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Federal Commissioner of Taxation v. Ball.

Judges:
Bowen CJ
Northrop J
Lockhart J

Court:
Federal Court

Judgment date: Judgment handed down 22 December 1982.

Bowen C.J., Northrop and Lockhart JJ.

This is an appeal from a judgment of the Supreme Court of Victoria upholding the respondent taxpayer's objection to his amended assessment to income tax for the year ended 30 June 1973. By that amended assessment the Commissioner included in the taxpayer's assessable income the sum of $8,691.00 being the value of certain bonus shares issued on 7 May 1973 by Henry Jones (I.X.L.) Limited (``Henry Jones'') to the taxpayer as a shareholder in that company. The bonus shares were capitalized from an assets revaluation reserve.

The Income Tax Assessment Act 1936 (``the Act'') includes in a resident shareholder's assessable income dividends which are paid to him out of profits (subsec. 44(1)). Section 6 of the Act contains an extended definition of ``dividend''. It includes bonus shares distributed by a company to its shareholders. But bonus shares are excluded from assessability if issued in satisfaction of a dividend paid from profits arising from the sale or revaluation of assets not acquired for the purpose of resale at a profit (subpara. 44(2)(b)(ii)). The exclusion does not apply if the bonus shares are redeemable shares as defined in subsec. 44(2D).

The result of this appeal turns upon the terms of para. 44(2D)(b), which deemed

ATC 4702

certain shares to be redeemable if issued in pursuance of, or as part of, an agreement or arrangement, whether oral or in writing, having or including the purpose of enabling the company by various specified means, including a reduction in the paid up value of those or other shares, to pay to any person any money or other property other than shares in the company. The critical question in this case is whether the bonus shares were issued to the taxpayer in pursuance of, or as part of, an arrangement of the kind mentioned in para. 44(2D)(b).

Henry Jones is an old and well established company. In 1972 it was, as it had been for many years previously, a listed public company manufacturing jam, canned fruits, sauces and similar products. It carried on its manufacturing and other activities through a number of subsidiaries and associated companies in each State of Australia and in South Africa. It also held a large investment portfolio.

Early in 1972 Mr. J.D. Elliott, a Melbourne businessman, was looking for a company ripe for takeover. He sought a company having, amongst other things, shares with a high asset backing relative to their market price. He said in evidence that Henry Jones ``stood out like a sore thumb'' as suitable for his purposes. He described its management as ``lamentable'' and concluded that it ``had a very large number of latent assets that obviously were undervalued in the books and weren't being managed in a manner to build the company, produce profitable results'' and that it had few long term debts.

On 22 September 1972 Mr. Elliott, as managing director of a company called Food Canning Industries Pty. Limited (``FCI'') which had been formed to make a takeover offer for Henry Jones' shares, approached the Board of Henry Jones and forecast an offer of $3.95 per share up to 50% of capital. The approach was made public and a press announcement stated that the directors of FCI believed that it would be possible to make a capital return to the shareholders of Henry Jones.

The Board of Henry Jones regarded the forecast offer as unacceptable. The Board then adopted a plan of action designed to justify a rejection of any takeover offer at a price of $3.95 per share. The plan included a proposed cash return to shareholders at the rate of at least 90c per share and a further distribution of up to $1.00 per share.

On 27 September 1972 the Board of Henry Jones resolved to commence immediately raising funds by the sale of assets for the purpose of making cash payments to members consequent upon an imminent reduction of capital. In a circular to shareholders dated 1 October 1972 the Board said that it recommended a repayment of at least 90c for each $1.00 ordinary share and that, in addition, directors were currently examining the sale of further surplus assets to generate additional funds with a view to providing substantial benefits for shareholders. The circular said that the directors of Henry Jones believed that the then tangible asset backing was at least $5.50 for each ordinary share.

Following further negotiation between the Board of Henry Jones and FCI, an offer by the latter of $4.30 per share for up to 100% of the issued capital of Henry Jones was made. The Board recommended the offer to shareholders. FCI acquired about 78% of the capital of Henry Jones by December 1972.

