Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd

[2004] HCATrans 281

[2004] HCATrans 281

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S562 of 2003

B e t w e e n -

CHIEF COMMISSIONER OF STATE REVENUE

Applicant

and

DICK SMITH ELECTRONICS HOLDINGS PTY LTD

Respondent

Application for special leave to appeal

GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 6 AUGUST 2004, AT 12.12 PM

Copyright in the High Court of Australia

MR B.A.J. COLES, QC:   May it please the Court, I appear with MR H.R. SORENSEN for the applicant.  (instructed by I.V. Knight, Crown Solicitor for the State of New South Wales)

MR J.W. DURACK, SC:   May it please the Court, I appear with my learned friend, MR D.G. CHARLES, for the respondent.  (instructed by Gilbert & Tobin)

GUMMOW J:   Yes, Mr Coles.

MR COLES:   May it please the Court.  Your Honours, the obligations imposed on the respondent purchaser by the transaction obliged it to pay, come what may, $114 million and we submit that was properly to be seen as the consideration without which ‑ ‑ ‑

GUMMOW J:   We have to look at clause 7, do we not, of the share acquisition agreement?

MR COLES:   Your Honours may have the full copy of the share acquisition agreement, in which case your Honours will find that relevantly, page ‑ ‑ ‑

GUMMOW J:   Page 21.

MR COLES:    ‑ ‑ ‑ 21 of the document, yes. 

GUMMOW J:   What are the relevant taxing words?

MR COLES:   The relevant taxing words?

GUMMOW J:   To bring it to duty?

MR COLES:   Duty is payable on the consideration for the dutiable transaction, relevantly in the present case, the monetary consideration for the dutiable transaction. 

GUMMOW J:   What does the actual statutory text say?

MR COLES:    Just that, I think, your Honour.  Section 21 provides:

The dutiable value of dutiable property that is subject to a dutiable transaction is the greater of:

(a)      the consideration (if any) for the dutiable ‑ ‑ ‑

GUMMOW J:   The consideration?

MR COLES:   

the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration –

and we say the amount of the monetary consideration, since we are only looking at monetary consideration, is the whole sum of $114 million without which the vendor would not have transferred the shares.

GUMMOW J:   How do you get that out of 7?  You get it out of 7, do you?

MR COLES:   One starts, if I can just take your Honours back to the – perhaps one needs to look at a couple of – the relevant definitions, your Honour, include the purchase price, which your Honours will see in the definitions as “$114,139,649.00 minus the Dividend Amount”.

GUMMOW J:   Where do we see that?

MR COLES:    That is in the definition section.

GUMMOW J:   Page 13.

MR COLES:    Page 13, yes.  I am afraid my page numbers are not particularly clear, but going back some three pages you will see the definition of dividend ‑ ‑ ‑

GUMMOW J:   Your point has to be that that definition of purchase price does not fully encompass the consideration.

MR COLES:    That is right.  The consideration is ‑ ‑ ‑

GUMMOW J:   For the stamp duties ‑ ‑ ‑

MR COLES:   For stamp duty purposes, although the purchase price is the purchase price as defined minus the dividend amount, in this agreement the dividend amount is also part of the consideration.  Dividend amount is the amount of the retained earnings which the company is able to pay on the shares at completion or such other – up to a particular amount or some other amount.  Then your Honours look at 4.4 where:

The parties agree –

the only parties being vendor and purchaser –

that prior to Completion, the Vendors shall ensure that the Company shall declare a dividend on its ordinary shares -

So then, after that, one goes over to clause 7, particularly 7.6 requires the payment of the purchase price, a defined expression, then 7.7 importantly is:

On Completion, immediately after payment of the Purchase Price, the Purchaser shall fund the Company so that the Company is able to discharge the debts created by the declaration of the dividend referred to in clause 4.4.  Immediately following such funding –

which we interpolate, your Honours, does not have to be any particular form of funding, it may be a loan, but it need not be –

the parties shall procure that the Company pay that dividend –

so that the parties have a joint obligation to ensure that the dividend is paid –

less any amount which the Company is required to withhold -

Then importantly, 7.8 provides that neither vendor - there are actually two vendors, a Canadian and a Delaware company:

Neither the Vendors nor the Purchaser need complete the sale of any Shares unless the Purchaser has performed, or is ready, willing and able to perform, its obligations under clause 7.7 -

the obligations there being the dual obligation of funding and joining in the procuring of the payment of the dividend.  So there are promises by the purchaser to make these payments which we say is the totality of the consideration for the vendor’s obligation to transfer the shares, the vendor, at the end of the day, receiving exactly what the purchaser pays out.

