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Humes Limited v. Comptroller of Stamps (Vic.)

Judges:
Kaye J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 19 May 1989.

Kaye J.

This is an appeal pursuant to sec. 33B of the Stamps Act 1958 against an assessment of duty charged on a convertible note certificate.

By a certificate dated 1 May 1987, Humes Limited (``Humes'') certified that S.C.I. Securities Pty. Ltd. (referred to in the certificate as ``Smorgon'') is the holder of 74 million convertible notes of ten cents each.

On 25 August 1987, upon Humes' request for an opinion, the Comptroller assessed the certificate dutiable under Heading XXII of the Third Schedule of the Act in the amount of $326,884 as the duty chargeable upon the instrument. In a letter of 26 August 1987 the solicitor for the Comptroller informed Humes that the assessment was made on the basis that the certificates secure the sum of $1.10 per note on conversion under condition 6 of the certificate. Humes objected to the assessment. By a notice of 23 November 1987, the Deputy Comptroller disallowed Humes' objection on a number of grounds, including that the instrument relates to 74 million convertible notes, each note securing an amount of $1.10. Humes, being dissatisfied with the disallowance of its objection, required that its objection against the assessment should be treated as an appeal.

Before the Court, it was argued on behalf of Humes that the certificate is not an instrument chargeable with duty under the Act, but if it is chargeable, the duty should be assessed on the par value of ten cents per note.

