THE ATTONEY GENERAL ,Appellant , and C. W. MACKIE (Junior) et al (Executor of th

046-NLR-NLR-V-54-THE-ATTONEY-GENERAL-Appellant-and-C.-W.-MACKIE-Junior-et-al-Executor-of-th.pdf

LORD REED—Attorney-General v. Mackie
193
[In the Privy Council.]
1952 Present: Viscount Simon, Lord Normand, Lord Morton ofHenryton, Lord Reid and Sir Lionel LeacbTHE ATTORNEY GENERAL, Appellant, and
W. MACKIE (Junior) et al. (Executors of the Will of
W. Mackie, deceased), Respondents
Privy Council Appeal No. 23 of 19518. C. 88—.D. C. Colombo, 71
Estate Duty Ordinance {Gap. 187)—Section 20—Valuation of Management Sharesin a Company—Tangible assets—Balance sheet method.
Where the question at issue was the valuation for the purpose of EstateDuty of a large block of Management Shares held by a person in a rubberCompany at the time of his death in September, 1940—
Held, that under section 20 of the Estate Duty Ordinance of 1938, the valueof any property should be estimated to be the price which, in the opinion of anassessor, such property would fetch if sold in the open market at the time ofthe death of the deceased. The value of the shares at the date of the deceased’sdeath was a question of fact which must be decided on the evidence which wasled. On the evidence led in this case the balance sheet method of valuationshould be accepted. In view of the controlling interest which the purchaserof the shares would obtain, the value of the shares should be assessed byreference to the value of the Company’s business as a going concern. Butif it was proved in a particular case that at the relevant date the businesscould not have been sold for more than the value of its tangible assets thenthat must be taken to be its value as a going concern. The deceased’s holdingcould not have been sold in September, 1940, at a price based on any higherfigure than the value of the tangible assets of the Company.
.^LPPEAli from a judgment of the Supreme Court reported in (1950)52 N. L. JR. 1.
Phineas Quass, Q.G., with J. H. Stamp and Biden Ashbrooke, for theappellant.
Frederick Grant, Q.G., with E. Irvine Goulding and Raymond Walton,for the respondents.
Cur. adv. vult.
October 6, 1952. [Delivered by Lord Reid]—
This is an appeal from a decree of the Supreme Court of Ceylon dated25th May, 1950, which allowed an appeal from an Order of the DistrictCourt of Colombo dated 31st August, 1949. The question at issue is thevaluation for the purpose of Estate Duty of 5,000 Management Shadesof C. W. Mackie & Company limited (hereinafter called the Company)which belonged to the late Mr, C. W. Mackie (hereinafter called the9LTV.
2i. N. B 22218-1,891 <12/52)
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LORD REID—Attorney-General v. Mackie
deceased) at his death on 7th September, 1940. The respondents arehis executors. The District Court of Colombo held that the value ofthese shares at that date was Rs. 250 per share. On appeal the SupremeCourt reduced that valuation to Rs. 40 ‘6188 per share. The appellantmaintains that the valuation of the District Court should be restored.
The deceased had carried on business in Ceylon as a rubber merchantsince about 1908 and his business was acquired by the Company as agoing concern on its incorporation in Ceylon in 1922. The capital ofthe Company, which remained unchanged throughout, was Rs. 1,000,000divided into 19,800 8 per cent. Cumulative Preference Shares of Rs. 50each and 5,000 Management Shares of Rs. 2 each. The deceasedwas life Director of the Company with extensive powers and from thebeginning he had held a large part of the share capital and taken theleading part in the management of the Company. He left Ceylon about1930 but continued thereafter to exercise some supervision. At his deathhe held 9,201 Preference Shares and all the Management Shares.
