Commissioner of Taxation v BHP Billiton Limited

[2010] HCATrans 229

[2010] HCATrans 229

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M29 of 2010
  No M39 of 2010
  No M40 of 2010

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

BHP BILLITON FINANCE LIMITED

Respondent

Office of the Registry
  Melbourne  No M30 of 2010
  No M31 of 2010
  No M32 of 2010
  No M33 of 2010

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

BHP BILLITON LIMITED

Respondent

Office of the Registry
  Melbourne  No M34 of 2010
  No M36 of 2010

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

BHP BILLITON PETROLEUM (NORTH WEST SHELF) PTY LTD

Respondent

Office of the Registry
  Melbourne  No M35 of 2010

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

THE BROKEN HILL PROPRIETARY COMPANY PTY LTD

Respondent

Office of the Registry
  Melbourne  No M37 of 2010
  No M38 of 2010

B e t w e e n -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

BHP BILLITON MINERALS PTY LTD

Respondent

Applications for special leave to appeal

FRENCH CJ
CRENNAN J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 3 SEPTEMBER 2010, AT 1.27 PM

Copyright in the High Court of Australia

__________________

MR S.J. GAGELER, SC, Solicitor‑General of the Commonwealth of Australia:   If the Court pleases, in each of those matters I appear with MS H.M. SYMON, SC, MR M.T. FLYNN and MR L.W.L. ARMSTRONG for the applicant Commissioner.  (instructed by Australian Government Solicitor)

MR D.H. BLOOM, QC:   May it please the Court, in all of those matters I appear with MR S.H.P. STEWARD, SC and MS L.A. HESPE for the respondents.  (instructed by Mallesons Stephen Jacques)

FRENCH CJ:   Mr Solicitor, are you able to address us on all of those matters?

MR GAGELER:   Yes.  There is essentially a billion dollar special leave question and a $300 million one.

FRENCH CJ:   I am glad you distinguish those – the value from the question of special leave.

MR GAGELER:   They are not entirely distinct.  The billion dollar special leave question is the Division 243 question which is entirely a question of statutory construction and turns, as we see it, substantially on the meaning of one word in section 243‑20(2).  It will take me about four minutes, I think, to explain the point.  The bottom line is this, that where section 243‑20(2) uses the word “capable” it is referring, in the Commissioner’s submission, to a practical capacity to bring about legal rights of the limited nature referred to in subsection (1).  That is a point which is glossed over, certainly not addressed by the Full Court of the Federal Court, and inconsistent with the way in which it approached the case.

Now, your Honours, to make the point - and my four minutes starts now - if your Honours can locate within the applicant’s material at tab 15 an extract from Chapter 3 of the 1997 Income Tax Assessment Act, your Honours there have the relevant parts of Division 243.  Within that division I am going to ask your Honours to look only to three sections.  The first is section 243‑10, which is called a guide, and appears in a box.  Other provisions of the 1997 Act tell us that a guide of that nature is to be considered in determining the object and the meaning of operative provisions. 

What the guide says is this division tells you when you must include an additional amount in your assessable income at the termination of a limited recourse debt arrangement, it also tells you what the additional amount is.  Basically, the division applies where the capital allowance deductions that have been obtained for expenditure that is funded by the debt and the deductions are excessive having regard to the amount of the debt that was repaid.  The reason for the adjustment is to ensure that where you have not been fully at risk in relation to an amount of expenditure you do not get a net deduction if you fail to pay that amount.

What the division is about, in essence, is clawing back capital allowance deductions – in old speak depreciation deductions – that have been obtained by a debtor in the following circumstances:  one, where the capital expenditure has been funded by a particular form of debt arrangement described as a limited recourse debt arrangement; two, where that arrangement has terminated; and, three, where the debt has not been fully repaid.  The reason, the purpose, the statutory objective, is to ensure that the debtor does not get a net deduction for expenditure of a capital amount that has been funded by a debt that has not in fact been repaid ‑ ‑ ‑

CRENNAN J:   Justice Edmonds recognised all of this.

