OF AUSTRALIA. {HIGH COURT OF AUSTRALIA.] re 2 % 3 : Z 2 5 APPELLANT; DrrEeNnDANT, AND [ER AND OTHERS . f 4 : . RESPONDENTS. DEFENDANTS AND PLarntiFF, ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES. Tenant for life and remainderman—Shares in company held by trustees— Dividend—Distribution of shares in another company—Accumulated profits— - Income or capital. A company registered in New South Wales, which carried on business within and without the Commonwealth, had accumulated large profits equal in amount tothe value of its assets without the Commonwealth. Being desirous of separat- ing its business without from that within the Commonwealth while keeping ~ both under the same management, the company proposed to form a new com- pany which should acquire the assets without the Commonwealth in exchange for shares of the new company. With that object in view the old company amended its deed of settlement so as to suthorize it to pay any dividend by the distribution among its shareholders of shares of any new company. The new company was then formed with a share capital consisting of a certain ~ number of ordinary shares and of preférence shares equal in number to the subscribed shares of the old company and in nominal value to the value of the assets of the old company without the Commonwealth. 'Those assets were then 'sold and transferred to the new company in consideration of the preference shares, which, pursuant to the amendment of the deed of settlement, were © distributed among the shareholders of the old company. The ordinary shares VOL. XXII, 23 H.C. or A. 1917. Sypyey, Aug. 21; Sept. 4. Barton, tsaacs, Gavan Duffy and Rich JJ. H. C. or A. 1917. FisHEr FisHer. HIGH COURT Held, by Barton, Gavan Duffy and Rich JJ. (Isaacs J. dissenting), between life tenants and remaindermen, preference shares of the new received by trustees in respect of shares of the old company held by capital and not income. Knowles v. Ballarat Trustees, Executors and Agency Co., 22 O.Ls followed. Decision of the Supreme Court of New South Wales (Harvey J.) : Maca v. Fisher, 16 S.R. (N.S.W.), 636, reversed. : . Apprat from the Supreme Court of New South Wales. Andrew Walter Irby Macansh, Robert Fisher and Donnelly as trustees of the estate of Thomasine Cox Fisher, deceased, 122 shares of the Colonial Sugar Refining Co. (Fiji and New Zeal: Ltd., a company registered in Fiji, and Macansh took out an ori; ing summons for the purpose of determining (inter alia) the ques' whetaer the trustees held the shares as income or as capital of residuary estate of the testatrix. The other two trustees, who tenants for life, and Edith Eleanor Wentworth Fisher, who r sented the remaindermen, were made defendants to the summon The summons was heard by Harvey J., who held that the t1 held the shares as income : Macansh v. Fisher (1). From that decision Edith Eleanor Wentworth Fisher now app to the High Court. Knox K.C. (with him Maughan), for the appellant. This case is governed by Knowles v. Ballarat Trustees, Executors and A, Co. (2). The fact that the old company distributed the shares of new company as dividend is irrelevant, for it cannot make inco that which as between life tenants and remaindermen is ca] No company except in the case of liquidation can distribute thing except as dividend. Leverrier K.C. (with him Jordan), for the respondents. On | e facts there is no evidence that the old company, in distributin among its shareholders shares in the new company nominally dividend, intended the distribution to be as capital and ni (1) 16S.R, (N.S.W.), 636. (2) 22 C.L.R., 212. OF AUSTRALIA. nted accumulated profits and to divide the proceeds as a lend. In this case the distribution was not in contemplation liquidation as it was in Knowles v. Ballarat Trustees, Executors Agency Co. (1). The fact that the distribution was of a very amount in proportion to the share capital is not important re Hume Nisbet's Settlement (2)). The burden is on the appel- ait to show that the intention was that the distribution was one of pital. Cur. adv. vult. e following judgments were read :— RTON J. The question in this appeal is between remaindermen tenant for life, the latter of whom was successful in the Court yw. The subject matter is a parcel of 122 shares in the Colonial Refining Co. (Fiji and New Zealand) Ltd. These are claimed by the appellant, whose title is in remainder, to be capital as etween her and the tenant for life, who is a respondent. 'The Colonial Sugar Refining Co., which is the parent company, issued to the trustees of the will of Thomasine Fisher, one f whom is a respondent, in right of 122 shares in the parent company or of any other company. In the circular announe- he proposal the directors said :—"' The object of the resolutions enable the Company to separate the Australian business from part carried 'on outside the Commonwealth, and to simplify (1) 2 CLR, 212. (2) 27 LLR., 461. (3) 60 L.J. Ch, 488. Their intention was to sell portion of their assets which H. ©. or A. 1917. ww FisHEer vw FisHer. Sept. 4. H. C. or A. 1917. ww FisHer v. Fisner. Barton J. HiGH COURT Fiji and New Zealand. It is intended to place before you a above meeting particulars of the scheme that is to be submitte your approval at a later meeting about the end of April. Meantim all that can be said is that the earning power of the business ca be affected one way or the other by the change which the Bi propose. On the other hand it will enable those concerned in our affairs to compare more accurately than is possible now the prof made with the cost of the assets from which it is derived." 