South Brisbane Gas and Light Company Limited v Hughes
[1917] HCA 37
•11 August 1917
396 HIGH COURT
[1917.
[HIGH COURT OF AUSTRALIA.]
THE SOUTH BRISBANE GAS AND LIGHT i
A p p e l l a n t s :
COMPANY LIMITED . . .
. /
AND
JOSEPH HUGHES (Co m m issio n e r o f
I n co m e )
R
espondent .
T ax fo r Q u e e n s l a n d ) . . .
J
ON APPEAL FROM THE SUPREME COURT OF
QUEENSLAND.
Income Tax (Qd.)—Company—Dividend— Declaration of dividend— Value of assets H. C. o r A. — Increase on revaluation— Debentures representing increase issued to share
1917. holders— Liability to income tax— Retrospective legislation—Income Tax Act 1902 (Qd.) (2 Edw. VII. No. 10), secs. 3, 7—Income Tax Act Amendment Act
B r i s b a n e ,
1904 (Qd.) (4 Edw. VII. No. 9), sec. 5—Income Tax Act Amendment Act 1906
Ju ly 30, 31;
(Qd.) (6 Edw. VII. No. 11), secs. 3, 5—Income Tax Act Amendment Act 1915
Aug. 1, 11.
(Qd.) (6 Oeo. V. No. 33), secs. 2, 5.
Barton, Isaacs,
Gavan Duffy By sec. 3 of the Income Tax Act of 1902 (Qd.), as amended by sec. 3 of the and Rich J J.Income Tax Act Amendment Act of 1906 (Qd.), the term “ dividend ” is, so far
as material, to include “ all sums of money paid, allocated, distributed, or credited by a company to or amongst its shareholders as such, by whatever name called.”
Sec. 7 of the Act of 1902, as amended by sec. 5 of the Act of 1904, after setting out in sub-sec. (iv.) (inter alia) the rate of tax on the income of com panies contains a proviso that “ the income subject to the tax of every company having its head office or chief place of business in Queensland shall be assessed at not less than the amount of the dividends declared by such company during the year in respect of which the assessment is made.”
Sec. 5 of the Income Tax Act Amendment Act of 1915 (Qd.), which inserts a new sec. 7 in the Act of 1902, provides that “ (x.)—(b) When the assets of any company are revalued, and on such revaluation such assets are increased in value, and . . . debentures (which term includes debentures or stock . . . ), representing the whole or any part of such increase, are issued to its shareholders as such, then . . . the issue of such debentures to the
23 C.L.R.] OF AUSTRALIA.
397
amount of the sum stated or alleged to be secured thereby, and the payment of
H. C. O F A.
interest from time to time accruing on such debentures, shall be and it is hereby 1917.
declared that the same always has been a declaration of dividends and a
distribution of dividends within the meaning of the two last preceding
S o u t h
B r is b . \x b
sub-sections,” one of which (viii.) is, so far as material, the same as the G .a s
-\x d
proviso to sec. 7 (iv.) above set out.L ig h t
Co. L t d .
V.
A company, finding on revaluation of its assets a considerable increase on the previous valuation, issued to its shareholders, free of cost, debenture-stock
H u g h e s .
of a face value practically equivalent to such increase, which stock the company could redeem either wholly or in part at any time, and was to carry interest from a future date until paid, and by the certificate for the stock the company acknowledged itself the debtor of the holder for the time being in a sum speci fied therein.
Held, that as each certificate for the debenture-stock connoted that a “ sum of money ” was “ credited by the company to its shareholder,” it came within the definition of a “ dividend” in sec. ,3 of the Act of 1902 as amended by the Act of 1906; that the is.sue of the debenture-stock was a “ declaration of dividend” within the meaning of sec. 7 (iv.) of the Act of 1902 as amended by the Act of 1904, and that, therefore, the sum stated to be secured thereby was assessable for income tax under that sub section.
Held, also, that sub-sec. x. (6) of the new sec. 7 of the Act of 1902 merely declared the law as it already existed.
Decision of the Supreme Court of Queensland: In re Income Tax Acts and
South Brisbane Oas and Light Co. Ltd., (1917) S.R. (Qd.), 105, affirmed.
A ppeal from the Supreme Court of Queensland.