The practice of the Company was to buy rubber and grade it forresale. Its graded rubber, known as Mackie standard, had • a highreputation in important foreign markets and it appears that some 20 percent, or 30 per cent, of the whole of the rubber exported from Ceylonwas handled by the Company. The policy of the Company was tohold large stocks, and, as the price of rubber has for long been subjectto large and rapid fluctuations, the Company’s profits varied to an extremedegree. During its first five years very large profits were made amountingin all to over Rs. 3,000,000. During the next six years to 1932 largelosses were incurred amounting to over Rs. 1,800,000. During the nextsix years there were profits in four years and losses in two, the figuresvarying from a profit of Rs. 443,161 in 1933 to a loss of Rs. 281,907 in1935. Finally in 1939 and 1940 there were profits of Rs. 787,641 andRs. 501,878. No dividend had been paid on the Preference Shares since1930 and no dividend had been paid on the Management Shares since1926, the Company having found it necessary to borrow large sums fromtime to time on overdraft. The leading witness for the appellant admittedthat he did not know of a more speculative business in Ceylon.
. The Statute in force at the time of the deceased’s death was the EstateDuty Ordinance of 1938 : by section 20 of that Ordinance it was providedthat the value of any property should be estimated to be the pricewhich, in the opinion of an assessor, such property would fetch if soldin the open market at the time of the death of the deceased. Section 20contains a proviso to the effect that if the value of the property has beendepreciated by the death of the deceased such depreciation is to be takeninto account. The respondents originally sought to rely on this provisobut they do not now do so. It is now common ground that the sharesmust be valued at the price which they would have fetched if sold in theopen market on 7th September, 1940. The Articles of Association of. the Company contained restrictions on transfer of a type often found inprivate companies, but it is admitted that the decision in Commissionersof Inland Revenue v. Crossman1 applies to tnis case. So the
» {1937) A. C. 26,
LORD REID—Attorney-General v. Maokie
196
shares must be valued on the footing that the highest bidder in theopen market would have been registered as a shareholder but thathe would then have become subject to the restrictions in the Articles.In addition to restrictions of a usual character the Articles also containeda provision to the effect that holders of not less than nine-tenths of theshare capital could at any time call for a transfer of any other shares ata fair value to be fixed by the auditors of the Company. It was admittedfor the appellant that no purchaser would have paid anything like Rs. 250per share for the Management Shares in face of the Company’s Articlesunless he could buy at the same time a large block of the PreferenceShares and so have a majority of votes. But the appellant contends thatthe respondents must be supposed to have taken the course which wouldget the largest price for the combined holding of Management andPreference Shares and to have offered for sale together with the Manage-ment Shares the whole or at least the greater part of the PreferenceShares owned by the deceased. In their Lordships’ judgment thiscontention is correct. But it means that the valuation for which theappellant contends depends on the possibility of having been able to findin September, 1940, a single purchaser prepared to venture a very largesum of money. The agreed valuation of the deceased’s Preference Sharesis Rs. 806,017 and the valuation of the Management Shares for which theappellant now contends is Rs. 1,250,000. So a purchaser who wished toacquire a sufficiently large holding to be in a dominant position wouldhave had, on this valuation, to pay some two million rupees in all.
Evidence was given in the District Court as to the value of the shares.The leading witness for the respondents was Mr. Lander, a CharteredAccountant, who had experience of rubber companies. The gist of hisevidence was that a buyer would first ask what was the last dividendand when was it paid : but as no dividend had been paid for many yearsit was impossible to value the shares on a yield basis. He then pointedout that in 1940 the future was unpredictable and it was difficult to findanyone who was willing to invest large sums of money on speculation.He valued the shares on a balance sheet basis because in his view no onewould have paid more than that at the time. When asked in cross-examination whether a buyer would not have taken into account theprobability that the high profits of 1940 would last for some time, besaid that the buyer “ would have needed to know precisely what was goingto happen in the world which was devastated by war, the length of whichcould not be guessed by the man in the street. In other words if apurchaser could have guessed that there was going to be a long war, noGovernment interference, no form of increased.taxation, that he was notgoing to have competition from others he might take that view. Hewould be a brave man. It would possibly be a gamble ”. In his viewno good will attached to the business. Similar evidence was given byother witnesses for the respondents.