MR GAGELER:   He did, but he failed to distinguish between subsection (1) and subsection (2) and, in failing to do that, failed really to give effect to any ambiguity that might be found in subsection (2) by reference sufficiently to this idea of ensuring that a debtor in those circumstances who has not been fully at risk is subject to this clawback.  The next provision, your Honours, is section 243‑15(1) which has the three relevant elements:

This Division applies if:

(a), (b) and (c).  There is no doubt never any controversy as to the application of (b):

the debt arrangement is terminated ‑

and (c) the deductions of capital allowance had occurred – the whole case is about (a).  That takes us then to section 243‑20(1) and (2).  Subsection (1) was very much the focus of the argument in the courts below, but in dealing with the argument about subsection (1) the separate and important operation of subsection (2) was lost very much in the Full Court, in our submission.  So subsection (1) says:

A limited recourse debt is an obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) where the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are limited wholly or predominantly to . . . 

(a)      rights . . . in relation to any or all of the –

debt property, meaning the property financed by the debt.  Now, it was held by the trial judge and upheld in the Full Court that where you read “rights” and “limited” in section 243‑20(1) you are reading “legal rights legally limited”; here, relevantly, contractual rights contractually limited.  We accept that construction for the purposes of this application, that is subsection (1) is to be read as held in the Full Court as referring to, relevantly, contractual rights contractually limited.  It is concerned with the circumstances where the debtor and the creditor so organised their affairs that the legal rights of the creditor in the event of default are legally limited to rights in relation to particular property.  Now, accepting that, you go on to subsection (2).  Subsection (2) says:

An obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) is also a limited recourse debt if it is reasonable to conclude that the rights of the creditor as against the debtor in the event of default in payment of the debt or of interest are capable of being limited in the way mentioned in subsection (1).

In our submission, what it is referring to is a capability, an ability, a capacity in fact or in practice to bring about legal rights of the nature referred to in subsection (1).  Why do we say that - for three reasons.  One is that the test is reasonable to conclude, which is a formula used throughout the Act to encompass the notion of a conclusion of fact drawn by a reasonable person and not a conclusion which is simply limited to a conclusion of law. 

Secondly, the factors to which regard is to be had, listed in paragraphs (a) through to (d) of subsection (2), are intensely factual questions; that is they are questions of fact and degree.  Paragraph (a):  the assets of the debtor; (b) any arrangement defined; a defined term encompassing arrangements that are not necessarily legally enforceable; (c):

whether all of the assets of the debtor would be available for the purpose of discharge of the debt –

again, an intensely factual question – and then (d):

whether the debtor and creditor are dealing at arm’s length in relation to the debt -

again, “arm’s length”, a defined term which requires consideration of the connection between the parties and any other relevant circumstances.

CRENNAN J:   The trial judge recognised that you have to deal with all those considerations as factual matters, did she not?

MR GAGELER:   The trial judge did, your Honour; the Full Court did not.  The trial judge did but her Honour did not deal, in our submission, adequately or properly with section 234‑22 because she appears to have characterised the Commissioner’s argument as a test of economic equivalence.

CRENNAN J:   Yes.

MR GAGELER:   She did that at pages 89 through to 91.  She dismissed it on the basis of it being a test of economic equivalence.  I do not know, I was not there, but if it ever was a test of economic equivalence it certainly is not now and was not before the Full Court.  But that is the way in which she really dismissed the entirely of the argument based on subsection (2).  When you then get to the Full Court ‑ ‑ ‑

FRENCH CJ:   They deal with it only really in 106, do they not?

MR GAGELER:   Yes.  Well, I am not sure, your Honour.  It goes back a little.  It is 104 through to 106.  What you see throughout is a blending of subsection (1) and subsection (2).  It is a little hard to unpack what, if anything, the Full Court is saying about subsection (2).