A special case, which was stated on 16th November 1916 by the Court of Review under the Income Tax Acts 1902'1915 (Qd.) for the opinion of the Supreme Court, set out {inter alia) the following facts :—
1. The South Brisbane Gas and Light Company Ltd. are a joint stock company duly incorporated and registered under the Companies Acts 1863-1913, and have their registered office in Stanley Street, South Brisbane, and carry on business in South Brisbane aforesaid. 2. In or about the month of November 1914 and prior to 28th November 1914 the assets of the said Company were made the subject matter of a revaluation, and on such revaluation the said assets were increased in value. The balance-sheets issued by the said Company and dated 30th June 1914 and 31st December 1914 show respectively the value of the said assets prior to and subse quently to the said revaluation—the balance-sheet of Jime 1914
398 HIGH COURT
[1917,
H. C. OB’ A. stating the value of the property and assets of the Company in the
shape of plant, land, buildings and Company’s undertaking, to be
S o u t h £179,386 13s. Id., and the balance-sheet of December 1914 stating
B r is b a n e
it to be £293,096 9s. lOd.
G a s
a n d
L ig h t
3. On or about 27th November 1914 the said Company issued to
Co.
L t d .
| V. | their shareholders a circular submitting to the approval of the share |
H u g h e s .
holders alternative schemes, one of which was as follows : “ Pass an ordinary resolution to issue to shareholders debenture-stock to the amount of £100,000—each shareholder to receive, free of cost;— Stock to the face value of 10s. for every share (ordinary and/or preference) held by him or her. Stock to bear interest from 30th June 1917 at 5 per cent, per annum, but in each half-year that there are profits available this interest to be increased up to 10 per cent, per annum. In the event of a winding-up (which is almost incon ceivable) stockholders will first be paid 20s. in the pound on the face value of their stock, and the balance of assets will then be dis tributed solely amongst shareholders. The stock will, of course, only be payable after all creditors have been satisfied. The Com pany may partially redeem the stock from time to time propor tionately to the amounts held by the stockholders, and the whole at any time.”
4. The said schemes referred to and set out in the circular in the last preceding paragraph hereof mentioned were considered at an extraordinary general meeting of the shareholders of the said Com pany held for that purpose on 14th December 1914, and the question was discussed at the said meeting whether shares of a nominal value of 10s. paid up to 9s. 9d. or debenture-stock should be issued to represent the said increase in value. A resolution was unanimously carried at the said meeting that the scheme set out in par. 3 hereof should be adopted by the said Company.
5. In pursuance of the said resolution in the last preceding para graph hereof mentioned, debentures or debenture-stock to the value of £100,000 were on 22nd December 1914 issued by the said Company to their shareholders without any payment being made therefor by the said shareholders, each shareholder receiving stock of the face value of 10s. for every share ordinary and preference in the said Company held by him.
23 C.L.R.] OF AUSTRALIA.
399
H. C. O F A.
6. A number of the shareholders to whom debentures or deben ture-stock were issued as aforesaid have, since the issue of the same,
1917.
sold and transferred the stock so issued to them, and the transfers
S o u t h
B r is b a n e
have been duly entered in the Register of Stockholders. The first G a s
a n d
L ig h t
of such transfers was made on 26th January 1915.
Co. L t d .
H u g h e s .V.
7. In or about the month of July 1915 the Commissioner of Income Tax assessed the income tax payable by the Company in respect of the issue of the said £100,000 debentures or debenture-stock at the sum of £5,000, and claimed the payment of the same from the said Company.
8. In or about the month of October 1915 the said Company served on the ’said Commissioner notices of objection to the said assessment on the ground that those debentures or debenture-stock were not assessable and their issue_did not attract income tax.
9. The said Commissioner disallowed the said objection, and due notice of the said disallowance was given to the said Company, and a Court of Review sat on 7th, 14th and 19th October 1916 to hear and determine the said objection.
10. The Court of Review on 18th October 1916 determined the objection of the said Company and disallowed the same, and con firmed the assessment of the said Commissioner, with costs.
