Treasury Corporation of Victoria v Victorian Bullion Securities Pty Ltd & Ors
[2001] VSCA 21
•16 March 2001
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No. 2215 of 1996
| TREASURY CORPORATION OF VICTORIA | |
| Appellant | |
| v. | |
| VICTORIAN BULLION SECURITIES PTY. LTD. & ORS | Respondents |
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JUDGES: | CALLAWAY, BATT and BUCHANAN, JJ.A. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 1 November 2000 | |
DATE OF JUDGMENT: | 16 March 2001 | |
MEDIUM NEUTRAL CITATION: | [2001] VSCA 21 | |
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CONTRACTS – Construction – Loan associated with transactions that produced tax losses – Tax losses shared – Calculation of sum to be paid on premature termination of agreement.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr B.J. Shaw, Q.C. with Mr P.E. Anastassiou and Mr P. Fox | Mallesons Stephen Jaques |
For the Respondents | Mr A.C. Archibald, Q.C. with Mr J.D. Elliott | Freehills |
CALLAWAY, J.A.:
Much of the appellant's argument relied on a purposive construction of the definition of the investors' "Required Rate of Return" in the Investors' Letter, but the real strength of the appellant's case seemed to me to lie in the words themselves.
All that the definition said was that the investors' initial after-tax equity balance would not be reduced by the rebate. It said nothing, in terms, of the possibility that the rebate might thereafter be taken into account in "adjusting the result by the after-tax cashflows". If the rebate were so taken into account, the concluding words of the definition would not be otiose. They would ensure that a higher figure would be used for the purpose of "accumulating the previous month's after-tax equity balance at the after-tax rate per month equivalent to the after-tax yield".
Moreover, whilst I agree with Batt and Buchanan, JJ.A. that the fact that the rebate was paid some days after the signing of the Investors' Letter does not affect its construction, the letter provided for an immediate rebate. The meaning of the word "immediate" is that one event follows another with no interval between them, but there are still two events one after another. Such language is to be contrasted with a provision for a reduction in the initial management fee or a simultaneous rebate.
I have concluded, however, that the rebate is not to be taken into account in "adjusting the result by the after-tax cashflows". As their Honours say, its source is not determinative and its true characterization is as part of the price for the investors' willingness to participate in the scheme. It was not a return of equity but a collateral payment . In particular, it was not "earned under the Transaction Documents and the transactions described therein or contemplated thereby". The Investors' Letter was not such a document and clause 2.5(e) of the management agreement is not enough.[1]
[1]Clause 2.5(e) reads: "(e) All fees paid to the Manager from time to time pursuant to this Clause 2.5 shall be non-refundable in all circumstances except to the extent of any rebate or refund as may be agreed between the A Class Investors and the Manager."
The better view is, I think, that the rebate is not an "after-tax cashflow" at all within the meaning of the definition but, if that is mistaken, the concluding words sufficiently evince an intention to erect what the learned primary judge called a "continuing bar". That is a matter of impression rather than purposive construction.
For these reasons I agree that the appeal should be dismissed.
BATT, J.A.
BUCHANAN, J.A.:
The appellant is the successor of the Victorian Public Authorities Financing Agency ("VicFin"), an authority established by the Victorian government to borrow money for the government and its agencies. In 1987 a member of the group of companies associated with FAI Insurances Ltd. ("FAI") devised a scheme to create tax losses from transactions involving loans and sales of gold and persuaded VicFin to participate in the scheme. VicFin was to be an essential part of the loan and sales transactions from which the tax losses were to arise. VicFin's participation was procured by the promoter of the scheme holding out the prospect that it could share in the benefit of the tax losses.
VicFin immediately obtained a sum of money and agreed to repay the moneys and interest over a period of years. That simple transaction, however, merged in an elaborate series of contracts concerned with lending and trading in gold, which were designed to create losses which could be used to reduce taxable income. The parties to those arrangements were more numerous and their rights and obligations were more extensive than those which it is necessary to describe in these reasons. The transactions were designed to benefit the promoters, the lenders and VicFin, who were to share in the financial advantage represented by the tax losses.