In a letter to the shareholders of Henry Jones which accompanied the formal takeover documents, the chairman of FCI said that, in addition to receiving an immediate payment of $4.30 per share, shareholders would receive ``a capital return on their remaining shares which it is anticipated will be along the lines already stated by the directors of Henry Jones (I.X.L.) Limited...''.

On 13 December 1972 the Board of Henry Jones was reconstituted following the acquisition of control by FCI. Mr. Elliott became managing director and representatives of his financial backers filled the positions on the Board vacated by the resignation of members of the old Board. The new Board immediately proceeded to realise surplus assets, largely following in that respect the plan that the old Board had put in hand with a view to making a return of capital.

The new Board resolved on 29 December 1972:

ATC 4703

``that the company proceed with statutory requirements relevant to making a return of capital to shareholders. The first return of capital of fifty cents per share is expected to be made in March 1973, and it is proposed to finance this capital return from the sale of investments.''

There was no further meeting of the Board until 27 February 1973. In the meantime the accounts of Henry Jones were prepared and audited (its financial year ended on 30 September) and the other reports necessary for inclusion in the Annual Report were written.

On 27 February 1973 the directors of Henry Jones met and resolved that an extraordinary general meeting of shareholders be held on 28 March 1973, immediately after the conclusion of the annual general meeting to be held earlier that day, to consider and, if thought fit, to pass a special resolution reducing the company's capital and returning to members 99c for each $1.00 share held. The draft report to accompany the annual accounts for the year ended 30 September 1972 was tabled at the meeting and approved by the Board. The draft directors' report contained under the heading ``CAPITAL REPAYMENT AND BONUS ISSUE'' the following:

``Directors previously announced that a capital return of 50 cents per stock unit will be made in March followed by a further 40 cents per stock unit later this year. The planned rationalisation of the Group's activities, necessary to make capital returns, is well in hand and directors now propose that 99 cents per stock unit be returned as soon as the legal requirements can be fulfilled. It is anticipated that cheques will be mailed to stockholders in May this year.

After the capital return, the 1 cent stock units will be consolidated into 50 cent stock units. In addition, stockholders will receive a bonus issue. The effect of these capital changes will be such that for every one dollar stock unit currently held, stockholders wili (sic) receive three 50 cent stock units after 99 cents cash per stock unit has been paid. Your Directors have been advised that the 99 cent cash return and the proposed bonus issue will be tax free in the hands of stockholders...''

The directors' report, the draft of which was approved by the Board on 27 February, was posted to members on 5 March as part of the 63rd Annual Report for 1972 which also included the notice of annual general meeting of shareholders of Henry Jones to be held on 28 March 1973 at 12 noon, the notice of the extraordinary general meeting to be held following the annual general meeting, and the managing director's report, signed by Mr. Elliott, which contained at its end under the heading ``OVERALL PROSPECTS FOR THE COMING YEAR'' the following:

``... as mentioned in the Directors' Report we are able to make a return of capital of 99 cents to shareholders and a bonus issue that will result in every one dollar stock unit currently held, being replaced by three 50 cents stock units. We expect, notwithstanding this return of 99 cents in cash per unit, profitability will increase this financial year...''

It seems that the meeting of directors of 27 February was somewhat hurriedly convened for the purpose of enabling the annual report to be approved and printed. It was attended by only four of the eight directors. Perhaps it was for those reasons that on 7 March 1973, at a fully attended Board meeting of which notice had been given for some time previously, the Board:

``... ratified the 63rd Annual Report for the year ended 30th September, 1972, which had previously been sent to shareholders. In addition to the 99c capital return, covered by the resolution of Directors at their meeting on 27th February 1973, it was specifically ratified by the Directors to proceed with a bonus issue the effect of which would be such that every $1 share currently held would be replaced by three 50c fully paid ordinary shares.''

At that same meeting the finance director, Mr. R.S. Wiesner, presented a written report to the Board setting out details and the timing of the proposed capital return and bonus issue. That document includes under the heading ``PROPOSED CAPITAL RETURN AND BONUS ISSUE'' reference to the capital return of 99c and the bonus issue followed by this statement:

``Effectively shareholders will end up with three 50c fully paid shares for every $1

ATC 4704

share held now. Plan to revalue assets by at least the amount of the capital return.''

