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Insomnia (No. 2) Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Murphy J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 12 March 1986.

Murphy J.

Two taxpayers, Insomnia (No. 2) Proprietary Limited and Insomnia (No. 3) Proprietary Limited appealed to the Court against assessments of tax on income for the year ending 30 June 1977. The Commissioner in making his assessment in each case had disallowed a loss claimed by each taxpayer to have been incurred on trading in shares as a partner in a partnership styled Baseline Share Traders.

By consent, having regard to the fact that the circumstances in each case were substantially the same, with no different principle of law involved, I granted leave for the two appeals to be heard together.

ATC 4147

The partnership, Baseline Share Traders, was formed by deed executed on 27 June 1977. Its members were a number of companies the shares in which had been acquired by a Mr Peter Hutchins, in circumstances to which I shall refer.

Each of these companies was income and profit earning at the time of acquisition and Mr Hutchins thought that by acquiring the companies, and then forming a share trading partnership which would acquire the shares of some ``private companies'' which he owned, and which private companies would declare a dividend to be satisfied by a bonus issue out of a capital reserve, he could reduce the income tax liability of the companies. It was suggested that the partnership was formed because Hutchins also hoped that this might enhance the profits of the companies. I have scrutinized the evidence carefully and I do not accept that Mr Hutchins had in mind any profit-making by the partners when the partnership was formed. All that I am satisfied that he had in mind was the decision of the High Court in
Curran's case (74 ATC 4296; (1974) 131 C.L.R. 409) and Hutchins thought that the circumstances of the partners were such that he could take advantage of this decision, avoid tax and so be advantaged in a pecuniary fashion.

When Mr Hutchins and his employee John Smith were conducting negotiations in Brisbane during May and June 1977 with an accountant acting for the shareholders in what is called the ``Kennedy Group'' of companies, it was not decided until the last moment who the purchaser of the shares of those companies would be. Adelaide Investments Pty. Ltd., another company controlled by Peter Graeme Hutchins, became the purchaser.

At that time it was also envisaged by Hutchins that the group of companies would form a partnership to trade in shares, ostensibly at a profit, but in any event as part of the plan to secure fiscal advantages for its members.

On 27 June 1977, Mr Hutchins set about forming this partnership, and being by this time a director of all companies in the group, there was little difficulty in having a deed drawn up which Mr Hutchins and Mr Smith signed and sealed with the seal of each of the parties to the agreement (ex. C). The taxpayers, Insomnia (No. 2) Pty. Ltd., and Insomnia (No. 3) were two of the partners.

There is no evidence to suggest that the deed was not signed on 27 June 1977, although Mr Hutchins does not remember the precise date of signing. I do not find it difficult to accept his evidence on this matter, for, as Mr Smith said, on his return from Brisbane to Melbourne with the papers relating to the purchase of the shares in the ``Kennedy Group'', he found on a Sunday that Mr Hutchins' office was ``a hive of industry''.

The authenticity of the partnership deed has been challenged on the ground that none of the parties to it had held valid meetings at which it was resolved to enter upon the partnership. I accept for present purposes that the deed was legally effective. A similar criticism has been levelled with differing force at all resolutions, including those of the private companies called Marghelvi Pty. Ltd., Givmarghelvi Pty. Ltd., and Luizzi Pty. Ltd., and I shall return to this criticism later. These private companies were also owned by Mr Peter Hutchins.

As soon as the partnership, which was called Baseline Share Traders was formed, Mr Hutchins who had been appointed manager instructed a Mr John Bate of May and Mellor, stockbrokers in Melbourne, to act as the partnership broker, trading in shares.

Apparently, in Mr Hutchins' mind, it was of some importance to give to this partnership, in the short time that remained of the financial year, an outward facade of being an eager share trader. Some 5000 Woodside shares were purchased on the stock exchange. The partnership deed itself contained in cl. 5 the self-serving assertion of its members that it should ``forthwith'' commence to engage in share trading.

The sharing arrangements between the partners, who included only one outsider, Casuarina Beach Pty. Ltd., were set out in the deed, and as it turned out were tailored to allow the best taxation advantage to be taken by each member of the result of the frenzied movements which were about to occur. These movements involved other companies, also wholly controlled by Mr Hutchins.

These other companies were the ``private companies'', Marghelvi Pty. Ltd., Givmarghelvi Pty. Ltd., Luizzi (soon to be renamed Umen) Pty. Ltd., and Wandeet Pty. Ltd., and Levart (Vic.) Pty. Ltd.