Consequently the primary question is whether the convertible note certificate is a debenture within the meaning of Subdiv. 17, Div. 3 of Pt II of the Stamps Act. Debenture for the purposes of Heading XXII of the Third Schedule is defined by sec. 137N, to the extent relevant to the certificate, as follows:

```Debenture' includes debenture stock, bonds, notes and any other document evidencing or acknowledging indebtedness of a corporation in respect of money that is or may be deposited with or lent to the corporation, whether constituting a charge on property of the corporation or not, but does not include -

  • ...
  • (v) a document, not being an acknowledgement of indebtedness of a corporation in respect of money that is deposited with or lent to the corporation, that does not create indebtedness;''

Thus, by definition, the essential requirements of a document to be a debenture are first that the document evidences or acknowledges indebtedness of a corporation, and secondly that such indebtedness is in respect of money deposited with or lent to the corporation. It follows that from the contents of the document it must appear or be capable of being inferred that there is a debtor and creditor relationship existing between the corporation and the lending or depositing party. Emphasis to the requirement of a debtor/creditor relationship would appear to be added by the exclusion from the definition those matters set out in para. (v), in particular, a document ``not creating indebtedness''. The construction of the exclusion provision was discussed but without expressing any opinion about its operation by Murphy J. in
Comptroller of Stamps v. Associated Broadcasting Services Ltd. (1988) 19 A.T.R. 1401 at pp. 1404-1405.

Mr Berglund, counsel for Humes, submitted that the contents of the certificate do not acknowledge or evidence indebtedness of the company in respect of moneys deposited with it or lent to it. The document, it was said, contains no more than an acknowledgment that Smorgon is the holder of convertible notes issued by Humes, giving Smorgon the right to convert the notes into shares in the capital of Humes, but not the right to repayment of moneys paid by it. It is significant, counsel contended, that whereas by the conditions of issue of the convertible notes, appearing on the reverse side of the certificate, Humes has an option to repay the notes in the circumstances and in the manner provided for by para. 9, the conditions do not reserve to Smorgon an option or right to require repayment of the notes.

If the holder of convertible notes is analogous to the holder of redeemable preference shares, counsel's submission derives support from
Handevel Pty. Ltd. v. Comptroller of Stamps 85 ATC 4706; (1985) 157 C.L.R. 177 and particularly from the following passage of the joint judgment of Mason, Wilson, Deane and Dawson JJ. at ATC p. 4714; C.L.R. p. 193:

``By no stretch of legal imagination can money subscribed for the issue of

ATC 4648

redeemable preference shares be described accurately as money lent or money advanced, even in a case in which there is an obligation, rather than an option, to redeem the shares on or before the date stipulated for redemption. The moneys are paid by the shareholder for the issue of the shares and on the issue of the shares he becomes a member of the company entitled to the rights which attach to the shares.''

Their Honours at ATC p. 4716; C.L.R. p. 196 said:

``And it has never been suggested that a promise in writing by a company to purchase shares at a future date amounts to a debenture in the ordinary sense of that term (cf.
I.R. Commrs v. Henry Ansbacher and Co. (1963) A.C. 191 at p. 205). Nor has it ever been suggested that a specific mortgage of land to secure a future obligation to purchase property amounts to a debenture according to its ordinary meaning.''

However, Professor Ford in Principles of Company Law, 4th ed. (1986) p. 161, para. 862 said of options to take up unissued shares that ``options are sometimes given to lenders to have their loans redeemed by the issue of shares. The lenders are said to have convertible debentures or convertible notes''. Under the subheading ``Convertible Debentures or Convertible Notes'' to the heading ``Conversion of Debt Finance to Share Capital'', the learned author stated:

``Options are sometimes given to lenders to have their loans redeemed by the issue of shares. In terms of company financing the option may be thought of as potential equity in the legal form of a debt. In that usage the option is the reverse of a redeemable preference share which is sometimes thought of as debt in the legal form of a share. From a company's viewpoint one of the advantages of this type of financing is the possibility that by the time the loan matures the company's shares will have sufficient market value to attract the lender to take them up so that the company will not have to raise funds to redeem the loan. If there is a strong possibility of its shares consistently commanding a premium the company is enabled to borrow at a low rate of interest, and this will be an advantage if it is financing a new plant which will take some time to earn profits. Convertible debentures or notes may be an alternative to an issue of preference shares for a public company whose ordinary shares have a market value below par. Investors who take up the convertible securities will have an option to become ordinary shareholders if the company's fortunes improve.''

I respectfully accept Professor Ford's distinction between a convertible note and a redeemable preference share. However, the existence of the distinction does not ipso facto resolve the question whether the certificate the subject of this appeal is a debenture as defined in sec. 137N. Nor is the answer to the question available solely from the face of the certificate. For the purpose of determining whether the certificate contains the required evidence or acknowledgment, it is necessary to examine and consider the conditions of issue of the convertible notes described in the certificate. The conditions relevant for this purpose are those appearing in the following paragraphs which read:

``1. Amount:

The aggregate face value of all Notes to be issued shall be $7.43 million (comprising 74,300,000 Notes with a par value of 10c per Note).

2. Issue Price and Advance Premium:

The Notes shall be issued at 10c par per Note (the `Issue Price'). An advance premium of $1.00 per Note (`Advance Premium') shall also be payable in accordance with paragraph 5(2).

3. Final Conversion Date:

The last date on which Notes may be converted by Smorgon shall be 30 June 1994 (the `Final Conversion Date').

4. Date of Issue:

The Notes shall be issued on the Completion Date. (It was accepted on behalf of the Comptroller that the completion date was 1 May 1987, being the date of the certificate.)

5. Payment:

  • (1) The Issue Price shall be paid as follows:
    • (a) 1c on application; and