FRENCH CJ:   Well, 106 is agreeing with 230, which is where her Honour, as it were, zeroes in on it.

MR GAGELER:   Yes.  But it is in the context of a blending which begins at 104 – a blending of subsection (1) and subsection (2).  If you recognise that subsection (1) is addressed to legal rights and legal limitations on legal rights, then everything that is said in paragraph 104 through to 105 is understandable as addressed to subsection (1).  If, however, subsection (2) is, as we say it is, about the practical capacity to alter legal rights then what is said in paragraphs 104, 105 and 106 is not an answer, in our respectful submission.

BELL J:   Whether one prefaces “capacity” with “practical” or not, the capacity to which subsection (2) is directed is the capacity to limit the rights, is it not, in the respects that are set out in subsection (1)?

MR GAGELER:   In subsection (1); that is right.

BELL J:   That is the inquiry.

MR GAGELER:   That is the inquiry, and it is not an inquiry that has been engaged in here by her Honour, who dismissed the argument under subsection (2) on the basis of it being an argument of economic equivalence, and it is not an inquiry that is engaged in here.  We have now looked at paragraphs 104 through to 106 at essentially the entirely of the Full Court’s reasoning on this point.  But if you were to do that, your Honour, and do it in conformity with the guidance given by paragraphs (a) through to (d), then you would be looking in particular, in the present case, at paragraph (a) of subsection (2) and at paragraph (d) of subsection (2).

BELL J:   Why not paragraph (c)?  I think that is an area of some controversy.  Both Justice Gordon and the Full Court placed some emphasis on the significance of that to their construction of what it is subsection (2) is doing.

MR GAGELER:   You would recognise that, but you would not treat that as dispositive.  You would not treat that as dispositive, you would treat that as a factor to which regard is had and put into the mix and you would address (a) and you would address (d).  In the present case, what is significant about factor (a) is that the assets of the debtor, DRI, were substantially limited to the debt property, meaning that if you are looking at the incentive of the lender and the borrower to bring about a contractual limitation in which the creditor’s rights in the event of the debtor’s default were limited to those assets, then the creditor has nothing to lose.

The creditor, in any event, is, in practical terms, limited to those assets so the contractual alteration would be hardly something one would expect the creditor to be concerned about.  So far as paragraph (d) is concerned, here we had two entities, the debtor and the creditor within the one group, operating in circumstances where all of the evidence showed that the finance decisions followed from investment decisions and the investment decisions were those of the parent company.  Your Honours, that is what I wanted to say about ‑ ‑ ‑

FRENCH CJ:   That is your four minutes.

MR GAGELER:   All right.  Did I say four?  I meant 14.

FRENCH CJ:   There is a time dilatation, I think.

MR GAGELER:   Your Honours, that is the billion dollar question.  The $300 million dollar question is the Part IVA question.  That concerns a different loan.  It concerns whether Finance, which was the lender, obtained a tax benefit as a result of an elaborate and highly‑orchestrated sequence of events.

FRENCH CJ:   They boil down, do they not, to the revocation of the letter of comfort, the substitution with a deed and then the writing off?

MR GAGELER:   That is right, all in the space of about an hour or so.

FRENCH CJ:   Then the counterfactual boils down to the question of whether or not it would have been a commercially appropriate judgment to write off the debt had the letter of comfort not been revoked.

MR GAGELER:   That is entirely the point.

FRENCH CJ:   The Full Court has made an assessment of that commercial judgment.  Where is the error in principle there?

MR GAGELER:   This is a really big error of principle.  I am serious in saying this.  This is a very big error of principle.  What the Full Court has said is that, as a matter of commercial judgment, BHPB, BHP Billiton, the parent company, which had given the letter of credit, treated by her Honour at first instance as contractually binding, assumed by the Full Court to be contractually binding – what is said is that, as a matter of commercial judgment BHPB would have ignored its contractual obligation to BHPTM. 