ATC 4148

Mr Hutchins was, he said, authorized to act and did according to the paper material act at meetings on behalf of each and all of these companies. The three private companies Marghelvi, Givmarghelvi and Luizzi were each in a position for different reasons to declare a dividend to be satisfied by a bonus issue of shares to be made out of capital profits reserve. With the principle of
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409 in mind, Mr Hutchins believed that if all the shares in these companies were purchased by a share trader partnership, these companies could then declare a dividend to shareholders to be realized in the shape of a bonus share issue out of the said capital profits reserve, and all the shares could then be sold by the trading partnership, throwing up a paper loss to the partners. Then that loss could be offset against the tangible profits (represented by way of cash in the bank) of the ``Kennedy Group'' of partners (including the taxpayers) for the year ending 30 June 1977, so as to reduce or completely avoid tax which would otherwise be payable by the Kennedy Group of companies.

But, late in June, there was little time for reflection. The paper work involved was extensive, if Mr Hutchins was to achieve his goal (as he said in evidence), namely, the creation of a mirror image of the Curran scheme.

The following steps were to be taken:

  • (1) The partnership was to purchase shares including the shares in the private companies Marghelvi, Givmarghelvi and Luizzi for the purposes of resale after the said companies first declared a dividend to shareholders to be satisfied out of capital profits reserve.
  • (2) The dividends were to be declared out of capital profits reserve in favour of the partners in Baseline Share Traders and applied towards an allotment of bonus shares to shareholders.
  • (3) These allotments were to be made after an amendment to the memoranda of association of the ``private companies'', increasing the share capital of the companies.
  • (Note - It was not planned to give notice of the alteration of the memoranda of association to the Commissioner for Corporate Affairs before each company passed a resolution to issue the bonus shares to shareholders. Following this error it became necessary because of sec. 21(3) of the Companies Act 1961 (Vic.) to make an application later to the Supreme Court of Victoria pursuant to sec. 122 of the Companies (Victoria) Code and Kaye J. on 12 April 1984 made an order that the relevant allotments of shares in the capital of Marghelvi, Givmarghelvi and Umen Holdings Pty. Ltd., (formerly Luizzi) made on 29 June 1977 be validated.)
  • (4) Baseline Share Traders were then to sell all their shares in these ``private companies'', Marghelvi, Givmarghelvi and Luizzi (Umen) to Levart (Vic.) Pty. Ltd. on 30 June 1977 at a price which, when account was taken of the notional price paid by the partners for their shares, threw up and accounting loss of some half a million dollars. Levart (Vic.) Pty. Ltd. was also owned or controlled by Mr Peter Hutchins.

The taxpayers' share of this ``trading'' loss would be reflected in their returns of income for the year ending 30 June 1977.

Whether the taxpayers in fact succeeded in carrying out the steps involved in the implementation of this scheme has been the subject to which much of the cross-examination of Mr Peter Hutchins was directed by counsel for the Commissioner, and I shall have to return to this question.

It is sufficient at this stage of the narrative to say that in their returns of income for the year ending 30 June 1977 (a copy of which was included in the papers forwarded by the Commissioner to this Court and was included in folios 1-8 and 48-49, in each case, which became by consent ex. A) each taxpayer set out in its profit and loss account appended to its income tax return, a profit from the partnership ``Kennedys'' as well as a profit from the partnership ``Baseline Share Traders'' which was marginally outweighed by the deduction of ``Exempt income on Share Trading re partnership Baseline Share Traders'' to throw up a ``Taxable loss carried forward''.

The Deputy Commissioner disallowed this exempt income and loss and adjusted each taxpayers' return by adding back the amounts claimed as exempt income.

ATC 4149

Upon the taxpayers' objection, the Commissioner disallowed the objection, and the taxpayers then requested that the objections be referred to this Court.

Before me, the Commissioner sought to maintain the assessment on the following grounds:

  • 1. Baseline Share Traders was not carrying on a business of trading in shares during the relevant year of income.
  • 2. The shares in Umen Holdings Pty. Ltd., Givmarghelvi Pty. Ltd. and Marghelvi Pty. Ltd. (``the victim companies'') were not at any material time trading stock of the partnership.
  • 3. Baseline Share Traders was not entitled to any deduction under sec. 51 of the Income Tax Assessment Act 1936 (``the Act'') in respect of the acquisition by the partnership of shares alternatively shares in proprietary companies in the relevant year of income.
  • 4. The bonus shares purportedly issued by the victim companies were not validly issued. The order of the Court validating the issue of the shares has no legal effect vis-a-vis the respondent in respect of the relevant year of income.
  • 5. None of the shares in the victim companies were sold by Baseline Share Traders to Levart (Vic.) Pty. Ltd. or any other person in the relevant year of income.
  • 6. No meetings of directors or shareholders of the victim companies were held in accordance with the articles of association of those companies or at all.
  • 7. In so far as the decision in Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409 has any application to the present case that decision is erroneous and ought to be overruled.
  • 8. The arrangement whereby:
    • (a) Baseline Share Traders was formed;
    • (b) capital profit reserves were created in the victim companies;
    • (c) Baseline Share Traders agreed to acquire the shares in the victim companies;
    • (d) bonus shares were issued by each of the victim companies to Baseline Share Traders; and
    • (e) Baseline Share Traders purported to sell the shares in the victim companies to Levart (Vic.) Pty. Ltd. -

    is void as against the Commissioner by reason of sec. 260 of the Act.

