226 HIGH COURT [HIGH COURT OF AUSTRALIA] BOAN AND ANOTHER . . =.) \). 3) Seem ReEsPONDENTS, AND THE COMMISSIONER OF STAMPS (W.A.) . Rusronp APPELLANT, ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA. H.C. or A, Succession Duty (W.A.}—Shares in proprietary company—Valuation of 1946, and preference shares—Administration Act 1903-1941 (W.A.) (No. 13 of 19 Ww No. 55 of 1941), ss. 110 (1), 112—Partnership Act 1895 (W.A.) (59 Vict. No. Prrtu, arB3;, Sept. 4, 5. acti Be oe F Paden ction 110 (1) of the Administration Act 1903-1941 (W.A.) provides t Metsourye, in the valuation of the share or interest of any person in any partne Oct. 11. for the purpose of this Act, the share or interest of the partner conee Tatham O7., shall be that sum which bears the same proportion to the total capital of th Rich and Dixon partnership as his fractional share bears to the whole number of shares in ty partnership. In this section total capital means the value of the asset the partnership less the liabilities of the partnership. Section 112 p that in the valuation of the shares of a shareholder in any proprietary com such shares shall be valued as if the company were a partnership and the holders were partners. At the time of his death a deceased person owned a number of pi shares and a number of ordinary shares in a company the assets of less its external liabilities, exceeded in value its issued share capital. Held, by Rich and Dixon JJ. (Latham ©.J. dissenting), that under s. the share or interest of a deceased partner is to be taken to be that sum bears the same proportion to the value of the assets of the partne liabilities, as his proportionate or fractional share in such assets less lial bears to the value of such assets less liabilities; that as a result of s, 112 interests in the proprietary company's assets are notionally transformed in 72CLR) OF AUSTRALIA. corresponding interests in the surplus assets of an imaginary partnership, H. C. or A. governed by the same definition of interests as the provisions of the memoran- dum and articles effect, and that accordingly the share of the deceased is to be ascertained by taking his proportion of capital representing preference shares first and then by taking a proportion of surplus assets of the company rateable with his holding of ordinary shares. Decision of the Supreme Court of Western Australia (Full Court), by majority, affirmed. Appeat from the Supreme Court of Western Australia. The Commissioner of Stamps (W.A.) stated a case under s. 102 of the Administration Act 1903-1941 (W.A.) for the opinion of the Supreme Court of Western Australia. The questions arising related to the correct method of valuing preference and ordinary shares in Boans Ltd. owned by the testator Henry Boan. _ The special case was substantially as follows :— 1. Henry Boan died on 18th March 1941 having made and duly executed his last will and testament bearing date 30th May 1939 and one codicil thereto bearing date 30th May 1939. 2. On 7th July 1941 probate of the will and codicil was granted by _ the Supreme Court of Western Australia in its Probate jurisdiction _ to Frank Thomas Boan and Sir Walter Hartwell James, the executors named in the said will. Sir Walter Hartwell James died on 3rd _ January 1943. On 12th February 1943 probate of the will and : codicil was granted to Ernest Blanckensee, the substituted executor named in the said will. 3. Included in the assets of the deceased were: (i) 30,000 7 per cent cumulative preference shares in Boans Ltd. ; (ii) 50,117 ordinary shares in Boans Ltd. * 4. Not more than five persons are entitled to at least two-thirds of the shares in the subscribed capital of Boans Ltd. and conse- quently the company is a "proprietary company" within the "gad of s. 112 of the Administration Act 1903-1941. _ 5. Under art. 72 of the articles of association of Boans Ltd. _ preference shareholders were entitled upon a winding-up to the repay- 'ment out of the surplus assets of the company in priority to all other claims of all capital paid up on their shares and to any arrears of dend, but to no further payment. This article also provided m employees' shares and other shares, and the further surplus assets, if any then remaining, should be distributed between the holders of 1946. Ww Boan v. Commns- SIONER OF Srames (W.A.). H. ©. or A. 1946, Ww Boa v. Commas- SIONER OF Stamps (W. HIGH COURT 6. The capital of the company is £500,000 divided into :— _ (a) 250,000 7 per cent preference shares of £1 each .. (b) 248,500 ordinary shares of £1 each (c) 30,000 employees' shares of 1s. each 7. The paid-up capital of the company as at the date of the d of the said deceased was made up of the following shares :— 250,000 7 per cent cumulative preference shares of £1 each 100,032 ordinary shares of £1 en 30,000 employees' shares of 1s. each . . 8. It has been agreed between the Commissioner of Stamps the executors of the estate of the deceased that for the purp this special case the value of the assets of the company less the bilities of the company was £582,430 at the date of death of the deceased. 9. In assessing the estate of the deceased for duty the Commission of Stamps at first valued: (i) the preference shares at £1 5s. 6d (ii) the ordinary shares at £3 13s. 6d., but now contends that the valu of the preference shares should be taken at their face value and thi the correct method of valuing the ordinary shares of the deceased i Boans Ltd. for the purposes of the Administration Act 1903-1941 i (a) To deduct from the value of the assets of the company the liabilities (namely £582,430) the face value of preference and employees' shares (namely £251,500) ; (6) To divide the balance (namely £330,930) by the num ordinary shares in the company (namely 100,032), multiply the result by the number of ordinary shares | by the said deceased (namely 50,117). The Com of Stamps contends that the answer so obtained ( £165,803) is the value of the ordinary shares of the deceased for the purposes of the Administration Act \' 1941. in par. 9 the correct method of valuing the ordinary shares Boans Ltd. ? (ii) What is the correct method of valuing the ordinary in Boans Ltd. for the purpose of the Administration Act 1903: 72 C.L.R.] OF AUSTRALIA. (iii) What is the correct method of valuing the preference shares in 4. C. oF A. Boans Limited for the purpose of the Administration Act 1903-1941 ? 