That is, in our respectful submission, inconceivable.  It is not a matter of commercial judgment.  There was no evidence on which it might have been said that the parent company, if it had a binding contractual commitment to the subsidiary, TM, it would have ignored that binding contractual commitment.

There was a lot of noise at trial in this matter and a very, very clear point, in our respectful submission a really obvious point, has just been missed.  You can see it really quite clearly in the judgment of the trial judge.  If your Honours go back to tab 2 of the application book, her Honour held, at the top of page 56, paragraph 126, correctly – and this holding was treated as an assumption in the Full Court – that the letters of comfort and, relevantly, the one that had been given to TM in July 1999, was binding as between TM and BHPB, absolutely correct – then she gets at page 74 to the question - she asks in the middle of the page, does Part IVA apply.  Then at the top of the next page she refers to possibilities suggested by the Commissioner.  We only need to look at the first of those possibilities:

that BHPB would provide funds by way of equity or loan to BHPTM for repayment of BHPTM’s loan from Finance -

If that were to occur that would be nothing more than BHPB performing the contractual obligation that it had in place to provide those funds to BHPTM.  Then, dealing with those possibilities, she gets to paragraph 189 on the same page and she says, apparently ignoring the contractual obligation owed by BHPB to BHPTM, that:

The first possibility suggested by the Commissioner is contrary to the way in which the BHPB Group acted –

There is no evidence that BHP, in any of its manifestations, ignored its contractual obligations -

and, secondly, in the circumstances in which BHPTM found itself, likely to be contrary to the provisions of the Corporations Law –

and then she goes on about directors’ duties but again ignoring that any director has a duty to ensure that a company honours its obligations.

CRENNAN J:   But are you treating, for the purposes of your argument, the letter of credit as creating legal obligations?

MR GAGELER:   She did.  It was her holding that it created legal obligations and that was accepted in the Full Court.  I am sorry, it was assumed.  If you go then to what the Full Court did with this, it is tab 17 at the bottom of page 177 and at the top of page 178, a continuation and compounding of the same basic error.  What is said in paragraph 68 is that:

there is nothing in the evidence which establishes or points to a finding that had Finance written off the TM debt as bad prior to the revocation of the 8 July 1999 comfort letter, that would not have been a reasonable assessment of the irrecoverability of the TM debt, any less than it is now accepted by the Commissioner that Finance’s write off of the TM debt after the revocation of that comfort letter was a reasonable assessment of its irrecoverability.  The matters to which the Commissioner pointed in his submission on the hearing of the appeal, namely:

(1)The possibility that Finance could have pressed TM to enforce TM’s contractual rights against BHPB (assuming such rights exist) by having TM wound up and funding a liquidator to bring proceedings against BHPB; and

(2)the possibility of having BHPB inject debt or equity into TM to enable Finance to be repaid the amount of the TM loan,

are no more than that:  possibilities ‑

How can it be said in respect of the second of those that the injection of debt or equity into TM to enable Finance to be repaid the amount of the loan, the performance of the contractual obligation required by the letter of credit, treating it as a contract, is no more than a possibility?

CRENNAN J:   What was the consideration, or how do you characterise the consideration?

MR GAGELER:   This is questioning, perhaps, her Honour’s finding that the letter of comfort created a binding legal obligation on the part of BHPB to put TM in funds.  The letter of comfort appears at pages 218 through to 220 – and I am answering your Honour’s question.  You will see that it is addressed to the directors and says, in paragraph 1 that BHP – it is really BHPB – undertakes to you and to your company to put it in funds in respect of existing debts; and similarly in 2 in respect of future debts.  In paragraph 6 it is said:

This letter is for your benefit and that of your company ‑ ‑ ‑

FRENCH CJ:   This was to enable the directors to sign off on the accounts, basically.

MR GAGELER:   This enabled the directors to sign off on the accounts, and the company therefore to continue trading ‑ ‑ ‑

FRENCH CJ:   Trading, yes.