GUMMOW J:   The consideration to be executed in the manner in 7.8?

MR COLES:   Yes, that is right.  Mr Justice Davies, in our respectful submission, who was the dissenting judge in the Court of Appeal, analysed the matter correctly when he said at paragraph 31 of his ‑ ‑ ‑

GUMMOW J:   I am sorry to interrupt you, Mr Coles.  How much duty is involved? 

MR COLES:   The total dollar amount, your Honour ‑ ‑ ‑

GUMMOW J:   Without interest.

MR COLES:   We do have that figure, I want to be precise about it.  It is about $150,000 we understand, your Honour.  I think that is common ground, in round figures.

GUMMOW J:   You were referring to Justice Davies.

MR COLES:   Yes, I am sorry.  If your Honours have then the application book, his Honour’s conclusion, which we respectfully submit is the correct one, appears in paragraph 31 on page 28 of that book.  He said:

The consideration for the agreement included the purchaser’s obligation to fund the dividend which the parties arranged to declare and pay.

In our respectful submission, that is a correct description of the events, or the substance of the agreement at the date it was made, and he said, if I can take your Honours back a page to paragraph 28 of his judgment, he said:

Nor does it matter if part of the consideration was payable to a person other than the vendors.  The question is whether the $25,584,097 –

that is the dividend funding –

was part of the consideration for the dutiable transaction, the agreement for the sale of the shares.

Your Honours, we respectfully submit that the Court of Appeal can be seen to have erred in a number of respects.  The first error seems to have been to treat the subject matter of the sale as a contract for sale of shares ex‑dividend, as they described it.  That is, with respect, a mischaracterisation for a number of reasons.  Firstly, the subject matter of the contract for sale was shares, the shares in InterTAN, the dividend characteristics being immaterial to that description. 

Secondly, we would respectfully say that at the date of the contract for sale, which is the relevant and essential date for duty purposes, the shares, of course, were not the subject of any declaration of dividend and they were simply shares.  They were certainly not ex-dividend at the relevant date, which is the date of the contract for sale, and of course, as your Honours know, and this is in section 9(2)(c), I think, of the Act, for the purposes of charging duty:

the transfer of the dutiable property is taken to have occurred at the –

date of the agreement, not, of course, at some prospective future date when the agreement is completed and in that respect – one way of identifying the Court of Appeal’s error, or the majority of the Court of Appeal’s error, is to note that really what they assumed was the consequences of completing the transaction, rather than the agreement to make the transaction.

We do not accept that they were sold ex-dividend in any event, but whether they were ex-dividend after the transaction was completed according to its terms or not does not matter because the subject matter of the sale and, indeed, the position at the date of the entry into the agreement was that they were simply shares, for all that it matters, cum-dividend.

We would respectfully point out then that the obligation to fund the dividend was simply the means or a means of getting to the vendors the desired outcome of the transaction, the dutiable transaction.  That is to say, plainly, the payment of $114 million as the quid pro quo for the transfer of the shares and it is important, in our respectful submission, that that amount was payable, regardless of how much of it, if any, for that matter I suppose, turned out to be the quantum of the dividend funding.

Importantly too, no other dividend was to be declared under this agreement.  Indeed, the vendors bound themselves contractually to ensure that no other dividend was paid except in accordance with the agreement of the parties giving effect to the sale agreement so that as at the date of the agreement, the only dividend that was in contemplation or could be paid was the one which might be put into effect as part of the overall program of implementing the agreement and ensuring the commercial outcome desired.

There are two decisions, in our respectful submission, of this Court which are important.

GUMMOW J:   One is Davis Investments, the other one Archibald Howie.

MR COLES:   That is right, but in our respectful submission, the Court of Appeal’s judgement involves a – certainly misunderstanding of the former and probably a misapplication of the latter. 

GUMMOW J:   I notice Justice Kitto dissented in ‑ ‑ ‑

MR COLES:   He dissented in Davis Investments; he, having been counsel as your Honour will have noticed in Archibald Howie. 

GUMMOW J:   Yes.

MR COLES:   Importantly, his observations in Davis Investments as to the meaning of consideration for stamp duty purposes were wholly in accordance with those of Sir Owen Dixon in Archibald Howie.  The Archibald Howie point, I suppose, your Honour, of course, notoriously, is that the consideration in stamp duty or duty exacting statutes is the element or the valuable matter which moves the transfer as opposed to or perhaps apart from the contractual offer and acceptance type of consideration, but importantly ‑ ‑ ‑

GUMMOW J:   That may be why clause 7.8 is so important.