3 At the meeting the chairman made a speech, before submitti1 the resolutions, in which he purported to tell the shareholders briefly why the directors advised them "to divide the business 0 the Company." He reminded the shareholders of the result of th adoption many years before of the practice of leaving in the busin the large amounts which would otherwise have been set aside depreciation of plant. The consequence had been, he said, that amounts so made available for extending the scope of their opi tions were equal to the book value of their assets in New and Fiji. He referred to statements on this subject made by hin to them in October 1910 and August 1913, which he said were true as to the position then held. He went on to say that the directors. proposed a step from which the Company could derive no advantag beyond that of disclosing to all concerned the outlay on their ven- tures in and outside of Australia. The half of their business outside . the Commonwealth would on 31st March represent about £3,250,000 and the directors' proposal was that the new company should hi preference shares of that amount ; while £250,000 in ordinar would be subscribed by the parent company to provide the nec working capital. The preference shares were to be distribul among the original shareholders ratably, each receiving one of for every share now held. After describing the position of the preference shares as to dividend, its priority, and the building up a reserve, the chairman used these words :—' But it must not thought that this 6 per cent. preference dividend will be an ad to your present income from the Company. On the contrary, will come out of this, and, as I said at the outset, you have no M to suppose that the proposed division of our assets will bring | more profit to distribute. Nor will there be any alteration in rega eres 3 CLR.) OF AUSTRALIA. d and management shall work the separated businesses, and it, so far as possible, everything shall go on in this way as at it. For this reason the investment should be regarded as a ole. Accordingly, if any of you want to sell your holding, it will better to sell the shares in both companies rather than the hold- arket value of the old shares. After the chairman's speech the shareholders adopted the resolu- ms as explained by him. 'A special general meeting was held afterwards, namely, on 29th ptember, to authorize the directors "to distribute in specie all é rence shares which the Colonial Sugar Refining Co. Ltd. 'is entitled to receive from the Colonial Sugar Refining Co. (Fiji and _ New Zealand) Ltd., in payment for the assets in Fiji and New Zea- " sold by the parent company to the additional corporation. In a circular announcing this meeting, dated 14th September, he directors of the original company had said, inter alia: " In the yas a foot-note to the circular in these words : "The term 'in specie' ed in the resolution means 'in shares' not 'in cash.' " At this meeting the shareholders gave the directors the required thority. _ Atthis stage I will refer to an agreement made a fortnight before the ecial general meeting last mentioned, namely, on 14th September inal company as vendors and the Fiji and New Zealand company s purchasers. It recites that the purchasers are duly authorized their Memorandum of Association to acquire the Fiji and the control of the business. It is our intention that the same H.- ©. or A. 1917. — FisHer v FisHEr. Barton J. H C. ora. 1917. Fisher FisHer. Barton J. HIGH COURT should sell and the purchasers should purchase the goodwill, holds and leaseholds, plant and other assets of the vendors, with a benefit of pending contracts, the cash and securities in hand banks in Fiji or New Zealand, and all other the vendors' pro in connection with Fiji and New Zealand. The consideration fc the sale was to be £3,250,000, deemed to be the value of the pre on the 31st of the previous March, and to include any profits earn by the transferred business after that date. The vendor comj was to have the right of taking up as a company 12,500 ordi contributing shares of £20 in the purchasing company. (That was exercised.) The vendor company was also to have the taking up 162,500 preferential shares of £20 each in the purel company, these preference shares aggregating £3,250,000 of caj t in the purchasing company. (It will be noted that the capi the Fiji and New Zealand company thus became £3,500, which £250,000 was in money.) The preference shares were to confer the right to a fixed cumulative preference dividend of 6 pe cent. per annum on their paid-up amount. The purchasers were to take all necessary steps to make the preference shares availabl the vendors or their nominees. (The 162,500 preferential were taken up by the vendor company for their shareholders their nominees, and were distributed to them, whether as dividen or as capital we have now to say.) The sale was to take effect from Ist April 1915, when the benefits and liabilities of the pure were to be complete. The vendors undertook, if thereto requ in Fiji and New Zealand on terms to be arranged, or if not arr to be fixed by arbitration. There were sundry other terms in t agreement which for present purposes need not be stated. : The agreement was carried out. The shareholders of the Coloni Sugar Refining Co. became the holders of all the prefe shares in the additional company, which they obtained as non ul of the vendors, share for share, in pursuance of the resolution of th special general meeting of the parent company already refe The parent company, however, retained the £250,000 woi contributing shares in the Fiji and New Zealand company, P' their face value as working capital of that company. .R.] OF AUSTRALIA. 