Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW)

100 CLR 392
1958 - 0509B - HCA

---

(Judgment by: Kitto J)

Between: Davis Investments Pty Ltd
And: Commissioner of Stamp Duties (NSW)

Court:

Judges: Dixon CJ
McTiernan J
Webb J

Kitto JTaylor J

Subject References:
Corporations
Share transfer
Consideration
Taxation and Revenue

Legislative References:
Stamp Duties Act 1920 (NSW) - s 41; s 66

Hearing date: 3 December 1957; 4 December 1957; 5 December 1957; 1958 December 1957
Judgment date: 9 May 1958

SYDNEY

---

Judgment by:
Kitto J

This appeal relates to the manner in which ad valorem stamp duty is to be charged on an agreement made on 30th November 1951 between a company called D. Davis & Co  Pty  Ltd  (referred to in the agreement as the vendor) and the appellant (called in the agreement the purchaser).  It was an agreement whereby it was agreed that the vendor should sell and the purchaser should purchase certain parcels of shares in other companies (these shares numbering 57 in all) together with certain chattels.  The agreement provided for a purchase price in respect of each parcel of shares, the total price for the shares being PD57, and for a separate purchase price of PD1,283 for the chattels.  It added that upon completion the vendor should execute and deliver transfers of the shares (scil.  to the purchaser).  In fact the shares were worth PD54,382.  

In so far as the agreement was for the sale of the chattels, it is chargeable with a duty of PD1  only:  see the proviso in the second schedule as to agreements made for or relating to the sale of any goods, wares, or merchandise.  But as an agreement for the sale or conveyance of the shares it is chargeable by virtue of s. 41 (1) with the same ad valorem duty, to be paid by the appellant as the purchaser, as if it were a conveyance (i.e. a transfer:  see s. 65) of the shares.  For convenience it will be referred to in this judgment as if it were in fact a conveyance of the shares and of nothing else.  The duty chargeable upon it, considered as such a conveyance, is governed by the provisions of s. 66.  That section contains in sub-s.  (1), a general provision for the charging of ad valorem duty on every conveyance in respect of the unencumbered value of the property conveyed.  This is qualified by a provision in sub-s. (2),  the effect of which is that in the case of  a conveyance on sale the duty  is to be on the amount or value of the consideration for the sale, unless that is less than the unencumbered value of the property.

Then follow three sub-sections, sub-ss. (3), (3A) and (3B). These were introduced into the Act by the amending Act No. 13 of 1931 to take the place of an earlier sub-s. (3) which had made special provision for the case of a conveyance "made upon any consideration other than full consideration in money or money's worth". The three sub-sections enacted in 1931 cover respectively the three possible cases of a conveyance made without consideration, a conveyance made upon a "bona fide consideration" of less than the unencumbered value of the property conveyed, and a conveyance made upon a "bona fide consideration" of not less than the unencumbered value of the property conveyed. In each case the consideration referred to is limited to consideration in money or money's worth. The purpose of providing separately for the three classes of conveyance is that, while duty at conveyance rates is to be charged on so much of the value as is balanced by consideration, duty at what may be called gift duty rates is to be charged on any amount by which the value is not balanced by consideration.  

The conveyance we have to consider is clearly not a conveyance without consideration in money or money's worth, for the appellant is bound under it to pay PD57. Sub-section (3) therefore cannot apply. The commissioner's contention is that sub-s. (3A) applies because the PD57 is the only bona fide consideration in money or money's worth upon which the conveyance is made, and that amount is less by  PD54,325 than the unencumbered value of the shares. The appellant, on the other hand, contends that although the consideration expressed is only  PD57 there is in truth a consideration passing which is equal to the unencumbered value of the shares, and that accordingly the duty payable is to be assessed in accordance with sub-s. (3B). If the commissioner is right the duty payable is PD1,902 10s. 6d. If the appellant is right it is only PD135 19s. 6d.  

