Hatfield Enterprises Pty. Limited & Companies Act.

Judges:
Rogers J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 19 April 1982.

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Rogers J.

I have before me a petition by the former shareholders and present shareholders of Hatfield Enterprises Pty. Limited and by the company for an order under sec. 63 of the Companies Act. That section provides as follows:

``Where a company has purported to issue or allot shares and the creation issue or allotment of those shares was invalid by reason of any provision of this or any other Act or of the memorandum or articles of the company or otherwise or the terms of issue or allotment were inconsistent with or unauthorised by any such provision the Court may upon application made by the company or by a holder or mortgagee of any of those shares or by a creditor of the company and upon being satisfied that in all the circumstances it is just and equitable so to do make an order validating the issue or allotment of those shares or confirming the terms of issue or allotment thereof or both and upon an office copy of the order being lodged with the Commission those shares shall be deemed to have been validly issued or allotted upon the terms of the issue or allotment thereof.''

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ATC 4123

The circumstances in which the share issue in question has been made are set out in the judgment which I have just concluded delivering in the matters of
Croker v. F.C. of T. and Deane v. F.C. of T. [82 ATC 4112]. Indeed, it is fair to say that the only reason why the present application has been made was to foreclose the possibility that the tax appeals might founder due to the possible invalidity of the issue here in question. It is worthwhile noting that the only evidence in support of the petition is the whole of the evidence which has been adduced in the tax appeals, but with a marginal addition. Notwithstanding that I have decided that the appeals should be dismissed, it is appropriate that I should deal with the present application in case it should happen, upon review, that my decision is found to be erroneous. I have hesitated for a long time in whether I should say anything concerning the difficulties to which these matters give rise. In the end, I have concluded that it is my duty to mention once again, in the hope that it draws attention to the difficulties which arise in practice, to the curious circumstance that this matter and the associated tax appeals involve.

The tax appeals come to this Court as a Court of original jurisdiction pursuant to the provisions of the Income Tax Assessment Act. They are heard in the Administrative Law Division of the Court. It is a Division to which only certain of the Judges are assigned. Another Division of the Court customarily administers those provisions of the Companies Act which require the intervention of the Court. When it was seen that there appeared to be some common problems involved in the tax appeals and this present application, it was decided that the same Judge should hear all matters. Due to the constitution of the Court, that was possible to be done. Had it not been feasible, the extraordinary situation which would have obtained would have been that it would have been necessary to repeat the entirety of the evidence given in the tax appeals before the Judge hearing the application under the Companies Act, in order to give him the benefit of evaluating the witnesses and hearing the evidence given by them in the witness box. However, if these matters are to be taken further, then it will be necessary for an appeal from my decision in the tax appeals to be taken to the Federal Court of Australia and the appeal on this present application to be taken to the Court of Appeal of New South Wales. I will content myself by saying that that, with all due respect, seems to me to be a wholly unacceptable and undesirable state of affairs.

Notwithstanding that in
Coolibah Pty. Ltd. v. F.C. of T. 80 ATC 4469, the Full Court of the Supreme Court of Queensland held that in an application under sec. 63 of the Companies Act the Commissioner of Taxation, although vitally concerned, was not a proper party, the petitioner in the present case has taken the responsible view that it was desirable that the Commissioner should be served and his views made known to the Court. I can only say that that course has been of assistance to me and I am grateful to the parties for solving what in other circumstances could have been an embarrassing difficulty.

The Commissioner opposed the making of the order validating the issue of the bonus shares in the circumstances which I will not recite because, as I say, they are fully set out in my other judgment, for two reasons: firstly he submitted that the invalidity was either the result of deliberate action on the part of Mr. Love, or at the very least, the consequence of Mr. Love not caring what was the consequence of his acting in the way in which he did in disregard of the provisions of sec. 21 of the Companies Act. That section provides as follows:

``21.

(1) The memorandum of a company may be altered to the extent and in the manner provided by this Act but not otherwise.

(2) In addition to observing and subject to any other provision of this Act requiring the lodging with the Commission of any resolution of a company or order of the Court or other document affecting the memorandum of a company, the company shall within fourteen days after the passing of any such resolution or the making of any such order lodge with the Commission a copy of such resolution or other document or an office copy of such order together with (unless the Commission dispenses

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ATC 4124

therewith) a printed copy of the memorandum as altered, and if default is made in complying with this subsection the company and every officer of the company who is in default shall be guilty of an offence against this Act.

Penalty: one hundred dollars. Default penalty.

(3) The Commission shall register every resolution order or other document lodged with the Commission under this Act that affects the memorandum of a company and shall certify the registration of every such order, and on such registration and not before, the alteration of the memorandum shall take effect.