MR GAGELER:   ‑ ‑ ‑ to the benefit of the parent company.

CRENNAN J:   Then there is the final sentence.

MR GAGELER:   Yes.  The final sentence really makes my point; that is as between BHPB and the company, which is TM, there is no such expression of intention not to create contractual or legal obligations, but so far as the ‑ ‑ ‑

CRENNAN J:   Which brings us back to the question of the consideration, I think.

MR GAGELER:   Well, the consideration is twofold.  The detrimental reliance on the part of the company in continuing to trade - of course, consideration only needs to flow from the promisee but it is of benefit to the promisor, BHPB.  Even if that were not seen in itself to be sufficient ‑ ‑ ‑

FRENCH CJ:   You would not need a contractual commitment for that purpose, would you?  You have an undertaking from your parent company.  Let us assume it is not legally binding in a contractual sense.  Is it any less effective in terms of giving the directors feeling that they can confidently sign off on the accounts and the company can continue trading?

MR GAGELER:   No, but the two things happen as a result of this letter being given.

FRENCH CJ:   All I am saying is, is the letter any less effective for its purpose if it lacks contractual force?

MR GAGELER:   No, it is not, but that is not the test.  So far as the directors are concerned, there is obvious detrimental reliance on their part in signing off on the company accounts.  If I can postulate, your Honours accepting that that gives rise to a consideration flowing from the directors but not flowing from the company, then you have joint promisees, and that is enough.  But if your Honours find very interesting the question of whether the letter of comfort created contractual rights, that in itself is an important question which could properly be explored in the appeal.

BELL J:   It seems that the Full Court, at application book 178 in subparagraph (1) was expressing a view assuming such rights existed.  It is putting it high to say that that was the finding of the Full Federal Court, it seems to me.

MR GAGELER:   I was corrected already by my learned friend, quite rightly, your Honour.  It was assumed.  It was assumed in the Full Court.  So the matter we have just been discussing was a matter assumed in my favour in the Full Court.  If your Honours please, those are our submissions.

FRENCH CJ:   Thank you, Mr Solicitor.  Yes, Mr Bloom.

MR BLOOM:   Your Honours, may I deal with the two matters in reverse.  We come first to Part IVA.  There are three things to say about Part IVA.  Firstly, the Commissioner advances no issue of principle.  All he really asks is that the Court review the decision below.  Secondly, so far as bad debts are concerned, there is no issue about the test as to when a debt is bad, there is only an issue as to its correct application in this case; and, thirdly, the premise upon which the first special leave question is founded, namely that the letter of comfort was enforceable, remains very much a live issue.  It was challenged in the Full Court but their Honours did not need to deal with it, having made the assumption which your Honour Justice Bell referred to.

Now, your Honours, while her Honour found that the letter of comfort was enforceable by the debtor against the parent, she found it was not enforceable by Finance.  The question needs to be looked at from the point of view of Finance.  It is Finance that makes the decision to write the debt off, not BHP Billiton.  Whether it might be reasonable to suggest, and we say it is not, that there are other ways of doing that, for instance, the suggestion was made that BHP Billiton should borrow from Finance to subscribe equity to TM so that it could repay Finance, so that the moneys would go around in a convenient round robin, something which if Part IVA were involved on another view the Commissioner would challenge ferociously ‑ ‑ ‑

FRENCH CJ:   That is a rhetorical flourish.

MR BLOOM:   Yes, your Honour.  But there was nothing in the evidence – and this is the thing – to suggest that from the point of view of Finance, the debt was not bad.  If your Honours go back to paragraph 68, their Honours in the Full Court have pointed out that there are provisions in the legislation and have been since 1922, that assume there may be recovery in respect of debts which have been written off as bad and specifically bring those amounts into the assessable income if and when they are recovered.  They then say in paragraph 68:

So understood, there is nothing in the evidence which establishes or points to a finding that had Finance written off the TM debt as bad prior to the revocation of the 8 July 1999 comfort letter, that would not have been a reasonable assessment of the irrecoverability of the TM debt, any less than it is now accepted by the Commissioner that Finance’s write off of the TM debt after the revocation of that comfort letter was a reasonable assessment of its irrecoverability.