  • 9. Transactions purporting to give effect to or carry out the arrangements referred to in para. 8 are shams.
  • 10. The arrangements referred to in para. 8 hereof are fiscally null.

In so far as the Commissioner sought to argue that Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409 was wrongly decided, this Court is bound to accept that its ratio is correct. It would also appear that since
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718 any argument before me to suggest that the arrangements in question were ``fiscally null'', could not hope to succeed on that ground.

The hearing before me occupied two weeks of court time and oral evidence was called and many documents tendered.

Mr Merkel Q.C. and with him Mr Fagenbaum of counsel appeared for the Commissioner and Mr A. Webb Q.C. and with him Mr Reicher of counsel appeared for the taxpayer in each case.

The evidence given by Mr Hutchins, taken in conjunction with the several exhibits tendered by both sides, reveals as much by what is not said, as by what is explicitly said.

Having heard and considered all of the evidence, it is clear that many glaring deficiencies in form came to light as a result of the close cross-examinational scrutiny to which each step in the implementation of the admitted plan was put. I shall have to refer to some of them. Some of these deficiencies may have been avoided by reason of the order of Kaye J. pursuant to sec. 122 of the Companies (Victoria) Code, but even that is not common ground, for it has been argued by counsel for the Commissioner that, occurring as it did several years after the assessment, it cannot be called in aid before me. I am not impressed by this latter argument.

Apart altogether from the strong criticisms made of the validity and efficiency of the

ATC 4150

procedural steps taken, the Commissioner also relied upon sec. 260 of the Act and submitted that it operated to render absolutely void as against the Commissioner and thus to annihilate:
  • (i) the arrangement whereby Baseline Share Traders was formed;
  • (ii) the creation of the capital profits reserve in Marghelvi, Givmarghelvi and Luizzi (Umen);
  • (iii) the agreement whereby Baseline acquired shares in those companies;
  • (iv) the bonus share issue to Baseline; and
  • (v) the sale by Baseline to Levart (Vic.) Pty. Ltd. of the shares held in those companies.

What I propose to do is to look at the submissions made by counsel, and to examine them in the light of the findings that I make on the evidence before me. This involves a consideration of the evidence and of counsel's submissions, simultaneously, but is none the less, I think convenient.

The first submission made was that at the time of the allotment of bonus shares by Marghelvi, Givmarghelvi and Luizzi, Baseline Share Traders were not registered as shareholders in those companies, nor was there any evidence that the taxpayers ever became registered as shareholders in these private companies.

Evidence was given that at the outset a company named Wandeet Pty. Ltd. owned the shares in Luizzi (Umen) and Givmarghelvi, and that Givmarghelvi owned the shares in Marghelvi. All of the shares in Wandeet were wholly owned by Mr Hutchins, at all material times.

There has been no instrument of transfer of shares from Wandeet to Baseline Share Traders produced and there was no evidence led which satisfies me that such an instrument ever existed. The furthest the evidence went in support of the existence of a transfer of shares in any of the private companies to Baseline was that Mr Hutchins was able to recall the signing of minutes of a meeting of directors of each one of the private companies authorizing the making of the transfers in question.

The Commissioner accordingly relied upon sec. 95 of the Uniform Companies Act 1961.

Section 95 reads (in so far as relevant):

``(1) Notwithstanding anything in its article... a company shall not register a transfer of shares... unless a proper instrument of transfer has been delivered to the company...''

At the relevant time each of the companies had articles reflecting the terms of sec. 95. Luizzi and Marghelvi incorporated Table A and reg. 20 of Table A (being the Fourth Schedule to the Uniform Companies Act 1961) read:

``20 Subject to these regulations any member may transfer all or any of his shares by instrument in writing in any usual or common form or in any other form which the directors may approve. The instrument shall be executed by or on behalf of both the transferor and the transferee; and the transferor shall remain the holder of the shares transferred until the transfer is registered and the name of the transferee is entered in the register of members in respect thereof.''

Regulation 21 of Table A contains further strictures regulating the transfer of shares and the retaining by the company of ``The instrument of transfer''.

In the articles of association of Givmarghelvi reg. 22 is in a similar form.

The evidence of Mr Hutchins was to the effect that the share registers of the private companies were not written up until at least ``1st July, may be the 31st March the following year, hopefully by 31st December but some of them dragged on''. Later he said that he had no specific recollection of having executed a share transfer but ``had hoped the share registers and transfer journals were written up before then'' (i.e. before 30 June 1977).

