Robertson v Federal Commissioner of Taxation

86 CLR 463
1952 - 1218A - HCA

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(Decision by: Williams J)

Between: Robertson
And: Federal Commissioner of Taxation

Court:

Judges:
Williams JKitto J
Taylor J

Subject References:
Taxation and revenue
Estate duty
Assessment
Shares in company
Valuation
Division of shares
Depression in value of shares

Legislative References:
Estate Duty Assessment Act 1914 No 22 - s 8(4)(e); s 16A(1)(a)

Hearing date: MELBOURNE 27 October 1952; 28 October 1952; 29 October 1952
Judgment date: 18 December 1952

SYDNEY

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Decision by:
Williams J

WILLIAMS J. Sir MacPherson Robertson, hereinafter called the deceased, died on 20th August 1945. On that date he held 561,667 shares of PD1 each in the capital of MacRobertson Pty Ltd , hereinafter called the company. For the purposes of Federal estate duty the respondent, the Commissioner of Taxation of the Commonwealth of Australia, valued these shares at 21s. 10d. per share. This is an appeal by the executors of the estate of the deceased from this valuation. They contend that the real value of the shares for the purposes of duty is 14s. 5d. per share. In valuing the shares at 21s. 10d., the respondent made use of s. 16A of the Estate Duty Assessment Act 1914-1947. This section has already been discussed to some extent in this Court by Williams J. in Federal Commissioner of Taxation v Sagar ^[F1] and by Latham C.J. in Federal Commissioner of Taxation v Shaw ^[F2] . The portion of the section relied on by the respondent in the present case is par. (a) of sub-s. (1). The text of the section, so far as material, is as follows:

"16A-(1) Where the Commissioner is of the opinion that it is necessary that the following provisions should apply for the purpose of assessing the value for duty of an estate for the purposes of this Act, the following provisions shall apply:(a) the value of shares or stock in any company, whether incorporated in Australia or elsewhere, shall be determined upon the assumption that the memorandum and articles of association or rules of the company, at the date of death, satisfied the requirements prescribed by the Committee or governing authority of the Stock Exchange at the place where the share or stock register is situate for the purpose of enabling that company to be placed on the current official list of that Stock Exchange".

Alternatively, the respondent relies upon s. 8 (4) (e) of the Act. Paragraph (e) is one of the paragraphs of sub-s. 4 of s. 8 which makes certain classes of property part of the notional estate of a deceased person for the purposes of duty. It provides that property "being a beneficial interest in property which the deceased person had at the time of his decease, which beneficial interest, by virtue of a settlement or agreement made by him, passed or accrued on or after his decease to, or devolved on or after his decease upon, any other person ... shall for the purposes of this Act be deemed to be part of the estate of the person so deceased".

The evidence before the Court consists in the main of a document containing admissions of facts and documents. Paragraph 36 of this document is in the following terms:"On the 4th day of October 1949 it was agreed between the Appellants and the Respondent that for the purpose of the said Assessment the value of the said shares would be accepted by the Appellants as at 21/10d. per share if it should be held that the provisions of s. 16A (1) (a) should be applied and that in applying s. 16A (1) (a) all the shares in the said Company should be treated as being of one class for the purpose of such valuation or if it should be held alternatively that the provisions of s. 8 (4) (e) are applicable; but that if it should be held that s. 16A (1) (a) should not be applied, or that in applying s. 16A (1) (a) all such shares should not be treated as being of the one class, and that the provisions of s. 8 (4) (e) are not applicable, the value of the said shares would be assessed by the Respondent and accepted by the Appellants as at 14/5d. per share".

Section 16A (1) (a) relates to the valuation of shares forming part of the dutiable estate and it is easy to see how the question whether it is necessary to apply its provisions has a material bearing upon the value of the subject shares. Section 8 (4) (e) is an enactment making certain property notionally part of the assets of the deceased for the purposes of duty and it is difficult to see how the application of its provisions could affect the value of these shares. But the parties have so agreed and the agreement presumably means that, while the shares are to be valued at 14s. 5d., the difference in value between 21s. 10d. and 14s. 5d. per share represents the value of the property which should notionally be included in the estate of the deceased if s. 8 (4) (e) is applicable, so that the total value of the shares and this notional property is equivalent to 21s. 10d. per share. The effect of the agreement is that the respondent must succeed if he can rely on either s. 16A (1) (a) or s. 8 (4) (e) of the Act.

