Commissioner of Taxation of the Commonwealth of Australia v AGC (Investments) Ltd

[1992] HCATrans 364

..

,

• ~

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S72 of 1992

B e t w e e n -

COMMISSIONER OF TAXATION OF THE

COMMONWEALTH OF AUSTRALIA

Applicant

and

AGC (INVESTMENTS) LIMITED

Respondent

Application for special leave

to appeal

BRENNAN J

DAWSON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 11 DECEMBER 1992, AT 10.50 AM

Copyright in the High Court of Australia

1   11/12/92

MR I.V. GZELL, OC: If the Court pleases, I appear with my

learned friend, DR H.R. SORENSEN, for the applicant. (instructed by the Australian

Government Solicitor)

MR R.J. ELLICOTT, OC:  Your Honour, I appear with

MR A.H. SLATER, QC, a newly appointed Queen's

Counsel. (instructed by Clayton Utz)

BRENNAN J:  Thank you, Mr Ellicott. Mr Gzell.

MR GZELL:  Your Honours, in view of the predicament with my

voice, we have actually set out in detail our

submissions in writing, rather than an outline.

BRENNAN J:  I am sure we are disappointed not to have the

enjoyment of the timbre, Mr Gzell.

MR GZELL:  Your Honour may yet do so. If I could invite

Your Honours to pause at the end of our point 1.05.

BRENNAN J: Yes.

MR GZELL: That summarizes the basis for our submissions to

make good the point that there is a conflict

between two Full Courts on the interpretation of

the insurance cases. Might I hand to Your Honours

copies of Employers' Mutual. If I could invite

Your Honours in particular to look at the passage from the judgment of Mr Justice Burchett at

page 25, lines 22 to 30.

DAWSON J: That is coming down to the subsidiary test,

perhaps. Could you, at least for my benefit

anyway, say what the test is which distinguishes an

investor from a trader?

MR GZELL:  Your Honour, the way in which this matter was

conducted in the Full Court - - -

DAWSON J:	No, I want it as an abstract proposition.
MR GZELL:	Oh, I see.  One view of the test would be,

Your Honour, that if one was conducting a business

which involved, at the time of acquisition of the

investment, the notion that at some time or other

it might be resold at a profit, one would

characterize that as an investment business, the

profits from which are assessable in accordance

with the London Australia concept. If, on the

other hand, one merely acquired an investment with

no intention that it should be ultimately resold

for profit, but one acquired it with the intention

solely of reaping from it dividend flows, whether

they be interest or - - -

11/12/92

DAWSON J:  I thought that is what you would say. It is a

terribly difficult thing to -

MR GZELL: It is very difficult -

DAWSON J:  - - - comprehend, because no one is pure in their

motives when they purchase investments.

MR GZELL:  Your Honour, it is a difficult notion to

comprehend and that is probably why the suggestion

that there might have been a difference in approach

in London Australia between Sir Harry Gibbs on the

one hand and Mr Justice Jacobs on the other is

really a matter of how one approaches a particular

fact situation and explicable on that basis, and it

is extremely difficult in the abstract to point to

a test other than that which I have attempted to do

in answer to Your Honour Justice Dawson, because it

is going to depend so much on the factual matrix.

There may be situations in which one will be able

to say with little difficulty that the business was

truly an investment business and the proceeds ought

to be regarded as on revenue account.

DAWSON J: Well then it is unlikely this Court can do very

much to elucidate the position.

MR GZELL: Yes, I accept that, Your Honour, and I also

accept - and we are not inviting the Court to do

that. Where we cavil with the approach that was
taken by the Full Court in overruling the primary

judge whose task it was to do precisely that, was

the manner in which the Full Court overruled him,

and they did it on the two bases that we say were

wrong and if this Court entertained the appeal and

agreed that those two bases were wrong, it would

follow that the primary judge's decision would be

returned.

BRENNAN J:	What are the two bases?
MR GZELL:	The two bases are that the Full Court wrongly

distinguished the insurance company case by

limiting it to a situation in which insurance

companies required investments for the purpose of
maintaining liquidity and for that reason rejected
the use that was made by the primary judge of those

cases. I will take Your Honours to those passages

to make good that proposition. But His Honour the

primary judge had said the insurance company cases
take the view that it is part of the business of an
insurance company or a bank to invest and therefore

the proceeds of an investment, regardless of the

purpose the individual bank officer may have had at

the time of the investment, or the individual
insurance company may have had, are to be assessed

11/12/92 as revenue according to ordinary concepts, because

it is part of the business.