In the notices of objections referred to in par. 8 of the case the Company states (1) that the debenture-stock is not income as contemplated and dealt with by the Acts and is not therefore liable to income tax, being (if anything) in respect of an accretion of capital, and capital is not liable to income tax ; (2) that the stock is not a sum of money within the legal definition of the term, and does not come within the definition of income ; (3) that even if it is a sum of money it has not been credited to the shareholders within the legal definition of the term ; (4) that the stock is not a debt to the shareholders, nor will it be unless and until a wdnding-up takes place and the shareholders are credited with the amoimt of such part thereof as the assets realize in a ^vinding-up after pa}Tnent of all debts or until the Company treat it as a debt by gi\dng notice to pay it, when it may perhaps be urged that it is then liable to the ta x ; (5) that the stock is not made a charge on the assets of the Company in any way unless and until perhaps a winding-up
400 HIGH COURT
[1917.
| H. | C. OF A. takes place, which may never happen ; (6) that the most that can | |
|
S o u t h inter se and the Company that in a winding-up, after paying all the
B r i .s b a n e
debts of the Company and distributing any accumulated income,
G as
a n d
L ig h t
Co. L t d .the Company are to hold the capital with all accretions thereof
V.to pay any part thereout to the shareholders or their assignees in
H u g h e s .
the shape of stock before paying anything on account of share capital, or, in other words, it is merely a method of distributing capital in winding up ; (7) that the Company have not in any way distributed or interfered with their accumulated profits ; (8) that instead of being a sum of money it merely represents assumed accretion to the value of plant, land, buildings and undertaking; (9) that no stockholder can demand payment of the amount or any part at any time except in a winding-up, when the assets are turned into money; (10) that no sum of money may ever be ascer tained and until such is ascertained there can be no crediting of a sum of money within the meaning of the Statute ; (11) that there is no difference between issuing stock in the manner done and issuing shares as many companies have done at a discount, and it has never been suggested that issuing shares at a discount could possibly attract income tax.
The questions submitted for the opinion of the Supreme Court were as follows ;—
1. Are the said Company liable for any and, if so, what income tax in respect of the issue of the said debentures or debenture-stock ?
2. Was the decision of the Court of Review confirming the assessment of the Commissioner of Income Tax with costs as aforesaid correct ?
To and by whom should the costs of this special case be paid ? The Supreme Court held that the Company were liable for income tax in respect of the issue of the debentures or debenture-stock as assessed by the Commissioner and that the decision of the Court of Review was correct, and that the Company should pay to the Com missioner his costs of the special case ; In re Income Tax Acts and South Brisbane Gas and Light Co. Ltd. (1).
3.
(1) (1917) S.E. (Qd.), 105.
23 C.L.R.] OF AUSTRALIA.
401
From that decision the Company now appealed to the High Court.
R*
1917.
Other facts and the arguments sufficiently appear from the judg ments hereunder.
S o u t h
B r is b a n e G a s a n d
Feez K.C. and Graham, for the appellants.
L ig h t
Co. L t d .
V.
Ryan A.-G. for Qd., Stumm K.C. and Real, for the respondent. During argument reference was made to Swan Brewery Co. Ltd. V. The King (1) ; Lubbock v. British Bank of South America (2) ; Foster v. New Trinidad Lake Asphalt Co. Ljd. (3) ; Edinburgh LAfe Assurance Co. v. Lord Advocate (4) ; Commissioner of Income Tax (Qd.) V. Bank of New South Wales (5) ; Wood v. Odessa Waterworks Co. (6) ; Harding v. Commissioners of Stamps (Qd.) (7) ; Ex parte Walton ; In re Levy (8) ; Hill v. East and West India Dock Co. (9) ; In re Coal Economising Gas Co. (Cover's Case) (10) ; Halsbury's Laws of England, vol. xxvii., p. 200, par. 402 ; In re Player (11) ; Com missioner of Income Tax (Qd.) v. Brisbane Gas Co. (12) ; Ex parte Todd\ In re Ashcroft (13); Attorney-General v. Theobald (14); R. V. Inhabitants of Dursley (15).
H u g h e s .
Cur. adv. vult.
The following judgments were read :—
Aug. 11.
Barton J. The facts of this case are set out in a special case stated by the learned District Court Judge, acting as a Court of Review, for the opinion of the Supreme Court. The balance-sheets and the other material documents are appended to the special case and incorporated in it. The material statutory provisions are cited in the judgment of the Supreme Court now under appeal.
The first proviso to sub-sec. iv. of sec. 7 of the Inc-ome Tax Act of 1902, as amended by sec. 5 of the Act of 1904, appended to the provision that the ta.x on the incomes of all companies should be one
(1) (I9U) A.C., 231.(9) 9 App. Cas., 448, at p. 450.
(2) (1S92) 2 Ch„ 198, at pp. 200, 201.
(10) 1 Ch. D., 182.
(3) (1001) 1 Oh., 208. .(11) 54 L.J.Q.B., 554.