Articles 28-30 of the articles of association of the company provided that during the lifetime of the deceased no transfer of the shares in the company should be registered without his consent and that he should have the right to purchase the shares of other members. Article 31 provided that on his death, except in the case of a change of trustees, no shares should be transferred, save with the consent of the directors, to a person who was not a member so long as any member or any person selected by the directors as one whom it was desirable in the interests of the company to admit to membership was willing to purchase the same at a fair value. The respondent relies on these articles in aid of his submission that it was necessary to apply the provisions of s. 16A (1) (a). It is difficult to see how articles 28-30, which ceased to operate upon the death of the deceased, could affect the value of the shares as part of his dutiable estate, and the respondent did not contend that the provisions of article 31 had any effect on this value. He could hardly do so in face of the agreement in par. 36 contained in the first alternative, which is very specific. It is that if it should be held that the provisions of s. 16A (1) (a) should be applied and that in applying s. 16A (1) (a) all the shares in the company should be treated as being of one class for the purposes of such valuation the value of the shares would be accepted by the appellants as at 21s. 10d. per share. The agreement relates to the effect that the notional deletion from the articles of association of article 6 would have upon the value of the shares.

The text of this article must be set out at length. It is as follows:

"6

(i)

Upon the death of MacPherson Robertson the whole of the then issued shares of the Company shall be divided into and become and thereafter be of two classes to be known respectively as No. 1 class shares and No. 2 class shares.

(ii)

The No. 1 class shares shall be all those shares in the Company other than those standing in the register at the date of his death in the name of the said MacPherson Robertson otherwise than as trustee executor or administrator of the estate of a deceased person. The No. 2 class shares shall be all those shares in the Company standing in the register at the date of his death in the name of the said MacPherson Robertson otherwise than as trustee executor or administrator of the estate of a deceased person.

(iii)

The rights following shall as from the date aforesaid be attached to such No. 1 class shares and No. 2 class shares inter se that is to say:

(a)

The No. 1 class shares shall confer the right to receive out of the profits of the Company a cumulative preferential dividend at the rate of 10 per cent per annum on the capital for the time being paid up or credited as paid up on such shares respectively.

(b)

Whenever the profits of any year shall be more than sufficient to pay the preferential dividend aforesaid with any arrears to the close of such year then the surplus profits after payment of such preferential dividend shall be applied in payment of a dividend for such year at the rate of 5 per cent per annum on the capital for the time being paid up or credited as paid up on the No. 2 class shares and thereafter the holders of the No. 1 class shares and the holders of the No. 2 class shares shall be entitled to participate pari passu in any further sum which may be distributed in dividend for such year according to the capital paid up or credited as paid up on such shares respectively.

(c)

In the event of the winding up of the Company the holders of the No. 1 class shares shall be entitled to have the surplus assets applied, first, in paying off the capital paid up or credited as paid up on the No. 1 class shares held by them respectively; secondly in paying off the arrears (if any) of the preferential dividend aforesaid to the commencement of the winding up and thereafter they shall be entitled to participate pari passu with the holders of the No. 2 class shares in the residue (if any) of such surplus assets remaining after paying off the capital paid up or credited as paid up on such No. 2 class shares.

(d)

The rights attaching to the shares of the Company aforesaid inter se from and after the death of the said MacPherson Robertson upon and by reason of the operation of this Article shall take the place of and be to the exclusion of the rights theretofore attaching to such shares or any of them by reason of the conditions of issue or otherwise howsoever.

(e)

In certifying the price of any share or shares under Article 30 hereof the Auditor shall not in arriving at the price which he proposes to certify pay any regard to the provisions of sub-clauses (a) (b) (c) and (d) of this Article or to the provisions of any previous Article of the Company embodying the provisions now contained in such sub-clauses and shall arrive at the price which he proposes to certify on the assumption that such sub-clauses or any previous Article of the Company as aforesaid is not and never has been incorporated in the Articles of the Company."

Section 16A (1) (a) requires that the shares shall be valued upon the assumption that the memorandum and articles of association of the company at the date of death satisfied the requirements prescribed by the committee or governing authority of the appropriate Stock Exchange, in the present case the Melbourne Stock Exchange. Article 6 provides for the division of the issued shares of the company into two classes upon the death of the deceased, that is to say at exactly the same moment of time. It was contended that the words in par. (iii) of article 6 that the new rights shall "as from the date aforesaid" be attached to the two classes of shares mean that these rights would only attach from the commencement of the day after the death of the deceased. In some contexts the words "as from" a certain date can have this meaning. But par. (i) of article 6 provides for the division of the shares into two classes upon the death of the deceased, and it is clear that in this context the rights set out in par. (iii) are intended to attach to the two classes of shares at that moment of time. Accordingly, article 6 operated upon the death of the deceased to divide the issued shares of the company into two classes having the respective rights attached thereto by this article. Paragraph 37 of the document of admitted facts and documents states that the inclusion of article 6 (i), (ii), (iii) (a), (b), (c) and (d) of the articles of association of the company would not as from and after the death of the deceased have precluded the listing of the company's shares by the Stock Exchange of Melbourne, but its inclusion would have precluded such listing during the lifetime of the deceased.