BRENNAN J: Is that entirely accurate, because leaving banks

aside, it seems to me the banks stand in a

different position but, in the case of insurance

companies it is one thing to say that investments

made by an insurance company, or for that matter by

an insurers subsidiary, are investments made in the
course of the insurance business; it is another
thing to say that investments made by an insurance
company or by a subsidiary of an insurer, are made

for a purpose other than the insurance business of

that taxpayer.

MR GZELL:  Yes. I accept that point, Your Honour, and no

doubt the same would apply to a bank. If a

bank - - -

BRENNAN J: Well, perhaps not, because a bank may need to -

may, as part of its business, look to its capital

appreciation.

MR GZELL:  But if a bank were to set aside, as a reserve

fund, totally separate and distinct from the need

to look to its growth in its loans, purely from the

point of view of providing a fund to pay a bonus

issue or to pay a dividend to its shareholders, one

might then say, in answer to Your Honour

Justice Brennan that that type of investment stood

apart from the banking business as the type of

investment Your Honour was putting to me in

relation to the insurance company - stood aside

from the insurance company's business - - -

BRENNAN J:  We need not debate the bank question, but so far

as the insurer is concerned, does your submission

go to this extent, that an insurer who makes any

investment is necessarily making that investment in

the course of its insurance business?

MR GZELL:  No, I do not need to go as far as that,

Your Honour.

BRENNAN J: Then, has the Full Court in terms of principle -

leave aside the question of its findings of fact -

in terms of principle has the the Full Court gone

any further than saying, "These investments were

not made as part of the insurer's business."?

MR GZELL:	I think, with respect, yes.
BRENNAN J:	Can you demonstrate that?

MR GZELL:  Yes. I will take Your Honour to the passage in a

moment in which this Full Court took the view that

the rationale behind the insurance company cases

11/12/92

was limited to circumstances in which the need to
invest was to provide for liquid funds for the

operation of the insurance business. Before I take

Your Honours to that I was at pains to draw
Your Honours' attention to an obverse proposition by another Full Court in the Employers' Mutual

indemnity case because, clearly, in that case there

was no suggestion that this fund was required for

the purposes of meeting liquid needs of the

company. Indeed, Mr Justice Burchett was putting

it quite to the contrary, that if it stands as a

fund of last resort, and His Honour's reference to

Torres Vedras - to a series of lines of defence

that were developed in the Napoleonic Wars to

protect Portugal and the French troops - Napoleon's

troops - approached the first of these barricades,

one shot was fired and they retreated and the

French never attempted to invade Portugal after

that.

So, His Honour is drawing the analogy of even

if the fund is there as a last resort, none the

less it is captured. One has to set it aside

totally from the needs of the insurance business in

order to overcome the rationale between those

cases.

Now, Your Honour the Chief Justice asked me

something. Your Honour the Chief Justice asked me

to make good the proposition and I will take

Your Honours to it. It appears under our

paragraph 2.04. We have given Your Honours a

reference to the way in which the Full Court

approached the matter. Perhaps if I simply invited

Your Honours first to read the paragraphs 2.01

to 2.03 which summarize the way in which the

primary judge approached the problem and then I

will take Your Honours to the way in which the

Full Court sought to limit the insurance company cases.

BRENNAN J:  Mr Gzell, looking at pages 74 and 75, the

question really is whether Their Honours there in
speaking of the necessity to have the securities in

order to maintain liquidity were speaking of

liquidity on a day to day basis, or liquidity in

the event of a first line at Torres Vedras being

breached.

MR GZELL: Well, the way in which they dealt with it, in our

submission, is to limit it to day to day liquidity,

because it was on that basis that they then

distinguish the facts of this case from the

insurance company cases and say that His Honour the

primary judge was wrong to take account of the

insurance company cases because the fund of AGC

investments was not utilized to meet day to day

11/12/92

liquidity. So the Full Court was clearly taking

the view that their meaning of liquidity was of the

type where it was necessary to meet the day to day

operations of the company, not the first, second or

third line of Torres Vedras.