Under the heading ``TIMING OF EVENTS'' the following appears:

``March 28: Shareholders approve special resolution for 99c capital repayment

First week in April: Application made to Supreme Court

Mid April: Books closed to determine entitlement

Late April/early May: Extraordinary Meeting to approve resolutions on bonus issue and consolidation of shares

- bonus issue will be 149:1

- consolidation into 50c units allows the bonus issue to avoid fractions.

Day after Extraordinary Meeting: Cheques mailed

Mid May: Bonus share certificates mailed and shareholders will be requested to send in their old certificates but it will not be compulsory thereby avoiding costly administrative follow up on `no replies'.''

Immediately after this under the heading ``CURRENT STATUS OF IMPLEMENTATION'' Mr. Wiesner's report says:

``... Legal work well in hand

- special resolutions for capital return already mailed to shareholders

- Supreme Court documentation in `final draft'

- bonus issue and consolidation resolutions also `in final draft'.''

On 5 March 1973 the company issued a press release which was sent also to the Melbourne Stock Exchange saying:

``Shareholders of Henry Jones (IXL) Ltd. are to receive a capital return of 99c for each $1 share held - and a bonus issue.

Directors have given details of the capital return and the bonus issue in the company's annual report, which was mailed to shareholders today.

The 99c will be paid as soon as the legal requirements can be fulfilled. Cheques are expected to be mailed in May.

After the 99c has been paid the capital of the company will be restructured and a bonus issue made. The effect of this will be that shareholders will receive three 50-cent shares for every $1-share currently held.

The report says directors have been advised that the 99-cent return - and the bonus issue - will be tax free.

Directors add that notwithstanding the capital return, they expect the rationalisation of the Henry Jones group's activities should lead to improved profits.''

On 26 March 1973 Messrs. Price Waterhouse & Co., the auditors of Henry Jones, wrote to its directors in these terms:

``We write in connection with your proposal to revalue the shares held by your company in its subsidiary companies to provide a surplus to be applied in making payment in full of new ordinary shares distributed as bonus shares to the shareholders of your company. You have told us the Board will be considering the revaluation of shares in subsidiaries at a meeting to be held on a date before the proposed extraordinary meeting of shareholders to approve the bonus issue and other proposed re-arrangements in the capital of the company.

You have asked us to comment on the appropriateness of the revaluation... Assuming there has been no material change in these figures since that date, we can say as auditors of your company, we accept your proposed entries to increase the total book value of shares in subsidiaries by approximately $12,000,000, and to credit that surplus to assets revaluation reserve account.''

The Board of Henry Jones met on 28 March 1973 at 9.30 a.m. The secretary tabled the letter from Price Waterhouse & Co., and the directors resolved that certain shares held by Henry Jones in wholly owned subsidiaries be revalued which thus resulted in a surplus upon revaluation of $12,000,000.00. They resolved that this surplus be carried to the credit of the Asset Revaluation Reserve Account and:

``(c) That pursuant to Article 128 of the Company's Articles of Association and

ATC 4705

  • (i) subject to the Supreme Court of Victoria approving the return of 99c a share;
  • (ii) shareholders approving an increase of capital from the reduced capital of $2,309,749.30 to $15,000,000.00 and a subdivision of the unissued shares in the capital of the Company into 50c shares;

the Board of Directors of the Company recommends to shareholders that -

  • 1. the sum of $11,574,215.70 being part of the undivided profits of the Company standing to the credit of Asset Revaluation Reserve Account in the books of the Company (such Reserve consisting (sic) wholly and exclusively of profits arising from the revaluation of assets not acquired for the purpose of re-sale at a profit) and available for dividend, be capitalized;
  • 2. the amount of $11,574,215.70 so capitalized be applied in making payment in full at par of
    • (i) 380,623,570 new ordinary shares of 1 cent each; and
    • (ii) 15,535,860 new ordinary shares of 50 cents each in the capital of the Company.
  • 3. the said new shares be distributed as fully paid up shares amongst the persons registered as the holders of ordinary shares of 1 cent each in the capital of the Company in the various Share Registers of the Company at 5 p.m. (Australian Eastern Standard Time) on the 4th day of May, 1973 in the proportion of -
    • (i) 49 ordinary shares of 1 cent each; and
    • (ii) 2 ordinary shares of 50 cents each for every one share of 1 cent held by each holder;
  • 4. the said new shares after issue -
    • (i) shall rank equally for dividends and in all other respects with the other fully paid ordinary shares of the Company.
    • (ii) shall be accepted by the said shareholders in full satisfaction of their interest in the capitalized amount of $11,574,215.70, and
  • 5. the said new shares be treated for all purposes as an increase in the amount of capital of the Company held by the shareholders entitled and not as income;
  • 6. the amount of $11,574,215.70 capitalized and applied in payment of the new shares be debited against the Asset Revaluation Reserve Account.