343 To meet the circumstances of this agreement and of the transac- H. C. or A. s generally, the Fiji and New Zealand company had on the recs ous day, 13th September, increased its capital to £3,500,000, Fisuer e shares absorbing £3,250,000 and ordinary shares the wiecee Barton J. +h of the chairman on the 26th of March, which was so clearly upon by the shareholders on that date in amending the parent ipany's deed of settlement to allow of the rearrangement for the business. These matters were brought before us on affi- it by agreement of the parties, so that we are enabled to consider em in coming to a conclusion. It should also be said that at the me of the hearing the case of Knowles v. Ballarat Trustees, Hxecutors and Agency Co. had not been reported. It is now to be found in the Commonwealth Law Reports (1). The parent company was authorized by clause xt. of its Articles crease its capital at a special general meeting to any amount to determined by such meeting, and to raise the increased capital by iting additional shares of £20 each. Art. 66 of the Fiji and New id company provided that at a general meeting every member ent in person should have one vote on a show of hands for every ary share held by him and on a poll every member present in or by proxy should have one vote for every such ordinary = while a corporation being a member, and being present by b proxy not being a member, should be entitled to vote by such cy on a show of hands. The holders of preference shares were ) be entitled to vote at any meeting of the company in respect ch shares or any of them. the whole of the voting power in the Fiji and New Zealand y came into the hands of the parent company, which held all ordinary shares, to the exclusion of the holders of preference "But it is also apparent that the holders of shares in the capital the parent company had the entire governance of the new (1) 22 C.LR., 212. H.C. or A. 1917. ~ FisHer v Fisner. Barton J. HIGH COURT company, not as preference shareholders in the new company, 7 as commanding the operations of the parent company. The effect that the rearrangement necessarily had upon.the va of the shares constituting the corpus in this case, if the content of the life tenant is correct, is manifest beyond the necessity of exp: evidence. If then the Fiji and New Zealand preference shares are inco the value of the property to pass to the remainderman may be roughly estimated at little more than half of that which it held was only made " to divide the business " of the parent company t placing half of that business outside the Commonwealth. It still the business of the parent company. It will be seen that there was no option to the shareholders in th parent company of taking cash instead of the preference shi First, as to the intention of the testatrix. In In re Armitage | Lindley L..J. said :—'* What does a man mean when he leaves shai to a tenant for life? He means that that tenant for life shall have the income arising from the shares in the shape of dividends bonuses declared during the lifetime of the tenant for life. He does not mean that the tenant for life shall receive profits in any other sense . . . This conclusion is completely in accord with Bo v. Sproule (2), which' . . . established the rational principle that what a tenant for life is to take under an ordinary bequest shares is what is declared as dividends or bonuses in the shape dividends during the lifetime of that tenant for life." To put i shortly, what the testatrix meant was that the life tenant should ha the income of the shares in the parent company, but no more. — Then, is this issue of preference shares in the Fiji and New Zea company to be regarded as between tenant for life and remainde as income or as capital? When I say capital J do not in this conn tion mean necessarily share capital in the parent company, but capital of the estate of the testatrix. The real question is, what is income on Thomasine Fisher's investment, and what is the corpus herinvestment? It matters not what name the parent company g the transaction, or whether it called the issue dividend or capi (1) (1898) 3 Ch., 337, at p. 346. (2) 12 App. Cas., 385. OF AUSTRALIA. 