BRENNAN J:  Was there not a reference in the judgment to the

long tail of workers compensation insurance

and - - -

MR GZELL: That is the primary judge and the primary

judge -

BRENNAN J: Yes, quite.

MR GZELL:  So that 74 to 75 is the clear basis upon which

the Full Court took the view that the primary judge was wrong in having regard to the insurance company cases because they ought to be limited to

circumstances where funds were needed for day to

day liquidity purposes. We say that that is a

novel approach and there is nothing in the face of

the authority that they drew support from, the

Colonial Mutual case, to indicate that that is so.

It is unnecessary for me to take Your Honour to it because at page 75 are set out the portion from the

text which appears in the judgment in CML that

Their Honours seek comfort from.

There was a reference in the CML case to the Punjab Cooperative Bank Ltd v Amritsar, but again the passage relied upon in CML at page 1072 to

page 1073 is in general terms and not limited to

concepts of day to day liquidity. The passage that

was relied upon in CML appears at the bottom of

page 1072 to page 1073 in the Privy Council

judgment. So that our first point, Your Honours,

is that the Full Court erred in restricting the

test under the insurance company cases to the needs

of day to day liquidity and, in any event, there is	a conflict in approach in the Federal Court which
this Court ought to look at.

That is the first ground for our application.

The second ground is based upon the argument that

with the inferences that had been drawn by the primary judge. But in taking that course the	the Full Court drew inferences of fact inconsistent the primary judge and, in particular, findings
based upon the credibility of witnesses; ignored
those findings and drew inferences in respect of the balance and we say that they erred in that regard.

6   11/12/92

DAWSON J: Is credibility really involved? I mean

preference for one line of evidence as against

another does not really involve credibility.

MR GZELL:	Rejection of testimony, Your Honour. And I will take Your Honours to the passages in a moment, but
one of the issues which was keenly debated was
whether or not there was a need of the holding
company - the insurance company - to call upon this
fund invested in the hands of the subsidiary, and
there was direct evidence by the managing director that insurances never called upon the fund in the
hands of the investment company to meet its
liquidity needs. His Honour disbelieved that
evidence and His Honour found to the contrary. There is no mention or analysis of any of - and I
should say, Your Honour, that - - -

DAWSON J: All I am saying - it is not a case where he was

calling the man a liar, but he did not accept that

because the facts pointed in the other direction.

MR GZELL: Well, he found contrary to the sworn direct

testimony of not only that witness, but Mr Crisp.

He also rejected the evidence of the other witness,

Mr Gates. So in respect of each of those three

witnesses who were called, the primary judge took a

view that - - -

DAWSON J: That is the point, it is a different view from

the view put by the witness. That is all I am

saying. It is not a question of credibility where

you really have to observe the witness in the

witness-box to be able to determine the question.

MR GZELL: Well, we would submit so; that he did observe the

witnesses in the witness-box, and notwithstanding

the testimony given, at the end of the

cross-examination -

DAWSON J:  It is not because he was shifty or looked guilty.

It is a different sort of case.

MR GZELL:  No. The primary judge does not say that he does

not accept his testimony because he looked shifty.

What the primary judge said was, he did not accept the testimony because the objective facts pointed

to the contrary - - -

DAWSON J: Because he did not accept that point of view.

MR GZELL: Yes. Well perhaps not, because there emerged

some facts in relation to two amounts totalling

$10 million, which went from investments up to the

holding company. That was sought to be explained

by processes other than an actual payment of money
from the subsidiary up to the parent company.

7   11/12/92

His Honour in the end found that the document

suggested that there was indeed a payment of money

up to the holding company and he found, more

probably than not, that that was in aid of the

liquidity needs of the company because it had been

subjected to this long tail run down of workers
compensation; the premiums having stopped, but the

claims still continuing.

McHUGH J:  I take it there is no suggestion that these

investments represent retained earnings in the

business, as opposed to investments coming from the

flow of funds into the business generally.

MR GZELL:  It appears that the fund was generated by funds

regarded as surplus to insurances needs being

loaned - lent - to investments. Investments was

entitled to reinvest proceeds of sale and

reinvest - I think that is right - reinvest the

dividend flow as well, and from time to time there

were decisions made about augmenting the amount

that was available for this purpose.