(d) That the Directors recommend to shareholders that upon the issue of bonus shares taking effect, that members approve the consolidation of all one cent shares into fifty cent shares.

(e) That the Secretary be instructed to despatch to shareholders, the circular explaining the Capital Reconstruction and Notice of Extraordinary General Meeting called for Thursday, 19th April, 1973 as tabled at the Meeting.

(f) That a press release tabled at the meeting be approved.''

The annual general meeting of Henry Jones was held on 28 March 1973 at 12 noon. It was followed by the extraordinary general meeting of shareholders at 12.15 p.m. At that extraordinary meeting the necessary special resolution was passed to reduce the company's capital in these terms:

``It was resolved as a special resolution that the Capital of the Company be reduced from $10,000,000 divided into 10,000,000 ordinary shares of $1 each (of which 7,767,930 and no more have been issued and are fully paid and 2,232,070 are unissued) to $2,309,749.3 divided into 7,767,930 ordinary shares of 1 cent each and 2,232,070 ordinary shares of $1 each by reducing the nominal amount of the said $1 to 1 cent each and that such reduction be effected by the Company returning to the holders of the said 7,767,930 ordinary shares the sums (sic) of 99 cents for each share held such capital ($7,690,250.7) being in excess of the needs of the company.''

The press release approved at the meeting of the Board was released on 28 March. It said:

ATC 4706

``The Chairman, Mr. T. Marcus Clarke, said at the Henry Jones Annual General Meeting today that profits for the year `should show a significant increase' over the previous year.

Shareholders of Henry Jones (IXL) Limited were told that they would get a dividend of at least 5c for each new share for the year to next September provided the profit expectations were met.

This dividend would represent a payment on existing capital of 15c a share compared with 14c paid for the year to September 1972.

Henry Jones recently announced a capital return to shareholders of 99 cents for each $1 share held and, under a capital restructure and bonus issue, replacing each $1 share with three 50-cent shares.

An Extraordinary Meeting would be held on April 19 to approve the capital restructure and bonus issue arrangements. Books would close on May 4 and cheques for payment of the capital return would be mailed two or three days later.

Shareholders were told that the company was still finalising plans for the development of its South Yarra property. However, it was reported the property would be developed by Henry Jones for the benefit of shareholders in keeping with the community interest and complementing the existing commercial area.''

A notice dated 28 March 1973 of an extraordinary general meeting of the shareholders of Henry Jones to be held at 9.00 a.m. on 19 April 1973 was sent to shareholders by order of the Board. The notice set out in detail the resolutions required to restructure the company's capital following confirmation of the reduction of capital by the Supreme Court, including the necessary resolutions to authorise the issue of bonus shares.

The extraordinary general meeting was held on 19 April 1973 and two ordinary resolutions were passed. The primary Judge summarised those resolutions in these terms:

``The first was designed to increase the capital of the company from $2,309,749.30 (consisting of 7,767,930 ordinary shares of one cent each which were issued and fully paid and 2,232,070 ordinary shares of one dollar each which were unissued) to $15,000,000 by creating 17,767,930 ordinary shares of 50 cents each and 380,628,570 ordinary shares of one cent each; and to sub-divide the previously existing 2,232,070 unissued ordinary shares of one dollar each into 4,464,140 ordinary shares of 50 cents each. Upon that resolution taking effect the company's capital of $15,000,000 consisted of 388,396,500 ordinary shares of one cent each, of which 7,767,930 had been issued and the remaining 380,628,570 were unissued, and 22,232,070 unissued ordinary shares of 50 cents each. The second resolution provided for the issue of bonus shares including those the subject of the present appeal. The resolution was in the following terms -

