Hong Kong & Shanghai Bank Hong Kong (Trustee) Ltd v. Commissioner of Estate Duty
Read the full judgment text of CACV 7/1975 on BabelCite. This Court of Appeal judgment.
1. Included in the estate of the late Harry Charrington were some twenty shares in a private limited company which manufactured metal window frames and fittings. The Commissioner of Estate Duty, for the purposes of that Duty, assessed the value of this minority holding at $15,804.40 per share, an assessment which was reduced by Leonard, J. to $11,463 per share upon the appellants' appeal against the Commissioner's valuation. The appellants now appeal further to this Court against Leonard, J.'s r
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CACV000007/1975 IN THE SUPREME COURT OF HONG KONG (APPELLATE JURISDICTION) CIVIL APPEAL NO.7 OF 1975 (On appeal from Estate Duty Appeal No. 2/74) -----------------
----------------- Coram: Briggs, C.J., Huggins & Pickering, JJ. Date of Judgment: 26th November, 1975. ----------------- JUDGMENT ----------------- Pickering J. 1. Included in the estate of the late Harry Charrington were some twenty shares in a private limited company which manufactured metal window frames and fittings. The Commissioner of Estate Duty, for the purposes of that Duty, assessed the value of this minority holding at $15,804.40 per share, an assessment which was reduced by Leonard, J. to $11,463 per share upon the appellants' appeal against the Commissioner's valuation. The appellants now appeal further to this Court against Leonard, J.'s reduced assessment and to succeed, they must convince us that his assessment was wrong. This they have failed to do. 2. The argument before us turned upon the method of valuation and notably upon whether the assets backing method used by the Commissioner and approved by the learned judge in the court below though subject to a greater element of discount than that employed by the Commissioner, was the correct method. The appellants abandoned, before us, the stance which they had adopted in the court below and conceded that a method of valuation based upon the dividend yield of the shares would have been inappropriate. However they contended for a valuation based upon the earnings yield of the shares discounted by 50% to allow for the company's severe cash shortage. 3. The argument, therefore, was as to methods of approach, essentially an accountancy decision and, whilst ideally, whatever method of approach is employed, the resulting valuation should arrive at substantially the same figure, that ideal is unlikely of attainment for the reason that, as became apparent to us in argument, each method involves an element of educated guesswork. Thus the abandoned dividend yield approach would have resulted in a value of only $250 per share; what we may term the discounted earnings yield approach, $3,450 per share; whereas the Commissioner's application of the assets backing method led him to the figure of $15,804.40 and the learned judge's application of that method, to $11,463. 4. Had the deceased's shareholding been a majority holding no choice of method would have arisen for s.44 of the Estate Duty Ordinance (Cap. 111) provides that in such a case the valuation shall be made on what we have termed the assets backing basis. That is not to say, however, that that basis may not be appropriate in any circumstances in the case of a minority holding. 5. Various cases were cited to us in which different methods of valuation had been adopted. Thus Mr. Chang, for the appellants, relied heavily upon the Irish case of Smyth v. Revenue Commissioners(1) in which the court held that the profit-earning capacity of the company was the prime factor to be taken into account but with the capital value of the shares as a well-marked background. Mr. Somerville, for the Crown, urged upon us the approach adopted in the Scottish case of McConnel's Trustees v. Inland Revenue Commissioner(2), that is, the taking into account of the capital value of the company's assets; he sought further to fit the present case within the framework of Rowlatt, J.'s decision in re William Francis Courthorpe (deceased)(3) where the assets backing approach had been approved but diluted by the learned judge by a factor of approximately one-third because of the fact that the interest in question was a minority interest and a person seeking to profit from his acquisition by influencing a winding-up or a take-over, would have the difficulty of persuading other shareholders to his viewpoint. The discount of approximately one-third there adopted, counsel said, showed the discount of 40% adopted by the learned judge in the present case to have been substantially accurate. We agree. 6. These and other cases, notably the Australian case of Abrahams v. The Federal Commissioner of Taxation(4) were cited to us but the net result of them all has not been to satisfy us that the learned judge was wrong in the assessment which he made. Rather do we think that the effect of the cases is, as Mr. Chang was at one point inclined to suggest, that the approach must be an empirical one. Few companies are precisely alike and in the present case, whilst the company was unquestionably a trading company, its assets in the form of real estate were disproportionate to the relatively meagre results of its trading and it would have been unrealistic, despite the wish of the shareholders at the time of Harry Charrington's death to continue as a trading company with tight control of the shares, to ignore the substantial assets of the company. In so saying we have, like the learned judge, kept our eyes tightly closed to events subsequent to the death for it is at that date that the market value of the shares has to be assessed. In particular, we have ignored the fact that, nine months after the death, some 51% of the shares were sold to or exchanged with another company on terms which valued each share at more than $44,000. 7. The appeal must therefore fail. 8. However, what appears to trouble the appellants just as much as the outcome of this appeal upon its actual facts in relation to this particular company, is a comment made by the learned judge in the course of his judgment which may or may not have been intended as a general observation. The comment was in these terms:
9. The "particular atmosphere of Hong Kong" to which the learned judge refers is a reference to his earlier statement that in Hong Kong the ordinary investor is attracted more readily by the possibility of capital gain than by the probability of secure annual returns. The whole observation may or may not have been intended to have reference merely to this particular case but the reference to "common practice" suggests that the observation was intended to be of general application. 10. Let us say at once that the remark was wholly unnecessary for the purposes of the judgment and that, as such, it can only be considered as an obiter dictum. Its very existence, however, appears to have alarmed the appellants that the observation may be used, by the Commissioner in the future, as legitimising the assets backing approach to the valuation of any shares passing upon death in private limited trading companies. For this reason we think it right to record our view that the observation was mistaken. The assets backing approach is not the only logically justifiable approach in these cases. It was an appropriate approach in the present case but, as we have said, the circumstances of different companies vary appreciably and, in the end, the choice of method adopted must be ascertained by something of an empirical approach dictated by those circumstances. Representation: Denis Chang (J.S.M.) for Appellant. Somerville, C.C., for Respondent. (1) (1931) I.R. 643 (2) (1927) S.L.T. 14 (3) (1928) 7 A.T.C. 538. (4) (1945) 70 C.L.R. 23. IN THE SUPREME COURT OF HONG KONG (APPELLATE JURISDICTION) CIVIL APPEAL NO.7 OF 1975 (On appeal from Estate Duty Appeal No. 2/74) -----------------
----------------- Coram: Briggs, C.J., Huggins & Pickering, JJ. Date of Judgment: 26th November 1975. ----------------- JUDGMENT ----------------- Huggins, J.: 11. The question we have to decide is whether the judge's valuation of twenty shares in Morlite Steel Windows Ltd. was wrong. Most of the primary facts are not in dispute. The twenty shares represented a 10% minority interest in a private trading company the transfer of whose shares was restricted. The company was formed in 1947 and had an issued capital of $100,000. The assets of the company at the material time were, we were told, in the region of $3,600,000, but during the last three years for which accounts were available the company had suffered losses in 1967/8 and 1968/9 and made a profit of only $99,661 in 1969/70. 12. Most of the argument has revolved around the method of assessment and the Appellant has, in particular, seized upon a passage in the judgment of the learned judge where he said:
For my part I doubt whether the judge was intending to lay down a general principle: it was not necessary for him to do so. What the court is seeking to do in these cases is to ascertain the price which a willing, but not anxious, purchaser would have been prepared to pay to a willing, but not anxious, seller in the open market. It must be assumed that the purchaser is entitled to be registered as holder of the shares but subject to the restrictions imposed by the Articles of Association: Lynall v. Inland Revenue Commissioners 1972 A.C. 680. The valuation can never be exact and the best one can hope to do is to arrive at a figure which is neither unreasonably high nor unreasonably low. In theory it should be possible to arrive at the same figure by each of the various methods, but there are inevitably factors which cannot be precisely weighed and in each case the most satisfactory method is likely to be that in which the factors which would have the greatest weight with the hypothetical purchaser are those which form the basis of the valuation. Thus in Smyth v. Revenue Commissioners 1931 I.R. 643, upon which the Appellant particularly relies, it was said that in the case of a private trading company with a restriction upon the transfer of its shares the principal factor which influenced a purchaser was the return upon the money invested by him in the purchase of the shares. In truth what Hanna, J. was saying was that that was what usually influenced a purchaser in such cases and that that was what he found would have influenced the purchaser in the case before him. That being so he rightly adopted the "earnings yield" method of assessment, but that does not mean that an assessment made in some other way would necessarily have been wrong. For my part I do not accept that in the case of a private trading company with a restriction upon the transfer of its shares the principal factor which influences a purchaser must always be the return upon the money he proposes to invest and I would not disturb the finding of Leonard, J. in the present case that a purchaser would have been influenced more by the possibility of capital gain. 13. That being so, counsel for the Appellant properly does not seek to support Mr. MacWhinnie's valuation of $250 a share, which was based exclusively on a "dividend" basis of assessment. In effect the judge preferred not to adopt the "earnings yield" basis for the same reason: he pointed out that, using this basis, the parties had arrived at figures so far apart as $6,900 (or even half that figure) and $10,133. In other words, the adjustments which had to be made to the basis figures were both large and difficult of accurate calculation. Nevertheless it may be that the Commissioner's valuation on this basis was not so unreasonable that we would have been forced to reject it had the judge come to the same conclusion. As it is, the judge thought it better to use the "assets" basis of assessment because of his finding that the possibility of capital gain was the most weighty factor, and I agree that in the circumstances of this case that was the wisest course. Certainly his figure of $11,463 a share was not unreasonable. 14. I also would dismiss the appeal. 26th November 1975. Representation: |