrears of dividend.

(iv) Upon the winding up of the company the right to payment of all capital paid up on the Cumulative Preference shares and of all arrears of dividend (whether earned or declared or not up to the date of commencement of winding up) in priority to all other shares. The holders of such Cumulative Preference shares shall not be entitled to any participation in the company's profits or assets other than to the extent expressly provided for in subclauses (i) and (iii) hereof and in this subclause.

(v) Except with the consent of the holders of not less than ¾ of such Cumulative Preference shares no further shares shall be issued by the company ranking prior to or pari passu with the abovementioned Cumulative Preference shares nor shall the capital of the company be reduced nor the rights and privileges of the holders of such shares be altered without such consent.''

The article providing for the capital of the company was also to be amended to provide for the attachment of the rights specified, in the paragraphs I have set out, to the preference shares. At the conclusion of the directors' meeting the 6,650 shares were allotted to Mr. Wright at a premium of $19 per share and he was recorded in the register of members of the company as the holder of those shares as from 6th May, 1970.

The extraordinary general meeting of members was held on 6th May, 1970. All members of the company were present and waived their right to greater notice. The special resolution was passed.

A third meeting of the directors of the company was held on 6th May, 1970. At that meeting one Quentin Alexander Wright delivered to the company his cheque for the sum of $200, together with an application for ten ordinary shares of $1 each in the capital of the company, at a premium of $19 per share. Such shares were issued to him on 6th May, 1970 and he is recorded in the register of members of the company as the holder of those shares from that date. He is the son of Mr. O.D. Wright.

The assets and liabilities of the company as at 6th May, 1970, immediately prior to the issue of the ten ordinary shares, were as set out in a balance sheet which is in evidence. The shareholders' funds are shown by that balance sheet to be $133,002.

On 6th May, 1970 Mr. O.D. Wright had a life expectancy of a little more than eighteen years.

ATC 4194

The conclusions reached in relation to the previous appeals establish that:

(1) Section 18(1)(a) does not apply;
(2) Section 18(2)(a) and sec. 18(2)(c), although capable of applying, ought not to be applied;
(3) The gift duty, if any, payable upon the allotment of the shares should not be taken into account in arriving at the value of the shares.

There was no escalation agreement and the shares were not issued pursuant to a binding contract. Again I prefer the evidence of Mr. Bagnall. I do not find it necessary to set out paragraphs from his valuation. He reached the conclusion that each of the ordinary shares was properly valued at the sum of $20. I adopt his valuation. The consequence is that, as in the case of Gwynedd Pty. Limited, no duty is payable.

CONCLUSION: In his dissenting judgment in
Gorton v. F.C. of T. (1964-1965) 113 C.L.R. 604, Windeyer, J. said (at p. 627):

``What occurred on the afternoon of 19th May shows up the unreality and formalism into which the decision in Salomon's Case (1897) A.C. 22 has led the law. The utterance of the right ritualistic phrases in their proper sequence, the signing of documents prepared in advance to record that this was done was, if one ignores the transient transmutations theoretically involved, merely an elaborately occult means of making a gift. There is an increasing tendency of courts in England, and perhaps more markedly in the United States, to retreat from the position where they must refuse to look behind the legal personality which the law has given to a private corporation, and to examine the purpose of its creation and the manner of its control. Moreover I am by no means sure that the companies that were created to carry out what Mrs. Abel should direct ought not, if their separate legal personality be insisted upon, to be regarded as her agents, or as intermediaries, in the present transaction. However, this was not argued; and in the view I take it is not necessary to consider it.''

In each of these appeals, other than St. Helens, similar ritualistic phrases were uttered and the same elaborately occult means of making a gift took place. But, unlike Gorton's case, these are cases where the gifts were alleged to have been made not by the original owner of the property but by the company in which that property became vested. The gifts were made when the company, in those cases where the consideration was inadequate, allotted shares to ordinary shareholders intended to be or to be trustees for the objects of the ``donor's'' bounty. The questions I have had to consider are questions not concerning the value of what passed from the ``donor'' to the company but the value of what it was that each of the ordinary shareholders received upon the allotment of the ordinary shares. The effect of what was done, I have found in each case, was not to confer upon the ordinary shareholders property of a value equal to or approximating the value of an aliquot share in the property that became vested in the company. That was so, in the cases other than St. Helens, not because the shareholders were minority shareholders, but because of the retention during the lifetime of the ``donor'' of voting control and the power to reconvert preference shares to ordinary shares. Those powers remain in the background during the lifetime of the ``donor'' and provide reasons, in my opinion, why it is not correct to place upon the ordinary shares any substantial value.

It should be emphasised that the schemes in each case were designed to avoid death and estate duties, not gift duty. The avoidance of gift duty was not the primary object, although it is true that, if that liability had been substantial, some may have been dissuaded from entering into the schemes. Each scheme was predicated upon a situation under which control, but not ownership, remained with the ``donor'' during his or her life. Thus the ``donor'' in each case set out to achieve, by the vesting of his or her property in a company, the same result as could have been achieved by testamentary disposition. If there were a change of mind, voting control and the power to effect reconversion were available to restore control to the ``donor'' either for the purpose of retaining it until his death or directing his bounty to other beneficiaries. The fact that those very powers may have been included in some schemes only for the purpose of achieving a situation in which the value of the ordinary shares would be kept low is not to the point.

Once those matters are understood, it follows that the placing of a comparatively low value on the ordinary shares in companies with such valuable assets is the only possible result in an exercise which the High Court has repeatedly emphasised involves the determination of the fair and real value of the property in question. It is true that sec. 18(2)(c) of the Act enables

ATC 4195

there to be applied in some cases a winding-up or assets-backing basis of valuation, but it will only be appropriate to apply such a basis if in truth its application will lead to a fair and real result. As I have said, when dealing with some of the cases, its application in them would, in my opinion, lead to a result which is neither.

In the result I determine the value of the ordinary shares in each case as follows:

      St. Helens Farm (A.C.T.) Pty. Limited
      (5 ordinary shares)                      $300,000
      Ceedon Pty. Limited
      (6 ordinary shares)                      $  5,000
      Gwynedd Pty. Limited
      (15 ordinary shares)                     $    300
      Lucinda Investments Pty. Limited
      (3 ordinary shares)                      $  3,000
      Q.A.W. Pty. Limited
      (10 ordinary shares)                     $    200

I propose to stand the matters over for a short time to enable counsel to consider what I have said. When the matters are again in the list, counsel for the appellants are to bring in short minutes of order to give effect to my decision. I shall then hear argument on costs.

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