  • (1) That pursuant to Article 128 of the Company's Articles of Association and to the recommendations of the Directors of the Company and subject to the increase of capital and sub-division of shares referred to in the first resolution having taken effect,
    • (a) the sum of $11,574,215.70 being part of the undivided profits of the Company standing to the credit of Asset Revaluation Reserve Account in the books of the Company (such Reserve consisting wholly and exclusively of profits arising from the revaluation of assets not acquired for the purpose of re-sale at a profit) and available for dividend be capitalised;
    • (b) the amount of $11,574,215.70 so capitalised be applied in making payment in full at par of
      • (i) 380,628,570 new ordinary shares of 1 cent each; and
      • (ii) 15,535,860 new ordinary shares of 50 cents each in the capital of the Company;
    • (c) the said new shares be distributed as fully paid up shares amongst the persons registered as the holders of ordinary shares of 1 cent each in the capital of the

      ATC 4707

      Company in the various Share Registers of the Company at 5 p.m. (Australian Eastern Standard Time) on the 4th day of May, 1973, in the proportion of -
      • (i) 49 ordinary shares of 1 cent each; and
      • (ii) 2 ordinary shares of 50 cents each for every one share of 1 cent held by each such holder;
    • (d) the said new shares after issue -
      • (i) shall rank equally for dividends and in all other respects with the other fully paid ordinary shares of the Company;
      • (ii) shall be accepted by the said shareholders in full satisfaction of their interest in the capitalised amount of $11,574,215.70;
    • (e) the said new shares be treated for all purposes as an increase in the amount of capital of the Company held by the shareholders entitled and not as income; and
    • (f) the amount of $11,574,215.70 capitalised and applied in payment of the new shares be debited against the Asset Revaluation Reserve Account.
  • (2) That forthwith upon the abovementioned issue of new shares taking effect, the 7,767,930 fully paid ordinary shares in the capital of the Company of 1 cent each and the 380,628,570 new ordinary shares in the capital of the Company of 1 cent each be consolidated so that 50 ordinary shares of 1 cent shall constitute one ordinary share of 50 cents.

When that second resolution had taken effect and had been implemented the capital of the company was $15,000,000 divided into 23,303,790 ordinary shares of 50 cents each which were issued and fully paid and 6,696,210 unissued ordinary shares of 50 cents each. A member of the company who had on 4th May 1973 held one dollar shares in its capital became entitled in respect of each one dollar share to hold three fully paid-up shares of 50 cents each in its capital. The appellant was such a one.''

The petition seeking the Court's confirmation of the reduction of capital was presented on 29 March 1973 and heard on 30 March when orders were made sanctioning the return of capital. The order was entered on 19 April 1973. It was not until 4 May 1973 that an office copy of the order confirming the reduction was lodged with the Registrar of Companies together with copies of the requisite resolutions. Also on 4 May the Share Registers of Henry Jones were closed to determine entitlement to the return of capital and the issue of bonus shares.

On 7 May 1973 the certificates for the bonus shares and cheques for the return of capital were posted to shareholders including the taxpayer.

The Supreme Court held that the Board of Henry Jones decided some time after the meeting of directors held on 29 December 1972 and before 27 February 1973 that the bonus issue should be made. The Court accepted the evidence of Mr. Elliott as to the reason why it was ultimately decided to make a bonus issue namely, that it was only after the new Board had decided to return capital in one step at the rate of 99c per share that it was realised that a bonus issue in some form such as that which was finally adopted was a practical necessity. His Honour said:

``A reduction of that kind by itself would have left the company with a nominal capital of $2,309,749.30 divided into 7,767,930 issued and fully paid ordinary shares of 1c each (some 78% of which were not publicly held) and 2,232,070 unissued ordinary shares of $1 each. Shares having a paid up value of less than 20c could not ordinarily have remained listed consistently with the Stock Exchange Listing Requirements. A simple consolidation of each parcel of 20 shares of one 1 cent into one share of 20 cents would have overcome that difficulty but created another. The listed shares were valued on the market at about $4 each even after the take-over and the surplus of assets was such that, even after the proposed reduction of capital and return of cash, they would have continued to be valued at about the same level. Consolidated shares of 20 cents would