The transactions included a loan of a quantity of gold by Rothschild Australia Ltd. to VicFin pursuant to a deed made on 4 November 1987 ("the gold loan agreement"), whereby VicFin promised to return the same quantity of gold over a
period of 15 years. VicFin sold the gold at a price of $200m. In order to perform its promise VicFin arranged to buy gold at fixed prices for future delivery from a special purpose trust established by members of the FAI group of companies. The trustee, the first respondent, purchased the gold sold by VicFin at a price of $200m. so that it could meet its obligations in respect of the forward sales to VicFin. The $200m. paid to VicFin was raised from persons subscribing for 200 million units in the trust at $1 each.
The investors, two members of the FAI group of companies, were entitled to a predetermined return after tax on their contributions. In calculating the investors' return VicFin was to be credited with part of the value of the tax benefits which the investors calculated they would obtain, and thereby VicFin would incur borrowing costs which were lower than the costs of more conventional financing methods. VicFin's obligations under the gold loan agreement were to increase if the mooted tax benefits did not materialize. In the event that the claimed losses were not allowed as deductions by the Commissioner for Taxation, however, VicFin was entitled to terminate its participation in the transactions. The price of doing so was an obligation to pay an amount sufficient to enable the investors to recoup their contributions and the sum necessary to give them the rate of return which they expected to the date of payment. That return was to be calculated in accordance with, inter alia, a document called the "Investors' Letter", which was a letter to the investors from their manager, a member of the FAI group of companies.
The manager was paid an initial management fee of $15m. by the investors from their equity contributions. In the Investors' Letter, which bore the same date as the gold loan agreement, the manager agreed to immediately repay to the investors $14m. of the initial management fee. In fact the rebate was not paid until 10 November 1987.
Prior to entering into the transactions constituting the scheme VicFin was provided with a version of the Investors' Letter which omitted the amounts of the investors' equity contributions, the after-tax yield per annum on the investors' after-tax equity balance, the manager's fee and the rebate. VicFin did not discover the amounts of the management fee, the equity contributions and the rebate until June 1988.
In 1995 the Australian Tax Office issued amended assessments to the investors for each of the years 1988 to 1994 pursuant to the provisions of Part IVA of the Income Tax Assessment Act 1936, disallowing the losses claimed by the investors. On 13 May 1996 the appellant gave the trustee notice in writing terminating the gold loan agreement.
Various disputes arose between the parties as to the sum payable by the appellant upon termination of the gold loan agreement. A number of those disputes were resolved in this proceeding. Only one issue remains. It is whether the sum payable by the appellant upon termination of the gold loan agreement should have been reduced by taking into account the rebate of $14m. paid on 10 November 1987.
The amount payable upon termination was the aggregate of a number of items set out in clause 8.4(e) of the gold loan agreement. The contentious item is that found in item (iii)(bb), which was stated to be the amount calculated by the manager which would (together with or allowing for certain other amounts):
"(bb)give to the Investors respectively an Actual Rate of Return for the period referred to in the Investors' Letter equal to their respective Required Rates of Return..."
The "Actual Rate of Return" and "Required Rates of Return" were defined in clause 1.1 as follows:
"'Actual Rate of Return' means, in relation to an Investor, the after Tax rate of return of that Investor earned under the Transaction Documents and the transactions described therein or contemplated thereby as calculated by the Manager using the methods of analysis reflected in the Investors' Letter and on the basis of the Assumptions but having regard to any of the Assumptions which shall have been or become incorrect."
"'Required Rate of Return' means in relation to an Investor, the after-tax rate of return required by that Investor to be earned by it under the Transaction Documents and the transactions described therein or contemplated thereby, being that rate ascertained in accordance with the Investors' Letter."
The definition of the "Transaction Documents" comprised a list of documents recording the rights and obligations of those concerned in the transactions, but did not include the Investors' Letter.