DAWSON J: But the initial loans to the investment company

may have had a component of premium income, take

Wood - - -

MR GZELL:  Presumably it may have had that component but was

actuarially regarded as surplus to day to day -

BRENNAN J:  Was there any comparison done between the amount

of profit of insurances and the amounts lent to

investments?

MR GZELL:  Not that I recall, Your Honour. The fund

continued to accumulate. There were periods during

which the funds were required to be taken into
account for the purpose of solvency ratios for

workers compensation and insurance authorities and,

at a later stage in the history of the

relationship, those ratios were solved, otherwise

than by a need to call upon the assets that were

held in investments.

BRENNAN J:  I am right in thinking that apart from the

moneys lent to investments, leaving those to one

side, there would have been a deficiency of assets

over liabilities in the case of insurances?

MR GZELL:	Not always.
BRENNAN J:	Not always?
MR GZELL:	No, not always, at all, but there were indeed a

number of years in which that was so, the earlier

period. Apparently there was some argument with

the insurance commissioner as to the way in which -

11/12/92

of the percentage of what was represented by a loan

from the holding company to the subsidiary which he

would take into account for the purpose of the

solvency ratios and, as a result of that

contretemps with the Commissioner, a decision was

made to restructure so that the solvency ratio

would be answered without recourse to the

investments below. But, up until that time there

were some years in which there was a deficiency.

Can I take Your Honours to the - - -

BRENNAN J: Can I just ask you one further question. If one

left out of the balance sheet of insurances the

loans to and shareholding in investments, would

there be a surplus of assets over liabilities?

MR GZELL: In the later years, I think the answer to that

is, yes. I hear my learned friend saying "Right

through". As I understood it there were a number

of years in which there was a deficiency which is referred to by the primary judge in his judgment.

BRENNAN J:  You need not go into the details. Mr Ellicott

can no doubt elucidate - - -

MR GZELL:  Yes.

McHUGH J: But does that mean that if you trace it through

that these investments represent shareholders'
funds - that these investments really represent

shareholders' funds of insurance?

MR GZELL: Well, they are certainly reflected in

shareholders' funds of insurance, because it is

part of the assets of insurances which are in

excess of the liabilities of insurances. So that

they would certainly be reflected in shareholders'

funds.	No doubt, when one got to the years - and I
will stand corrected if I am wrong about this -	when one got to the years in which there was no
deficiency without recourse to the underlying subsidiary then those funds, if they had been held
by the holding company, would have been available
solely as excess funds for shareholders.

Can I take Your Honours to our paragraph 3 and

to the passages upon which we rely to indicate the

findings that we say were based upon credibility

but not in the sense that Justice Dawson has put to

me as being overtly stated to be dependent upon a

view that the primary judge took of the demeanour

of the witnesses.

Firstly, at page 78, 27 to 30, the Court of

Appeal asserted that it was no part of the
corporate scheme to maintain liquidity. In drawing
that inference we say that the Full Court ignored

9   11/12/92

the findings of the primary judge in respect of
this $10 million incident that I mentioned a moment

ago, and if one looks at the application book at

page 11, His Honour the primary judge made a

finding about that in the last paragraph on that

page. And if one goes back to the previous

page 10, line about 5, there is the reference to

the witness, Mr Robson, deposing to the contrary of
the view that His Honour ultimately took.

That finding of His Honour is an important one, because it negates the suggestion that this

fund was not required for the purposes of the

liquidity activities of the insurance business at

any time.

McHUGH J: But, is not the fact that historically there were

very few sales of shares a powerful indication that

these investments were not used for the purpose of
carrying on or carrying out the business of

insurance.

MR GZELL:  No, not necessarily, Your Honour. I certainly

accept the fact that there were relatively few

sales and that those sales were normally as a

result of takeovers rather than a deliberate
standing in the market to sell, but that might be

indicative of a fund which is held solely for the

purpose of generating the cash flows, but the point

that the primary judge fastened upon was that this

fund was an essential element of the insurance

business.

McHUGH J: Well, you say that. That is an ultimate

conclusion. Supposing an insurance company said, "Well, at the end of each year 60 per cent of our earnings we will distribute by way of dividends;

40 percent of our earnings we will lend to a

subsidiary company for long-term investment in

shares".	Now you could not argue in that situation
that any sales of those share would constitute

income, could you?

