Broken Hill Proprietary Co Ltd v Commissioner of Stamp Duties

[1997] QCA 128

IN THE COURT OF APPEAL	[1997] QCA 128
SUPREME COURT OF QUEENSLAND

Appeal No. 5943 of 1996 Appeal No. 5944 of 1996 Appeal No. 5945 of 1996 Appeal No. 5946 of 1996 Appeal No. 5947 of 1996 Appeal No. 5948 of 1996 Appeal No. 5949 of 1996 Appeal No. 5951 of 1996 Appeal No. 5952 of 1996 Appeal No. 8255 of 1996

Brisbane

[BHP v. CSD]

BETWEEN:

THE BROKEN HILL PROPRIETARY COMPANY LIMITED

A.C.N. 004 028 077 Appellant

AND:

COMMISSIONER OF STAMP DUTIES Respondent

CASE STATED BY COMMISSIONER OF STAMP DUTIES PURSUANT TO SECTION 24 OF THE STAMP ACT 1894

McPherson J.A.
Davies J.A.

Byrne J.

Judgment delivered 16 May 1997

Separate reasons for judgment of each member of the Court; each concurring as to the orders made.

IN THE CASE OF EACH APPEAL THE QUESTIONS ARE ANSWERED AS FOLLOWS:

(A)	THE INSTRUMENTS REFERRED TO IN QUESTION (A) OUGHT IN THE YEAR SPECIFIED TO HAVE BEEN CHARGED WITH DUTY PURSUANT TO S.65 OF THE STAMP ACT 1894.
(B)	THE RESPONDENT’S ASSESSMENT FOR THAT YEAR IS CORRECT.
(C)	THE COSTS OF AND INCIDENTAL TO STATING THIS CASE AND THE APPEAL ARE TO BE BORNE AND PAID BY THE APPELLANT.
CATCHWORDS:	COMMERCIAL - STAMP DUTY -EMPLOYEE SHARE PLANS - Whether duty payable - Whether loans to purchase shares amounted to a mortgage - Stamp Act 1894 s.65(1) - City of London Brewery Co. v. I.R.C. (1899) 1 Q.B. 121 explained.
Counsel:	Mr J. Muir Q.C., with him, Mr J. McKenna for the appellant Mr P. Dutney Q.C., with him, Mrs D.A. Mullins for the respondent
Solicitors:	Allen, Allen & Hemsley for the appellant Crown Solicitor’s Office (Qld.) for the respondent
Hearing Date:	13 March 1997

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5943 of 1996 Appeal No. 5944 of 1996 Appeal No. 5945 of 1996 Appeal No. 5946 of 1996 Appeal No. 5947 of 1996 Appeal No. 5948 of 1996 Appeal No. 5949 of 1996 Appeal No. 5951 of 1996 Appeal No. 5952 of 1996 Appeal No. 8255 of 1996

Brisbane

Before McPherson J.A.
Davies J.A.
Byrne J.

[BHP v. CSD]

BETWEEN:

THE BROKEN HILL PROPRIETARY COMPANY LIMITED
A.C.N. 004 028 077

Appellant

AND:

COMMISSIONER OF STAMP DUTIES Respondent

CASE STATED BY COMMISSIONER OF STAMP DUTIES PURSUANT TO SECTION 24 OF THE STAMP ACT 1894

REASONS FOR JUDGMENT - McPHERSON J.A.

Judgment delivered 16 May 1997

There are ten appeals by way of stated case against assessments by the Commissioner of

Stamp Duties of stamp duty on instruments executed on dates between 1985 and 1995 in favour of

the appellant taxpayer. The instruments were designed to give effect to a share incentive scheme

established by the appellant Company in favour of employees. The procedure adopted was that in each year the Company issued a prospectus setting out the terms and conditions under which it was

prepared to issue shares in the company to eligible employees. The terms and conditions included

provision for a loan to be made to an applicant employee to enable that person to pay for the

shares.