    • (b) 9c on or prior to the second anniversary of the Completion Date.

      ATC 4649

  • (2) The Advance Premium shall be paid as follows:
    • (a) 10c at the time of application for the Notes; and
    • (b) 90c on the same day on which the balance of the Issue Price is paid pursuant to paragraph 5(1)(b).

6. Conversion:

  • (1) Smorgon may convert the Notes as follows:
    • (a) subject to paragraphs 6(1)(b), 6(2), 6(4), 6(5), 7 and 9(4), the Notes may be converted at any time up to and including the Final Conversion Date
    • (b) subject to paragraphs 6(2), 6(4), 6(5) and 9(4) a maximum of 31.5 million Notes may be converted in the period between the Completion Date and 1 November 1988 (both dates inclusive).
  • (2) Smorgon shall give not less than 24 hours prior written notice to Humes of the exercise of any of its conversion rights. Notice shall be effected by delivering to Humes the certificate in respect of the Notes with the conversion notice thereon duly completed and executed. Notice of conversion cannot be withdrawn without the prior written consent of Humes.
  • (3) The Notes may be converted into Shares ranking with other Shares in accordance with paragraph 13 on the basis of one Share for each Note held (subject to any increased entitlement as described in paragraph 12). Shares shall be allotted:
    • (a) subject to the condition that the sum of $1.70 per Note shall be payable with the conversion notice referred to in paragraph 6(2);
    • (b) at $2.80 per Share (being 50c par value and $2.30 premium) credited as fully paid up to par value and premium (the premium comprising the aggregate of the following amounts -
      • the amount payable pursuant to paragraph 5(2)(a);
      • 50c of the amount payable pursuant to paragraph 5(2)(b); and
      • the amount payable pursuant to paragraph 6(3)(a)).
    • ...

9. Repayment:

  • (1) Subject to paragraph 15(4), there is no fixed repayment date for the Notes and Humes shall (subject to paragraph 15) only have the right to repay them in accordance with the following provision of this paragraph 9.
  • (2) On the last day of the months of April or October in any year falling after the Final Conversion Date, Humes may (on the expiration of not more than 60 or less than 30 days notice to Smorgon) repay all, or from time to time some, of the Notes at par (being 10c per Note) together with all interest then due (if any) in respect of all the Notes, subject as provided in paragraph 15.

10. Interest:

The Notes shall bear interest at the rate of 10% per annum on the amount (from time to time) paid up on the Issue Price. Interest shall be payable on 30 April and 31 October of each year. The first interest payment shall be due on the 30 April or 31 October first occurring after the Completion Date and shall be pro rated for the number of days in the period between and including the Completion Date and the date upon which the first payment of interest is due. Interest shall cease to accrue:

  • (a) on any Notes which have been converted - from the date for payment of interest last preceding the date of conversion of those Notes;
  • (b) in any other case - upon repayment.

...

15. Subordination:

  • (1) The Notes shall constitute unsecured obligations of Humes and shall rank equally with the Class B Convertible Notes.
  • (2) Prior to an order being made or an effective resolution being passed for the winding up of Humes in accordance with

    ATC 4650

    the Code the rights of Smorgon are subordinated to the claims of Senior Creditors only to the extent that the obligations of Humes to make payments of principal and interest in respect of the Notes are conditional upon Humes being solvent at the time of payment by Humes and in that no principal or interest shall be payable in respect of the Notes except to the extent that Humes could make such payment and still be solvent immediately thereafter. For this purpose, Humes shall be considered to be solvent if:
    • (a) it is able to pay its debts to Senior Creditors as they fall due; and
    • (b) its Assets exceed its Liabilities.

    A report as to the solvency of Humes by two Directors of Humes or the Auditors or, if Humes is being wound up, by its Liquidator shall, unless the contrary is proved, be treated and accepted by Humes and Smorgon as correct and sufficient evidence thereof. Interest which is not satisfied on the interest payment date relating thereto as a result of the condition referred to in this paragraph 15(2) not being satisfied shall be paid to Smorgon if, and as soon as, the condition is satisfied.

  • (3) The maturity date of the Notes shall be the first date on which an order is made or an effective resolution is passed for the winding up of Humes in accordance with the Code and upon such maturity date Humes shall be obliged to repay the Notes in accordance with paragraph 15(4).
  • (4) If an order is made or an effective resolution is passed for the winding up of Humes in accordance with the Code, Humes shall in lieu of any other payment on the Notes due but unpaid be obliged to pay, in respect of the Notes, such amount as would have been payable if Smorgon had, either on the day immediately preceding the presentation of a petition for the commencement of a winding up of Humes or on the date of the creditors' or shareholders' meeting at which the relevant resolution for a winding up was passed, as the case may be, had the right to receive in such winding up in preference only to the rights of the preferred and ordinary shareholders and creditors whose claims rank or are expressed to rank after Smorgon in respect of such Notes, but subject to paragraph 15(1), an amount equal to the amount which a holder of a Class B Convertible Note shall be entitled to receive in such winding up provided that Smorgon shall not be entitled to receive an amount per Note in excess of the amount paid to Humes in respect of each Note.''

The first observation to be made from the conditions is that on 1 May 1987 notes at a par value of ten cents per note, being the issue price, and subject to an advance premium of $1 per note, were issued. The last day on which the notes may be converted into shares by Smorgon will be 30 June 1994, which is described as the final conversion date. Payment of the issue price of one cent per note was required to be made on application, which was the completion date. If the conditions contained in para. 5(1)(b) were complied with, on the second anniversary of the completion date, namely, 1 May 1989, each note would be fully paid up to its par value by Smorgon. Each note bears interest at the rate of 10% per annum from the completion date. Interest ceases to accrue from the date of the last payment of interest before conversion, or upon repayment of the note.

Payment of ten cents of the advanced premium was made at the time of application, and the balance of $1 was required to be paid on the same day as payment of the balance of the issue price was paid. Interest, however, is not payable on the amount of the advanced premium paid.