(4) (1910) A.C., 143, a t p. 103.
(12) 5 C.L.R., 90.
(o) 10 C.L.H., 504.
(13) 19 Q.B.D., 180.
(0) 42 Oh. 1)., 030.
(14) 24 Q.B.D., 557.
(7) (1898) A.C., 709, at p. 775.
(15) 3 B. & Ad., 405.
(8) 17 Ch. I)., 740, at p. 750.
VOI,. X.XIII.
402 HIGH COURT
[1917.
H. C. OF A. shilling in the pound the requirement “ that the income subject
to the tax of every company having its head office or chief place of
S o u t h business in Queensland shall be assessed at not less than the amount
B r is b a n e
G a s a n d of the dividends declared by such company during the year in
L ig h t
| respect of which the assessment is made.” Is, then, this issue of |
Co. L t d .
| V. | debentures “ a dividend declared ” by the Company during the |
H u g h e s .
year in respect of which the assessment was made ?
Barton J.
The assessment was made in 1915 on the basis of the income of
1914. The word “ dividend ” as used in this body of Acts is, with certain exceptions not material to this case, defined as “ all sums of money paid, allocated, distributed, or credited by a company to or amongst its shareholders as such, by whatever name called.” If the debenture issue was dividend within this definition it was clearly declared by the Company in their balance-sheet describing the operations up to 31st December 1914, and is therefore the proper subject of income tax.
The process adopted by the Company was as follows :—Their balance-sheet of 30th June 1914 debited them with £100,000 of capital, and other sums, including profit and loss £11,549, making up £208,745. Against this they credited property and assets in the shape of plant, land, buildings and Company’s undertaking valued at £179,386, and other credits, bringing their total on that side to the same sum of £208,745. Between this balance-sheet and that of the next half-year, namely, in November 1914, they had a revalua tion made showing a very large increase in the value of their assets. In the balance-sheet of 31st December 1914 they debited themselves with share capital paid up £100,000, interminable debenture-stock (being the issue in question) £100,000, and reserve funds £44,125, and also with other items, including profit and loss account £10,745, bringing the debit side to £309,900. Against this they credited themselves by way of property and assets with plant, land, build ings, and Company’s undertaking, value £293,096, and other items, bringing the total on that side to £309,900. The main factor was the increased valuation of plant, land, buildings and Company’s under taking by £113,710.
The debenture issue was the consequence of a scheme embodying proposals of the directors adopted at an extraordinary general
23 C.L.R.] OF AUSTRALIA.
403
meeting of shareholders on 14th December 1914, by which debenture-
H. C. OF A.
stock to the amount of £100,000 was issued to shareholders free
1917.
of cost to them. It clearly represented an equivalent amount
S o u t h
B r is b . \n e
of the revalued assets. This debenture-stock had a face value of G a s
a n d
L ig h t
10s. for every share held by the member. It was to bear
Co. L t d .
interest from 30th June 1917 at 5 per cent, per annum, which might
V.
H u g h e s .
be increased up to 10 per cent, according to profits.
The stock was
redeemable by the Company at face value from time to time pro
Barton J.
portionately to the shares held, or the whole might be so redeemed at any time. In the event of a winding-up the stockholder was to receive from the Company the full face value of his stock in priority to shareholders. The debentures and the names of the holders, with tlie amount of the stock held by each, and the date of entry, were to be registered in the books of the Company, and the stock was transferable.
I do not discuss the question whether the scheme which was carried out was strictly warranted by law. The shareholders do not appear to have raised the question, and could scarcely do so on this assess ment appeal.
Before the Court of Review the chairman of directors said in evidence that certificates were issued to shareholders to the amount of £100,000, that the stock book, pp. 7 and 8, contained a typical entry in the register of stockholders relative to the issue of stock, and that the shareholder to whom this stock had been issued sold and transferred it on the date shown. (This entry showed that H. M. A. of Mars Street, Wilston, had on 22nd December 1914 by certificate No. 7 acquired stock to the amount of £305, and had on 2nd September 1915 disposed of stock to the amount of £205 by transfer No. 33, and to the amount of £100 by transfer No. 34.) He further said that the revaluation was rendered necessary because of the greatly increased cost of material, labour, &c., and that the Company allocated the increase to the year 1914.
The reason given by the chairman for the revaluation is not very intelligible in view of the fact that the directors had described the debenture issue as “ the best method of giving to shareholders the full benefit of the extra profits which the Company will undoubtedly make.”