MR GZELL: Yes, and we would, Your Honour.

McHUGH J:	You would?
MR GZELL:	We would, because if it held by the insurance

company and the insurance company has simply made a

decision that it will hold in liquid funds that

which actuarially is required to meet the day to

day claims that are likely to occur, but as part of

the process of running that business it must hold a

fund readily able to be liquidated in the event of

a catastrophe, in the event that there is a run on

the insurance business beyond the actuarial

calculations, and if that fund is set aside as a

10   11/12/92

requirement for that expedient, albeit that it may

only be rarely called upon - - -

McHUGH J:	What is the real difference, apart from the terms of the liquidity, I suppose, than if it said, "Well we will put those retained earnings in companies
manufacturing technology." or "We will invest it in business" or something of that nature?

MR GZELL: Well, Your Honour, we would say that it makes no

difference, whether the form of investment is in

the type of industrial stock that Your Honour is

talking about, or liquid funds. What we would say

is, it would be unlikely that a prudent insurance

company would put a great deal of its basket

into - - -

McHUGH J: Well, it cannot, for various reasons - it

certainly - - -

MR GZELL: Well, it may be limited in any event in the form

of securities it may invest it, but that would not

matter, in our submission. What is important is

whether or not the conduct of the insurance

business requires that there by a fund invested to

meet the ultimate catastrophe if it can - - -

McHUGH J:	You seem to be coming very close to converting the rule in the CML case into a rule of law, rather
than a proposition of fact.
MR GZELL: Well, I hope that I am not seeking to do that.	I

am seeking to argue that, on the facts of this

case, His Honour the primary judge was right in

saying that because this fund in the subsidiary was

a necessary part of the insurance business of its

holding company, he could infer and could draw the

inference that it was in the business of investment

with the result that the profits were assessable

went about forming its own inferences was based	and we say that the way in which the Full Court
upon a basis that was wrong because it took no
account and, indeed, if I can take Your Honours
to - - -

BRENNAN J: Well, you do not need to argue the appeal at

this stage, Mr Gzell.

MR GZELL:  No, well, if I might just simply say the

Full Court has suggested that there were no

findings as to credit which were significant and we

say that that was clearly wrong in relation to the

passages I have drawn Your Honour' attention to and

the other passages that we have mentioned but I

need not take Your Honour to; they are summarized

in our outline, and, before I take my seat, in the

application book at pages 6 and 7 His Honour deals

11   11/12/92

with that question of deficiencies in the earlier

years. Towards the bottom of page 7 is the

indication of the change in strategy in the later

years. Those are our submissions.

BRENNAN J: Yes, Mr Ellicott.

MR ELLICOTT:  Your Honours, when this Court dealt with a

special leave application in Westfield, which is

reported, Your Honour - might I hand up a set of

authorities - it is under tab 4, Your Honours - the

Court, in the second-last page of the judgment

at 402, this Court said this, that:

The Full Court of the Federal Court is the ultimate court of appeal in taxation matters subject only to the exceptional cases in which this court grants special leave to appeal. It

follows that a question of fundamental

principle must arise for decision in such a

matter before this court will grant special

leave.

And Your Honours went on to say:

we consider this case turns on its own facts

and does not call for the grant of special

leave to appeal.

Your Honours, we would submit that this is exactly on all fours with AGC Investments and another case

that Your Honours might recall is Equitable Life,

which had been an insurance company and then it had

all sorts of sales over a period and Your Honours

refused leave on an application by the Commissioner

in relation to this. Now this is - and it was

refused in Employers' Mutual Indemnity, so the

whole attitude of this Court, we would submit, with

respect, has been to say, "Well, on these matters"

and we say for very good reason, "if they are

questions of fact", as they obviously are, we would

say, "this Court will not intervene".

Now, my friend has not asked this Court to lay

down some new principle, or has not pointed to an error of principle on the part of the Full Court.

The Full Court was concerned with the facts of the

case, and it just happened to come to a different

view to that of the trial judge. But those facts

were not in any way related to these questions of

credibility, as I hope to demonstrate to

Your Honours. The facts were, in effect, the

objective facts, the documents and the other facts

that were undisputed, and therefore the Court did

not deal with it otherwise than as a question of

fact.