'The case was heard before Northmore C.J., who held that the correct method of valuing the deceased's 30,000 7 per cent preference shares and 50,117 ordinary shares in Boans Ltd. for the purpose of the Administration Act 1903-1941 was to multiply his fractional share 80,117 351,532 liabilities of the company (namely, £582,430) and that the answer so obtained (namely, £132,740) was the value of the deceased's preference and ordinary shares in Boan's Ltd. for the purpose of the Act. The Commissioner of Stamps appealed to the Full Court of the Supreme Court from the decision of Northmore C.J. The Full Court (Dwyer C.J. and Walker J.) answered the questions in the case stated as follows :—(i) Yes; (ii) Not necessary to answer ; (iii) Not necessary to answer. From that decision the executors of Boan appealed to the High Court. The relevant statutory provisions are set out in the judgment of Latham ©.5. (namely, ) by the value of the assets of the company less the Downing K.C. (with him A7nslie) for the appellants. The object 'of ss. 110 and 112 of the Administration Act 1903-1941 is to place an entirely conventional value on shares in proprietary companies and partnerships quite irrespective of the terms of the partnership agreement or of the memorandum or articles of association of the 'company. The words of s. 110 make this perfectly clear: See " for the purposes of this Act" and sub-s. 2, which would otherwise be 'meaningless. The Full Court has not attempted to construe these sections and has based its judgment on the value of a share in a ene under s. 33 of the Partnership Act 1895 (W.A.). That has no application in ascertaining the conventional value of the shares under s. 110. The word " shares " in that section means 'preference, ordinary, employees' or any other class of shares, and the word. * "shareholders" has a corresponding meaning and therefore means all the shareholders in all classes of shares. The " fractional share" of the testator within the meaning of s. 110 is the total iber of all shares in whatever class held by him in the company, namely 80,117, over the total number of all classes of shares in the 80,117 ipany, namely 351,532" 'partnership " within the meaning of s. 110 is the total number of ; ' The "whole number of shares in the 230 HIGH COURT H.C. or A. issued shares in the company after the employees' shares have beer ey brought to the same nominal value as the preference and ordin; Bow Shares, namely 351,532. The value of the testator's share is then th vw, sum (x) which bears the same proportion to the " total capital of ti coms partnership " (£582,430) as his " fractional share " (80,117) b Sramps the " whole number of shares in the partnership " as follows: ia to 569,490 as 80,117 in to 551,892; ie, x = Uaem is to 582, as 80, is to ,002 5 Le. X = 351,532 b == £132,740, The legislatures of other States and of Engl dealing with the valuation of shares have expressly provided for th position where preference shares have to be valued (Stamp Dut Act 1920 (N.S.W.), 8. 127; Estate Duty Assessment Act 1942 (( s. 6; Finance Act 1930 (Imp.), s. 37). As the local legislatt has not drawn any distinction between preference and other of shares the legislature must be taken to have intended thet should be no distinction between preference and other cli $ shares. Alternatively, if s. 33 of the Partnership Act (W.A.) has application then the testator was entitled to a proportion o assets of the partnership after they have been realized and cd verted into money and after all the then existing debts and bilities of the company have been discharged. The amo £582,430 mentioned as the "capital" of the company with meaning of s. 110 is not the amount which would be obtained company's assets were realized and converted into money debts and liabilities paid. The sum of £582,430 is simply the ence between the value of the assets and the amount of the lial and from that amount the cost of realization must be dedu an allowance made for a reasonable profit to the purchaser (Abra v. Federal Commissioner of Taxation (1)). Tt is true that in valuation of assets in an estate no allowance is made for the e of realization (Elder's Trustee and Executor Co. Ltd. v. Federal Commissioner of Taxation (2)). That is because duty assessed on the value of the assets in the hands of the testator no the hands of the executor (Hlder's Trustee and Executor Co. Deputy Federal Commissioner of Taxation (3) ). So that the share within the meaning of s. 33 of the Partnership Act is not a proportion of the difference between the value of the and the amount of the liabilities but a proportion of the net proc of realization. Virtue, for the respondent. The Administration Act, 8. requires (a) the ascertainment of the share of the deceased ; (1) (1944) 70 C.L.R. 23, at p, 35. (3) (1934) 51 CLR, at p. 697. (2) (1934) 51 CLLR. 694, f F 72 C.L.R.] OF AUSTRALIA. evaluation of the share when ascertained. Section 112 applies H. C. or A. similar principles to proprietary companies. The assumption of the appellant that " share " is used in the same sense in ss. 110 and 112 is incorrect. Ins. 112, where the word is used in the plural, it means portion of the share capital of acompany. Ins. 110, which is dealing solely with partnerships, it means share in the assets of a partnership. Shares in the assets of a partnership must be ascertained by reference to the definition in s. 33 of the Partnership Act, which, as a codifying enactment, must have been within the contemplation of the legis- lature in enacting s. 110. In arriving at the fractional share of the deceased under s. 110 the deceased's proportion of the paid-up share capital is not the measure or test ; it is necessary to ascertain from the memorandum and articles of association of the company what proportion of the total assets less liabilities the deceased would have been entitled to on a notional winding up : See also Partnership Act (W.A.), 8.57. To treat the deceased's fractional share as his propor- tionate interest in share capital of the company is to treat the company as a joint stock company and not a partnership as required by s. 112. The words used in s. 110 to describe share, i.e., " frac- tional share " and " whole number of shares " are more apt to describe 'the normal provision in a partnership deed where the interests of the various partners in both assets and profits are expressed by a simple fraction. The more complicated factors which must enter into con- sideration in dealing with a corporation on partnership principles do not appear to have been within the contemplation of the legis- lature in enacting the section. The fact that the calculation of the fractional share of a shareholder in a proprietary company becomes a complicated numerical sum does not support an interpretation which is the negation of s. 112 in requiring partnership principles to be adopted in the assessment of shares in proprietary companies and the negation of s. 110 in requiring partnerships to be valued not in relation to sale value or profits but to the excess of assets over lia- bilities. The expression " whole number of shares" is the contra- positive of " fractional share " used earlier in the section and means the common denominator to which the fractional shares of all the individual partners can be reduced : See Oxford Dictionary, definition of fraction, " one or more aliquot parts of a unit or whole number," aliquot " mathematically contained in another and dividing it without remainder." If " fractional share " and " whole number of shares " are regarded as one composite expression, " fractional share" is equivalent to the numerator of the fraction, and " whole number of shares " the denominator of the fraction. The fact that anomalies exist in a Finance Act must induce great caution before assenting to 1946, we Boax v. Comms. SIONER OF Srames (WAL). 