404 HIGH COURT
[1917.
| H. | C. or A. A form of “ certificate for debenture-stock,” as handed to stock | |
|
S o u t h itself to pay to the registered holder for the time being hereof the
B r is b a n e
principal sum (named) and until payment thereof to pay interest
G a s
a n d
L ig h t
thereon or on so much thereof as shall from time to time remain
Co. L t d .
| V. | unpaid at the times after the rate and in the manner provided by |
H u g h e s .
the resolution.”
Barton J.
It is clear that the Company acknowledged itself the debtor of the debenture-holder in a sum of money specified. I t matters not that this debt, a present debt, was only payable in the future and was to run until the Company chose to discharge it. Being transferable, it necessarily had a value in the market, as a security the price of which depended upon the success of the Company. But it had behind it a very large sum in the shape of realized profits of the Company, which held against its capital a sum nearly three times as great in plant, land, buildings and value of undertaking alone. The excess of this sum over capital must represent profits gained by the Company. During the argument I am afraid I was rather insistent in putting to Mr. Feez the view that each debenture certifi cate acknowledged that a “ sum of money ” was “ credited ” to a shareholder, and that therefore it came within the definition of a dividend as contained in the 1906 amendment of sec. 3 of the Prin cipal Act. I cannot hold that a dividend is not declared unless the cash out of which it is to come actually exists in the hands of the company. That would be to ignore the notorious fact that large sums of profits, invested, as large sums constantly are, either in the company’s business or in other concerns, are constantly and rightly made applicable to the purpose of distribution to share holders. Such reinvestments themselves return large profits, which in their turn may either be distributed at once or again invested until the time comes at last for the realization of such investments for the benefit of shareholders. I t is true that they may be kept intact all this time at the option of the members, or of the directors with their sanction express or implied. But it does not follow that when a distribution representing a part of these accretions, just as these debentures do, is made to shareholders, that operation is to escape income tax if it amounts to a distribution
23 C.L.R.] OF AUSTRALIA.
405
of profits under some other name, whether payable at once or at
H. C. O F A.
1917.
some future date.
It is no answer to say that this is the creation
of a debt and cannot therefore be a declaration of a dividend. There
S o u t h
B r is b a n e
is no declaration of a dividend without the creation of a debt.G as
a n d
L ig h t
The views which I suggested during the argument are put, of course in a much clearer and more forcible form, by Lord Shand
Co. L t d .
H u g h e s .V.
in the case of City of Glasgow Bank v. McKinnon (1). I have
Barton J.
been referred to that case by my brother Isaacs, who is about to quote fully from his Lordship’s judgment, but I am sure he will not think 1 unduly anticipate him by mentioning two short passages. The first runs thus :—“ It is clear that it is not necessary that there must be cash realized, and in the coffers of the bank, received expressly on account of interest or profits, in order to justify the payment of a dividend. To enforce such a rule would be to run counter to ordinary and reasonable usage in the case of mercantile companies.” Again : “ The profits may, and must often to a great extent, be represented by obligations of debtors, often secured, and by direct securities over property. They are not the less profits fairly realized and divisible because they exist in that form and have not been received in cash.”
Here was a valuation exceeding the amount of the Company’s capital by so great a sum that a great deal more than the £100,000 denoted by the debentures was available for the shareholders if they chose to authorize the directors to deal with it either by way of cash distribution or in the way adopted. I t is to my mind, as in each case a “ sum of money credited,” a dividend within the defini tion, no less than if so much actual cash had been distributed in place of the allocation or credit, and, if a dividend within the defini tion, it does not lack the quality of declaration to bring it within the first proviso to sub-sec. iv. already quoted.
I do not propose to make any full analysis of sec. 5 of the Act of 1915. It is enough to say that there is not a tittle in that Act which takes away from the quality of the transaction as it existed under the prior Acts. I agree with the Supreme Court in their view of the meaning of sec. 5 and of its declaration that a transaction such as this, described as it is in sub-sec. x. (6), is to be regarded
( 1) 9 R., 535, at p. 602.
406 HIGH COURT
[1917.
| H. | C. OF A. as having from the first enactment of the definition and of the pro | |
|
S o u t h In my opinion the Supreme Court answered the questions raised
B r is b a n e
in the special case correctly, and the appeal to this Court must
G a s
a n d
L ig h t
Co. L t d .
therefore be dismissed with costs.
V .
