Re Mercantile Credits Limited v the Commissioner of Taxation of the Commonwealth of Australia [1985] FCA 359 (30 September 1985)

FEDERAL COURT OF AUSTRALIA

Re: MERCANTILE CREDITS LIMITED
And: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
Nos. G 60 of 1985 and G 61 of 1985
Income Tax

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Morling J.

CATCHWORDS

Income Tax - administrative law - judicial review - withholding tax - decisions of Commissioner of Taxation to refuse to issue certificates under s.128H of Income Tax Assessment Act - extension of time for repayment of principal - whether loan raised in pursuance of a contractual obligation entered into on or after 20 May 1983 - meaning of "loan raised"

Income Tax Assessment Act 1936, ss.128G, 128H

HEARING

SYDNEY
30:9:1985

ORDER

No. G 60 of 1985

1. Declare that the interest payable on the loan to the applicant by Mellon Bank NA of Hong Kong since 16 March 1984 is interest to which s.128G of the Income Tax Assessment Act applies.

2. Respondent is to pay the applicant's costs, including the costs of the hearing of the objection to competency and of the proceedings on 17 May 1985.

3. Liberty to apply for further or other relief.

No. G61 of 1985

1. Declare that the interest payable on the loan to the applicant by Samuel Montagu & Co. Limited since 7 March 1984 is interest to which s.128G of the Income Tax Assessment Act applies.

2. Respondent is to pay the applicant's costs, including the costs of the hearing of the objection to competency and of the proceedings on 17 May 1985.

3. Liberty to apply for further or other relief.

NOTE: Settlement and entry of orders is dealt
with in Order 36 of the Federal Court Rules.

DECISION

These are two applications for review of decisions by the Commissioner of Taxation to refuse to issue certificates of exemption from withholding tax in respect of interest payable by Mercantile Credits Limited on loans raised from two non-residents of Australia, namely, Samuel Montagu & Co. Limited of London ("Samuel Montagu") and the Hong Kong Branch of Mellon Bank N.A. ("Mellon Bank"). Mercantile Credits requested the Commissioner to issue the certificates under s.128H of the Income Tax Assessment Act 1936. The Commissioner's refusal to issue the certificates was based upon his view that the loans were loans raised in pursuance of contractual obligations entered into on or after 20 May 1983.

2. Section 128G exempts from withholding tax interest payable on loans to which the section applies and in respect of which the Commissioner has issued a certificate under s.128H. However, s. 128G(3) provides:

"(3) This section does not apply to interest
paid on or after the date of commencement of this
sub-section in respect of a loan raised in pursuance
of a contractual obligation entered into on or after
20 May 1983."

3. It appears to be conceded by the Commissioner that if it is correct to say that the loans were raised before 20 May 1983 he was in error in refusing to issue the certificates. This makes it unnecessary to refer to the terms of s. 128H of the Act which contains a prescription of the numerous conditions which must be fulfilled before interest payable on a loan by a non-resident may properly be made the subject of a certificate issued under that section.

4. The facts which give rise to the present applications can be briefly stated. In the course of carrying on its business as a finance company Mercantile Credits agreed to borrow moneys from Samuel Montagu and Mellon Bank. On 16 June 1982 Samuel Montagu wrote to Mercantile Credits confirming an offer of what it described as Advance Facility 2440. The maximum principal amount offered under the Facility was U.S.$5 million. The offer was accepted on 2 August 1982. It was part of the agreement that the maximum principal amount available under the Facility might be drawn down in one amount on or before 30 September 1982. Clause 12 of the agreement dealt with possible default by Mercantile Credits. Clause 9 was in the following terms:

"9. Repayment

Subject to Clause 12 hereof the Advance
shall be repaid in one amount either
18 months after drawdown or on 31st January
1984, whichever date falls earlier.
However we hereby agree to consider any
request received from MCL prior to
31st January 1984 to renew this facility.
Any renewal would be subject to terms and
conditions to be discussed and agreed at
that time."

The reference to "MCL" is, of course, a reference to Mercantile Credits.

5. The loan of U.S. $5 million was drawn down by Mercantile Credits on 7 September 1982 and on 13 October 1982 the Commissioner issued a certificate to Mercantile Credits that the loan complied with s. 128H(2) of the Act.

6. On 28 February 1984 Samuel Montagu wrote to Mercantile Credits in the following terms:

"We refer to our Facility No: 2440 dated
16th June 1982 as amended by our letter of 2nd August
1982 whereby we offered Mercantile Credits Limited a
US$5m. Advance Facility and write to confirm that
following our recent discussions we have agreed to
extend this Facility for a period of three years.

Our Facility Letter should now be amended as
follows:

Clause 9: Repayment

Delete in its entirety and substitute therefor

'Subject to Clause 12 hereof all amounts outstanding
under this Facility shall be repaid in one amount on
6th March 1987'.