To convert the notes into shares, Smorgon is required to exercise its right on or before 30 June 1994, which will be the final conversion date. Thereafter, whatever rights it might have, Smorgon will have no right to have its notes converted. On the other hand maturity of the notes will be possible on the day when an order is made or a resolution is passed for the winding up of Humes: para. 15(3). On the maturity date, Humes would be obliged to repay the notes in accordance with the terms of repayment provided for by subpara. (4) of para. 15. Other than the maturity date, there is no fixed date for repayment of the notes.

ATC 4651

Mr Berglund submitted that by condition para. 15(4), the obligation of Humes to make repayment in the event of an order or resolution for winding up of the company is limited to payment of interest accrued on the notes. However the terms of the condition are expressly directed to the amount per note in excess of the amount paid to Humes in respect of each note to which Smorgon will be entitled to receive on maturity of the notes. This amount is the principal sum paid in respect of each note. By subpara. (3) of condition para. 15, the obligation of Humes is to repay the notes, that is, the par value of each note, or if the note has not been paid in full so much of the issue price as has been paid. This may be accurately expressed as the principal sum paid by Smorgon in respect of each note.

One situation to which subpara. (4) of condition para. 15 would apply would be in the event of the maturity date preceding the second anniversary of the completion date, and the balance of the issue price of the notes then remaining unpaid. In such circumstances the amount of principal in respect of each note which Smorgon would be entitled to receive would be an amount not exceeding the amount paid by it to Humes; this amount might be no more than one cent per note paid on application. Subparagraph (4) also limits the amount of interest for which Humes would be liable to interest on the amount of issue price paid; and the ranking of Smorgon amongst the creditors of Humes for repayment of so much of the issue price paid and accrued interest is fixed by this condition.

Of particular significance in this connection are the conditions providing for priority of payment contained in subpara. (2) of para. 15. By those conditions, before an order is made or resolution passed for winding up of Humes, Smorgon's rights against Humes for payment of principal in respect of the notes are subordinated to the claims of ``Senior Creditors''.

From the several conditions of issue of the convertible notes, I conclude that the total amount of the issue price of each note paid by Smorgon is the principal sum of money lent to Humes at a fixed rate of interest, that the principal together with accrued interest is repayable to Smorgon at the option of Humes which may be exercised by it after the final conversion date, and that in the event of the notes not having been converted into shares and an order or resolution for winding up of Humes having been made, Smorgon would have a right to repayment of the principal and to payment of interest accrued on the principal. It follows that moneys advanced by way of payment of the issue price by Smorgon under the conditions of the convertible note issue are moneys lent to Humes, which loan may be converted into shares by Smorgon at its option at any time until the final conversion date, that thereafter Humes, at its option, may repay the notes at par, and that moneys lent, which on the day of an order or resolution for the winding up of Humes have not been converted into shares, constitute a debt owing by Humes to Smorgon. Thus the conditions of the convertible notes issue operated to create a debtor and creditor relationship between Humes and Smorgon, so that the certificate acknowledges indebtedness by Humes in respect of money lent to it by Smorgon. The notes may be described in the terms referred to by Professor Ford as ``potential equity in the legal form of a debt''. Consequently, in my opinion the certificate is a debenture as defined and therefore chargeable with duty under Heading XXII of the Third Schedule.

It then becomes necessary to consider whether the Comptroller was in error in assessing the duty chargeable on the basis that the certificate secured $1.10 per convertible note. The duty chargeable upon a debenture as defined is required to be calculated on the amount secured by the instrument; Heading XXII of the Third Schedule. The amount secured is the amount deposited with or lent to Humes. That sum is the amount repayable by Humes at its option under condition para. 9(2), or, if the option has not been exercised, the amount payable on the maturity date under condition para. 15(3). As I have already noted, Humes exercising its option is required to pay the notes at par value, namely ten cents per note. Again, it is the issue price, being either the amount paid on application or the total of ten cents paid on or before 1 May 1989; this is the sum lent to Humes.

For the purpose of calculating duty, the par value of each note being the amount lent, is the amount secured. It matters not that only one cent of the issue price of each note was paid by Smorgon, or that Smorgon might not pay the balance of the issue price on or before the

ATC 4652

second anniversary of the completion date. The sum of ten cents per note is the sum which is payable for each note, and this sum is the basic amount secured; see
Ansett Transport Industries v. Comptroller of Stamps 80 ATC 4323; (1981) V.R. 35 at ATC pp. 4331-4333; V.R. pp. 46-47 per Tadgell J.

The advance premium of $1 per note is neither repayable at the option of Humes nor payable on the maturity date by Humes. Moreover interest is not payable on the advance premium. It is the consideration paid or payable by Smorgon for the issue of a convertible note, and it is a sum which Humes in the exercise of its option is not required to repay or refund. Again Smorgon having no right to repayment of the advance premium at any time including on the maturity date, it is not recoverable. The premium paid for the sum secured is not part of the amount secured;
Knights Deep Ltd. v. Comptroller of Inland Revenue (1900) 1 Q.B. 217. Similarly, the sum of $1.70 per note payable with the conversion notice is consideration payable by Smorgon for the conversion of the notes into shares.

For these reasons, in my opinion, the amount secured by the certificate was ten cents per convertible note. It follows that the Comptroller was in error in assessing duty chargeable on the amount of $1.10 per note.

I therefore uphold the appeal with costs and order that the assessment be set aside and that the matter be remitted to the Comptroller for reassessment according to law.


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