Industrial Equity Ltd v Blackburn

[1977] HCA 59

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(Judgment by: Jacobs J)

Industrial Equity Ltd
vBlackburn

Court:

Judges: Stephen J
Mason J

Jacobs JMurphy J
Aickin J

Subject References:
Companies
Dividends
Interim dividend
Capitalized profits
Date of declaration of dividend
Date of payment of dividend
Dividend not payable except out of profits
Group accounts
Profits insufficient
Whether distribution valid
(NSW) Companies Act 1961 as amended, s 376

Legislative References:
Companies Act 1961 (NSW) - s 376(1); article 129
Companies Act 1896 (Vic) - s 48

Case References:
Ammonia Soda Company Ltd v Chamberlain - [1918] 1 Ch 266
Burnes v Pennell - (1849) 2 HLC 497
Dovey v Cory - [1901] AC 477
Lee v Lee's Air Farming Ltd - [1961] AC 12
Lee v Neuchatel Asphalte Company - (1889) 41 Ch D 1
Potel v Inland Revenue Commissioners - [1971] 2 All ER 504
Re National Bank of Wales Ltd - [1899] 2 Ch 629
Re National Funds Assurance Company - (1878) 10 Ch D 118
Re Severn and Wye and Severn Bridge Railway Company - [1896] 1 Ch 559
Salomon v Salomon & Co Ltd - [1897] AC 22
Trevor v Whitworth - (1887) 12 App Cas 409
Verner v General and Commercial Investment Trust - [1894] 2 Ch 239
Walker v Wimborne - (1976) 50 ALJR 446

Hearing date: 22 August 1977
Judgment date: 15 November 1977

Sydney

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Judgment by:
Jacobs J

I am of opinion that the whole of the special distribution made in mid-November 1975 was invalid and I would dismiss the appeal.

The special distribution needed to be made out of profits earned up to a date which was either the date of the declaration of the special distribution as a dividend or the date of the making of that distribution. I do not find it necessary to decide which of these dates is the relevant one in application of s 376(1) of the Companies Act or art 129 of the company's articles of association and I would prefer not to express a concluded opinion on this question.

I am satisfied that the relevant profits earned must be profits in the company itself, that undistributed profits from subsidiaries cannot as such be taken into account. I do not wish to add anything to the reasons which Mason J has given for this conclusion.

Next, I would make it clear that the appellants expressly disclaimed any reliance upon the accumulation of profits in subsidiary companies as evidence that the shares in those subsidiaries had additional value, so that, if a revaluation of assets had taken place, there would have been disclosed capital profits with the result that such capital profits could be taken into account even without a revaluation. It was accepted before this court that the reasoning of Buckley J in Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] 1 Ch 353 correctly stated the law.

The question then is -- did the respondents who bore the onus of proof establish that there were no profits sufficient to cover the amount of the special distribution? The appellants have submitted that they did not, in that the respondents relied on the accounts of the company up to 30 June 1975 and did not establish that profits had not accumulated between that date and the dates of declaration and payment (or distribution) of the dividend. It was submitted that the dividend could be regarded as an interim dividend and might have been out of profits made or disclosed after 30 June 1975. I am satisfied that the distribution could not be regarded as an interim dividend in respect of the financial year ended 30 June 1976. I agree with the reasons expressed by Mason J for this conclusion and do not wish to add anything in this respect. Further, I am not satisfied that it would make any difference even if it were. No dividend can be paid except out of profits and the impugned dividend and distribution was in fact paid and made. The application of this requirement is not governed either by accounting periods or the accounting system.

The question is whether there were profits at the relevant time which I shall take to be the time of the payment and the making of the distribution. (If there were not profits at that date then certainly there were not profits at the date, a little earlier, when the dividend was declared and I am therefore content to examine the position at the date of payment and distribution.)

It must be borne in mind that, although the respondents bore the onus, the whole of the information upon the subject matter lay within the knowledge of the appellant company. That being so the burden of proof could be satisfied by such evidence as could support the inference that the special distribution was not a dividend in respect of profits acquired or disclosed subsequently to 30 June 1975. The appellant company could easily have cleared up the misapprehension if the drawing of such an inference was in fact a misapprehension of the true position but it did not do so. The fact that the profits had not been earned or disclosed up to 30 June 1975 carried the respondents some distance towards establishing that they had not been earned up to the time of the special distribution in mid-November. To this must be added the circumstances of the calling and holding of the annual general meeting. The notice of meeting relevantly gave as an item of business only the approval of the payment of dividends for the year ended 30 June 1975. The annual report dated 3 October 1975 gave no hint that the special distribution which was described therein was to be made out of profits which had been earned or disclosed since the end of the last accounting period. In these circumstances the inference that they had not been earned or disclosed since the end of that period was certainly open. The failure to make any attempt to rebut it gave it greatly added strength. The course of the hearing before Needham J when adjournment was granted to enable a revaluation of assets to be made is practically conclusive that there had not been an earlier revaluation. I am therefore of the opinion that the respondents established their case that the special distribution was contrary to s 376(1) of the Companies Act and art 129 of the appellant company's articles of association.

Having come to this conclusion it is not necessary for me to express an opinion on the question whether the company had power to make a discriminatory distribution of cash in respect of the shares beneficially owned by one company only and of shares in Minerva Centre Ltd in respect of shares held by all other shareholders. I bear in mind that the good faith of the directors and the members in general meeting was not challenged. The question turns upon the construction of arts 134 and 137 of the articles of association. I am not satisfied that in no circumstances could directors under such articles distribute shares to some shareholder or shareholders and cash to another or others, exercising their powers under art 137 for that purpose. That being so, I prefer to express no concluded opinion on the question.