12   11/12/92

Now, Your Honours will historically recall

that during the S0s and 60s there was a view that
the banking cases and insurance cases were in a

special category and that otherwise if companies

bought shares and held them and said, well we do

not - even though they bought and sold them, if

they bought them for a purpose which was not

profit-making by sale, even though they seemed to

be part of a business, then nevertheless they were

not assessable and that the insurance and banking

cases were in a special category.

London Australia was a watershed case, in a

way, and Your Honours can see that because the

dissentient was the then Chief Justice

Sir Garfield Barwick and those in the majority were

Mr Justice Gibbs and Mr Justice Jacobs. The

argument was really on the question whether those

insurance and banking cases were special cases or

whether they were under a general head, and what

the court was saying in London Australia, and it

has been adopted since and referred to in Myer

Emporium case was that this comes under the

umbrella, and if, in the course of a business,

assets are acquired for a sale at a profit, then

the proceeds will be assessable.

The ultimate question is always, were they

acquired for sale at a profit as part of the
business, and that was taken from the California

Syndicate case. Mr Justice Gibbs applied in London

Australia. It is referred to again in Myer

Emporium and so that in this particular case there
is no special principle from which the Full Court

of the Federal Court has departed because it simply

asked the question: looking at the facts, were

these shares acquired for a profit? Now, the facts

here are rather significant because they indicate

that except in relation to takeovers and sometimes

in relation to rights issues, there were not - and

except in relation to one particular case where the

investment adviser thought that they should, for

very special reasons, get rid of the portfolio

because they were worried about it, the investments

were in, what you might call, the blue chip stocks

and they were held for long periods.

DAWSON J: But the very nature of the business, which is an

insurance business for which - - -

MR ELLICOTT:	Your Honour, can I come to that in a moment?
DAWSON J:	- - -for which this company was a part is such

that, if the necessity arose, they would be called

on. It is not like an investment company which is
such that the necessity will not arise.

13   11/12/92

MR ELLICOTT: Well, Your Honour, with respect, has taken a

big leap in saying that - - -

DAWSON J: Well, I am putting it as a proposition on - - -

MR ELLICOTT:  - - - because we would submit the facts do not

justify that conclusion.	The Court must understand
that there were two companies.	One was called

Securities - that is AGC Securities and one was

called AGC Investments, the taxpayer. AGC

Securities had lots of liquid funds in it and it

was the company that received the premiums, the day

to day amounts and there were many millions of

dollars -

DAWSON J: For the moment, but that need not necessarily

continue and if it did not, then its shareholding

in investments was such that it could and would

call on the portfolio there to meet its

requirements.

MR ELLICOTT: Well, Your Honour, there was no finding to

that effect, and in fact, the liquidity - never was

there any attempt to call on the - and this is the

important thing, and one gets - it is easily

confused. That is to say, with respect, the notion

that you might want to sell your assets some day

and the notion that you might want to have recourse

to profits from the sale of the asset for the the

purpose of your business - and they are two quite

distinct things, and these funds that went over to

the AGC Investment Company, which was not an

insurance company - yes, it was a subsidiary, but

it was not an insurance company, it was not

involved in the insurance business - these funds
represented surplus - surplus to the requirements

of the business.

McHUGH J:  What sort of surplus? Were they earned income or

were they surplus in terms of the day to day, or

let us say, month to month needs?

MR ELLICOTT:  Your Honour, they represented basically

moneys - they may, if Your Honour wanted to trace

them, they might come out of some fund that had

represented premiums, they may have, but the fact
was that the actual moneys, when they were paid

over they were paid over because they were surplus

to the requirements of the business and therefore

represented funds which, if the company had wished

to, could have been paid to the shareholders by way

of dividend.

DAWSON J: Well that is not really true, is it, Mr Ellicott?

What the company would have done, I assume, is to

assess its liabilities in terms of claims and
possible claims and then say what the surplus was

14   11/12/92

in one sense, because what they assessed as
possible claims may turn out to be untrue and that

is when they would have to have recourse to these

funds.

MR ELLICOTT:  Your Honour, these were true surpluses and

that is the sense in which I am submitting they

were surpluses. These were surpluses after taking

into account all possible claims.	They were not
the surpluses - - -

DAWSON J:  You never can. You would never know.