232 HIGH COURT H.C. or A. a construction which supports such anomalies (Commissione bse Stamp Duties (N.S.W.) v. Simpson (1) ). The construction cont Boy __ for by the appellants results in the following anomalies :—Emp ». Shares of 1s. nominal value would receive same value as ordinary ee preference shares of £1; partly paid shares would be paid as equi lent to fully paid shares ; preference shares would always be the same as ordinary shares notwithstanding their widely di rights to the surplus assets of the company ; the position of 1920 (N.S.W.), s. 127, wherein preference shares are ¢ excluded from the statutory method of valuation. In consequ necessity be calculated in relation to paid-up share capital and therefore necessary to exclude preference shares so that ano could be avoided. The general intention of ss. 110 and 112 apparent from a consideration of a previous state of the law. to the passing of the 1934 Act there was no provision dealin, cally with the valuation of shares in private companies, which authorities was the value which the shares would fetch in the oj market having regard to the restrictions on transfer (Afton General v. Jameson (2); Macarthur Onslow v. Commissione Stamps (3) ; Blackwood's Executors v. Commissioner for Stamp The object of the legislature was apparently to ignore questi market value of shares in a private company and base tl exclusively on the shareholder's share in the surplus assets of company. The commissioner's assessment is based on this get principle whereas the method of valuation contended for b appellant entirely ignores it. Ainslie, in reply. The costs of realization must be deducted £582,430 before assessing the testator's share or interest (Ab Federal Commissioner of Taxation (5)). The answers to the q tions by the Full Court precluded the appellants from contestin; question of costs of realization (Elder's Trustee and Executor v. Deputy Federal Commissioner of Taxation (6)). Tt is very lous to construe s. 110 as the Full Court construed the ordinary shares are not worth 50 per cent of the value, £3 (1) (1917) 24 C.L.R. 209, per Isaacs J., (4) (1917) 17 S.R. (N.S.W.) 4 at p. 221. W.N. 204, (2) (1905) 2 Ir. R. 218, (5) (1944) 70 C.L.R, 23. 4 (3) (1913) 13 S.R. (N.S.W.) 354, (6) (1934) 51 C.L.R. 694, at p. 6 72 C.L.R.) OF AUSTRALIA. s income produced by shares and therefore cannot possibly areal value on shares. The value of the employee's shares is not s. because a dividend up to 2s. may be paid under the articles of ssociation. Cur. adv. vult. The following written judgments were delivered :— - Larnam C.J. Appeal from a decision of the Full Court of the Supreme Court of Western Australia upon a case stated under s. 102 of the Administration Act (W.A.) 1903-1941. The questions submitted the case relate to the proper method of valuing preference shares ordinary shares in Boans Ltd. owned by the testator Henry an, who died on 18th March 1941. The testator owned 30,000 per cent cumulative preference shares and 50,117 ordinary shares. 'Under Article 72 of the articles of association preference shareholders were entitled upon a winding-up of the company to the repayment yut of the surplus assets of the company in priority to all other claims f all capital paid up on their shares and to any arrears of dividend, but to no further payment. This article also provided that after the claims of preference shareholders the surplus assets "shonld then be devoted to the repayment of capital paid up on ~ employee's shares and other shares, and that the further surplus s if any then remaining, should be distributed between the of ordinary shares in proportion to the capital paid up on the he issued and paid-up capital of the company at the date of the th of the deceased was made up of the following shares :— 250,000 7 per cent cumulative preference shares of £1 100,032 ordinary shares of £1 each .. $s oe 100,032 _ 30,000 employee's shares of 1s. each Fe he 1,500 £351,532 Section 112 of the Act provides: " In the valuation of shares of a shareholder in any proprietary company, such shares shall be valued if the company were a partnership and the shareholders were the tituent partners. In this section proprietary company means ny company in which not more than five persons are entitled to at two-thirds of the shares in the subscribed capital of the com- laced on them by the Full Court. Section 110 completely dis- H. ©. oF A. 1946. we Boax v Comnnis- SIONER OF Sramrs (W.A.). Oct 11. H.C. or A. 1946, ad Boa v. Comaus- SIONER OF Srames (W.A.) Latham C.J. HIGH COURT Boans Ltd. is a proprietary company within the meaning of section, This section requires that the testator's shares i company shall be valued as if the company were a partnershij the shareholders were partners. It is therefore necessary to ase how the interests of partners are to be valued under the Act. Section 110 contains the provisions dealing with this s This section provides as follows : "'(1) In the valuation of thes interest of any person in any partnership for the purpose of the share or interest of the partner concerned shall be ship as his fractional share bears to the whole number of shares partnership. In this section total capital means the valu assets of the partnership less the liabilities of the partners Provided that any legatee, beneficiary, donee, or other p whom any share or interest in a partnership passes on the any other person shall be liable to pay to the person respon the payment of the duty on such share or interest under the pi of this Act, any increase in duty which may be necessitated by the share or interest of the deceased partner in accordance ¥ section." Sub-section 3 of s. 110 gives a right of appeal to a person wl the section is made liable to pay an increase of duty. It was a by the parties for the purposes of the case that the value of th of the company less the liabilities of the company was £582, the date of the death of the deceased. This amount thereft the "total capital" of the company for the purposes of s. The object of these provisions is to secure the payment upon the value of the share of a deceased partner upon a prescribed basis. That basis is that the value of his share is a determined in accordance with s. 110. That sum is a sum wh bears the same proportion to the total capital (i.e. surplus of a over liabilities) as the partner's fractional share bears to the number of shares in the partnership. The section therefore re the ascertainment of (1) the whole number of shares in the pal ship, (2) the fractional share of the deceased partner, (3) the capital" of the partnership. If the deceased partner had example, one share out of a whole number of three shares i partnership, then the value of his share or interest in the partnt is a sum representing one-third of the " total capital." The legislature was not content to allow the courts to estim value of a deceased partner's share in the ordinary way. had been no express provision such as that contained in s. Ill 2CLR.) OF AUSTRALIA. taining the value of that which the deceased partner's estate was entitled to receive as the proceeds of his share in the partnership. Ordinarily, in the absence of any agreement to the contrary, the provisions of the Partnership Act (W.A.) 1895, ss. 33 and 57, would be applied. The value of the share of the partner would be repre- sented by the value of what he would be entitled to receive as upon a dissolution of the partnership. Section 33 of the Partnership Act - (W.A.) provides as follows : "The share of a partner in the partner- - ship property at any time is the proportion of the then existing partnership assets to which he would be entitled if the whole were realised and converted into money and after all the existing debts and liabilities of the firm had been discharged." _ Section 57 provides that upon a dissolution (subject to any agree- _ ment between the parties) the assets of the firm are to be applied in _teplacing losses of capital in the manner specified, paying debts to _ external creditors, repaying advances by partners and paying back capital. Then s. 57 (6) (4) applies :—" The ultimate residue, if any, - shall be divided among the partners in the proportion in which profits are divisible." But, on the other hand, it might have been the case that the partnership agreement provided that the other partners were either bound or entitled to purchase the share of a deceased "partner at a fixed amount. " Section 110 excludes both these methods of ascertaining for the purposes of the Act the value of the share in the partnership of a deceased partner. It is plainly intended to prevent the avoidance of e payment of duty by special provisions in the partnership agree- fixing as between the partners the value of a share of a partner. value of the share is to be estimated by taking a fraction of the total capital of the partnership as defined in the section, that fraction being the same fraction as that which represents the partner's share in the tnership. Equally s. 110, in my opinion, excludes the applica- of the provisions of the Partnership Act to which I have ed. None of the provisions of s. 57 of that Act have any ance for the purposes of s. 110. They result in the ascertain- ent of a sum of money as representing the value of the share of a eceased partner. Section 110 does not allow these provisions to operate, but instead, takes as representing that value a proportion the share of the partner in the " total capital " of the partnership. ie total capital of the partnership means " the value of the assets partnership less the liabilities of the partnership." The es here referred to are liabilities of the firm to external -yalue of the share would ordinarily have been estimated by ascer- H. ©. or A. 1946. Ye Boa v. Comans- SIONER OF Sramrs (W.A.). Latham J, H, ©. oF A. 1946, ees Boax v. Comms. SIONER OF Sramrs (W.A.). Latham ©. HIGH COURT creditors. They cannot include liabilities of the partners Accordingly the provisions of s. 57 with respect to losses of cap repayment of advances and repayment of capital are, in my opinion to be disregarded for the purpose of applying s. 110. The sectio gives no authority for any deduction, in respect of replacement losses of capital, repayment of advances or repayment of capital, an the provision in the Partnership Act that the ultimate residue is be distributed in the proportion in which profits are divisible is, i my opinion, also irrelevant. The application of the provisions of the Partnership Act result in the ascertainment of a sum of money which is dete by the provisions of the partnership deed in respect of capital a in respect of sharing the profits, as well as by the financial posi of each partner in relation to the firm and the assets and deb the firm. Section 110 adopts a quite different point of view. In the first place, the "total capital" of the partnership is a which may be very different from the ultimate divisible b: under the Partnership Act, s. 57, and also from any sum whic appears in the course of calculations made for the purpos applying that section. The final result under the Partnership would not be reached as a proportion of the "total capital " the partnership. In the next place, the application of the Pa ship Act involves the consideration of the rights of the pa to share in capital and their rights to share in profits. These ma} quite different. A partner may have a large share in capital a small share in profits, or vice versa. The Partnership Act visions allow for the application of different fractions in the cai capital and in the case of profits. But s. 110 contemplates rf 7. ae ascertainment only of a single fraction : deceased DSU whole number of sha and the value of the deceased partner's share is simply that s proportion of the total capital. The sum calculated under the Act may be greater or less th benefit derived by the estate of the deceased partner. The be derived will depend upon the rights of the partner in respect of ca] and of profits. He may (as in the case of a managing partner) a large share in profits and a small share in capital. The ultimé residue under s. 57 may be much greater than the capital, 0 the estate and the value calculated under s. 110. As already the partnership agreement may require or entitle the si partner to purchase the share of the deceased partner for 4 72 C.L.R.] OF AUSTRALIA. which bears no relation either to the value as upon a dissolution, or to H.C. oF A. the value as calculated under s. 110. Sub-section 2 of s. 110 deals with such cases by providing that "Any legatee beneficiary donee or other person to whom any share or interest in a partnership passes on the death of any other person shall be liable to pay to the person responsible for the payment of the duty on such share or interest" the increase in duty so necessi- tated. The application of this provision involves the consideration of two methods of valuation and a comparison of the results in respect of amount of duty payable—(a) valuation in accordance with the section; (b) valuation not in accordance with the section. The latter valuation must be a valuation upon the basis which would have been proper if the section had not been passed—i.e., an ascer- tainment of the true value of the share of the deceased partner. The ascertainment of such value might be simple enough or it might be complicated ; but, however the valuation is made, if the result is that it is lower than the valuation made in accordance with sub-s. (1), the provisions of sub-s. (2) come into operation and the person beneficially taking the interest has to pay the increase of duty. How can the conceptions of "fractional share" and " whole number of shares" be applied in the case of a partnership? A "share in a partnership " may be either 'a share in the capital, or a share in the profits, or the share as upon a dissolution, which depends upon both rights in capital and rights in profits. But the "share" in the last sense is not a '' fractional" share of a " whole number of shares." It is simply a sum of money. By the applica- tion of s. 57 of the Partnership Act, the estate of the deceased partner might be required to make good losses of capital to the extent of £1,000, to pay £500 towards repayment of advances by the partners, and might be entitled to receive £5,000 on account of capital and £10,000 on division of ultimate residue. The estate would receive £5,000 plus £10,000 minus £1,500, namely £13,500. But that sum would not be a fractional share of any whole number of shares in the partnership. The estate could not be said, as a result of the adjustment of accounts between the surviving partners and the estate, to have 13,500 or any other number of shares out of some other number representing 'the whole number of shares in the partner- ship." Nor is it possible to say that the sum of £13,500 represents the result of calculating any proportion of the " total capital" of the partnership as defined in s. 110. Thus the value of a share in a partnership as calculated under s. 110 is something quite different VoL, LXXIl. 