There are slight variations in the terms of some of the prospectuses issued from time to time;

but in essential respects they are sufficiently uniform to enable any one of them to be considered

representative of the others. Because of this, it was possible for all ten appeals to be heard together.

The decision of any one will determine the fate of the others.

For this purpose it is convenient to consider appeal no. 5944 of 1996, which was the one

chosen on the hearing of the appeal. The prospectus or document initiating the scheme in that

instance was dated 4 April 1987. It invited employees to complete, in accordance with

accompanying instructions, certain forms attached to it . One was a form of application for shares

headed “Employee Share Plan”, to be signed by the applicant employee. It contained a provision

by which the applicant agreed to be bound by the memorandum and articles of association of the

appellant company and by the Rules of the Employee Share Plan 1987 (ESP). The form

incorporated an application by the applicant for a loan from the Company for the balance, after

making an initial payment, of the amount payable for the shares as set out in the ESP Rules. Another

document to be signed by the applicant was a “blank” standard form of transfer of the shares

subscribed for.

Rule 7 of the ESP Rules contains a number of provision relating to the loan. So far as

relevant here, the most important is contained in rule 7(1). It provides in effect that if the employee

defaults in payment of any instalment:

“... the Company may sell the relevant shares by completing the remaining details in the previously signed Australian Standard Transfer Form and retain all moneys owing to the Company including interest to the date of sale, and refund to the employee any surplus from the proceeds after deduction of all reasonable costs and expenses.”

Rule 9 made provision for share certificates to be issued. By rule 9(c), certificates for shares

allotted in respect of applications subject to an ESP loan were to be held by the Company “until

repayment in full of the loan plus interest”.

By letter dated 24 April 1987 the Company notified the applicants of its acceptance of the

application to subscribe for shares and that it had approved the loan application and allotted the

shares subscribed for. In each instance where a loan was granted for purchase of the shares, the

letter of acceptance and allotment also advised that the share certificates were being held until the

loan was repaid.

In due course the share subscription and loan applications and the letter of acceptance and

allotment were assessed by the Commissioner to duty under the heading “Mortgage Bond

Debenture and Covenant” in Schedule 1 to the Stamp Act 1894. Paragraph 1(b) of that Schedule

prescribes a rate of duty for an instrument, other than one of a kind specified in para.1(a), that

secures payment of an amount of financial accommodation to be paid by way of an annuity, etc. It

was not suggested that the loan agreement, as it has been called, fulfilled that description; but it was

considered by the Commissioner to fall within para.1(a) as being “a mortgage ... that secures the

payment ... of money”.

It may be accepted that the loan agreement does not constitute a “mortgage” within the

technical meaning of that expression, as involving an outright transfer of property as security for

repayment of a loan subject to a condition for re-transfer or redemption on repayment. Section

65(1) of the Act does, however, contain a definition of the word “mortgage”, which it is necessary

to set out in full:

“65(1) For the purpose of this Act -

“mortgage” means a security by way of mortgage for the payment of any definite and certain sum of money advanced or lent at any time, or previously due and owing or forborne to be paid, being payable, or for the repayment of money to be thereafter lent, advanced, or paid, or which may become due upon an account current, together with any sum already advanced or due, or without, as the case may be, and includes -

(a)	any conveyance of any lands, estate, or property whatsoever in trust to be sold or otherwise converted into money intended only as a security, and redeemable before the sale or other disposal thereof, either by express stipulation or otherwise, except where the conveyance is made for the benefit of creditors generally or for the benefit of creditors specified, who accept the provision made for payment of their debts, in full satisfaction thereof; and
(b)	any defeasance, declaration, or other deed or writing for defeating, or making redeemable, or explaining, or qualifying any conveyance, transfer, or disposition of any lands, estate, or property whatsoever, apparently absolute, but intended only as a security; and
(c)	any agreement, contract, or bond, accompanied with a deposit of title deeds for making a mortgage, or any other security or conveyance as aforesaid, of any lands, estate, or property comprised in the title deeds, or for pledging or charging the same as security [and any instrument by which any property whatsoever is charged with or rendered liable as a security for the payment or the repayment of any sum of money]; and
(d)	any [instrument] operating as a mortgage of any stock or marketable security [and any power or letter of attorney given upon the occasion of or relating to the deposit of any title deeds or instrument constituting or being evidence of the title to any property whatsoever or creating a charge on such property; and]
[(e)	any deed of mortgage and trust for the purpose of securing debenture holders.]”