The "Required Rate of Return" was defined in the Investors' Letter as follows:
"The Investors’ Required Rate of Return... is to be calculated by the multiple investment sinking fund method of analysis applied from the date of payment for the... [$200M worth of Units in the Trust]... until... the payment by VICFIN of the Lump Sum... being:
an after-tax-yield of 14% per annum effective on the Investors’ outstanding after-tax equity balance from month to month assuming an after-tax nominal monthly sinking fund rate of 3.5% per annum where each monthly after-tax equity balance is determined by accumulating the previous month’s after-tax equity balance at the after-tax rate per month equivalent to the after-tax yield and adjusting the result by the after-tax cashflows of the Investors during that month. For purposes of the calculation of the relevant after-tax yield of the Investors, the interim period from the date of purchase of the [Units] to 1 December 1987 will be treated as a proportion of a thirty day month... The Investors’ initial after-tax equity balance for purposes of calculating the Investors’ Required Rate of Return is equal to the initial equity contribution by the Investors on the Drawdown Date and will not be reduced by the Investors’ Fee Rebate payable by the Manager."
The Investors' Letter dealt with the rebate of the fee in the following terms:
"Investors’ fee rebate
The Manager commits upon the signing of this Investors’ Letter by the Investors to immediately rebate $15 million of the initial management fee paid to the Manager by the Investors under Clause 2.5(a)(i) of the Management Agreement less the sum of $1 million and the interest rate hedge cost (if any) payable to the Lender in relation to the interest payable on the First Advance and it is assumed that such rebate will reduce the Investors’ management fee deductions in respect of the year of income ending 30 June 1988 to the extent that it is non-assessable to the Investors in respect of that year."
The appellant contends that the last sentence in the definition of the "Investors' Required Rate of Return" in the Investors' Letter only required the rebate to be ignored in calculating the initial equity balance. The balances thereafter were to reflect the cashflow to the investors represented by the payment of the rebate. This contention was rejected by the trial judge, who said:
"In my opinion, it is tolerably plain when the letter is read as a whole that the words 'and will not be reduced' are being used to effect a continuing bar to the reduction of the Investors’ equity balance by the amount of the rebate. It is clear from the letter that the Investors’ initial equity contribution is $21M and that therefore the Investors’ initial equity balance is also $21M. Given that the Manager was committed by the letter immediately upon receipt of the fee to pay the defined rebate to the Investors this would be a cash flow reducing the initial equity contribution whether paid on 5 November 1987 or later - accordingly the words 'and will not be reduced by the ... rebate' are in my opinion intended to and do prohibit such a reduction whenever the rebate was in fact paid."
According to the appellant the last sentence of the definition of "Required Rate of Return" in the Investors' Letter required the rebate to be ignored in the calculation of the investors' after-tax equity balance for November 1987, but not thereafter. Three steps were to be taken in calculating the balance for December 1987. The first was to take the initial equity contributions made by the investors as the initial after-tax equity balance of the investors at the commencement of the transaction without any reduction for the rebate. The second step was to accumulate the after-tax yield for the interim period as directed by the second and third sentences of the sub-clause. The final step was to adjust the result of that accumulation by the cashflows which occurred during that month, that is to say, during November, by adding to the result or subtracting from the result the net movement in those cashflows during that month in order to produce the after-tax equity balance for December 1987. At the third step the rebate was to be taken into account because it was part of the cashflow that occurred during the month. Under the procedure which the appellant says determines the "Investors' Required Rate of Return", no reduction is made to the initial after tax equity balance. The difficulty with the appellant's construction is that the last sentence of the definition is not required to achieve that result. On that construction, it is otiose.
The appellant emphasised the fact that the rebate was paid some days after the date of the signing of the Investors' Letter, so that it could form part of the cashflow that occurred in the ensuing month, but of course the construction of the agreement cannot depend upon that event. The Investors' Letter is to be construed according to its terms. The Investors' Letter required the manager to "immediately rebate" $14m. of the fee. In providing that the Investors' initial after-tax equity balance was not to be reduced by the amount of the rebate, we consider that the Investors' Letter contemplated that otherwise a reduction might be argued to take place at the outset, and, by precluding that result, the intended effect of the Letter was to exclude the rebate altogether from the calculation of the Investors' after-tax equity balance. The fact that the rebate was payable was not to require a reduction of the amount of the equity balance established by the initial equity contribution, even if the payment of the rebate, which necessarily was to take place after the payment of the initial equity contribution, could be described as part of the cash flow.