H u g h e s .
I saacs J. The claim made by the Commissioner for income tax
Isaacs J.in this case rests upon the meaning which the first proviso to sub
sec. IV . of sec. 7 of the Act of 1902 had, or which Parliament now declares it had, up to 31st December 1914. If its meaning at that time embraced such a transaction as the one proved here as a declaration of dividend, this appeal should be dismissed, otherwise it should be allowed.
I consider the latest expression of the legislative will in the first place. In the Act of 1915, Parliament, after describing in par. (b) of sub-sec. X. of sec. 7 of that Act the issue of debenture-stock such as that in the present case, says it “ shall be and it is hereby declared that the same always has been a declaration of dividends and a distribution of dividends within the meaning of the two last preceding sub-sections.”
The Supreme Court has held that those words amount to a legis lative interpretation of the old sub-section relied on in the present
case.
'
The arguments against any implied retrospectivity have no place here, because the retrospectivity is express. The only question is how far back does it reach ?
The appellants contend that the limit is 1st January 1915, and two considerations are urged in support of that view. The first is that sec. 2 expressly carries the operation of the Act back to that date only, and the next is that the words “ the two last preceding sub-sections ” limit the declaration to the two sub-sections of the Act of 1915.
As to the first, it should be observed that in the Act of 1902, passed 1st December 1902, it was provided by sec. 39 (2) as follows : “ The first period for which assessments shall be made shall commence on the first day of January 1902, and, save as hereinafter provided, all subsequent annual periods shall be reckoned from that date, and
23 C.L.R.] OF AUSTRALIA.
407
to that extent this Act shall have retrospective operation.” A
H. C. O F A.
1917.
similar section appeared in the amending Acts of 1904 (No. 9),
of 190(; (No. 11), of 1907 (No. 5).
S o u t h
B k is b a n b
Sec. 2 of the Act of 1915 is therefore merely a repetition of a sec tion the function of which is to apply as from a given date the whole
G a s
a n d
L ig h t
Co. L t d .
body of income tax law as last enacted. In other words, the relevant
V.
H u g h e s .
effect of the section in the Act of 1915 is to apply to appropriate
cases as from 1st January 1915 the two sub-secs. viii. and ix. of
Isaacs J.
sec. 7, quite apart from the declaration of retrospectivity. That declaration is not wanted for that purpose. And further, reading it literally, its application for that purpose would be nonsense. The date of the declaration is, of course, the date of the Act—29th December 1915. Up to that date, the two sub-sections of that Act did not exist, and therefore could not have had the declared, or any, meaning. The Legislature, consequently, must either have declared a nullity or an absurdity if they did not mean by the words “ the two last preceding sub-sections,” the two sub-sections in identical terms, which they were merely transplanting into an improved section 7, along with certain additions, but without any intention of altering these provisions themselves, or of allowing their force and operation to cease for a single moment. Their real intention is clear. Now, as the Privy Council said in Salmon v. Duncombe (1), it is “ a very serious matter to hold that when the main object of a Statute is clear, it shall be reduced to a nullity by the draftsman’s unskilfulness or ignorance of law. It may be necessary for a Court of Justice to come to such a conclusion, but their Lordships hold that nothing can justify it except necessity or the absolute intractability of the language used.” I do not find the words intractable. Having regard to the way in which sec. 7 was dealt vuth, I entertain no doubt the legislative declaration is sufficiently indicated by the Legislature’s words as applicable to the law as existing in the words of the two sub-sections referred to at the moment the Legislature were enacting the Act of 1915, The transparent object of Parliament was to prevent the very contention now raised upon the former
Act.
This conclusion in itself would be decisive of the case.
Rut, in the circumstances, I proceed to consider the other branch,
(1) 11 App. Cas., 627, at p. 634.
408 HIGH COURT
[1917.