There was mention made in the minutes of the ``private companies'' of the establishment of a Darwin Register, but despite some hesitation and apart from such mention, there was no evidence led to satisfy me of the existence of any Darwin Register (sec. 157) or that any of the requirements of sec. 157(4), (5) of the Companies Act 1961 were followed in connection with these alleged transactions.

Books entitled the share registers and transfer journals of Marghelvi (ex. J(i)), Givmarghelvi (ex. J(ii)) and Luizzi (ex. J(iii)), were tendered and revealed that it was on 29 June 1977 that

ATC 4151

Baseline Share Traders, comprising the Kennedy Group of companies and Casuarina Beach Pty. Ltd. became registered as shareholders in the three private companies, although in the case of Umen Holdings Pty. Ltd. (formerly Luizzi Holdings Pty. Ltd.) it appears that Insomnia Pty. Ltd. and others trading as Baseline Share Traders became registered by transfer on some unspecified date. The transfer journal of Umen Holdings Pty. Ltd. also contains reference to a ``transfer from Darwin Register'' on 29 June 1977.

The importance of the fact that these registers or transfer journals contain repeated reference to 29 June 1977 as the date upon which Baseline became registered as a shareholder in the companies by transfer and allotment lies in the further fact that the resolution submitted to the extraordinary general meeting of each company (e.g. Givmarghelvi Pty. Ltd.) following the directors meeting of 29 June 1977, stated:

``That it is desirable in pursuance of Article 106 of the Articles of Association of the Company to capitalize the sum of $230,496 (being the sum standing to the credit of the following accounts: -

  • Capital Profits Reserve)

and accordingly that such sum be set free for distribution amongst the members of the company shown in the Register of Members of the Company as at the 28th day of June 1977 in the same proportions in which they hold shares in the capital of the company, on condition that the same be not paid in cash but be applied in paying up in full unissued shares of the company to be allotted and distributed credited as fully paid up to and amongst such members in the proportions aforesaid and the Directors shall give effect to this Resolution.''

Baseline Share Traders was not shown in the register of members of Givmarghelvi on 28 June 1977. The resolution passed at the extraordinary general meeting of Givmarghelvi was to the same effect, and the directors meeting which implemented the resolution resolved in the same way.

Similar defects appear in the corresponding Marghelvi resolutions and in the Umen Pty. Ltd. resolutions where 28 June 1977 appears as the relevant date. I am not satisfied that Baseline or its members were shareholders in the private companies on 28 June 1977.

Questions of rectification of the register as between the members and the company may have been open to debate (sec. 155, Uniform Companies Act 1961) but until then, as between each company and the registered shareholder, Baseline was not entitled as a member of the private companies on the register at 28 June 1977 to share in the bonus issue made out of capital profits reserve. Even assuming that an agreement to purchase by Baseline the shares in these companies was made on 28 June 1977, interesting issues might arise as to whether the vendor or the purchaser became entitled to the benefit accruing from the recorded bonus issue. I do not need (in view of my decision on other submissions) to explore these interesting questions.

The books either record the true situation or were faultily kept. The register is prima facie evidence of the matters entered in it. No move has been made to rectify any incorrect entry in the registers. In my opinion, the Commissioner was entitled to conclude upon the material supplied to him as I do on the evidence led before me, that the taxpayers were not on the relevant registers as members as at or on 28 June 1977 and were not legally entitled to the dividends by way of bonus issues made out of capital profits reserve. Thus the question of the applicability of the principle of the Curran case became irrelevant, see
Patrick Corporation Ltd. & Ors v. F.C. of T. 74 ATC 4149 at pp. 4, 163-4, 164; (1973-1976) 140 C.L.R. 247 at pp. 272-273 per Mason J.

The view expressed by Mason J. at first instance in the High Court in the Patcorp case was confirmed on appeal, see 76 ATC 4225; (1973-1976) 140 C.L.R. 247 - McTiernan J. at ATC pp. 4227-4228; C.L.R. p. 283, Gibbs J. at ATC pp. 4233-4234; C.L.R. pp. 293-295, Stephen J. at ATC p. 4237; C.L.R. p. 300, Jacobs J. at ATC pp. 4238-4239; C.L.R. pp. 302-304.

I agree that even if it had been shown that Baseline was beneficially entitled to receive the benefit of the amount of the dividend it did not constitute ``exempt income'' in Baseline's hand under sec. 44(2), of the Income Tax Assessment Act, and that, being income it was assessable (see Gibbs J. 74 ATC 4149 at p. 4234; (1973-1976) 140 C.L.R. 247 at p. 295).

ATC 4152

Next, I have mentioned that these records refer in some places to a Darwin Register. But the evidence led before me does not satisfy me that a Darwin Register ever existed. Indeed, on the evidence before me, I conclude that the paper entries to the effect that such a register existed relating to each company are misleading.