MR COLES:   It may be, your Honour, yes, but can I point this out.

GUMMOW J:   That is what is moving, one might think.

MR COLES:   The important feature, perhaps, in Archibald Howie was that there was, of course, no pre-existing agreement.  There was merely the transfer of the dutiable property without an agreement and, of course, the real issue upon which the case arose was whether there was any consideration at all for the transfer of the property in Archibald Howie and it was said that, in effect, you look not at what the parties have said in some agreement is the consideration, you look really – and indeed, if you find they have made no agreement, you come to the conclusion that there is no consideration - to the contrary, you look apart from that and more widely and you say what is it that move the transfer of the dutiable property.

I am translating this into the text of the modern statute, but you look at what really brought about or caused the vendor to transfer or convey.  We say there could be only one answer to that question in this case and, indeed, it cannot be said that – it could not be suggested that the remarks of Sir Owen Dixon posing the question what is it that moves the conveyance were intended to limit or contract or attenuate what would be for ordinary contractual law principles the concept of consideration.

GUMMOW J:   No.  You have to translate it as what is it in the agreement that, when performed, will move the conveyance, I suppose?

MR COLES:   This moves one to the second error we ascribe to the Court of Appeal which is the misapplication, in our respectful submission, of Davis Investments.  Davis Investments was a case of a very simple contract where the only element identifiable was a single consideration for some identified property.  The attempt was there being made to say that there was some other extra contractual consideration discernable from the surrounding circumstances of the transaction relying, of course, on the inspiration afforded by the earlier decision of Archibald Howie.  That attempt, of course, failed and there are dicta in Davis Investments which say well, the parties chose to cast the transaction in the form of a transfer for a price so that is the consideration and that is exactly what Justice Meagher said in terms in this case the parties had done.  They chose to cast the ‑ ‑ ‑

GUMMOW J:   And your point is they had not?

MR COLES:   And my point is they had not.

GUMMOW J:   Yes, all right.  So, you say, the primary error you point to in the Court of Appeal majority is misconstruction or misunderstanding of the transaction in terms of the stamp duties requirements?

MR COLES:   It may be a little more profound and a little more perhaps a potential concern.  There is a second characterisation error, that is to say treating the agreement as a contract for the acquisition of two assets instead of one.  That was sourced to Justice Gzell at first instance.  He said what the purchaser was really buying was, in part, shares for the ascribed consideration and as to the other part, he was buying a debt, but that, of course, wholly overlooked the fact that it was the purchaser’s obligation to fund, not the purchaser’s contractual right to acquire, a debt.  Indeed the grantor or the provider of the debt, that is to say the company, was not, of course, even a party to the contract itself so you could hardly regard this as a contract to acquire a debt from the party – not, that was in effect, a stranger to the consideration in the most general sense.

GUMMOW J:   What do you say about Justice Sheller’s reasoning on page 24?

MR COLES:    We say his reasoning ‑ ‑ ‑

GUMMOW J:   At paragraphs 16 and 17.

MR COLES:    He really is picking up on that which we are criticising.  He says the:

funding, in this case by making a loan, to the company . . . in some way -

Paragraph 16 does not describe the reasoning.  He is there recording the argument.  Paragraph 17 is the reasoning.  The first problem with it, of course, is that he is not dealing with the matter as at the date of the contract.  He says:

this ignores the fact that the vendors as shareholders were entitled to the dividend from the company -

Now that is, of course, in consequence of the effectuation or performance of the contract not, of course, the agreement itself, and he says the:

the loan by the purchaser was a loan to the company which could in due course . . . be repaid -

That is not a necessary incident or feature of the contract for sale between the parties.

GUMMOW J:   Does the contract deal with that?

MR COLES:    No.  It says “fund”.  What we say, your Honour, to come back to your Honour’s question, at least part of the error of Justice Sheller in that paragraph is to look at how the parties implemented or performed the transaction and there was a latitude open to them how they might do so, rather than to characterise or examine the transaction they made.  Duty is payable, as I have pointed out, on the contract you make, not on the consequences of the contract you perform and that is part of the error, in our respectful submission, in Justice Sheller’s reasoning in paragraph 17.  He says:

The vendors became entitled to that amount from the company as shareholders of the company, not as vendors to the purchaser.