ATC 4708

therefore have borne an unacceptably high market value - in the region of $80 each - and there would have been too few of them to have allowed proper trading. The evidence justifies the conclusion that these considerations accounted for the administrative decision to make a bonus issue of the kind that was made. There is, I believe, no evidence inconsistent with that conclusion; and the evidence which leads me to draw it has about it an air of commercial reality which supports the conclusion. As for the timing of the decision, I can say no more on the evidence than that the circumstances which dictated it became evident to one or more of those in charge of the company during January and February 1973, perhaps progressively over that period, and that arrangements were put in hand so that, by 27th February, the Board was in a position to decide upon it as the annual report disclosed. There was on 27th February a point at or by which the arrangements for a reduction of capital proceeded concurrently with those for a bonus issue. By 27th February the intention of the Board was that the reduction would be followed by a bonus issue. The decision that the bonus issue would occur was occasioned by a decision upon the higher rate of the proposed capital reduction; and the implementation of the former was effectively subject to due implementation of the latter. In other words, given that a reduction at the rate of 99 cents was to occur, a bonus issue in some such form as that which was eventually made was regarded as a practical necessity.''

His Honour held that what was done before 27 February constituted an arrangement entered into in terms of para. 44(2D)(b), but that the issue of bonus shares to the taxpayer was not part of that arrangement. His Honour said:

``By 27th February a proposal for a bonus issue had also been made and accepted in principle - perhaps indeed as an inevitable concomitant or consequence of the proposed reduction... By the conclusion of the directors' meeting on 27th February the essential steps which had been decided upon and were required to be taken in order to enable the company by means of a reduction in capital to pay money to its members did not include the bonus issue, and there was no need that they should. The plan for the bonus issue afterwards went side by side with the plan for the reduction. To say, however, that the concurrence signifies that the one was part of the other involves a fallacy as much as to say post hoc ergo propter hoc... My conclusion is that the decision to issue bonus shares was not only subsequent to but was separate from and subsidiary to the previously existing arrangement that had a purpose of enabling the company to pay money. The bonus issue and the decision to make it concerned the capital structure of the company as it was to be at a time after the payment of money was to be effected and were matters on which neither the company's ability nor even its facility to pay money depended. Neither the decision to make a bonus issue nor the issue itself nor any step leading up to it made the company able or more able to pay money or facilitated it or was otherwise necessary to the payment. It is essentially for this reason, in the light of the evidence of Mr. Elliott, that I think the issue of the bonus shares should not be regarded as part of the arrangement a purpose of which was to enable the company to pay money...''

The case does not turn on the credibility of witnesses. The appeal was conducted on the basis of agreed facts. Indeed, there was only slight disagreement between the parties during argument before us as to the correct inferences to draw from primary facts not in dispute.

The Commissioner's case is that the bonus shares in question are deemed to be redeemable shares by virtue of the provisions of subsec. 44(2D) of the Act and that as a consequence the shares did not fall within subpara. 44(2)(b)(iii) but were included in the assessable income of the taxpayer under subsec. 44(1).

The judgment of the High Court in
F.C. of T. v. Lutovi Investments Pty. Limited 78 ATC 4708; (1978) 140 C.L.R. 434 relates directly to the present case. It involved very similar questions to those before us in respect of the year of income ended 20 June 1972. Notwithstanding amendments to the Act by

ATC 4709

Act No. 51 of 1973 which relate to the year of income ended 30 June 1973 in question here and not the previous year which was involved in Lutovi's case, those amendments are not material to this case.

The policy of subsec. 44(2D) is stated in the joint judgment of Gibbs and Mason JJ. in Lutovi's case in these terms (ATC at p. 4712; C.L.R. at pp. 442-443):

``Had redeemable shares not been excepted from the operation of sec. 44(2)(b)(iii) it would have been relatively simple to have circumvented the limits of the exclusion arising from that provision by issuing redeemable shares in satisfaction of a dividend declared out of an amount standing to the credit of an assets revaluation reserve and then redeeming the share by paying to the shareholder the paid-up value of the share. But for the existence of sec. 44(2D) the exception of redeemable shares in sec. 44(2)(b)(iii) would have had a very limited operation. Section 44(2D) is designed to give it a more extensive operation.''