The entries in the registers and transfer journals, which are inconsistent with the case now presented, support the submission that at best the whole scheme was one organised purely on paper, was not legally implemented and was not truly a commercial trading transaction, but rather a sham.

There were other criticisms directed by the cross-examination at the records and legal effect of the merry-go-round meetings of the several companies, and at the effectiveness of the resolutions supposedly passed by the private companies at these meetings.

For example, it was pointed out that each of Marghelvi, Givmarghelvi and Luizzi had regulations in their articles of association which stipulated that a meeting of two directors constituted a quorum, see reg. 83 Table A - Luizzi Pty. Ltd., reg. 83 Table A - Marghelvi Pty. Ltd., reg. 63 and 84 Givmarghelvi Pty. Ltd.

It was submitted that a director who meets with himself, even in another capacity, does not make two. Support for this proposition was found in the authorities. See
Equity Nominees Ltd. v. Tucker (1967) 116 C.L.R. 518 at pp. 522, 525-526 and
Re Efron's Tie and Knitting Mills Pty. Ltd. (1932) V.L.R. 8.

It was argued that each step taken after the first directors' meeting of each private company at which only Mr Hutchins was present, was consequentially bad.

Furthermore in the case of Luizzi, its articles required that a director be a shareholder (reg. 71), and accordingly after Wandeet sold its shares, it had no right to be present or represented by Mr Hutchins at a directors' meeting,
Spencer v. Kennedy (1926) 1 Ch. 125,
Holmes v. Kayes (1958) 1 Ch. 670.

In my opinion there is substance in these submissions.

It was submitted that the consequence of the fact that the directors' meetings were invalid was that there was no lawful allotment of bonus shares.

Further, it was submitted that none of the members' meetings of any of the companies was valid. Only Mr Hutchins was present at each alleged meeting. Nor was there any evidence led to suggest that Mr Hutchins was authorized to act, within the meaning of sec. 140(3), as the representative of Baseline or of its corporate members. Section 140(1)(a) (Companies Act 1961 (Vic.)) requires that two members be present to constitute a meeting, see
Re London Flats, Ltd. (1969) 1 W.L.R. 711 at p. 717; (1969) 2 All E.R. 744 at pp. 750-752.

This submission must be considered in the light of the fact that Mr Hutchins (whatever hat or form he assumed from time to time), was the brains of each company and the sole shareholder, either in his own right or under the cloak of one or other of the companies which he solely owned. It would be highly likely that an order could have been obtained from the Court, directing that a meeting be held in a manner directed by the Court (sec. 142 Companies Act 1961 (Vic.)) but there is no evidence that any such order was sought.

Finally, it was put that, accepting the hypothesis that Baseline did purchase all the shares of Marghelvi, Givmarghelvi and Luizzi, and accepting also that these three companies then declared a dividend in favour of Baseline to be satisfied by way of a bonus issue out of capital profits reserve, Baseline did not sell to Levart (Vic.) Pty. Ltd., the shares in the said private companies on or before 30 June 1977.

There is no document evidencing such sales. The returns of the taxpayers were made on the basis that such sales occurred on 30 June 1977. Accepting for this purpose that the taxpayer (via Baseline) was a share trader, and that the shares in the private companies were stock in trade - then, pursuant to sec. 31 of the Income Tax Assessment Act, the taxpayer at its option may bring in such stock at market value or cost, but the Commissioner may put his own value on such stock (sec. 31C), if a sale has occurred - not at arm's length.

Here we have no evidence led as to the true market value of the said shares. There is here no evidence led of an arm's length transaction. The contrary appears to be the case.

ATC 4153

If there was no genuine sale, the Commissioner's assessment would proceed on a different footing.

The basis for the submission that here there was no sale at all to Levart (Vic.) Pty. Ltd. on 30 June 1977 is solidly founded on the evidentiary material as well as upon its absence.

In the first place, there is no instrument evidencing any such transaction, such as a sale document. The only document in evidence said to relate to the alleged sale is a cheque which is dated 17 August 1977, drawn by Levart (Vic.) Pty. Ltd. in favour of Baseline Share Traders for $636,180.

The books of account of the companies were written up well after the event, and they are completely unreliable, containing many demonstrable errors (or as it was put, ``lies'').

Baseline's cash book (ex. E) is patently false and misleading. It cannot be reconciled with the actual cheque dated 17 August 1977.

The income tax returns of Marghelvi and Givmarghelvi, as lodged for the relevant year, assert that at 30 June 1977 Baseline Share Traders owned the share capital of each of them. They do not refer to Levart (Vic.) Pty. Ltd. From an evidentiary point of view, this might not be relevant to provide evidence against the taxpayers, but when one considers that Mr Hutchins filed all returns, it does in my opinion, assist in the evaluation of the worth of his evidence that Baseline sold its shares in the private companies to Levart (Vic.) Pty. Ltd. on 30 June 1977. I would be slow to accept that evidence.