That overlooks the fact that the vendors became entitled to that amount because they had exacted a promise to pay it from their purchaser.  It was the purchaser’s promise to the vendor to pay the funding to the company to pay the vendor the dividend that we say was in truth and in substance and in law the consideration for the whole of the transaction.  We would say then that – to go back to Davis Investments then, your Honour, we would go on to say that case is not, in our respectful ‑ ‑ ‑

GUMMOW J:   We will hear from Mr Durack at this stage, Mr Coles.  Yes, Mr Durack.

MR DURACK:   Your Honours, first if I could just clarify one aspect of the exchange between your Honour Justice Gummow and my learned friend.  Your Honour asked what was the charging provision of the legislation.  My friend referred your Honour to section 21 ‑ ‑ ‑

GUMMOW J:   Not just 21.

MR DURACK:   No.  The charging section is actually section 8, which charges duty on an agreement for the sale of dutiable property, and section 9 elaborates upon it and the sale of dutiable property is the sale of the shares.  With respect to my learned friend, he made a Freudian slip in the last few sentences that he addressed, your Honour, and he referred to consideration for the transaction.

Now, with respect to Justice Davies and my learned friend, that is where the error lies in treating the consideration for the sale of the shares as the whole $114 million.  That might be, in a loose sense, the consideration for the transaction.  It is not the consideration for the sale of the shares because what the applicant’s case comes down to is an assertion that because the vendor walked away with $114 million, leaving the purchaser with the shares, the whole $114 million was consideration for the transfer.  That is essentially the way his Honour Mr Justice Davies put it at paragraph 29 on page 27 of the application book.

Your Honours, to regard the matter in this way has the apparent merit of simplicity but, with respect, it overlooks three significant factors.  The first is that, of the $114 million received by the vendor, $25 million was received as a dividend from the company with franking credits and the other consequences of the receipt of a dividend, not the receipt of consideration for a sale.

The second is, that his Honour Mr Justice Davies seems to have recognised, at the application book, page 27 paragraph 30, where his Honour noted at the bottom of the page that the $25 million immediately diminished the value of the shares, so that the value to the company was diminished by the amount of the dividend and if the applicant and Justice Davies are right, then the respondent paid $114 million for shares which could only have been worth about $88 million.

The third matter which, in our submission, is overlooked by the applicant’s submission, is that after settlement the purchaser had two assets, the shares in the company and a debt due by the company, assets which had been acquired respectively by outlays of $88 million and $25 million ‑ $25 million by way of the funding of the company.  Justice Davies said that the purchaser did not receive any benefit other than the transfer of the shares, seemingly because his Honour ‑ ‑ ‑

GUMMOW J:   Well, there would be a promise to repay the loan, would there?

MR DURACK:   I beg your pardon, your Honour?

GUMMOW J:   There would be a repayment of the loan?

MR DURACK:   There would be, your Honour.  Seemingly, his Honour took the view that there was no benefit because of the diminution in value of the shares, but his Honour seems to have overlooked in that same paragraph, that it was not the payment of the dividend which reduced the value of the shares, but it was the declaration of the dividend which diminished the value and which preceded the settlement and the purchaser did, therefore, gain a benefit as a result of its outlay in addition to the shares, that is, the debt that was due by the company. 

GUMMOW J:   Clause 7.7 simply said “shall fund”.

MR DURACK:   Yes, your Honour, and both Justices Sheller and Meagher made the points ‑ ‑ ‑

GUMMOW J:  

shall fund the Company, so that the Company is able to discharge the debts ‑ ‑ ‑

MR DURACK:    ‑ ‑ ‑ in their judgments, your Honour, that – and if I could refer your Honour to page 21 of the application book and to paragraph 7 of Mr Justice Meagher’s reasons for decision ‑ ‑ ‑

GUMMOW J:   But is this not committing the fallacy of looking beyond the instrument, beyond the state of affairs at the date of execution of the instrument?

MR DURACK:   No, with respect, no, your Honour.  It is looking at what is contemplated by the instrument.

GUMMOW J:   It just says “shall fund”.

MR DURACK:   Yes, and the point that both Justices Sheller and Meagher made was that the obligation was simply to fund, not in any particular amount or by any particular means, and as Justice Meagher said, the company could have had sufficient reserves of its own to pay the dividend and Justice Sheller said something similar ‑ ‑ ‑

HEYDON J:   Dividend amount ‑ ‑ ‑

MR DURACK:   Your Honour put to my learned friend ‑ ‑ ‑

GUMMOW J:   Just a minute.