The square brackets have been inserted to indicate provisions that were added by The Stamp Act

Amendment Act of 1918, s.28(2).

At first impression, there appears to be little difficulty in bringing the subject loan agreement

within the terms of at least the last part of s.65(1)(c). Under that provision, “mortgage” includes an

instrument “by which any property ... is charged with or rendered liable as a security for the payment

or repayment of any sum of money”. The property here consists of the shares subscribed for and

allotted to the applicant employee pursuant to the application and letter of allotment. The fact that

certificates for the shares may not be issued immediately does not affect their status as shares. It is

the agreement to subscribe followed by allotment and entry on the register that makes a person a shareholder. Allotment in this context means appropriation, with the assent of the directors, of

particular shares to the subscriber in question: Spitzel v. Chinese Corporation Ltd. (1899) 80 L.T.

347, 353; Central Piggery Co. Ltd. v. McNicol (1949) 78 C.L.R. 594, 599-600.

“A share”, said Lord Green M.R. in Re V.G.M. Holdings Ltd. [1942] Ch.235, 241, “is a

chose in action”. It is certainly property: see Colonial Bank v. Whinney (1886) 11 App.Cas. 426.

The shares in the present case are a means to ensuring payment or repayment of a sum of money;

that is, the balance of the ESP loan made by the Company to the subscriber. They serve as security

for payment of that sum. In the event of default in payment, the Company may under ESP rule 7(i)

sell and transfer the shares and retain all moneys owing to it, but must refund to the borrower any

surplus of the net proceeds of sale. All of these features are characteristics, if not essential features,

of property held as or subject to a security for payment of money.

Speaking of the “normal meaning” of the word “securities”, Viscount Cave in Singer v.

Williams [1921] 1 A.C. 41, 49, said the word denoted a debt or claim the payment of which was in

some way secured. The security, his Lordship went on, “would generally consist of a right to resort

to some fund or property for payment”. In the same case, Lord Wrenbury ([1921] 1 A.C. 41, 59)

described a security as “a right to resort to some fund for the satisfaction of some demand after

whose satisfaction the balance of the property or fund belongs to the grantor”. Lord Phillimore

agreed ([1921] 1 A.C. 41, 59) that this was the “proper meaning” of the word securities. The

shares subscribed for in the present case are, within the terms of s.65(1)(c) of the Act, readily

capable of being described as property “rendered liable as security” in that sense. The Company

has the right to resort to the shares or the proceeds of their sale to obtain payment of the loan

indebtedness. In addition, the shares answer the description of property “charged ... as a security” in

s.65(1)(c). The essence of a charge is that property is “made liable, or specially appropriated, to

the discharge of a debt or obligation”. See Swiss Bank Corporation v. Lloyds Bank Ltd. [1982]

A.C. 584, 595, per Buckley L.J. Here the shares and the proceeds of sale are appropriated in that way by the loan agreement. The structure and terms of the loan agreement very closely resemble

that of similar provisions commonly found in standard forms of articles of association conferring on

the company a “lien” on shares for unpaid calls on subscription moneys. Such a lien has traditionally

been regarded as creating an equitable charge: see New London & Brazilian Bank v.

Brocklebank (1882) 21 Ch.D. 302, 306; Chase Corporation (Australia) Pty. Ltd. v. North

Sydney Brick & Tile Co. Ltd. (1994) 35 N.S.W.L.R. 1, at 9-11.