(4) The certificate of the Commission shall be conclusive evidence that all the requirements of this Act with respect to the alteration and any confirmation thereof have been complied with.

(5) Notice of the registration shall be published in such manner (if any) as the Court or the Commission directs.

(6) The Commission shall where appropriate issue a certificate of incorporation in accordance with the alteration made to the memorandum.''

The resolution that the memorandum should be amended was passed at an extraordinary general meeting of shareholders, which according to the minutes commenced at 2.15 p.m. on 30th June. It lasted, according to Mr. Croker, for ten minutes; according to Mr. Love, five minutes; according to the minute book, the meeting of directors which allotted shares, created by the special resolution, commenced at 2.20 p.m. There was no way in which a copy of the resolution amending the memorandum could be lodged with the Corporate Affairs Commission anteriorally to the meeting allotting those shares. Even assuming in favour of the transaction that lodgment with the Corporate Affairs Commission of the copy of the resolution equalled registration, it was a feat impossible of achievement. It is true that Mr. Love deposed at pages 28 and 28A to the fact that he had caused enquiries to be made from the Corporate Affairs Commission, and that he presumed, as a result of those enquiries, that lodgment was registration. However, due to the time difficulty, even if that were so, it was impossible of achievement. Not only that, but no effort was evidently made to lodge a copy of the resolution until some months later.

I think there is a great deal of force in the submission made on behalf of the Commissioner that even though Mr. Love may not have deliberately flouted the provisions of sec. 21, he really acted with such a reckless disregard of the Statutory provision that it would be inappropriate to exercise the Court's discretion to validate the transaction.

Nonetheless, were that all to the transaction, I think that having regard to all the circumstances I should not decline the exercise of discretion.

However, the Commissioner also relies on the dictates of public policy in resisting the exercise of discretion in favour of the application.

I should commence by saying that I accept unreservedly that the mere fact that the exercise of discretion is called for in connection with the achievement of a fiscal advantage is not a bar per se. That much is clearly demonstrated by the applications under the Trustee Act; see In
re Westons Settlement (1969) 1 Ch. 223;
Re A.S. Sykes (dec'd.) and the Trustee Act (1974) 1 N.S.W.L.R. 597.

Furthermore, Courts have not been deterred from granting approvals to schemes of arrangement merely by reason of the fact that the motive prompting the entry into the scheme of arrangement was a fiscal one. In
re A & C Constructions Pty. Limited (1970) S.A.S.R. 565.

However, I can see a difference between those circumstances and the present. Before I come to mention those, I think it is desirable, lest I be misunderstood, to mention that I have had full regard to the recent reiteration by the House of Lords in
W.T. Ramsay Limited v. I.R. Commrs. (1981) 2 S.L.R. 449 at p. 465, of the oft-repeated statement that a subject is entitled to arrange his affairs so as to reduce his liability to tax and that the fact that the motive for a transaction may be to avoid tax does not invalidate it, in the absence of some specific enactment.

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ATC 4125

However, I think in relation to schemes which are popularly described as tax avoidance schemes and which, like the present, are calculated to generate only paper losses, designed to obtain tax deductions, I have, as a guide, the repeated recent actions of the Commonwealth Parliament. Time and time again, in recent times, the Parliament has acted so as to demonstrate its intention that it is desirous of abolishing schemes which, without any commercial significance or motive, are entered into simply and purely for fiscal advantages. The enactment of Pt. IVA of the Act is a demonstration of the parliamentary wish and of the parliamentary view that tax avoidance schemes be put outside the range of permissible activities, and thereby demonstrates Parliament's view of the dictates of public policy.

There is, however, a significant matter to be weighed in the balance. As I have said in the other judgment in the tax appeals, the decision of the High Court in Curran was given in 1974. When in 1979 the Parliament finally acted to outlaw Curran schemes, it made the provision retrospective only to August 1977. The question which I ask myself is, should I, in the exercise of discretion, now take the view that as a matter of public policy the Court should go further than did the Parliament in precluding a taxpayer from acting in a way which, on the face of it, was lawful. After long consideration, I have taken the view that I should regard the Parliament's actions as a sufficient indication that schemes of the kind here under consideration are unacceptable and unworthy of receiving the aid of the Court in validating facets of the scheme which have failed to comply with relevant legislation.

For those reasons I dismiss the petition. I think in all the circumstances I should make no order as to costs. Insofar as exhibits are concerned, they may be handed out unless an appeal is lodged to the New South Wales Court of Appeal within twenty eight days.