16 1946. Se Boan v. Commtts- SIONER OF Srames (W.AL). Latham C.J. Latham C.J. - from the value of the share as calculated under the Partne HIGH COURT Act. Tf then the share of a deceased partner is not the share as ase tained under the Partnership Act (which takes into account the terms of any agreement between the partners) what can " fractional share or interest of any partner" in a partnership m As already stated, it must be a share represented by a single fraet Is it a share of capital or a share of profits? It cannot be both shares in capital and in profits may be different. It cannot b share in the "' total capital" as defined in the section, for that sl is determined as a result of taking a share of the " total capi corresponding to the proportion of the fractional share to the number of shares. The section cannot be interpreted by trans the definition of "' total capital " into its substantive part by ing all references to shares as references to shares in " total caj If this were done the section would read as follows :—' The sha interest of the deceased partner in the total capital shall be th which bears the same proportion to the total capital of the ship as his fractional share in the total capital bears to the number of shares in the total capital." Such a proposition simply mean that the share of the partner in the total capital share in the total capital—an identical proposition, which is n¢ sarily true, but which is also meaningless. It was not argued that " fractional share " and " whole nun shares " related to shares in profits, but the respondent would admit that the terms referred to shares in capital. The court ha choose between the two alternatives. The section deals with thet capital of a partnership as specially defined in the sectio surplus assets. The value of the deceased partner's share is portion of those surplus assets determined by his fractional shi the whole number of shares. These words, in their setting, apj me to be more apt to refer to shares in capital than to share profits. This was the view of the section taken by Northmo and, having regard to the many objections to any other Y think that it is the preferable view to adopt. There is no diff in applying the conceptions of "fractional share" and " number of shares " to the capital of a partnership. Thus if part owns half of the capital, partner B owns one-third and pat owns one-sixth, the fractional share of partner A is three sha of six, of partner B two shares out of six, of partner C one six. In such a case the application of the section would me A died the value of his interest would be taken to be three the surplus assets; if B died his interest would be taken RCLR] OF AUSTRALIA. two-sixths of the surplus assets ; and if C died his interest would be H- ©. or A. taken to be one-sixth of the surplus assets. The value of the interest of a partner is determined simply by applying the fraction represent- ing his share in the capital of the partnership to the surplus assets _ of the partnership, that is, the value of the assets less the liabilities. There are some difficulties in applying s. 110 in the case of a partnership. There are other difficulties in applying it to shares in 'companies, as required by s. 112. For example, s. 110 does not include any provision distinguishing between preference and ordinary shares. Further, the section does not distinguish between fully paid and partly paid shares. But, if the provision is construed as referring _ to shares in capital, these difficulties can be overcome. The pro- _ portion of the deceased's shareholding to total shares issued can be _ readily ascertained, and allowance can be made for the difference _ between fully paid and partly paid shares. In Boans Ltd. there ~ are 30,000 employee's shares, but they are shares only of Is. each. In order to ascertain fractional shares in the capital of the company, the 30,000 shares have been regarded by both parties, and in my opinion rightly, as representing only £1,500. It is objected that upon this view the application of the section _ would sometimes bring about extraordinary results—that, e.g. in the present case it would attribute the same weight in calculation to 'one preference share of £1, which entitled the holder only to £1 plus any arrears of 7 per cent dividend upon a winding-up, as to one _ ordinary share of £1, which would entitle the ordinary shareholder, __ upon the accounts of the company as they at present stand, to repay- ment of capital of £1, together with a large additional amount representing a share of surplus assets. But upon any view ss. 110 and 112 are artificial provisions for ascertaining value for the purposes ofthe Act. In the first place, it is plain that they entirely disregard any market value of the shares. In the second place, sub-s. 2 of s. 110 shows that the legislature recognized that the value as ascertained under the section might not correspond with the true value of the shares, so that in some cases the testator's estate would be called upon. to bear an unduly high amount of duty, which should therefore be tefunded by a beneficiary who received the shares. When the case came before Northmore C.J. it was held that the combined operation of s. 110 and s. 112 when applied to the facts of the case required the ascertainment of the number of shares held _ by the testator in the company and the ascertainment of the fraction of the whole number of shares in the company which that number of shares represented. The testator owned 30,000 preference shares : and 50,117 ordinary shares, a total of 80,117 £1 shares. The total Re eae: ' : '. z ; 1946. ES Boan Latham C.J. H. ©. or A. 1946, — Boan v. Commis- SIONER OF Sramrs (W.A.). Latham €.J. HIGH COURT number of shares in the company expressed as £1 shares was 351,532, 80,117 ssi pao "omy C.J. then applied this fraction to the " total capital " of the pa ship as defined in s. 110 (1), that is, the amount of £582,430, 80,117 : 2,430, i.e. £132,740, ga sgg 01 £82,480, ie. £132,740 The fractional share of the testator was therefore the value of the share was the true value of the testator's interest in the partnership and by then asking whether there were any provisions in ss. 110 Boans Ltd. in the following manner. In the first place the articles o association of the company were regarded as representing the a; applied in repaying the capital of preference shares. Thus the element in the value of the interest of the deceased in the comp was taken at £30,000, being the amount to which he was entitled preference shareholder in priority to the claims of all other sh holders. In the next place, the testator upon a winding up would have been entitled, after repayment of the capital of prefi shareholders and of holders of employee's shares, to a rateable portion of the balance of the surplus assets of the company. preference share capital was £250,000, the employee's share capital was £1,500, a total of £251,500. When this sum is deducted fi £582,230 a balance of £330,930 is left as the sum divisible am ordinary shareholders in accordance with the articles of associati There were 100,032 ordinary shares, of which the testator ow ne 50,117 td i um of 700,082 of £330,930, that is, to asi £165,800. To this sum the sum of £30,000, representing his inte as a preference shareholder, was added, producing a total of £19: It was declared by the Full Court that this sum represented the vs of the testator's shares in the company. : The proportion of "the fractional share of a partner" to " whole number of shares in the partnership" is quite independ of the amount of the total capital of the partnership. That p portion will remain the same whether the total capital of the parti ship is £1,000 or £1,000,000. When that proportion has been tained, then the sum representing the value of the deceased's sha 50,117. He was entitled to 72 C.L.R.