The taxpayers submit that the confusion which might appear to exist in this paper documentation should not be allowed too easily to influence a decision as to the true factual situation. But as the whole of this contrived scheme depended on paper sales within a discrete group of legal personalities all controlled by the same man, it is, I think, vitally important to the taxpayers' argument that at least on paper the transactions to be relied upon are able to be seen, and confirmed. This is not the position.

In my opinion, the evidence contained in the books and documents tendered, does not support, let alone establish, a sale by Baseline to Levart (Vic.) Pty. Ltd. on 30 June 1977 of the shares in Marghelvi, Givmarghelvi or Luizzi.

The annual returns of Marghelvi Pty. Ltd. filed 26 September 1977 and of Umen Holdings (formerly Luizzi Holdings) Pty. Ltd. filed 26 September 1977 state that at 30 June 1977 Hutchins and Baseline Share Traders were their shareholders and not Levart (Vic.) Pty. Ltd. In the light of the cheque dated 17 August 1977, it might be thought that there may have been at least an agreement to sell on foot on 17 August 1977. But the date of the cheque does not support the taxpayers' contention, but rather that of the Commissioner, namely that at 30 June 1977, Levart (Vic.) had not purchased the shares in question. If it had purchased them, it had not paid for them. But the purchase and sale is the important thing, and there is no reliable oral or documentary evidence tendered, upon which I would be prepared to find that such a sale occurred on 30 June 1977.

Even if Mr Hutchins, wearing one after another of his many hats, intended that Levart (Vic.) Pty. Ltd. (which he also controlled) should have purchased the shares from Baseline (which he controlled) on 30 June 1977, such an intention is of no avail to the taxpayers, if even the outward manifestations of agreement are lacking. This is basic to contract, cf. Chitty on Contracts 25th ed. vol. 1 para. 3.

I am not satisfied that Levart (Vic.) Pty. Ltd. did purchase the share capital in the private companies Marghelvi, Givmarghelvi and Luizzi from Baseline on 30 June 1977, or at any prior date.

The taxpayers relied heavily upon the order made by Kaye J. pursuant to sec. 122 of the Companies (Victoria) Code, validating the bonus share issue made by the said private companies. A good deal of argument before me was devoted to the effect of this order. The order of Kaye J. was made on 12 April 1984, many years after the Commissioner's assessments, which are the subjects of this appeal.

It was argued by the taxpayers that the order of Kaye J. was an order in rem and that the question of the validity of the issue was res judicata. That this was so was said to be implicit in the decision of Burt C.J. in the
Barewa Oil case (1971) W.A.R. 65 at pp. 67-68 and also in the decisions in
Coolibah Pty. Ltd. v. F.C. of T. 80 ATC 4469 and

ATC 4154


Hatfield Enterprises Pty. Ltd. & Companies Act 82 ATC 4122.

Where an appeal against an assessment concerns an issue depending for its determination on the state of mind of the Commissioner at the time that he made the assessment in question, it does appear that material coming into existence after the assessment is made may not be material that will be considered on the appeal, cf.
Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. 75 ATC 4028 at pp. 4032-4033, 4055-4056; (1975) 132 C.L.R. 535 at pp. 543, 578-579.

But an appeal to this Court from the Commissioner's assessment (sec. 187) is an appeal by way of rehearing, a ``proceeding de novo'',
F.C. of T. v. Finn (1960) 103 C.L.R. 165 at p. 167;
F.C. of T. v. Students World (Australia) Pty. Ltd. 78 ATC 4040 at pp. 4051-4052; (1977-1978) 138 C.L.R. 251 at p. 271.

In the present case it is, in my opinion, open to this Court to take into account material which was not available to be put before the Commissioner [or before a Board of Review] whether it be evidence led by the taxpayer or by the Commissioner, provided that it is relevant to the issue. The Commissioner's state of mind is not here determinative of the issue.

However, counsel for the Commissioner went so far in the present case as to submit that even if the only issue on this appeal, was whether the issue of shares by the private companies was illegal (or merely null and void) as a consequence of the fact that it preceded the resolution of the companies authorizing the increase in capital, the order of Kaye J. had no relevance to this issue, because the Commissioner's decision in 1980 had occurred some four years earlier. Even if the only issue was that the private companies failed to lodge notice of the alteration to its memorandum until after the allotment of bonus shares was made, the order of Kaye J. (so it was submitted), could not have been called in aid to prevent that omission from being fatal to the appellant taxpayer's case on the appeal from the Commissioner.

In the present circumstances, I do not accept that this submission is correct.