MR ELLICOTT: Well, if Your Honour takes the view that

actuaries are inaccurate and they do not know their

business -

DAWSON J:  They can be inaccurate; yes, I do.

MR ELLICOTT: Well, they can, but the fact is that they are

relied on by the insurance industry and the

Insurance Commissioner to make decisions about

whether a company is liquid or not liquid, or

whether a company is insolvent or not insolvent and
these assessments are made from day to day and

every insurance company has its actuary and that is

their job and they make a decision based on

immediate requirements and other requirements of

the business. Now, these were surplus to the whole

of the requirements of the business and,

therefore - - -

BRENNAN J: That is a proposition which, at the moment,

Mr Ellicott, I see nothing to support. If it were

possible to demonstrate that this was a fund which

was not simply set aside as against possible errors

on the part of the actuary or in terms of prudence

in the view of the directors in order to answer

some unforeseen catastrophe that was so manifestly

beyond anything that the insurance business could

ever acquire, then one can see the force of the

argument that you are putting. But, as I

understand it, there was never a comparison between

the financial situation of the holding company in the conduct of its business and these funds which

were invested in - - -

MR ELLICOTT: Yes, Your Honour. That was implicit in what

they were doing.

BRENNAN J: Well, it could not be implicit in what they were

doing. What they were doing was simply taking

money from insurances and putting it into

investments. That is all they were doing. The

question really is, "Were the moneys that were
taken from insurances and put into investments part
of the moneys which, in prudence, were being

15   11/12/92

maintained for the purposes of the insurance

business?"

MR ELLICOTT:  They were not being maintained for the

purposes of the insurance business. They were

moneys that they chose to retain as surplus funds.

They were surplus to the business in the sense that they could have been paid out as dividends; they

chose not to.

McHUGH J: In distribution of capital.

MR ELLICOTT: They chose to put them into an investment

company and have that investment company operate as

an investment company and not as a trader in shares

and not to acquire shares at a profit.

BRENNAN J:  What is the finding which supports that view,

Mr Ellicott? Where is the finding which supports

that submission?

MR ELLICOTT: 

Which one, Your Honour?

BRENNAN J: 

The one that this is not part of the insurance

business; it is taken away from the insurance
business and simply put into the fund as surplus.

MR ELLICOTT: 

Your Honour, in order to substantiate that one would have to go to the evidence, Your Honour.

McHUGH J: Yes, that is what I thought, because

MR ELLICOTT:  And that is why this is a question of fact.

Unless there is some principle - and this is really what this application for special leave is about -

that an insurance company cannot hold assets - and

let us forget about the relationship between parent

and subsidiary, but it must be an added

circumstance here to support us - but unless there

hold assets other than its head office, for is some principle that an insurance company cannot	instance, except as part of its business for the
purposes of providing for the insurance business,
then this has to be a question of fact and the question - - -

BRENNAN J:  The question of principle must be this, must it

not, looking at page 75, whether it is appropriate

in considering whether an investment is in the

course of an insurance trade it is right to regard

merely the question of whether it was necessary to

maintain liquidity.

MR ELLICOTT:  Your Honour, I am sorry, I cannot pick that up

I -

16   11/12/92

BRENNAN J: Well, you would have to look at two parts of the

page to pick it up. If you look at the top of the

page in the citation from Konstam, there are the

critical words "in the course of its trade" on the

third line. If you look at line 19 you can see

words to the same effect:

such an acquisition and subsequent realisation

is a normal step in carrying on the insurance

business.

MR ELLICOTT: Yes, all right.

BRENNAN J:  So that the criterion in point of law is whether

or not the investment in the fund is part of the

business of insurance. If you look then at line 28

and line 32 you will see the reference by the

Full Court to the need to maintain liquidity and the negative answer given to the Full Court to the

satisfaction of the test because it was not

necessary to maintain liquidity.

MR ELLICOTT:	Yes, and that -
BRENNAN J:	Now, the question is, is the test of liquidity

the test of part of carrying on the business.

MR ELLICOTT: It is part of it, Your Honour, and in this

from facts - concluded that it was not required for liquidity, and there is no suggestion

particular case, as a matter of fact, the inferences

that the funds - - -

BRENNAN J: Did that go far enough as the question of

principle?