It was nevertheless submitted by Mr Muir Q.C. for the appellant Company that it was

essential to an equitable charge that there be an intention to create it, and that no such intention

appears from the loan agreement in this instance. The Company, he said, may, in the event of

default, be perfectly content to rely on its power to sell and transfer the shares and pay the debt out

of the proceeds. The relationship between the parties is, after all, that of employer and employee.

The whole transaction rested in agreement and, so it was submitted, did not involve the creation in

favour of the Company of a proprietary interest in the shares themselves.

The true nature of the transaction would be put to its test if the Company elected to sell

upon default after the bankruptcy of the subscriber. If the loan agreement did not create a charge,

the Company would not be entitled to retain and apply proceeds of sale in satisfaction of the debt.

Instead, it would be bound to pay those proceeds to the trustee in bankruptcy and to prove in the

bankruptcy and receive no more than a dividend along with other creditors. It would be surprising if

the directors of the Company had intended to enter into a transaction having only that limited effect.

The sums involved in the ESP transactions are not trivial, and in total their amount is some millions of

dollars. In one of the examples chosen for use in App. no. 5944 of 1996 the number of shares

applied for was 1000 at a price of $10.56 each, on which the initial sum paid was $1,060 and the

amount of the loan was $9,500 with interest at 5%. In another, it was 500 shares at $9.00 each,

and the amount of the loan was $4,050 with interest at the same rate. It would surely have been

remiss to approve loans by the Company of that order of magnitude without insisting upon security of some kind over the very subject matter of the transaction. One would not readily impute to the

directors of a public company an intention to disregard its legitimate interests without some clear

indication to that effect. It is true that the loan agreement does not use the expression charge, lien or

security; but equally it does not expressly provide, as it quite readily might have done, that no such

result was intended. In the absence of any indication of such an intention, the loan agreement must

receive its ostensible effect, which is to confer an equitable charge over the shares to secure the loan

arising from the agreement to subscribe.

It is not suggested by anyone that the security interest created by the loan agreements is a

mortgage, whether legal or equitable, according to the technical or legal meaning of that expression.

Unlike a legal or an equitable mortgage, an equitable charge confers no right to foreclose or become

the owner of the secured property. See Matthews v. Goodday (1861) 31 L.J.Ch. 282; Tennant

v. Trenchard (1869) 4 Ch.App. 537. An equitable mortgage as distinct from a mere charge, cannot

have been intended, because transfer to the company of title to the shares in consequence of

foreclosure would be likely to involve the Company in a contravention of the rule in Trevor v.

Whitworth (1887) 12 App.Cas. 409, which prohibits a company from holding its own shares: cf.

Re Castiglione’s Will Trusts [1958] Ch. 549. An intention to that effect should not lightly be

implied or inferred. It is no doubt the reason why the security looks only to sale and not transfer of

the shares in the event of a default under the loan agreement.

The appellant Company submits that, if the security conferred by the loan agreement is

neither a legal nor an equitable mortgage, it falls outside the definition of “mortgage” in s.65(1), and

is not liable to duty under the Act. The submission depends on reading the word “mortgage” in its

limited or technical sense where it first appears in the introductory words of s.65(1), and then

treating it as governing everything that follows, including each of the instruments creating any of the

forms of security specified in paras. (a) to (e) of s.65(1). That appears to be an improbable

interpretation of the definition, given that it begins by defining what “mortgage” means, and then proceeds by specification in paras.(a) to (e) to say what it “includes”. If “mortgage” bears its

technical meaning of a security under which legal title is or may be transferred to the mortgagee, it is

difficult to account for the presence of some of the subjects included by specification. An obvious

example appears in s.65(1)(e), which specifies “a deed of mortgage and trust for the purpose of

securing debenture holders”. The universal method of securing debentures is by an equitable charge

which “floats” until crystallisation. If only an equitable mortgage or fixed charge is within the

contemplation of s.65(1)(e), it would prevent the mortgagor company from using its assets for

trading purposes, which is the basic reason why in such cases the device of a floating charge is

employed. If the appellant is correct in its construction of s.65(1), it would deprive s.65(1)(e) of the

whole, or virtually the whole, of its effective content.