The applications to Kaye J. on 12 April 1984 were made under sec. 122 of the Companies (Victoria) Code. His Honour ordered that, pursuant to sec. 122 of the Companies (Victoria) Code the allotments of shares in the capital of the private companies made on 29 June 1977 and specified in schedules to the orders ``be validated''.

Section 122 of the Code, in so far as relevant, reads:

``122(1) Where a company has purported to issue or allot shares and

  • (a) the creation, issue or allotment of those shares is invalid by reason of any provision of this Code or any Act or of the memorandum or articles of the company or for any other reason...
  • ... the Court may, upon application made... by a holder... of any of those shares..., and upon being satisfied that in all the circumstances it is just and equitable so to do, make an order...
  • (c) validating the purported issue or allotment of those shares...,

(2) Upon an office copy of an order made under sub-section 5(1) being lodged with the Commission the shares to which the order relates shall be deemed to have been validly issued or allotted upon the terms of the... allotment of the shares.''

This section of the Code takes the place of sec. 63 of the Companies Act 1961 (Vic.), which was in 1961 a new section introduced in the Victorian statute.

It appears to me that, as a matter of statutory construction, an order of the Court pursuant to sec. 122 of the Code, ``validating the issue or allotment'' is intended to have that effect, not only by creating an estoppel per rem judicatum between the parties to the application but also as against the world.

It may be that, if a party interested in the matter was not given notice of a successful ex parte application under sec. 122 that such person could, if he applied immediately, hope to have the matter reopened. Such a view is suggested by dicta in
Cooper v. Wandsworth Board of Works (1863) 14 C.B. (N.B.) 180 at p. 194;
Owners of S.S. Kalibia v. Wilson (1910) 11 C.L.R. 689 at p. 694;
Commissioner of Police v. Tanos (1957-1958) 98 C.L.R. 383 at pp. 395-396. It appears that this would be seen to be an elementary rule of justice.

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On the other hand, as was pointed out in In
re Vanderwell's Trusts (1971) A.C. 912 (per Lord Wilberforce at p. 936) the Crown could be brought in in innumerable cases, if the test of entitlement to appear was whether the outcome of the application to the Court would determine that more tax was payable if the outcome was one way than if it was the other.

The better view appears to me to be that an interest of this sort is of itself insufficient to entitle the Commissioner to be made a party to an application made under sec. 122 of the Code and such view appears consistent with the decision of the Full Court of the Supreme Court of Queensland in
Coolibah Pty. Ltd. v. F.C. of T. 80 ATC 4469.

In any event, no application by the Deputy Commissioner was made to challenge or alter the order of Kaye J. and it stands today. In these circumstances, it is my view that the validation order of Kaye J. is an answer to the challenge by the Commissioner to the validity of the allotment of the bonus shares based on the fact that there was a breach of the Act or Code, or a breach of the memorandum or articles of association of any one of the said ``private companies'', or otherwise. Accordingly in this case I do not accept the Commissioner's submissions on this issue.

Next, the Commissioner submitted that each of the transactions commencing with the purchase of the private company shares were ``shams'', such as were described in
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802 by Diplock L.J. applied in
R. v. Crown Court at Knightsbridge (1983) 1 All E.R. 1148.

The inconsistencies as seen in the documents recording these transactions do, I find, support the view that these transactions were not true commercial dealings, but whether they were properly to be characterized as ``shams'' as apprehended by Diplock L.J. simply because they were carried into operation to enable the taxpayers to proffer to the Commissioner a loss sufficient to offset taxable profits otherwise seen to be made by the partners, is I think doubtful. Did they intend to create legal rights and obligations between the parties? I think it must be said that they did and that they were not shams in this sense. But at the same time the purchase and sale of shares in the private companies to Levart (Vic.) Pty. Ltd. were not real commercial transactions,
Albion Hotel Pty. Ltd. v. F.C. of T. (1964-1965) 115 C.L.R. 78 at pp. 91-92 per Windeyer J. The purchase price and sale price were conditioned by fiscal and not by trading considerations.

Although, I have found that in many instances it is difficult to rely upon the oral evidence of Mr Hutchins, he was at all times quite frank in stating that the dominant purpose of the purchase by his companies of the Kennedy Group of companies was to enable the initiation of the subsequent series of transactions in an endeavour to ``mirror the Curran scheme''. I find that, thereafter Mr Hutchins deliberately endeavoured by a series of steps to create the appearance of a legal replica of the Curran scheme, with all its benefits.

I had reached this point in writing my judgment when the High Court delivered on 18 December 1985 a series of judgments namely F.C. of T. v. Gulland Watson v. F.C. of T.; Pincus v. F.C. of T.

Although these judgments are as yet unreported, a copy of the reasons were delivered to me by Mr Fagenbaum, junior counsel for the Commissioner appearing before me, following notice given to Mr A. Webb Q.C. who appeared for the taxpayers. [CCH Note: These decisions have since been reported at 85 ATC 4765.]