McHUGH J:  It does not seem to me to go anywhere near far

enough, simply to say you do not need it to

maintain liquidity. It is a question of whether it

is there to meet a risk. What sort of risks were

insured by the insurance company, Mr Ellicott, in

this particular case; I mean, was it Bhopal-type

disasters or were they insuring - - -

MR ELLICOTT: Well I do not think we went into that,

Your Honour.

MCHUGH J:  I see.

MR ELLICOTT: It was just a general insurance company, but

those risks, whatever they were, they were

accounted for in the assessment of whether these

were surplus funds or not. Just because -

McHUGH J:  On an actuarial basis, but the question my

brother Dawson put to you earlier seemed to raise a

17   11/12/92

fundamental question of principle: can an insurance

company ever say while it is at risk that

notwithstanding the actuarial calculation, these

investments are not needed as part of its business?

MR ELLICOTT: Well, Your Honour, in the Chamber of

Manufacturers v Federal Commissioner of Taxati:on ·-

and there is a reference to the relevant passage at

page 95 - the Full Court said - I think

Sir Nigel Bowen was one of the members of the

Court:

"Even in a case such as the present -

this is at page 95 of the appeal book -

the position might have been different had the taxpayer maintained two quite separate funds - the first acknowledged as a reserve fund and

demonstrably sufficient to meet claims and

expenses in all reasonably foreseeable

contingencies -

and that surely should be the test -

the second categorised and dealt with as an

investment fund."

So that is the sense in which we are putting it,

that it is a question of whether it is truly an

investment fund which is a question of fact, or

whether it is truly needed to meet all reasonably

foreseeable requirements and we would submit that

there is a principle, it is encapsulated in that

little paragraph, in that case, which is directly

applicable to this case and makes this a question

of fact.

McHUGH J: Is that not the question? It raises the question

of special leave as to whether or not that

principle is correct.

MR ELLICOTT: Well, Your Honour, that principle, we would

submit, has not been challenged by my friend.	What
my friend is trying to say to this Court, "The

Full Court is wrong because it had a narrow view of

liquidity and it did not look at the real principle

and therefore it fell into error." But the real

principle - and I come back to this, Your Honours,
because whatever one may say about insurance

companies as such, the fact is that they have now

come under the umbrella of the general proposition,

and explained in that way, were the assets acquired

in the course of a business for the purposes of

sale at a profit? And throughout the evidence here

there is a clear indication that at no stage - and

I know that the trial judge took a different view

18   11/12/92

for certain reasons, but the Full Court, as a question of fact has said they were not share

traders; that is clear.	They were not acquired for
resale at a profit.	They were shares acquired as a
long-term investment.	The very nature of the

shares was long-term; the holdings were long-term, the reasons for sale were not related to any issue of liquidity.

The reasons for sale were simply, apart from

the final sale which was to look after the total

portfolio, and of course it was just before the

crash in 1987, they have some prescience that
others did not have, so they sold, but the reasons
for sale were in no way connected, and so the

objective facts, Your Honours, are such that they

endorse the view that this was an investment fund

and we would submit there is no room for a

proposition, in the light of London Australia and

Myers Emporium, for the develop::,ent of the law any further than those cases go. And that is what my

friends are asking Your Honours to do: to develop

the law in relation to the acquisition of assets

for resale at a profit and we would submit

therefore that Your Honours should not grant

special leave.

BRENNAN J:  Mr Ellicott, where is the reference to the CMI

case again? Could you point that out to me; the

passage from Sir Nigel Bowen's judgment?

MR ELLICOTT:  Page 95, Your Honour.

BRENNAN J: Yes.

MR GZELL:  I would just like to say one thing, if

Your Honours please. In relation to the

characterization of the reserve fund, I draw

Your Honours' attention to pages 3 and 4 of the

application book, where His Honour the primary

judge analysed the nature of this reserve fund and,

in our respectful submission, it falls into the

category of the first type of fund in the Chamber

of Manufacturers case.

BRENNAN J:  The Court will consider its decision in this

matter and give its decision at 2.15 pm.

AT 11.47 AM THE MATTER WAS ADJOURNED
UNTIL LATER THE SAME DAY

19   11/12/92

UPON RESUMING AT 2.14 PM:

BRENNAN J: There will be a grant of special leave in this

case.

AT 2.15 PM THE MATTER WAS ADJOURNED SINE DIE

20 11/12/92