That is the question, your Honours.  That is looked at from the point of view of Finance, notwithstanding attempts by our learned friends below to argue that Finance and BHPB were one and the same company.  That was rejected in finding for BHPB on the principal issue and really the question has to be determined from the point of view of Finance and, as I say, there is no issue about the test, only about its application to the facts.  Those three matters, which our learned friend took your Honours to and which were referred to by her Honour were really the alternate postulates advanced by the Commissioner and all three of them were rejected by all four judges below.

Your Honours, if I could then come to 243.  In doing that, my learned friend talks about it as a billion dollar matter.  All of the matters involving BHP Billiton are large.  Whether they are all a billion is another matter but they are always going to be large.  One would suspect that that is not a factor which gives Billiton an access as of right to this Court in all matters, and it should not give access to the Commissioner as of right just because it is Billiton on the other side.

The Commissioner concedes in his written submissions that both his special leave questions are now of limited relevance following the introduction of the consolidation…..  He, at page 260 of the application book identifies only two somewhat exotic instances where Division 243 might still apply.  The first is dual‑listed companies, and of course BHP Billiton is one of only two of those in Australia; and the second is loans by foreign subsidiaries to Australian companies. 

Now, your Honours, that is, with respect, a very narrow springboard from which to mount a submission about importance.  Again as to his reference in a couple of places, including on his feet, to the case involving one or $1.4 billion, we have pointed out at paragraph 24 of our written submissions that the application of another division, Division 245, has resulted in a comprehensive reversal in one way or another of a total of $1.4 billion of deductions. 

Now, 245 is the general provision.  It is there to deal with the situation where a debtor and a creditor would otherwise enjoy deductions for the same economic loss.  Division 243 is a specific provision which targets only what are defined as limited recourse loans.

Your Honours, if I could come to his second special leave question, at least as identified in his written submissions – that is the one concerning subsection (2) – he now eschews subsection (1).  He complains that the Full Court and her Honour did not deal with the current argument under (2) below.  The reason for that is that the current argument was put under (1) below.  In other words, it was said limitations in (1) includes practical limitations.  It was not an argument put under (2).  That is why your Honours will not find it being dealt with under (2) but will find that it was dealt with under (1).

Now, the question as asked by our learned friends uses expressions to be no nowhere found in the section.  It first refers to limits which are practical limitations.  These are nowhere identified.  What are the practical limitations?  Secondly, it refers to limitations on the creditor’s ability to recover.  These words too are not to be found in the legislation.  If I could ask your Honours to turn back to the legislation and, firstly, if your Honours would, to Division 243-15(1), there are three preconditions for the operation of the division. 

One is something which, as the Commissioner himself submitted below, must be determined at the time the advance is made.  You must be able to look at it in advance and say this is a limited recourse loan – at that time.  The second, on the other hand, looks at the end, at the time the debt arrangement is terminated.  That will generally be when the debt is forgiven.  The third can be left aside for the moment.

It was common ground as to that first proposition that you have to be able to determine that question at the time, which means that you have to, in the context of (2), identify that capacity.  If we look at the subsections themselves, subsection (1) uses terms which might be familiar to lawyers.

A limited recourse debt is an obligation imposed by law on an entity (the debtor) to pay an amount . . . where the rights of the creditor as against the debtor in the event of default . . . are limited wholly or predominantly ‑

in the manner set out.  Then (2) piggybacks upon one:

An obligation imposed by law on an entity (the debtor) to pay an amount to another entity (the creditor) is also a limited recourse debt if it is reasonable to conclude that the rights of the creditor as against the debtor in the event of default . . . are capable of being limited in the way mentioned in subsection (1).