HEYDON J:   The dividend amount was all retained earnings, up to 27 million? 

MR DURACK:   Yes, your Honour.

HEYDON J:   Does that not mean in the bank, or in some realisable asset?

MR DURACK:   With respect, no, your Honour.  The company might have had only a million dollars in the bank and still had retained earnings represented perhaps by other assets.

HEYDON J:   Well, so that “fund”, “shall fund the company” means do for the company what it presently cannot do for itself?

MR DURACK:   What it might not be able to do, your Honour.  Certainly the view that Justices Meagher and Sheller took was that the obligation to fund meant an obligation to fund to the extent necessary, and your Honour Justice Gummow asked my friend whether the primary error that was made was not a misconstruction or a misunderstanding of the contract and, in our submissions, if there was an error, which is not conceded, but if there was an error, that is the kind of error it was, of construction of the contract.

If that is indeed the primary error, which again the applicant does not accept, but if it is the primary error then it is an error of fact, it is not an error involving a misinterpretation of the legislation of the kind which might involve the sort of special question which would invite the interest of this Court.

Justice Davies also took the view that section 9 of the Duties Act was relevant to the issue, that section making provision in relation to timing of the transaction for the purpose of determining the point at which duty was payable, but I would remind your Honours, and it is clear from page 4 of the application book at the end of paragraph 2 of his Honour Mr Justice Gzell’s reasons for decision that:

It is common ground that it is the consideration for the dutiable transaction and not the unencumbered value of the shares that is in question.

Your Honours will remember that section 21 imposes duty on the dutiable value which is either the consideration or the unencumbered value but it has never been an issue – the unencumbered value of the shares has never been the issue in this case.

It is possible, your Honours, that section 9 of the Duties Act might have had a bearing on the – if we were looking at the unencumbered value of the shares and the way in which section 9 would operate in those circumstances, but the fact that it could conceivably have been relevant to that issue does not mean that it would change the amount of the monetary consideration nominated in the agreement and that was the issue in these proceedings.  That was, as we say, your Honours, essentially a factual issue involving construction of the agreement.

Justice Davies said at the application book page 25, paragraph 24 of his reasons, that the crux of the case, was that, referring back to the previous paragraph:

it could be inferred from the structure of the agreement that no dividend would be declared unless the purchaser funded the payment of a dividend.

Now, precisely why his Honour regarded that as crucial to the result in the case is not entirely clear.

GUMMOW J:   Because he is construing clause 7, that is why.

MR DURACK:   Well, your Honour, if so, then it underlines the fact that what was there involved was the construction of a contract about which two other justices of the same court took a different view.  Again, your Honour, in our submission, a matter which depended essentially not on a question of principle but on a construction of the particular facts of the particular transaction.

Your Honours, in our submission therefore, what was involved in this case, was consideration of the – what was the amount of consideration in circumstances where there was never any suggestion that the parties entered into the contract in the way they did with a view to minimising stamp duty, let alone avoiding stamp duty and indeed, in Justice Meagher’s judgment at the application book page 23, his Honour referred to the parties having given the transaction the form of a sale at a price and saying:

There is nothing misleading about that form.

Now, it was a question, obviously, on which there are ultimately differences of opinion between Justice Davies and the other three members of the court ‑ ‑ ‑

GUMMOW J:   Well, is it one of your submissions that, essentially, this case turns on the construction of this particular agreement and does not provide a special leave point?

MR DURACK:   Yes, your Honour.  Apart from that, we think it was the correct construction, your Honours, and that as far as Davis Investments is concerned, the fact that there might have been a dissenting judgment in that case was accounted for by the peculiar facts in that case which, of course, involved the transfer of assets by the company to a shareholder in

circumstances where the consideration nominated in the contract of sale, which was less that the value of the shares, could only have been accounted for by the fact that the transferee was a shareholder.  That was so close to Archibald Howie, your Honours, that with respect it was ‑ ‑ ‑

GUMMOW J:   I know.  Revenue people can talk for hours about Archibald Howie and Davis Investments.  I am not being critical. 

MR DURACK:   No, I am sure you are not, your Honour, but Justice McHugh once said to me, “All you tax lawyers are the same, you all think your cases are special.  They’re not, they’re all about facts”.  That is what we say this case is about, your Honours.

GUMMOW J:   Yes, thank you.  We do not need to hear you in reply Mr Coles.  There will be a grant of special leave in this matter.  It is a one‑day case.  We will adjourn until 2.00pm.

AT 12.42 PM THE MATTER WAS CONCLUDED