Can it be said that in these circumstances it was necessary to apply the provisions of s. 16A (1) (a) for the purpose of assessing the value of the shares as part of the dutiable estate of the deceased? The first person nominated by s. 16A as the person to form the opinion that it is necessary to apply its provisions is the commissioner. But sub-s. (2) of this section provides that any board or court having jurisdiction to determine, for the purposes of this Act, the value of any shares to which the last preceding sub-section applies, may substitute its own opinion for any opinion of the commissioner under that sub-section. In the present case the respondent formed the opinion that it was necessary to apply par. (a). He did so because article 6 operated to depreciate the value of the shares owned by the deceased upon his death below the value they had in his lifetime. During his lifetime all the shares were of the one class. But for article 6 all the shares would have continued to be of the one class after his death. If the application of the paragraph could effect the notional deletion of this article and authorize the respondent to value the shares on the basis that the whole of the issued shares of the company were of one class, there would be ample justification for the respondent forming the opinion that it was necessary to resort to the paragraph and there would be little doubt that this Court on appeal would not hesitate to form the same opinion.

The crucial question is whether its application could have this effect. In order to comply with the Act it is necessary to ascertain the real value as at the date of death of the assets which form part of the dutiable estate: McCathie v Federal Commissioner of Taxation ^[F3] , at p. 6; Abrahams v Federal Commissioner of Taxation ^[F4] , at p. 29. The real value of an asset is its sale value, that is its prospective value. The assets with which we are here concerned are shares held by the deceased in the company at the date of his death. The company was not then listed on a Stock Exchange so that there was no market in which the shares could be sold or bought. Apart from special statutory provisions, the shares would have to be valued in accordance with the principles discussed in Perpetual Trustee Co (Ltd ) v Federal Commissioner of Taxation ^[F5] , the two cases just mentioned, and Commissioner of Succession Duties (S.A.) v Executor Trustee and Agency Co of South Australia Ltd ^[F6] . That is to say, the court must estimate as best it may the price which a reasonably willing vendor would have been prepared to accept and a reasonably willing purchaser would have been prepared to pay for the shares in question at the date of death, regard being had to the financial position of the company, the nature of its business, and the rights conferred upon its members by its memorandum and articles of association and the general law. Section 16A provides statutory modifications of this process of valuation. It was said in Sagar's Case ^[F7] that the purpose of the section was to eliminate the depressing effect that expert witnesses often claim that certain types of articles of association often found in the articles of association of companies not registered on the Stock Exchange have on the value of shares so that the value of unlisted shares should be assessed upon a more real basis and depend principally upon the profits and assets of the company and the probable yield that investors might reasonably expect to receive in the future as consideration for investing their capital in a business of the nature carried on by the company. Paragraph (a) of s. 16A (1) requires that for the purposes of the valuation the shares must be assumed to be shares in a company having a memorandum and articles of association in a form which satisfy the requirements of the Stock Exchange. There is nothing in the paragraph to alter the general principle that the shares must be valued at the date of death, and the value of shares on a particular date, apart from any assistance that can be derived from comparable sales, must necessarily depend upon the opinion that is formed as to the future prospects of the company. The only alteration made by par. (a) is to substitute a notional memorandum and articles of association for the memorandum and articles of association of the company to the extent to which its actual memorandum and articles of association do not satisfy the requirements of the Stock Exchange on the crucial date.

The constitution of the company prior to the date of death is immaterial. It is the constitution of the company on that date that matters. It can only be necessary to apply the paragraph where the memorandum and articles of association of the company do not then comply with the requirements of the Stock Exchange. In the present case the articles of association of the company were not in the lifetime of the deceased in a form which satisfied these requirements. In particular, article 6 provided that upon his death the whole of the then issued shares of the company, which during his lifetime had been of the one class, should be divided into two classes to be known respectively as No. 1 class shares and No. 2 class shares. The No. 1 class shares were all the issued shares in the company other than those standing in the register in the name of the deceased at the date of his death. The No. 2 class shares were all the shares standing in the register in his name on that date other than shares registered in his name as trustee, executor or administrator of the estate of a deceased person. The rights attached to the No. 1 and No. 2 shares at and from the date of death were those set out in the article. They were rights calculated to give the No. 1 shares a far higher value than the No. 2 shares. But there is nothing in the requirements of the Stock Exchange to prevent a company issuing shares conferring different rights and therefore having different values. Only the No. 2 shares became part of the estate of the deceased, and there was nothing in article 6 which detrimentally affected the prospective value of these shares after this division based on the value of the profits and assets of the company and the yield that investors who purchased the No. 2 shares might reasonably expect to receive having regard to the nature of the business carried on by the company. There was therefore nothing in the memorandum and articles of association of the company in the form that article 6 assumed on the death of the deceased that made it necessary to apply par. (a). No advantage was to be gained from its application, because on and from the death of the deceased article 6 was no longer an article which failed to satisfy the requirements of the Stock Exchange.