} OF AUSTRALIA. for the purposes of the Act is simply the same proportion of the total H. ©. or A. capital. To calculate the value of the interest of the deceased in the assets of the company apart from the section, and then to say that the section has been properly applied because that value can be expressed as a fraction of the " total capital" is, in my opinion, to invert the procedure required by the section. Such a procedure does not ascertain the value of the shares by taking a proportion (namely, partner's share whole number of shares' the value of the partner's share in the total capital in the same way as that value would be ascertained if s. 110 did not exist. The operation is then (on this view) complete—the value is represented by the sum so ascertained and that is the end of the matter. That value, of course, is necessarily some fraction of the " total capital." The fraction, however, on this procedure, emerges as a quite meaning- less end result and is not used, as s. 110 requires, as the means of reaching the result at which the section is directed, namely the ascertainment of the value of the shares. Section 110 requires the ascertainment of a sum which bears a particular proportion to the "total capital" of the partnership. That sum is to be ascertained in this case, therefore, by applying some fraction to the sum of £582,430. The words of the section 'require that one fraction, and one fraction only, is to be applied _ to a single sum, namely, the " total capital" (or surplus assets) of the partnership. The words of the section do not admit of the _ adoption of one fraction for the purpose of calculating one part _ of the value of the share, and another fraction for the purpose _ of calculating another part of the value of the share. Neither _ do the words admit of a process of calculating value by first sub- _ tracting a sum from the amount representing surplus assets, then _ taking a proportion of the balance of that amount, and adding _ together the sum subtracted and the proportion of the balance. Such a process may be a proper method of ascertaining the actual _ value of each part, and consequently of the whole, of a deceased partner's share, but it is a process which ignores the provisions of —s. 110. The method adopted by the Full Court appears to me to fail to apply s. 110 in any manner. The first element in the total sum _ of £195,800 is £30,000, representing the amount receivable, as upon winding up, by a shareholder who owns 30,000 preference shares. This amount is arrived at in this case merely by reference to the pital paid up on the shares. It is quite irrespective of any relation the shareholding to the total number of shares (preference or ) of anything. On the contrary, it ascertains 1946. Ww Boan v Comms SIONER OF Sramps (W.A.). Latham 0.5. Latham ©.5. HIGH COURT same whether there were only 30,000 preference shares d in the pany or ten times that number of preference shares. It is rea without any consideration of the "whole number of shares " without any consideration of the proportion of the share of th deceased to the whole number of shares. Court, this amount of £30,000 (no more and no less) would bh included as an element in the estimate of value under the sectio whether the " total capital " was £500,000 or £5,000,000. Thus method of ascertaining the value of the share pays no attenti whatever to the terms of s. 110, It disregards the provision as to fractional share of the deceased partner (that is the proportion of hi shareholding to the total shareholding) and also completely ig the provision which introduces the " total capital" of the com as an essential element in the calculation required by the section. The calculation of the value of the ordinary shares is open similar, though not identical, criticism. In the calculation under the judgment of the Full Court it is true that the proporti of the testator's ordinary shares to all ordinary shares (though not all shares) is taken but this fraction is then applied, not to the to capital of the company as defined in the section, but to the bala of the surplus assets of the company which is left after repaying capital of ordinary shareholders and of holders of employee's s! I can see no authority in the words of the section for adopting procedure. Accordingly, in my opinion, the order of the Full does not satisfy the requirements of s. 110. In my opinion, when s. 110 is applied to a proprietary company i is necessary to ascertain the share of the deceased shareholder in the share capital of the company, and to regard the value of his inte for the purposes of the Act as represented by a corresponding share 0 the total capital of the company as defined in the section. Th result is that, in my opinion, the decision of Northmore O.J. ¥ right, that the appeal should accordingly be allowed, and that questions in the case should be answered in favour of the taxpayt that is, as follows :— Question 1.—No. Questions 2 and 3.—As stated in the order of Northmore C.J. Ric J. This matter originated in a special case stated by th appellant under the provisions of s. 102 of the Administration 72 C.L.R.J OF AUSTRALIA. Act 1903-1941 (W.A.). The substantial question submitted in the H. ©. or A. special case is whether the method adopted by the appellant in par. 9 of the special case is the correct method of valuing the ordinary shares in Boans Ltd. The company's capital consisted of three classes of shares, preference shares, employee's shares and ordinary shares. Of these the deceased held preference shares and ordinary shares. In effect the controversy between the parties is whether the "fractional share " referred to in s. 110 (1) of the Act is founded on the capital held by the partners or upon the shares and interests held by them in the surplus assets of the partnership. The com- missioner's valuation in par. 9 of the case is based on the latter prin- ciple. When the case came on to be heard the learned primary judge decided against this basis and adopted the former method. On appeal the Full Court of the Supreme Court reversed this decision and adopted the commissioner's method—hence this appeal. Boan's Ltd. is a company which falls within the provisions of s. 112 of the Act. Accordingly in valuing the shares of such a com- pany the company is deemed to be a partnership of which the share- holders are the constituent partners and all questions of company law are laid aside. The matter is thus relegated to the provisions of partnership law. And the effect of s. 33 of the Partnership Act 1895 (W.A.) is that the share of a partner is the proportion of the surplus assets to which he is entitled. Turning to s. 110 of the Administration Act (W.A.) express provision is made for the valuation of partnership interests. Sub-section (1) of this section is, as I mentioned during the argument, so far as a partnership is concerned, derived from s. 127 of the Stamp Duties Act 1920 (N.S.W.) with the verbal modification of fractional share for aliquot portions. The New South Wales section also states the object of the section thus : "a share in a partnership shall be deemed to represent aliquot por- tions of the whole value of the business of the . . . partnership notwithstanding anything contained . . . in the partnership agreement or any agreement for a dissolution of the partnership." By s. 110 what is really being dealt with is the value of the share or interest of a partner in the partnership assets and his share or interest must, I think, be compared