There was really no contradictory evidence for the appellant on whattheir Lordships regard as some of the most important points. Neitherof the appellant’s witnesses professed to have been familiar with themarket for shares of rubber companies or to have any direct knowledgeabout the possibility in 1940 of finding a purchaser for this large block of
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LORD REID—Attorney-G&mtoI v. Machie
shares although they admitted that no one would pay the price on theirvaluation without acquiring such an interest. The respondents’ case wasthat if the shares had been offered at prices corresponding to the value ofthe tangible assets held by the Company they might have been sold: a pur-chaser would not then have been gambling on a continuance of the highrate of profit at the beginning of the war. But a purchaser could nothave been found to venture two million rupees on a speculation. Theappellant’s witnesses hardly dealt with these matters. Their approachwas more theoretical. They assumed that it was possible to estimate thefuture average maintainable profit by means of an arithmetical calculationfrom past profits and losses, and that a purchaser could have been foundwho would have paid a price for the shares determined by a furtherarithmetical calculation from that average maintainable profit. Onewitness said that “ a buyer would concentrate on the last five years profitsbecause that is most likely to represent what would happen in the futureand the other witness went so far as to say that a prudent buyer wouldtake it for granted that conditions would remain the same.
It may be that these assumptions would be justified in many cases.Where the past history of a business shows consistent results or a steadytrend and where there has been no disruption of general business condi-tions it may well be possible to reach a fair valuation by a theoreticalcalculation. But in this case neither condition was satisfied. The profitsand losses of the Company had fluctuated so violently in the past that,as the second witness for the appellant admitted, it is impossible to chooseany five consecutive years in the Company’s history the result of whichwould be reflected in the next years profits. It is therefore in theirLordships’ judgment not possible in this case to derive by an arithmeticalcalculation from past results anything which could properly have beenregarded in 1940 as an average maintainable profit, and in addition therewere extremely uncertain conditions of 1940. The appellant’s wit-nesses made no allowance for these facts and were not able to giveinformed evidence on the question whether a purchaser could have beenfound in 1940 willing to lay out the large sum required on their valuation.
The learned judge of the District Court founded on two lists of rubbercompanies’ shares quoted in 1939 and 1940 as showing that in 1940 theinvesting public were not pessimistic. Their Lordships are unable to drawany conclusion from these lists. No evidence was given about them bythe appellant’s witnesses. A few questions about them were put to oneof the respondent’s witnesses Mr. Cuming in cross-examination. Hesaid : “ There was business in buying rubber shares in 1940 but notconsiderable business. There was a feeling that Government was goingto take over the buying of rubber and as a result there was a certainamount of business ”. As the Company’s business depended on its abilityto buy rubber, any such feeling could not have helped the sale of itsshares. It may be that these share lists show that there were more buyersin the market in 1940 than in 1939, but they do not show whether thosebuyers were prepared to buy large blocks of shares or whether the pricesoffered exceeded the break up value of the shares. Their Lordships cannotagree with the District Judge that these lists diminish the value of the
Ratnayake v. Mary Nona
197
evidence of the respondents’ witnesses. And there are other matterswhere the learned judge appears to have gone beyond the evidence. Forexample he said that it was quite evident to the other directors at thedeath of the deceased that large profits were to be made in the nearfuture, and that there is always a goodwill attached to a company of thischaracter.
In their Lordships’ judgment the value of these shares at the date ofthe deceased’s death is a question of fact which must be decided on theevidence which was led. That evidence has been very fully consideredby the learned j'udges of the Supreme Court and their Lordships cannotfind that these learned j’udges have in any way misdirected themselves.It was argued for the appellant that the Supreme Court erred in law inaccepting the balance sheet method of valuation because that can onlygive break up value and in this case it is necessary to find the value of thebusiness as a going concern. It is true that a purchaser of the sharesheld by the deceased could have obtained a controlling interest in theCompany as a going concern and in their Lordships’ judgment it is rightto value these shares by reference to the value of the Company’s businessas a going concern. No doubt the value of an established business as agoing concern generally exceeds and often greatly exceeds the total value,of its tangible assets. But that cannot be assumed to be universally true.If it is proved in a particular case that at the relevant date the businesscould not have been sold for more than the value of its tangible assetsthen that must be taken to be its value as a going concern. In theirLordships’ judgment it has been proved in this case that the deceased’sholding could not have been sold in September, 1940, at a price based onany higher figure than the value of the tangible assets of the Company.
Their Lordships will therefore humbly advise Her Majesty that thisappeal should be dismissed. The appellant must pay the costs of theappeal.
Appeal dismissed.