In the regime established by the definition of the "Investors' Required Rate of Return" in the Investors' Letter, the investors' outstanding after-tax equity balance depended upon the previous month's after-tax equity balance. Thus the initial after-tax equity balance was to affect the calculation of all subsequent after-tax equity balances. In our view, in the light of the fact that the rebate was to be paid immediately, the definition of "Required Rate of Return" in the Investors' Letter contemplated that the payment of the rebate would have affected the equity contribution in November (assuming the payment is to be described as relating to equity), unless it was expressly excluded by the last sentence of the sub-clause.
If the appellant's construction of the Investors' Letter is correct, the amount of the rebate was of considerable interest to VicFin, for it played a significant role in determining the sum payable upon termination of the gold loan agreement. The fact that VicFin was not told the amount of the rebate when it agreed to participate in the scheme in our view tells against the appellant's construction, for it appears to be unlikely that VicFin embarked upon the scheme without knowing the size of an item in the calculation of the sum it was required to pay upon termination of its participation in the scheme.
The appellant contended that, unless the rebate reduced the investors' equity balance at 1 December 1987, the investors would recover the same amount twice and would obtain a return on moneys at a time when those moneys were in their possession and could be used for other purposes. That result was said to be absurd. The argument depends upon the rebate being characterized as a return of equity. The appellant's outline of argument stated:
"The Investors obtained a rebate of $14 million from FAI Financial out of FAI Financial's initial management fee of $15 million..."
In our view it is more accurate to describe the payment as one reducing the fee, as the concluding words of the section in the Investors' Letter entitled "Investors' Fee Rebate" make clear. The fact that the original source of the rebate was moneys contributed as equity does not determine the matter: the question is whether the money was returned as equity. In our view it was not. The rebate was part of the price the investors required in order to agree to participate in the scheme by quantifying the fee which was to be earned by the manager.
The form of the documents recording the arrangements between the parties indicates that the rebate was no concern of VicFin. The provision as to the rebate is found in the Investors' Letter, to which VicFin is not a party and which was not within the definition of "Transaction Documents". Although VicFin was provided with a version of the document, the amount of the rebate did not appear in that version. The appellant pointed out that clause 2.5(e) of the management agreement, which was one of the "Transaction Documents", referred to the possibility of a rebate or a refund of the manager's fee. That provision, however, created no obligation to pay any rebate. The appellant also relied upon the fact that the agreement regulating the investors' rights and obligations as partners was one of the "Transaction Documents" and the investors as partners took the rebate into account in their partnership return of income for the year which ended on 30 June 1987. Those circumstances in our view are consistent with the rebate being the concern of the manager and the investors to the exclusion of VicFin.
Another result of the construction given to the agreement by the trial judge which the appellant described as absurd was that it ensured that the "Actual Rate of the Return" would always be in discomformity with the "Required Rate of Return". The discomformity arises from treating the "Actual Rate of Return" as affected by the rebate. The definition of "Actual Rate of Return" in the gold loan agreement is concerned with the rate of return to the investors "under the Transaction Documents and the transactions described therein or contemplated thereby ...". The Investors' Letter is not a "Transaction Document", and the only document which requires a rebate to be paid is the Investors' Letter. On no view was the rebate a transaction "described" in the Transaction Documents. Nor do we think that the rebate was "contemplated" by clause 2.5(e) of the management agreement merely because it was foreshadowed as a possibility. In our view the word "contemplated" in the definition of "Actual Rate of Return" was intended to denote an event which was bound to occur[2] or an event occurring as a result of a choice between alternative courses of action. The rebate was extraneous to the transactions described in the Transaction Documents.
[2]Cf. Scene Estate Ltd. v. Amos [1957] 2 Q.B. 205 at 213 per Parker, L.J.
For the foregoing reasons we are of the opinion that the trial judge was correct in holding that the terms of the Investors' Letter required the rebate to be ignored in calculating the investors' after-tax equity balances for the purpose of arriving at the sum payable on termination of the gold loan agreement.
The appeal should be dismissed.
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