The foundation of the submission on this point is the judgment in City of London Brewery

Co. v. I.R.C. [1899] 1 Q.B. 121, of Rigby L.J., who (at 139) said:

“It was argued on the part of the Crown that the deed falls within the description of sub-s.(c) of s.86, and I am of opinion that it does, but it seems to me that this will not suffice to make the deed a ‘mortgage’ within the Act. Sub-ss. (a) to (g) are not to be taken as though they were parallel clauses extending the introductory words defining the meaning of ‘mortgage’ and adding cases not included within them. They only add by way of greater precaution and to avoid misapprehension an extensive, though possibly not exhaustive, list of the various sorts of instruments which, if they answer the requirements of the introductory words, will be ‘montages’ within the meaning of the Act. To treat them as operating independently of the introductory words would be altogether to deprive of effect in most if not all, cases the very words which are inserted to give the meaning of ‘mortgage’. If it were necessary to decide the point, I should be strongly inclined to be of opinion that the trust deed of 1897 is not a mortgage within the meaning of this Act.”

The section referred to by Rigby L.J. was s.86 of the Stamp Act 1891 (U.K.) to which s.65(1) of

the Queensland Act of 1894 corresponds in an approximate fashion. Section 86(1)(c) of the British

Act of 1891 contained the equivalent of s.65(1)(a) of the Queensland Act in its present form, which

is directed to what may conveniently be described as an old system mortgage effected by transfer of

title. Section 86(1)(d) and (e) have analogues in s.65(1)(b) and (c) of the Queensland Act, but

without including that portion of s.65(1)(c) which is rendered above in square brackets. Section 65(1)(d) of the Queensland Act appeared as s.86(1)(g) of the British Act of 1891, which, however,

was limited to “any deed operating as a mortgage of any stock or marketable security”. Once

again, the portions of s.65(1)(d) appearing in square brackets did not form part of s.86(1)(g) which

did not extend, as para. (d) of the Queensland Act now does to “an instrument ... creating a charge

on such property ...”. Those words were added to s.65(1)(d) by The Stamp Act Amendment Act

of 1918, s.28(1), which also inserted s.65(1)(e), which had no analogue at all in s.86(1) of the

British Act of 1891.

Rigby L.J. was therefore considering a provision differing in several material respects from

s.65(1) of the current Queensland Act. Section 86(1) of the Stamp Act 1891 (U.K.) might have

been capable of sustaining the interpretation adopted by the learned Lord Justice, but it is impossible

to apply it to the Queensland legislation in its present form. As it is, the approach of Rigby L.J. to

the interpretation of s.86(1) was not adopted by the other Lords Justices in City of London

Brewery Co. v. I.R.C. Lord Justice A.L. Smith said he considered the instrument in question there

to be a mortgage deed within s.86 (see [1899] 1 Q.B. 121, 134), and Collins L.J. held ([1899] 1

Q.B. 121, 140) that, whether or not the instrument came within the preliminary definition in s.86, it

was certainly “within one or other” of the provisions in ss.86 or 88 that were relevant in that

instance.

In Queensland the amending legislation of 1918 introduced such changes in s.65(1)(c), (d)

and (e) of the Stamp Act 1894 that the observations of Rigby L.J. in 1899, even if originally

applicable to that Act in its original form, are of little or no assistance in interpreting s.65(1) as it now

stands. In its present form, the last part of s.65(1)(c) (“... any instrument by which any property

whatsoever is charged with ... the payment ... of any sum of money”) is capable of being understood

as describing a particular and independent form of security instrument chargeable for stamp duty

purposes under the heading Mortgage in Schedule 1 to the Stamp Act. Whether or not it is a “mortgage” within the introductory portion of s.65(1), an instrument that answers the description in

s.65(1)(c) is specifically included as a mortgage under s.65(1).