with or have relation to the value of the partnership assets less the partnership liabilities. This according to the section is measured by a method of pro- portion which, in effect, provides that the value of the partner's share or interest shall be such a sum as bears the same proportion to the surplus assets of the partnership as his share in the partnership bears to all the shares in the partnership. Though the language of the section is difficult to construe the only reasonable meaning that can 1946. Ww Boan v. Comms- SIONER OF STaMes (W.A.). Rich J. SION: OF Srames (W.A.). - be given to it, in my opinion, is that the partner's share or int HIGH COURT the purposes of the section must be a share or interest bearing g surplus assets of the partnership and the numerator refers to a of these assets. This interpretation is, I think, suggested and co firmed by the definition of " total capital'? which appears in section. The substitution of the word " fractional" for the "aliquot" can, I think, make no substantial difference interpretation of the section because an aliquot share of anythin obviously a fractional share. Moreover I think "the numb shares' means the total interests of the members in the s assets. The Full Court, in my opinion, came to a correct conclusi accepting the method of valuation adopted by the commissio1 I can see no reason for not accepting the valuations arrived accordance with this method by the commissioner. In my opinion, the appeal should be dismissed. Drxon J. The deceased held preference shares and ordinary shat in a proprietary company and the question for our decision is h they should be valued for duty for the purpose of the Administ Act 1903-1941 of Western Australia. The company had issued th classes of shares, preference shares, employee's shares and ord shares. Under the constating instruments of the compa preference shares bore a fixed cumulative preferential divid: employee's shares bore such dividend as, subject to a ma might be fixed by the directors and the ordinary shares carri dividend as might be declared with respect to them out of th arising from the business of the company. Upon a liq the preference shares would rank first in respect of arrears of diy and in respect of repayment of capital paid up upon them, employee's shares would rank next in respect of repayme capital paid up upon them, and the further surplus assets, then remaining would be distributed among the holders of ordinary shares in proportion to the capital paid up on the sh held by them. § Section 112 of the Administration Act (W.A.) deals with valuation of shares in a company in which two-thirds of the are held by less than five persons. The proprietary com question fell within this description. The section provides thi such a case the shares shall be valued as if the company partnership and the shareholders were the constituent p 2RCLR] OF AUSTRALIA, "This appears to mean that the corporate character of the company 4. ©. or A. shall be disregarded and that notionally the interests given to the 'shareholders respectively by the constating instruments in respect of their various holdings of shares should be considered interests in partnership of which they are the members. But the valuation of shares or interests in a partnership is dealt with specifically. Section 110 (1) contains a provision the general policy of which is apparent. Its purpose is to ensure that upon the death of a partner the value of his share or interest in the partnership shall, for purposes of duty, be the proportionate share properly attributable to him 'of the value of the net assets of the partnership. It is directed against the operation upon the value for duty of special provisions 'in partnership articles dealing with the death of a partner and, for example, requiring the acceptance by his executors of an artificial value for his share, or limiting the value or extent of the transmissible interest of the deceased in the partnership. The text of s. 110 (1) has caused the controversy in the present case and, therefore, it requires special consideration. What to my _ mind is its most important feature occurs in a separate sentence at the end of the sub-section. It is a definition of one of the terms _ that the draftsman employs, viz. "total capital." It says: "In this section total capital means the value of the assets of the partner- ship less the liabilities of the partnership." Substituting this _ definition for the expression " total capital," the operative part of the sub-section reads as follows: "In the valuation of the share or Z of any person in any partnership for the purpose of this Act, share or interest of the partner concerned shall be that sum which the same proportion to the value of the assets of the partnership the liabilities of the partnership as his fractional share bears to whole number of shares in the partnership." The direction given by this provision to take a proportion rateable the deceased partner's fractional share is readily applied when, er the terms of a partnership, the partners are interested in the assets of the partnership in such definite proportions as, for ance, equally or one third and two thirds. No doubt that is the case. But the interests of the partners in the assets may be amore complicated pattern. It is not difficult to imagine a case which the several partners contribute definite but unequal amounts 'capital, which upon dissolution each respectively under the terms the partnership is entitled to have repaid out of the assets while ie further surplus assets are distributable equally among them. such a case, if there were no surplus over the capital contributed, if there were a deficiency in part of such capital, the provision 1946. we Boan v Commits: SIONER OF Srames: (W.A.). Dixon J. H.C. or A. 1946, — Boan v Commis- SIONER OF Sramps (W.A.). Dixon J. HIGH COURT would be satisfied if the amount available were notionally sha the proportions which the contributions of capital bore to o another. But, if there were a surplus over capital contribut the fraction for the amount of capital contributed and the for the surplus assets would not be the same. Moreover to a fraction for the capital contributed would be an unnei form. For you know the amount of the deceased's capital contrib tion and that represents his first claim upon the assets, considerations have led to the contention that the proportion ship less the liabilities of the partnership." It is an interpretatic of the provision which I find myself quite unable to adopt. ] appears to me to magnify to undue proportions the difficulties applying the word " fractional" to one particular case and to those difficulties to exclude the interpretation to which all the of the language of the sub-section points as well as its general pr It is as well perhaps at this point to pause in order to give: illustration. Suppose that A, B and C are partners who are the conditions of the partnership entitled in equal shares to the su plus assets after the return of their capital contributions and they had contributed respectively £1,500, £1,000 and £500 by v capital. Suppose that A died and that it is found that the the assets of the partnership, less liabilities, is £9,000. A's the £9,000 is composed of two parts, his share in the amount senting the capital contribution to be returned, an aggregat £3,000, and his share in the further surplus of £6,000, Of th he is entitled to £1,500 or one half ; of the second he is entitled to third or £2,000. To satisfy the necessity, if it be one, of having a " fractio it would be enough to add the £1,500 and £2,000 together and treat the result, £3,500, as the numerator and the £6,000 as denominator, which gives seven twelfths. But to do so is to through a formal step only. The alternative, however, to recogni that A's share is composed of two parts is to treat the proportio the capital contributions as governing the entire fund and ac ingly to divide the £6,000 so as to attribute to A £3,000, to B and to C £1,000. To do this is not only to produce a result f fact, that is a fictional quantification of A's interests in the but to place an unnatural meaning upon the language of th section. It is unnatural because, in the first place, a partner's or interest in a partnership means, I think, his share in the part ship property. "What is meant by the share of a partner 72 C.L.R.] OF AUSTRALIA. proportion of the partnership assets after they have been all realized H. C. or A. and converted into money, and all the partnership debts and lia- bilities have been paid and discharged. This it is, and this only, which on the death of a partner passes to his representatives, or to a legatee of his share." Lindley on Partnership, 10th ed. (1935), p. 416. This definition was, in substance, adopted by Sir Frederick Pollock (Digest of the Law of Partnership, 9th ed. (1909), p. 74) and upon it is based s. 33 of the Partnership Act 1895 of Western Australia. In the second place, even if "share in a partnership " might mean " share in the capital contributed," the words " interest in a partner- ship " cannot bear that meaning. In the third place, the words " value of the assets of the partner- ship less the liabilities of the partnership" describe the whole subject matter upon which the sub-section founds its operation. As it seems to me, the prima facie meaning of the expression "' whole number of shares in the partnership " is confirmed and put beyond doubt by the fact that the thing to be proportioned is the value of the assets of the partnership less the liabilities of the partnership. Accordingly, I think that the proportional or fractional share to which the sub-section refers is the partner's share or interest in the excess of assets over liabilities and not the relative amounts of capital contributions. I interpret the sub-section as meaning that the share or interest of the deceased partner shall be that sum which bears the same pro- portion to the value of the assets of the partnership, less liabilities, as his proportionate or fractional share in such assets, less liabilities, bears to the whole number of shares in such assets, less liabilities. If it is objected that this is a curiously periphrastic way of saying that the share of the deceased partner shall be his share in the surplus assets, I would point to three considerations by way of answer. The first is that, if the draftsman had used any such simple expres- sion, he would have exposed the provision to the risk of receiving a construction under which the partnership articles might be taken as defining and determining the extent and nature of the transmissible share or interest of the deceased, the very thing against which the provision is directed. The second is that the draftsman naturally resorted to a formula that fits the most usual and ordinary case, namely that in which the interest of a partner in the surplus assets is described by the terms of the partnership as a proportion or fraction, e.g. a half, a fourth or the like. In the third place, wherever the assets are not enough to repay capital contributions the use of a proportion is necessary. I should perhaps add that I think that upon the interpretation of sub-s. (1) the considerations to be found in 1946. ey Boay v, Comans- SIONER OF Stamps (W.A.). Dixon J. SIONER OF Sramps - sub-s. (2) are quite neutral. It is a sub-section which recogni: HIGH COURT sub-s. (1) may or will result in an increase in the value of the es a corresponding increase in the rate of duty. On any cons this is true of sub-s. (1). Once theinterpretation of sub-s. (1) of s. 110is settled, little diffie remains in applying s. 112. The interests in the company's are notionally transformed into corresponding interests surplus assets of an imaginary partnership, governed by th definition or determination of interests as the provisions memorandum and articles of the company effect. According share is ascertained by taking the deceased's proportion of ea represented by preference shares first, and excluding ne represented by employee's shares, of which he held none, and taking his proportion of the further surplus assets. I shall now turn to the numbers of shares and value of ai the case and express my view of the matter in terms of th figures. The deceased held 30,000 preference shares of £1 each fu paid ; 250,000 preference shares had been issued. He held 5f ordinary shares fully paid ; 100,032 ordinary shares had been He held no employee's shares ; 30,000 employee's shares of 1s. fully paid had been issued. He is therefore notionally to regarded as a partner entitled, in the first place, to a £30,000 of capital, other partners (i.e. holders of the r preference shares and of the employee's shares) being enti return of £221,500 of capital, and, in the second place, to share int further surplus assets in the proportion of 50,117 to 49,915, that fraction of 50,117 over 100,032. The value of the assets, less the liabilities of the company agreed for the purpose of the special case at £582,430. On the foregoing figures the first step is to distinguish betwee much of the assets in excess of liabilities as is needed to retum capital representing the rights of the notional partners correspon to those given by preference shares. That means that as to the deceased was entitled to £30,000, or to express it formally fraction, z's of £250,000. Then, after deducting the £1,500 senting the return of capital in respect of the employee's sh there remains £330,930 of which the deceased was entitled tor 4 If there were no question about the application of the agreed £582,430 for all purposes, the result would be that adopted b commissioner and by the Full Court of the Supreme Court of W Australia. But counsel for the appellant contended that th 72 C.L.R.] OF AUSTRALIA. did not represent the value to the company or hypothetical partner- 4. C. oF A. ship arrived at after giving appropriate weight to the consideration that an owner must incur some costs of realization. It was said that, however correct this might be in ascertaining the fund to be pro- portioned, that is the value of the assets of the partnership, it was not correct in estimating the value of the net assets for the purpose of ascertaining the proportions. It seems to me that whatever ele- ments or considerations must be taken into account in ascertaining the value for one purpose must be taken into account for the other. As the figure has been agreed for one purpose, and in the very words of the statute, I think we must use it for all purposes. This final point fails. Accordingly, for the foregoing reasons, I am of opinion that the appeal should be dismissed with costs. Appeal dismissed with costs. Solicitors for the appellants, Stone, James & Co. Solicitor for the respondent, G. B. d'Arcy, Crown Solicitor for Western Australia. E. L. B. 1946. Se Boan v. Comaas- SIONER OF Sramps (W.A.). Dixon J.