345 intention is to be gathered not from mere words but from the H. ©. or A. uals a y tance of the thing done. In that respect its intention, to be ail FISHER v. FISHER. Barton J. d company for shares therein consisted of accumulated profits is conclusive, any more than is the fact that those profits had been ively invested in extensions of the Company's business pro- ing profit for the shareholders. But it is most material that a huge of money which made a great accretion to the market value of e shares in the parent company was, if the life tenant is correct, ransmuted into something which withdrew nearly half that value m the corpus and placed it at one fell swoop into the hands of life tenant as income of his for that particular year. Could this what the testatrix meant in giving profits to the life tenant and pus to the remainderman? Or could this be the substance of arrangement, so as to turn half the capital value into income, a transaction intended by the Company as a distribution of divi- ? I do not think any case can be cited which so governs | transaction as to give it a complexion of such strangeness. whole object was to rearrange an existing business, not to " leprive any person of capital or to make an addition of perhaps nt. per cent. to any person's income for a particular year. Tn all these cases of tenant for life and remainderman J think that, | Sargant J. said in In re Thomas (1), the inquiry for the Court is "whether the benefits in question are really, and not merely no1 ainally, received in respect of a division of dividend or are really ived as and by way of a distribution of capital." I think that the it for their working capital in the parent company. The former of one ordinary share in the Australian company was converted o the aggregate values of one share in the Australian company one share in the Fiji and New Zealand company by a process ch halved the old value merely for the purpose of restoring it, and an organization which embraced the new company as in truth (1) (1916) 1 Ch., 383, at p. 392. H.C. or A. and fact part of the old concern, in a position to carry on its n 1917. rs R FisHEr. Barton J. HIGH COURT justed business with greater convenience, though not, as the cha pointed out, with greater profit. I draw attention to that passag the rule laid down by Fry L.J. in Sproule v. Bouch (1), and adop the House of Lords in Bouch v. Sproule (2), which reads "What is paid by the company as dividend goes to the tenant life, and what is paid by the company to the shareholder as capits or appropriated as an increase of capital stock in the con emt enures to the benefit of all who are interested in the capital." " dividend " does not here mean in the guise of dividend, nor d "as capital " mean in the guise of capital. It means the substan and not the mere name, and I think that what the shareholders in the parent company received was allotted by the Company to the shareholders as capital in that sense. The case of Knowles vy. The Ballarat Trustees, Executors and Agency Co. (3) was a good deal discussed in the argument in the present case. In principl think that case is an authority in favour of the present appella but I should have been prepared to come to my present conclusion had that case not arisen. T am of opinion that this appeal must be upheld. Isaacs J. The Colonial Sugar Refining Co. Ltd. registe under the Companies "Act 1899, carried on business in Fiji New Zealand as well as in Australia. Its powers as to creation 0 capital and distribution of assets are the ordinary powers of a tra company under the Companies Act. It had assets of the value (say) £6,500,000, of which £3,250,000 were accumulated profits. March 1915 it resolved to sell its assets in Fiji and New Zealand another company formed in Fiji, and called the Colonial Si Refining Co. (Fiji and New Zealand) Ltd., for £3,250,000 p: able principally in preference shares of the latter company. new clause was added to the selling company's deed of settlem in these terms : " That any general meeting may direct payment any dividend wholly or in part by the distribution of specific assets and in particular of paid-up shares, debentures and debenture-sto (1) 29 Ch. D., 635, at p. 653. (2) 12 App. Cas., 385. (3) 2C.LR., 212. R.] OF AUSTRALIA. any other company," &c. I italicize "dividend." The proposed tion was effected, and in September 1915 a resolution of the South Wales company was passed authorizing the directors to distribute in specie among its members in proportion to their spective interests the consideration shares it had received from Fiji company. This was done, and the trustees of the Fisher tate received 122 of those shares. Prior to the distribution the »w South Wales shares were worth in the market about £44 to £45 each, and afterwards about one-half that sum. The will simply in the most general terms gives income to tenant for life, and capital d profits represented by the assets sold, and afterwards by the ideration shares received in exchange, were never converted ito capital, strictly so called, and were never intended to be so con- . Asa fact, that cannot be denied. Harvey J., upon a review the authorities, held that that cardinal fact governed the case, and at in law the preference shares in the purchasing company were to be arded as dividend with respect to the New South Wales company. His Honor's decision was given on 4th October 1916. On 13th ctober 1916 this Court, by a majority, decided the case of Knowles v. Ballarat Trustees, Baecutors and Agency Co.