I have now read these judgments which consider the operation of sec. 260 of the Income Tax Assessment Act 1936 (Cth) as amended, as it is applicable to contracts, agreements or arrangements entered into before 27 May 1981 (when the Act was further amended).

Counsel on both sides have delivered written submissions as to their relevance to the present appeals. In my opinion it becomes unnecessary to consider many other submissions made by both parties in this appeal.

From the judgments of Gibbs C.J. and Dawson J. in the above-mentioned trilogy of cases it is made clear that the present series of transactions which I have to consider, even assuming (in the taxpayers' favour) their effect and validity otherwise to be as intended by Mr Hutchins, fall to be judged against sec. 260 according to their ``purpose or effect''. Here we find a prearranged and planned course of

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action involving several artificial steps which I find were not commercial transactions, and, in my opinion the purpose or effect of the arrangements was simply ``to provide an escape for the taxpayer from the payment of tax in a manner precluded by sec. 260'' (per Dawson J. in
F.C. of T. v. Gulland 85 ATC 4765 at p. 4791).

``Purpose'' may be defined as the result aimed at and ``effect'' may be defined as the result achieved. These statements might be seen by many as self evident were it not for the several decisions of the Court which preceded the decision in Gulland, and were it not for the interpretation of those decisions apropos sec. 260, to which Deane J. refers in his dissenting judgment in the aforementioned trilogy of cases decided on 18 December 1985.

I may, however, now approach the instant appeals and the Commissioner's submissions concerning them and sec. 260 of the Act in the light cast by the said majority decisions of the High Court in those cases.

I need spend little further time concerning the instant cases. If the transactions had a purpose which (as I have found above) they did not achieve, then the taxpayers' appeals cannot succeed. If they had a purpose to avoid the payment of income tax by the taxpayers as Mr Hutchins stated, and if the transactions were so carried out as to have the effect (as he intended) of achieving that purpose, then in my opinion they are none the less struck down by sec. 260, and are absolutely void, as against the Commissioner.

I find that the incidence of tax in the ordinary course was intended to fall upon the taxpayers and that the arrangements made late in June 1977 by the taxpayers were purposed to avoid this occurrence. Accepting the hypothesis that the arrangements made were otherwise effective then I find that the arrangements were rendered null and void by sec. 260. I find that the arrangements were made in this precise way so as to avoid the incidence of tax on the taxpayers. This was not, indeed, made the subject of debate by Mr Hutchins.

The nature of the Baseline partnership, that is to say whether it was a true share trading partnership, was debated. I find that it was contrived. There is no debate but that in so far as it attempted to give to Baseline the appearance of being a share trader, it did so solely in order that colour might be lent to the picture which was to be painted of its partners as share traders. The partners, it was intended, could then demonstrate for taxation purposes profits and losses on share trading transactions. This would then enable the Curran principle to be called in aid, when the private company shares were purchased, a dividend to be satisfied by a bonus share issue out of capital profits reserve declared, and notional trading losses to be thrown up on the immediate sale of those shares at a pre-ordained figure.

On the evidence, I find that in the instant cases, there was no other immediate purpose in the minds of the partners of Baseline than the necessity to ``mirror Curran'' so that in buying shares including the private company shares it might appear that the latter purchases were share trading transactions in the course of their business and that the shares were stock in trade. I doubt very much whether it can be said that between 27 June 1977 and 30 June 1977, Baseline had become a share trader so as to characterize the private company shares as stock in trade.

In any event, the arrangements which the taxpayers attempted to make were artificially contrived solely for the purpose of avoiding taxation.

It cannot avoid being characterized as a manufactured arrangement, altogether outside the normal business of the taxpayer. It was not a genuine business transaction or series of transactions, being designed solely for tax avoidance. In effect, Mr Hutchins (the brains of the taxpayers), admitted that this was so, no doubt encouraged by the judgments in Curran's case to believe that an intent to take advantage of such a series of arrangements would not attract sec. 260 of the Act. But the recent decisions demonstrate that in the circumstances his belief was ill-founded.

In Curran's case itself, the appellant was beyond question a share dealer and it was remarked by Gibbs J. (as he then was) that ``although it may be surmised that the issue was made with an eye to its consequences under the taxation law, it was not suggested that what was done attracted the operation of sec. 260 of the Act'' ((1974) 131 C.L.R. 409 at p. 418).

In these circumstances, Menzies J. also disregarded the purpose of the transactions

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``notwithstanding that the purchase was made with an eye to what was, in due course, done'' (131 C.L.R. at p. 417).

That is not the present case. Here the Commissioner relied upon sec. 260 to render the transactions null and void against him.

As a matter of construction, I find that, in accord with these recent decisions, sec. 260 applies to render null and void, as against the Commissioner, the present series of transactions and the appeals in each case should stand dismissed. I so order.


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