So one must find a capacity existing somewhere in some person or persons to limit the rights against the debtor upon an event of default.  Nowhere do our learned friends identify any of that.  What they seek to do is to substitute for the words of the section words which are not there in an attempt to in effect argue a different case. 

Now, your Honours, not only does he not identify the capacity and in whom it resides, he does not identify any arrangement of the kind referred to in (2)(b).  Nor, your Honours, apart from asserting that because the companies are related they must necessarily be taken to be dealing with each other otherwise than at arm’s length, which is not a self‑evident proposition, with respect to him, there is no instance given of any situation where they were not dealing with each other at arm’s length in relation to the debt, which is the question which is asked.

In those circumstances, (c), particularly in the light of the guide, the “at risk” or “not at risk” provision takes on another importance, whether all of the assets of the debtor would be available for the purpose of the debt other than certain assets which are excluded.  That was answered positively by the courts below and it is the subject of a concession by the Commissioner in his submissions.  He says in paragraph 3 of his reply:

It is true that Finance had full recourse to the assets of DRI –

Now, your Honours, if I could turn to the first special leave question, not only is that hypothetical ‑ ‑ ‑

FRENCH CJ:   I think Justice Crennan had a question.

CRENNAN J:   I was just going to ask you, how is it put, then, that Division 243 is engaged, having regard to the full recourse point you have just made?  It is something I cannot get a grip on at the moment.

MR BLOOM:   Your Honour is asking me to formulate my learned friend’s argument.

CRENNAN J:   Well, you must know how it is put.

MR BLOOM:   Your Honour, I am guessing, with respect.  It is put that if, when you get to the end, you see that the only assets that are there are predominantly assets that have been purchased with the moneys advanced, then at that point you can look back and, in effect, say well, at the beginning the loan was a non‑recourse or limited recourse loan.  It does not rise any higher than that, with respect, your Honour.  Perhaps my learned friend Mr Gageler with his talent will put a better gloss on it but that is, as we understand the case we have to meet.  His first question says, and is based upon the proposition, that in any case this company was established as a sole purpose company.

CRENNAN J:   You challenge that, do you?

MR BLOOM:   Yes.  As a matter of fact it was not an issue at trial and if it had been, evidence would have been available to refute that proposition.

BELL J:   This really emerged in response to the Full Federal Court at paragraph 107, did it not?

MR BLOOM:   Yes.  What happened in the Full Federal Court, your Honour, was that my learned friend instanced the sole purpose company as an example.  It was in the context of that sort of argument that the Full Federal Court was dealing with it, but it was not a factual matter.  My learned friend in any case concedes in his submissions that it will not apply to all special purpose companies, although an indication of when it will and will not apply is not given.  Your Honours, can I just draw your attention to one finding of fact by her Honour at application book 86, paragraph 218:

Moreover, even if the Commissioner’s construction were adopted (and I do not adopt it), there is some doubt about the

accuracy of the factual premise in the present case.  Namely, that Finance’s practical rights of recovery or recourse against BHPDRI were wholly or at least predominantly limited to BHPDRI’s assets ‑

That is where it is being put under (1), the argument now put under (2).  But:

A list of the property of BHPDRI was tendered in evidence and included licences and intellectual property.  It was by no means clear that all of that property was located at or connected with the plant -

That was the hot briquette plant.  If your Honours please, for those reasons, special leave should be granted on neither aspect.

FRENCH CJ:   Thank you, Mr Bloom.  Yes, Mr Solicitor.

MR GAGELER:   Dealing with the Part IVA case to start with, my learned friend says there is no issue of principle.  The issue of principle is this, whether compliance by a parent company with a contractual obligation to that parent subsidiary can be dismissed as a mere possibility.  In our respectful submission, the answer to that is obviously no.  If there is any suggestion that the answer should be yes, that is a very serious question of principle. 