(1). dissented, taking the me view of the law as Harvey J. had taken. The judgment now ppealed against must therefore be taken to be wrong. Mr. Leverrier ited he was prepared to argue against the correctness of the view dopted in Knowles's Case, but obviously reconsideration by this Court would have been useless, and counsel was informed that he must ecept the decision. And accordingly Mr. Leverrier, reserving his its as to that point, proceeded to discuss the only question open him, and to contend that on the facts the distribution was by vay of dividend. The law laid down in Knowles's Case, as I understand it, is (1) that -conversion of profits into share capital is not necessary to con- them into capital for the purpose of a case between life tenant (1) 22 GLR., 212. e Company, or paid-up shares, debentures or debenture-stock of H. ©. or A. 1917. ~ FisHer v Fisner. Isaacs J. H.C. of A. 1917. Sw Fisner v. Fisuer. Isaacs J. HIGH COURT mination of that ultimate fact you have to regard not merely immediate acts of the company in distributing the assets, but all the surrounding circumstances of the company's general position possibly including, as in Knowles's Case, the whole past history of company, and its future prospects. I frankly admit my perplexit Case. There are, as it appears to me, only three possible methods approaching such a question. The first method is by determining the legal effect of what Company did. That is, whether what they did left the profits profits of the Company, and therefore legally distributable, or con verted them from profits into capital of the Company as permitte by law, so that they were no longer divisible as profits. But tha amounts to my own, still individually unchanged, but, as I must so long as Knowles's Case stands, judicially assume, fallacious, understanding of Bouch v. Sproule (1) and of the method adopter in such cases as in In re Evans (2); and so I cannot adopt it. The second method is to look at all the circumstances, immediat and surrounding—including not only the fact that the shares of th purchasing company were primarily profits of the selling company, and the form in which they were offered in distribution to the share- holders of the selling company, but also the magnitude of the Com-_ pany's business, and its general position including the value of it own shares on the market, and come to some conclusion as to wha the Company would conjecturally intend. It was urged that the market value of the shares, which indicates the opinion of the out-— side world, was material, because it showed the procurable mon y value of an aliquot part of the Company's "assets." Now, strict speaking, a share is the aliquot part of the capital. The Compan ies Act 1899 speaks of the " capital divided into shares," as, for instance, its sec. 19 and following sections, including sec. 46. I am afraic ; it is productive of error to say that a share is an aliquot part of the company's assets. "' Assets" in this sense is more appropriate in the case of a non-solvent company. In the English Companies Act 1908 (8 Edw. VIL, c. 69, sec. 2 (1) 12 App. Cas., 385. (2) (1913) 1 Ch., 23, at p. 32. 30.LR.] OF AUSTRALIA. creates rights of participation in profits when the company deter- mines to distribute them, but that does not make the share a share of the profits. But even regarding the matter from a business it of view, and assuming the share is regarded by the public as a e in the whole " assets " of the company, it must still be remem- - bered that in the present instance the "assets" comprised both _ (1) capital and (2) profits. Consequently it does not, to my mind, p to say how much of the market value—supposing that factor material at all—would represent in the mind either of the hypo- etical purchaser or the hypothetical vendor the aliquot part of "capital, and how much the aliquot part of profits. It is plain that _ if the Company had received cash upon the sale, and distributed 'the cash avowedly as profits, the result on the market value of the shares would have been precisely the same. - Thave to confess, therefore, I am personally unable to divine the tention of the Company by taking into account the variety of outside circumstances suggested as material, and therefore cannot come to any conclusion on that basis. As this is a question of fact, _ Tof course have to act upon the impression created upon my mind y the facts of the particular case. circumstances of the distribution. I start with the fact that the Company had in its hands certain preference shares representing a - words in Bouch v. Sproule (1)) of the distribution. The only conclusion of fact I can reach is that they were distributed as divi- d, that is as " profits," of the New South Wales company; and (1) 12 App. Cas., at p. 398. share is defined as a " share in the share capital of the company." H.C. or A. — 1917. ot FisHer v. FisHEer. Isaacs J. 350 HIGH COURT H.C. or A. therefore the judgment appealed from was in my opinion right, a n 1917. this appeal should be dismissed. — Fisner : a Gavan Durry anp Ricu JJ. We adhere to what we said oe at Knowles v. Ballarat Trustees, Executors and Agency Co. (1), an Rich J." concur in the conclusion at which our brother Barton has arri the facts of the present case. We therefore think that the ap should be allowed. Appeal allowed. Order appealed from vari substituting for the declaration in ans the first question in the originating sumi a declaration that the trustees hold the sh in question as capital and not as inco me the residuary estate. Order that the remitted to the Supreme Court in Equi be proceeded with in accordance with judgment. Costs of this appeal as be solicitor and client to be paid by the i Solicitors for the appellant, Fisher & Macansh. Solicitor for the respondents, J. T. Ralston. (1) 22 C.L.R., 212.