Aickin J. said (ATC at p. 4727; C.L.R. at p. 468)

``The exclusion of redeemable shares properly so called from the exemption accorded to `bonus' shares paid-up from the relevant reserve accounts demonstrates that the objective is to prevent moneys in those reserve accounts from reaching the shareholders in cash without bearing tax, while the company is a going concern.''

We need not trouble to consider the meaning of the word ``arrangement'' in the subsection. It was discussed in Lutovi's case both in the Full Court of this Court and in the High Court.

There was some discussion before us as to the meaning of the word ``enabling'' in the provision. This was considered in Lutovi's case. Gibbs and Mason JJ. were content to adopt the narrowest interpretation of ``enable'' as to ``make able or possible'' rather than the broadest interpretation ``facilitate''. We are content to adopt the same interpretation here.

Lutovi's case reflected a sharp division of opinion among the members of the High Court who decided it. Gibbs and Mason JJ., with whose reasons for judgment Murphy J. agreed, held that, notwithstanding even the absence of discussion at the relevant meeting of directors, when the directors by resolution approved a proposal for the consolidation and reduction of capital and for a bonus issue and directed that an extraordinary general meeting be convened to consider and, if thought fit, pass the necessary resolutions they entered into an arrangement. They, or a majority of them, assented to a plan involving a series of steps. Their Honours rejected the view that subsec. 44(2D) was directed only to arrangements entered into by directors in their personal capacities and otherwise than as a meeting of directors. They said (ATC at p. 4713; C.L.R. at p. 445):

``The subject matter and purpose of sec. 44(2D) indicate that arrangements entered into by directors or shareholders by means of resolutions providing for the transactions dealt with by the subsection fall within its reach. Decisions for the issue of bonus shares, the redemption, purchase or cancellation of shares and the reduction of capital are necessarily made by meetings of directors or shareholders. It is not rational to suppose that Parliament intended to exclude from the operation of sec. 44(2D) arrangements constituted or adopted by resolutions of directors or shareholders. Certainly the language of the provision evinces no evidence of such an intention.''

Their Honours held that para. 44(2D)(b) speaks of the objective purpose of the agreement or arrangement. They held that a purpose of the scheme in Lutovi's case was to make the company able to pay money to shareholders by bringing about a reduction of its capital.

Stephen and Aickin JJ. dissented and held that there was no arrangement.

Lutovi's case established that for an arrangement to be within the subsection it must be consensual and there should be some adoption of it. It is not essential that the parties are committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it notwithstanding their adoption of it.

ATC 4710

In the present case it is plain that at least by mid-December 1972 the directors of Henry Jones intended to realise certain of the surplus assets of the company and its subsidiaries with a view to an early reduction of capital and a return of funds. It seems that they did not turn their minds to the possibility of making a bonus issue until January or February 1973.

The primary Judge held:

``There was on 27th February a point at or by which the arrangements for a reduction of capital proceeded concurrently with those for a bonus issue. By 27th February the intention of the Board was that the reduction would be followed by a bonus issue. The decision that the bonus issue would occur was occasioned by a decision upon the higher rate of the proposed capital reduction; and the implementation of the former was effectively subject to due implementation of the latter. In other words, given that a reduction at the rate of 99 cents was to occur, a bonus issue in some such form as that which was eventually made was regarded as a practical necessity.''

These findings were not challenged by either party.

It is clear that at least by the Board meeting of 27 February 1973 the directors of Henry Jones intended that there would be a reduction of capital of 99c per share, the consolidation of fifty 1c shares into one 50c share and in addition a bonus issue so that each shareholder would receive three 50c shares for every $1.00 share previously held. The directors of Henry Jones had approved a proposal for the reduction of the company's capital, for a bonus issue and subsequent consolidation of capital. They assented to a plan which involved a series of steps. One step was to convene an extraordinary general meeting to consider and, if thought fit, pass the necessary resolutions to reduce capital. A later step was to issue the bonus shares and to consolidate capital. As was pointed out by Gibbs and Mason JJ. in Lutovi's case decisions to issue bonus shares and reduce capital are necessarily made by meetings of directors or shareholders. At least by 27 February 1973 there was an arrangement between the directors that there would be a reduction of capital followed by a bonus issue. The bonus issue was regarded as a practical necessity.