These conclusions would entitle the respondent Commissioner to succeed in having the

appeals dismissed but for a further matter mentioned in the course of the hearing, which was that, on

their face, the loan agreements appear to involve an infringement of s.205(1) of the Corporations

Law, or its predecessor s.129(1) of the Companies (Queensland) Code. The point first emerged in

the appellant Company’s written outlines, where it was initially relied on as an indication that the loan

agreement could not have been intended to confer security on the Company. It is, however, as

much the lending agreement as the security itself that would be affected with invalidity if the

prohibition applied; and, when this was pointed out, Mr Muir Q.C. disavowed further reliance on

that part of his written submission.

That might not relieve the Court of the duty to consider the impact (if any) of the prohibition

on the loan and its relation (if any) to liability for stamp duty. Whether duty would or would not be

assessable if the instrument was void for illegality is, however, a question which I do not consider it

necessary to investigate in this instance. Section 205(9)(b) of the Corporations Law and, before it,

s.129(9)(b) of the Companies Code both specifically authorise the giving of financial assistance in

connection with the acquisition of fully paid shares in a company by participating employees where

the company has in a general meeting approved a scheme for providing money for that purpose.

For some reason we were not referred by counsel to either of these provisions; and, perhaps for the

same reason, the Stated Cases before us contain no reference to any such approved scheme. For

the present, however, it is enough to say that I do not consider it was a function of the

Commissioner to be satisfied of the existence of an approved scheme before proceeding to assess

the loan agreement instruments to such duty as, according to their tenor, they ought to bear.

In the case of each appeal the questions should be answered as follows:

(a) The instruments referred to in question (a) ought in the year specified to have been charged

with duty pursuant to s.65 of the Stamp Act 1894.

(b)	The respondent’s assessment for that year is correct.
(c)	The costs of and incidental to stating this case and the appeal should be borne and paid by

the appellant.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5943 of 1996 Appeal No. 5944 of 1996 Appeal No. 5945 of 1996 Appeal No. 5946 of 1996 Appeal No. 5947 of 1996 Appeal No. 5948 of 1996 Appeal No. 5949 of 1996 Appeal No. 5951 of 1996 Appeal No. 5952 of 1996 Appeal No. 8255 of 1996

Brisbane

Before McPherson J.A.
Davies J.A.
Byrne J.

[BHP v. CSD]

BETWEEN:

THE BROKEN HILL PROPRIETARY COMPANY LIMITED
ACN 004 028 077

Appellant

AND:

COMMISSIONER OF STAMP DUTIES

Respondent

CASE STATED BY COMMISSIONER OF STAMP DUTIES PURSUANT TO SECTION 24 OF THE STAMP ACT 1894

REASONS FOR JUDGMENT - DAVIES J.A.

Judgment delivered 16 May 1997

I agree that the questions in the case stated should be answered in the way suggested by

McPherson J.A. and with his reasons for that conclusion.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 5943 of 1996 Appeal No. 5944 of 1996 Appeal No. 5945 of 1996 Appeal No. 5946 of 1996 Appeal No. 5947 of 1996 Appeal No. 5948 of 1996 Appeal No. 5949 of 1996 Appeal No. 5951 of 1996 Appeal No. 5952 of 1996 Appeal No. 8255 of 1996

Brisbane

Before McPherson J.A.
Davies J.A.
Byrne J.

[BHP v. CSD]

BETWEEN:

THE BROKEN HILL PROPRIETARY COMPANY LIMITED
A.C.N. 004 028 077

Appellant

AND:

COMMISSIONER OF STAMP DUTIES

Respondent

CASE STATED BY COMMISSIONER OF STAMP DUTIES PURSUANT TO SECTION 24 OF THE STAMP ACT 1894

REASONS FOR JUDGMENT - BYRNE J.

Judgment delivered 16 May 1997

I agree with McPherson JA.