The appellant's case depends upon the fact that shortly before the agreement was executed, though on the same day, the appellant purchased from the persons who held them all the issued shares in the capital of the vendor company. They were  15,000 shares of PD1 each, all fully paid. Being executed after this situation had come about, the instrument obviously cannot be considered as if it effectuated a transaction between strangers. The transaction to which it gives effect is in form a sale, and it may be conceded to be in substance a sale; but it is a sale at a nominal price, made between a company and its only shareholder as a means of liberating assets of the company to the shareholder. That is the plain fact of  the matter, and comparisons with transactions which in truth are sales pure and simple are not helpful.  If the instrument involves the passing to the shareholder of assets of the vendor company representing any portion of its paid-up capital, it is necessarily invalid and therefore not chargeable with duty as an agreement for the sale or conveyance of property at all.

This is so because of the fundamental principle of company law that the whole of the subscribed capital of a company with limited liability, unless  diminished by expenditure upon the company's objects (or, of course, by means sanctioned by statute) shall remain available for the discharge of its liabilities: Trevor v  Whitworth; ^[F16] In re Walters' Deed of Guarantee. ^[F17]   One aspect of this principle is that every transaction between a company (while it is a going concern) and any of its members, by means of which any of the money paid to the company in respect of the member's shares is returned to him, is prohibited, unless the court has sanctioned the transaction: Trevor v  Whitworth. ^[F18]   But there is nothing in the material before us to show that on 30th November 1951 the vendor company did not have assets possessing a value of at least PD15,000 over and above those comprised in the agreement.  The agreement is, therefore, so far as the Court knows, valid; but, proceeding, as we must, to consider the case on the footing that it is valid, the hypothesis must be kept always in view that immediately before the agreement was executed the vendor company had, wrapped up in its assets, distributable profits amounting to at least PD54,325.  

By its purchase of all the issued shares in the capital of the vendor company, the appellant became the owner of a bundle of rights against the vendor company.  These were, of course, rights in personam only; the appellant acquired no proprietary right or interest in any of the shares in other companies which were later to be dealt with by the agreement.  For this reason it is not open to the appellant to contend that the property comprised in the instrument is less than the entirety of those shares.  The value with which the consideration must be compared is the unencumbered value of the shares: and it may be remarked that there is nothing in the Act to support a construction of the expression "unencumbered value" as denoting the  value to the conveyee, in a case where that value differs from the value to purchasers generally.  

But the acquisition of all the shares in the vendor company invested the appellant with power to bring into existence, certainly and without any significant delay, a right in its own favour to receive at least PD54,325 out of the vendor company's assets.  The hypothesis being that there was that amount available for distribution as profits, all that was necessary was the declaration of a dividend of PD54,325 by the directors or by the general meeting- we have not the articles before us-and such a declaration the appellant could cause to be made at any time it wished.  It is in this situation that the instrument takes effect.  As from the moment of its execution (if it be considered as a conveyance), the appellant's right as the sole shareholder to take at least PD54,325 out of vendor company's assets is gone.  But the commissioner says that this is true in the sense only that the vendor company's assets are depleted by that amount, so that the appellant's right to take out as much as he likes of that company's distributable profits is, though intact, applicable to a reduced fund.  This result, he contends, is merely consequential upon the operation of the instrument and forms no part of the consideration upon which the conveyance is made.  The appellant, on the other hand, submits that it is part and parcel of the operation of the instrument that his right to take PD54,325 out of the vendor company's assets generally is satisfied by his taking specific shares of  that value; and that is enough, he says, to make  the conveyance of the assets a conveyance upon a consideration equal to the value of the shares conveyed.  