As to s. 8 (4) (e) of the Act: the relevant beneficial interest in property which the deceased had at the date of his death was the beneficial interest in the shares he then owned in the company. Article 6 operated upon his death to make these shares less valuable and the shares owned by other shareholders more valuable. But this circumstance is not sufficient to satisfy the provisions of par. (e). To satisfy these provisions, the beneficial interest in the shares owned by the deceased must, by virtue of some settlement or agreement made by him, have passed or accrued or devolved on or after his decease to or upon some other person. The subject property in the present case is the shares which the deceased owned at his death. These shares formed part of his estate after his death. No part of the beneficial interest in these shares passed or accrued or devolved on or after his death to any other person. They simply became shares of less value than they were before. No one acquired any beneficial interest in them except as part of his estate. The No. 1 shares increased in value but they were not the shares of the deceased. They were not his property at the date of his death. He had no beneficial interest in them. Consequently no beneficial interest in these shares could pass or accrue or devolve on or after his death to or upon any other person. He was not in a position to make a settlement or agreement about them because they were not his to settle or agree about.

It was submitted, however, that there was an agreement with the company created by the memorandum and articles of association. The company is a company incorporated in Victoria and s. 20 (1) of the Companies Act 1938 (Vict.) contains the usual provisions found in Companies Acts that the memorandum and articles shall bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles. The meaning of this enactment has been the subject of considerable judicial controversy. In Beattie v E. & F. Beattie, Ltd ^[F8] , at p. 721 Sir Wilfrid Greene said that it is at least good law "that the contractual force given to the articles of association by the section is limited to such provisions of the articles as apply to the relationship of the members in their capacity as members". In Welton v Saffery ^[F9] , at p. 315 Lord Herschell said:"It is quite true that the articles constitute a contract between each member and the company, and that there is no contract in terms between the individual members of the company; but the articles do not any the less, in my opinion, regulate their rights inter se. Such rights can only be enforced by or against a member through the company, or through the liquidator representing the company; but I think that no member has, as between himself and another member, any right beyond that which the contract with the company gives". In Borland's Trustee v Steel Brothers & Co Ltd ^[F10] , at p. 288 Farwell J. said that "A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s. 16 of the Companies Act, 1862. The contract contained in the articles of association is one of the original incidents of the share". In Inland Revenue Commissioners v Crossman ^[F11] , at p. 66 Lord Russell of Killowen said that "A share in a limited company is a property the nature of which has been accurately expounded by Farwell J. in Borland's Trustee v Steel" ^[F12] . His Lordship added:"It is the interest of a person in the Company, that interest being composed of rights and obligations which are defined by the Companies Act and by the memorandum and articles of association of the company". But all these rights and obligations are contractual rights and obligations. It is quite clear that a shareholder has no proprietary rights either at law or in equity in the property of the company. In Short v Treasury Commissioners ^[F13] , at p. 545 Lord Porter said that "a shareholder has no direct share in the assets of a company, he has such rights as the memorandum and articles give him and nothing more". The contract between the company and its members created by s. 20 of the Companies Act or the contract thereby created between the members inter se, if there be any such contract, could not cause the beneficial interest in the shares of one member to pass or accrue to or devolve upon the shares of another member (perhaps "accrue" is the most apt word for present purposes). The property in shares is the property that exists in the shares themselves. Shares do not give an aliquot proprietary right in the property of the company. The whole effect of article 6 upon the death of the deceased was to alter the existing contractual rights of the shareholders against the company and inter se. The article did not cause any beneficial interest in any property owned by one person to accrue to any other person. It merely altered contractual rights upon the death of the deceased. It did not alter any proprietary rights. But par. (e) only operates where the settlement or agreement causes a beneficial interest in property which the deceased had at the date of his death to accrue on or after his death to any other person.

For these reasons the appeal should be allowed with costs and the respondent ordered to amend the assessment under appeal by including the 561,667 shares in the dutiable estate of the deceased at the value of 14s. 5d. per share.