My learned friend then says that there is – he put his case very carefully with a double negative on Part IVA.  He says there is nothing to suggest from the point of view of Finance that the debt was not bad.  Really the question that needs to be asked for the purpose of section 177C(1)(b) in determining whether there is a tax benefit and conformably with Peabody is whether it was a reasonable prediction that from the point of view of Finance, while the letter of comfort remained in place, that letter of comfort would have been honoured by BHPB, the parent company.  That is the correct statutory question and there is nothing to suggest that it would not have been honoured. 

Indeed, if you look at the formulation of the scheme, and it is worth just looking back at the scheme as her Honour described it, at pages 39 and 40 of tab 2, those carefully sequenced events on 23 August 1999 were orchestrated in accordance with a memo of 20 August 1999, set out at page 82.  What was the purpose of them?  It was to allow Finance to write off the loan to TM as a bad debt.  What needed to be done for that to occur?  There had to be a revocation of the letter of comfort.  That was the whole point of what occurred on 23 August.  Your Honours, that is what I wanted to say in reply about the Part IVA case.

Going to Division 243 – dismiss Division 245 immediately.  Division 245 was referred to by Justice Edmonds at page 189 of the application book, paragraph 102.  He saw it as having no bearing on the issue of Division 243.  His Honour was entirely correct.  There is a provision – section 243‑75 that says you apply Division 243 first before you get to Division 245.  It is neither here nor there.

So far as Division 243 is concerned, the focus of our argument before the trial judge and the Full Court was subsection (1).  It is completely understandable, insofar as the Full Court is concerned – probably my fault that the Full Court focused its attention almost entirely on subsection (1) to the exclusion, in our respectful submission, of subsection (2).  The point we are now making about subsection (2) proceeds on an acceptance of what the Full Court said about subsection (1), that is, it is all about legal limitations on rights. 

What the Full Court has misunderstood about subsection (2) and what our learned friend’s response misunderstands about the argument we are seeking to advance before this Court is that we are not saying that subsection (2) is about practical limitations.  We are saying that subsection (2) is about a practical capacity to bring about the legal limitations that subsection (1) refers to.

CRENNAN J:   It functions in a way as saying a debt is also a limited recourse debt by reference to the capacity of the right of the creditor to be limited in the way mentioned in subsection (1).

MR GAGELER:   That is right.

CRENNAN J:   That is the grammar of having them both otherwise it seems a bit superfluous.

MR GAGELER:   That is right.  Our learned friends are really largely addressing argument that we have not put.  We are accepting that the manner referred to in subsection (1) is legal limitations.  What you look to in subsection (2) by reference to paragraphs (a) through to (d) is a practical capacity.  Whether it is reasonable to conclude that in practice that could occur, that is the question.

CRENNAN J:   In a way you would leave practical out, it is whether it is reasonable to conclude.

MR GAGELER:   Pardon me.

CRENNAN J:   You could leave practical out.

MR GAGELER:   You could leave practical out, but what you cannot do, as our learned friend’s argument implicitly does and as the Full Court implicitly did, is confine the operation of subsection (2) to existing legal capacities.  That is not what it is about, in our submission.  If the Court pleases.

FRENCH CJ:   Thank you, Mr Solicitor.  The Court will adjourn briefly to consider what course it should take.

AT 2.19 PM SHORT ADJOURNMENT

UPON RESUMING AT 2.22 PM:

FRENCH CJ:   In relation to applications M29, M39 and M40 of 2010, we are of the opinion that the approach of the Full Court applied principle correctly.  It is not attended with sufficient doubt to warrant the grant of special leave and special leave will be refused with costs.

In relation to M30 to M33 and M34 to M38 of 2010, there will be a grant of special leave.  Mr Solicitor, your estimate of time – would it be more than a day?

MR GAGELER:   We could do it in a day, your Honour.

FRENCH CJ:   Yes, all right.  Thank you. 

The Court will adjourn briefly to reconstitute.

AT 2.23 PM THE MATTERS WERE CONCLUDED