H. C. OF A. namely, whether the transaction would be struck by the sub-section.
The material facts are that in the balance-sheet issued on .30th
S o u t h June 1914, the value of the Company’s plant, buildings and under
B r is b a n e
taking—that is, their whole business enterprise, except cash, stock
G a s
a n d
L ig h t
Co. L t d .and coal account—stood at nearly £180,000. A revaluation was
V.considered necessary and was made, by which the above sum was
H u g h e s .
increased, roughly speaking, to £280,000. The Company allocated
Isaacs J.
the whole increase to the one year 1914, and issued a circular in November of that year in which they offered the shareholders £100,000 worth of debentures, or the same amount in shares. On 14th December a general meeting by resolution adopted the debenture scheme, and debenture certificates to the amount of £100,000 were actually issued to the shareholders, as such, propor tionately to their respective share interests. The debentures were registered in the Company’s books, each shareholder being entered according to the serial number of his debenture, and the amount of it. The debentures contain an acknowledgment of indebtedness in respect of a specific sum—in fact an aliquot part of the £100,000; they also contain a promise to pay that sum, and until payment to pay interest on that sum or so much as remains unpaid, at the times, after the rate and in manner provided by the resolution. The rate is a minimum rate of 5 per cent., with provision for possible increase ; the interest is payable half-yearly after 30th June 1917. The debentures are transferable to any person even though not a shareholder. They are redeemable at face value at any time but
| fro rata. | In the event of winding up, they are payable out of |
surplus assets, but in priority to shareholders.
No express condition is made that the debentures shall not be paid ofi unless the Company chooses, or otherwise before liquidation. I am not prepared to hold that the view presented on behalf of the Company that a debenture-holder could not otherwise demand payment is correct. I do not decide for or against the view ; it is not necessary to do so. But having regard to legal principles, illustrated by the decision of Lord (then Mr. Justice) Parker in In re Tewkesbury Gas Co. (1), subsequently affirmed (2), I leave that for future consideration, should it ever become necessary.
(1) (1911) 2 Ch., 279.
(2) (1912) 1 Ch., 1.
23 C.L.R.] OF AUSTRALIA.
409
Assuming, however, that the position is as contended, namelv, H. C. or A.
that the principal sum need not be paid until the Company chooses, 1917.
or otherwise upon licjuidation, how does it stand ?
S o u t h
B r is b a n e
It is said the debentures are not money, and that is true. HandG a s
a n d
L ig h t
ing debentures is not the same as paying money
{Wood v. Odessa
Co. L t d .
Waterworks Co. (1) ). And if the statutory definition of “ dividend ”
V.
H u g h e s .
in the Income Tax Act were limited to “ money paid,” the objection
would be complete. Nowhere does it appear that money was actually
Isaacs J.
or constructively immediately handed to the shareholders. The
facts show that that is what the Company decided to avoid.
The Supreme Court has rested on the word “ allocated.” I do not say that is wrong ; but I prefer the word “ credited.” The debentures in acknowledging an indebtedness by the Company to the debenture-holder connote that the amount of that indebtedness stands to the credit of the debenture-holder in the accounts of the Company. Mr. Feez said that could not be, because there was no “ money ” in the Company’s hands to be credited; it was only a balance on valuation. But that is not a sound argument. A com pany may validly declare a dividend of money though for the moment it has not the money in hand or in the form of cash, provided, in substance, when accounts are adjusted as between capital and revenue, the amount proposed to be divided belongs to revenue. I shall cite only three authorities.
One is Lord Cairns L.J. in Hoole v. Great Western Railwai/ Co. (2), where it is said :—“ A dividend can only be declared upon the assumption that there is either money in hand to pay it, or that there is money which ought to be brought into the revenue account for the purpose of paying it. If, when the dividend comes to be payable, there is not money hi hand sufficient to pay it, what should be done ? If the revenue account is entitled to be recouped, the natural and ordinary process would be at once to take steps, by means of the raising of capital, for recouping the revenue account out of the capital account.”
The second is the judgment of Selwyn L.J. in In re Mercantile
Trading Co. (Stringer's Case) {?>), the second half of p. 492.
(1) 42 c;i. D„ 636.
(2) L.R. 3 Ch. 262, at pp. 269-270.
(3) L.R. 4 Ch., 475. ■
410 HIGH COURT
[1917.
| H. | C. OF A.The third is a few years later, 1882. In City of Glasgow Bank | |
|
S o u t h the matter very clearly (part only of the passage I refer to being
B r is b a n e
found in the English Law Reports (2) ), and as the Scottish report
G a s
a n d
L ig h t
is less generally accessible than the ordinary reports, I quote his
Co . L t d .
| V . | observations somewhat freely. The learned Lord said ;—“ It is |
H u g h e s .