The choice between these contentions must depend upon the construction of the relevant provisions of s. 66.  An initial question which suggests itself on a reading of sub-ss. (3A) and (3B), and one which obtrudes even more when the terms of these sub-sections are compared with the terms of sub-ss. (2) and (3), is whether the use of the expression "bona fide consideration" does not confine the application of the former provisions to cases where the instrument presented for stamping discloses a consideration genuinely regarded by the parties as a fair quid pro quo for the property conveyed.  The question is important here because the instrument we are considering states as the consideration a sum which quite obviously the parties could not have considered anything like equivalent to the value of  the shares sold.  Sub-sections (2) and (3) both omit "bona fide".  The contrast thus presented with sub-ss. (3A) and (3B) loses much of its suggestiveness, however, when one observes that in the second schedule, pars. (1) and (3) under the head "Conveyances of Any Property", which reflect and substantially repeat sub-ss. (3A) and (3B), both omit "bona fide".  But, more than that, it is important to observe that sub-ss. (3A) and (3B) are speaking of conveyances and not of contracts.  They are concerned with the consideration "upon" which conveyances are made, and not only consideration in the sense of that which contracting parties have arranged between themselves in the course of offer and acceptance.  The language is therefore that of conveyancing rather than of contract, so that "consideration" has rather the meaning of "the money or value passing which moves the conveyance or transfer" than "the more precise meaning of the law of simple contracts": Archibald Howie Pty  Ltd  v  Commissioner of Stamp Duties (N.S.W.). ^[F19]   This being recognized, it seems right to conclude that "bona fide" adds nothing to the subsections beyond emphasis upon the fact that what is to be compared with the unencumbered value of the property conveyed is the consideration which really passes, and not, if there be a distinction between them, the consideration appearing from the instrument.  In other words it is the money or money's worth really moving the conveyance.  

If anything is clear in this case it is that what moves the conveyance here is not PD57.  That is part of it, but there is much more than that.  In Archibald Howie's Case, ^[F20] a shareholder, having what Dixon J. called a "proportionate `interest' in the assets, an interest consisting of a congeries of rights in personam", ^[F21] took, under a reduction of capital properly carried out, an aliquot part of the assets.  There being an equivalence between his rights in personam with respect to a proportion of all the assets and the severed part of the assets which he took in specie, the conveyance to him of the latter was held to be upon a consideration of not less than their unencumbered value.  In the present case, having a right in personam with respect to all the assets, a right to get an amount of money thereout by appropriate steps wholly within his own unconditional power, the appellant takes specific assets of corresponding amount and by so doing exhausts the right.  If it be said that the conveyance to him leaves the vendor company the poorer by PD54,325, the answer  is that that is true only if  the appellant is regarded as not having had any claim upon the assets immediately before the agreement was entered into.

It is at that point that, in my opinion, the argument for the commissioner fails.  It insists, rightly, that the appellant had no proprietary interest in the assets,  and no interest of any sort which it could assert as against creditors of the company.  But it omits to recognize that in the situation which existed when the agreement came to be executed, namely that (on the necessary hypothesis of the case) there were no creditors whose debts exceeded in the aggregate the value of the assets which the agreement left untouched, the appellant did  have a claim upon the assets, and a claim entitling him to as much as the value of the property which he now takes.  In truth, to ask whether the vendor company is the poorer for having executed the instrument is to divert attention from the question to  which sub-ss. (3A) and (3B) demand an answer.  That question, in the circumstances of this case, is whether the conveyance of the shares comprised in the instrument to be stamped was moved by the appellant giving up a right as against  the vendor company worth as much as the value of those shares.  And the answer must be that it was.  By the very act of executing it and thereby accepting the specific shares  which it covered, the appellant destroyed his pre-existing right to a dividend of PD54,325 out of the assets generally.  That was no mere consequence of the operation of the instrument; it was part of the operation itself.  

For these reasons I am of opinion that the agreement is liable to be stamped under sub-s. (3B) of s. 66.  The appeal is from an order of the Supreme Court of New South Wales answering in the opposite sense certain questions submitted to it by a case stated under s. 124 of the Stamp Duties Act.  I would allow the appeal, set aside the Supreme Court's order, and in lieu thereof order that the first three questions in the case stated be answered: (1) No; (2) (a) No, (b) No, (c) Yes; (3) The duty chargeable is PD135 19s. 6d. only.