In our opinion when the directors approved the proposal for reduction of capital, bonus issue and consolidation of shares they entered into an arrangement of the kind described in para. 44(2D)(b).

It is plain that the reduction of capital, the issue of bonus shares and the consolidation of capital were closely and inevitably interrelated. Mr. Elliott said, as to the difficulty of making the return of capital without more and having the company with shares of 1c each, ``the only way through it'' namely, the difficulty created by the Stock Exchange requirements and the existence of the 1c shares, was for the company to make an issue of bonus shares. Again he said ``the only course of action I think that was then open to us'' was to have the bonus issue and the consolidation.

The return of capital, the bonus issue and the consolidation of shares were treated by the Board as part of the same exercise. The report of Mr. Wiesner, the finance director of Henry Jones and a close associate of Mr. Elliott, presented to the Board on 7 March 1973 speaks eloquently of this. The timetable and plan prepared by Mr. Wiesner and included in his report required that shareholders pass the necessary special resolutions for reduction of capital on 28 March and that there be a further extraordinary general meeting of shareholders ``in late April/early May'' to approve the necessary resolutions for the bonus issue and the consolidation of shares. 4th May was a critical date to co-ordinate much of the administration necessary to give effect to all capital changes. On that day the special resolution to reduce capital took effect upon lodgment of an office copy of the order of the Court with the Registrar of Companies and the Registers were closed to determine entitlements to capital return and bonus shares. The cheques for the return of capital and the stock certificates for the bonus shares were all posted together to shareholders on 7 May.

Approximately seventy-eight per cent of the issued and paid up capital of Henry Jones was held by FCI. Mr. Elliott himself held 3,000 shares in the capital of Henry Jones upon trust for FCI. It was inevitable that all

ATC 4711

stages of the plan would be passed by the shareholders.

It is not a case of two contemporaneous parallel arrangements, one to reduce capital and the other to make a bonus issue and consolidate capital. They were all part of but one arrangement entered into by the directors of Henry Jones. It is true that the directors did not turn their mind to the question of bonus issue until early 1973 and that they had before then for some time intended to take the necessary steps for the reduction of the company's capital and the return of capital to shareholders. But those earlier proposals merged with the later proposals merged with the later proposals for the bonus issue and the consolidation of share capital. It is commercially unreal for these steps to be treated otherwise than as one overall plan.

We therefore respectfully disagree with the conclusion of the primary Judge that the decision to issue bonus shares was separate from and subsidiary to the previously existing arrangement and that neither the decision to make a bonus issue nor the issue itself nor any step leading up to it made Henry Jones able or more able to pay money or facilitated it or was otherwise necessary to the payment of money consequent upon the reduction of capital.

In conclusion we will refer briefly to two matters. First, it was submitted by counsel for the taxpayer that the words ``in pursuance of'' in the first line of para. 44(2D)(b) relate to the word ``agreement'' and that the words ``or as part of'' relate to the word ``arrangement''. This was said to follow because, so it was submitted, it is both infelicitous and inaccurate to talk of a share being issued ``as part of'' an agreement. We do not agree. Indeed, to adopt the view contended for by counsel for the taxpayer would necessarily do violence to the plain words and structure of para. 44(2D)(b). The language of the introductory words of that provision is clear and unambiguous and can be applied sensibly to the subject matter with which it deals.

Secondly, in our opinion the amended assessment proceeded correctly on the basis that the value of the bonus shares to be included in the taxpayer's assessable income was correctly determined by the Commissioner as $8,691.00.

We would allow the appeal with costs.

THE COURT ORDERS THAT:

1. The appeal be allowed.

2. The orders of the Supreme Court of Victoria be set aside and in lieu thereof the appeal to that Court be dismissed.

3. The amended assessment of the appellant be confirmed in so far as it relates to the receipt of bonus shares capitalized out of the assets revaluation reserve.

4. The respondent pay the appellant's costs of the appeal to this Court and of the appeal to the Supreme Court.


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