clear that it is not necessary that there must be cash realized, and
Isaacs J.in the coffers of the bank, received expressly on account of interest
or profits, in order to justify the payment of a dividend. To enforce such a rule would be to run counter to ordinary and reasonable usage in the case of mercantile companies. In order to ascertain the profits earned and divisible at any given time, the balance-sheet must contain a fair statement of the liabilities of the company, including its paid-up capital; and, on the other hand, a fair or more properly bond fide valuation of assets ; the balance, if in favour of the company, being profits. The profits may, and must often to a great extent, be represented by obligations of debtors, often secured, and by direct securities over property. They are not the less profits fairly realized and divisible because they exist in that form and have not been received in cash. If profits have been earned, and are, in the judgment of those in the management of the company, secured, the shareholders of a joint stock company are, in t.he ordinary case, entitled to have such profits, which may properly be called realized profits, declared and divided, except in so far as they may be otherwise appropriated either by the express terms of the contract, or by the exercise of powers conferred on those charged with the management of the company; and the directors may properly use funds otherwise available to them, and forming part of the floating balances on capital account, in payment of the dividend.”
Consequently, assuming, as I do, perfect honesty on the part of the Company in making the revaluation, and finding that £100,000 at least was available over and above capital to enable the debentures to that aggregate amount to be handed to the shareholders, then it appears to me there was an allocation or a crediting of money to the shareholders in the form of a present debt payable either presently
(1) 9 R. at p. 002.
(2) 35 Ch. D., at pp. 506 and 507.
23 C.L.R.l
OF AUSTRALIA.
or in the future. I also can see no objection to it from the point of
C. oe A.
view of any statutory provision, and, as far as the Articles go, no
‘‘
shareholder has objected. In any case the Income Tax Statute
S o u t h
B r is b a n e
either assumes in such case the legality and regularity of the act G a s
a n d
done or imposes the tax irrespective of anything but the actual L ig h t
| Co. L t d . |
fact.
V.
H u g h e s .
Then it is said, the debentures are only after all a debt payable
in futuro ; and creating a “ debt ” is not the same as declaring a
Isaacs .7.
dividend of money. Therein lies a fallacy. Every declaration of dividend until payment creates only a debt, and one which may be barred by the Statute of Limitations—running from the time the dividend is made payable. (See Lindley on Com-panies, 6th ed., p. 609, and cases there cited, notably In re Severn and Wye and Severn Bridge Railway Co. (I) ; and see also Buckley on Companies, 9th ed., p. 649.) In the meantime the money stands to the credit of the shareholder in account with the Company as his debtor. And the debt once validly created is, until barred by the Statute of Limitations, recoverable out of any assets of the Company.
1 have dealt with the only substantial objections raised, and am of opinion that the appeal is not well founded, and should be dis missed.
Gavan D u ffy a n d R ic h JJ. We are not called upon to deter mine the validity of the transaction to which we are about to refer, but to decide whether, if valid, it renders the appellant Company liable to pay income tax.
In July 1914 the Company revalued the miscellaneous assets which appear in its balance-sheets under the heading of “ plant, land, buildings, and Company’s undertaking.” and found their value to be greater by about £100,000 than the sum at which they had been valued in its then last half-yearly balance-sheet. There upon the directors proposed at the option of the shareholders either to issue and distribute among them “ free of cost ” debenture-stock to the face value of £100,000, or to allot among them shares paid up to 9s. 9d., in the proportion of one new share to every existing share. The shareholders in general meeting adopted the debenture
(1) (1896) 1 Ch., 559.
412 HIGH COURT
[1917.
H.C. OP A. scheme and debenture certificates were issued and distributed
| 1917. J . , |
accordingly.
In the next half-yearly balance-sheet the Company was debited with the amount of £100,000 in respect of this debenture-stock and
S o u t h
B r is b a n e
G a s
a n d
L ig h t
Co. L t d .credited with the increased value of the “ plant, land, buildings, and
V.Company’s undertaking.” The effect of this transaction, if valid,
H u g h e s .
was that the shareholders became possessed of debenture-stock, and Rich'̂ ̂ the assets of the Company which belonged to the shareholders subject to the claims of the Company’s creditors became liable to satisfy the debenture-holders.
In these circumstances we think that the shareholders were credited with this sum of £100,000 within the meaning of the definition of the word “ dividend ” in sec. 3 of the amended Income Tax Act of 1902, and that the Company is liable to pay income tax on that sum under sec. 7 (viii.) of that Act.
Appeal dismissed with costs.
Solicitors for the appellants, Atihow & AIcGregor.
Solicitor for the respondent, J. S. Hutcheon, Crown Solicitor
for Queensland.
159
0
0