All other terms and conditions of the
Facility Letter remain unaltered.

Please indicate your acceptance of this amendment
by signing and returning to us the attached duplicate
copy of this letter."

7. On 7 March 1984 Mercantile Credits accepted the amendments to Advance Facility 2440 as set out in Samuel Montagu's letter of 28 February 1984.

8. No payments have been made to Samuel Montagu by Mercantile Credits by way of repayment of principal of the loan. In particular, no moneys passed between Mercantile Credits and Samuel Montagu on or about 7 March 1984 when Mercantile Credits accepted the amendments to the Advance Facility set out in Samuel Montagu's letter of 28 February 1984. However interest has been, and continues to be, paid on the loan.

9. On 15 March 1982 Mercantile Credits also agreed to borrow U.S.$5 million from Mellon Bank. The entire amount of the loan was drawn down in one amount on 16 March 1982. The time for repayment of the loan was expressed in the following terms:

"1.5 'Term of the Facility' means the period
commencing on 15th March 1982 and ending -

1.5.1 on a date on which the Facility hereby
created shall have been terminated in
accordance with the terms hereof by
either party, or

1.5.2 if not so terminated on 15th March
1984, or

1.5.3 if not so terminated and the parties so
agree before the expiration of the said
period of two (2) years on such later
date as the parties shall agree in
writing."

10. On 2 March 1984 Mellon Bank wrote to Mercantile Credits as follows:

"In accordance with paragraph 1.5.3 of the agreement
made the Fifteenth day of March One thousand nine
hundred and eighty-two between Mercantile Credits
Limited ("the Company") and Mellon Bank N.A. ("the
Bank"), the Bank hereby proposes that paragraph 1.5
be amended as follows:

'Term of the Facility' means the period
commencing on 15th March, 1982 and ending -

1.5.1 on a date on which the Facility hereby
created shall have been terminated in accord
ance with the terms hereof by either party, or

1.5.2 if not so terminated on 15th March, 1987,
or

1.5.3 if not so terminated and the parties so
agree before the expiration of the said period
of five (5) years or such later date as the
parties shall agree in writing."

11. On 9 March Mercantile Credits accepted the alteration proposed by Mellon Bank to para. 1.5 of the original agreement.

12. No payments were made to Mellon Bank by Mercantile Credits by way of repayment of principal of the loan until 15 March 1985 when the loan was repaid in full. In particular no moneys passed between Mercantile Credits and Mellon Bank on or about 9 March 1984 as a result of the exchange of letters to which I have referred. Interest was, of course, paid on the loan.

13. I turn now to consider whether the Commissioner is correct in his view that the loans in respect of which the interest is payable were loans raised in pursuance of contractual obligations entered into on or after 20 May 1983. Counsel for the Commissioner submitted that the true analysis of the agreements made in March 1984 was that new contracts of loan then came into existence. In his submission the arrangements made in March were inconsistent with the original loan contracts and constituted fresh contracts. He argued that since fundamental terms of the original loan agreements were changed in a manner not agreed upon in the original agreements, the result of the changes was to create fresh agreements. He contended that the loan agreements under which the loan moneys were first advanced came to an end in March 1984, and that the lenders then agreed to lend the same amounts on the same terms and conditions as under the original agreements for further terms of three years. This, so it was submitted, amounted to the making of new loans, as distinct from the variation of the terms of the original loans. He relied on Roberts v I.A.C. (Finance) Pty. Limited (1967) VR 231 at 238 where Adam J. said that an agreement for the extension of a loan may involve, in effect, the discharge of a pre-existing loan and the making of a fresh loan in respect of moneys then outstanding on different terms.

14. It was submitted that the decision of the Court of Appeal in B.S. Lyle v Chappell (1932) 1 KB 691 was directly in point. In that case Scrutton L.J. said at p. 700:

"In my opinion, when the time for payment of the
original loan has expired without complete
repayment and the time for repayment is extended
or altered, there is a fresh loan, ..."

15. It was then submitted that since the March 1984 transactions gave rise to fresh loans, those loans should be regarded as having been raised at that time. Raising a loan was said to be no different from obtaining a loan.

16. I see the force of this reasoning, but I do not think that it pays sufficient attention to the ordinary meaning of "raise" when used in respect of a loan. The Income Tax Assessment Act does not contain any definition of the term "loan raised" as found in s.128G(3). Insofar as the Act refers to advances of moneys by way of loan, it provides that each receipt of moneys by a borrower under a contract under which moneys may be advanced by way of loan "shall be deemed to be the raising of a loan" - s. 128A(5)(b). This provision is, of course, inapplicable to s. 128G(3) but it does treat the receipt of moneys by a borrower as being the raising of a loan. In the analogous situation of the raising of capital, there is much authority to the effect that capital is not raised by a company until it actually receives the moneys represented by the new capital - see Re Standard Charges Schedule (1925) 94 LJKB 364 per Pollock MR at p 367, Attorney-General v London and India Dock Company (1906) 95 LT 536 at 539 and Attorney-General v South Wales Electrical Power Distribution Company (1920) 1 KB 552. In the last-mentioned case a company being unable to pay the interest on its debenture stock issued "deferred warrants" in payment of the interest. The warrants themselves bore interest and were payable, both as to principal and interest, after a specified date out of the first available funds of the company. It was held that the issue of the deferred warrants was not an issue of loan capital. At p. 555 Lord Sterndale M.R., when dealing with the question whether the deferred warrants came within the expression "loan capital" which was defined as meaning "any debenture stock, county stock, corporation stock, municipal stock, or funded debt, by whatever name known, or any capital raised ..." said:

"Passing by for the moment the question of funded
debt, it must be debenture stock, county stock,
corporation stock, or municipal stock. It is
obvious on the face of it that it is none of those,
and if it is not one of those, then it must be
capital raised which is borrowed, or has the
character of borrowed money. This transaction
seems to me to be wanting in several particulars in
order to bring it within that definition. In the
first place I think it is not capital at all; it
is not capital raised at all. It is a mere
provision for the payment of overdue interest by
postponing the payment in consideration of paying
interest upon the overdue amount. That is not
raising capital. But it must also be capital which
is borrowed or has the character of borrowed money.
Again there is no money borrowed here nor has this
transaction the character of borrowed money. You
do not borrow money by postponing the payment of
your debt and agreeing to pay interest upon it,
..."

17. In my opinion it is not a usual use of the language to say that a loan is raised if all that is done is to postpone the time for payment of loan moneys which have already been received. In the present cases, none of the principal moneys due under the original loans had been repaid to the lenders at the time the fresh arrangements were made in March 1984. No moneys were advanced, or even credited to, Mercantile Credits by Samuel Montagu or Mellon Bank at that time. In these circumstances it would be an artificial use of language to say that new loans were raised by Mercantile Credits in March 1984. All that happened was that the parties to the original loans agreed to extend the dates upon which the original loans were to become repayable. This being so, I think the Commissioner was in error in refusing to issue the certificates.

18. I do not think that the decision in Lyle's Case (supra) is of any real assistance in the present applications. In that case, the transaction was carried out by the money lenders handing to the borrower a cheque for L/200.0.0. which the borrower endorsed and handed back to the moneylenders. The time for payment of the original loan had expired without complete repayment at the time the new transaction was entered into. That was not the situation in the case of the loans presently under consideration. The transaction in Lyle's Case was, in substance, one in which there was a fresh loan made to the borrower, rather than the granting of an extension of time for repayment of the original loan. The case was not concerned with the question whether the granting of an extension of time to repay an existing loan is equivalent to the raising of a new loan. The essential nature of the transaction in Lyle's Case is made clear by Greer L.J. at pp.704-5 of his judgment. His Lordship there pointed out that the arrangement to which the parties had come could not have been carried out without in some way discharging the original liability of the borrower. He said that a mere renewal or giving of further time to meet the original liability would not have met the situation. At p.705 his Lordship said:

"In my judgment the oral agreement made, as
found by the learned judge, that the defendant
should be relieved from his liability, could not be
carried out by a renewal of the old debt with a
grant of further time to pay it, plus additional
interest. It could only be carried out by some
method whereby the old debt would be extinguished
and a new one created."

19. In the present cases the agreement between the parties were carried out by the granting of further time to pay the moneys which had already been advanced. I do not think that Lyle's Case assists the Commissioner's argument.

20. Although it is not directly in point, the decision of the Privy Council in Burnes v Trade Credits Limited (1981) 1 NSWLR 93 lends support to the view which I have expressed. In that case a guarantee agreement provided that it extended to "any further advance" made by the lender to the borrower unless the guarantor gave the lender written notice that no further advances would be covered. The lender gave the borrower an extension of time to pay. It was held (overruling the N.S.W. Court of Appeal) that the extension of time to pay did not fall within the expression "any further advance" because "advance" normally means the furnishing of money for some specified purpose. In the Court of Appeal, Mahoney JA had said (1979) 1 NSWLR 630 at 638:

"In my opinion 'further advance' as used in
cl.14 should be held to include the subsequent
transaction. I do not think that 'advance'
according to its ordinary meaning, is limited to
transctions under which money or goods are, as part
of the particular transaction, handed over or
delivered to the debtor. The term is, in my
opinion, wide enough to include a transaction under
which, moneys being already available to a debtor,
he becomes entitled to retain it for a period beyond
that for which otherwise it would have been
available to him. According to ordinary parlance,
it would be proper to describe that money as having
been 'advanced' for a further term."

21. The Privy Council disagreed with this reasoning. Speaking for the Board, Lord Keith said ((1981) 1 NSWLR at 95):

"In their Lordships' opinion that view is
erroneous and the argument for the respondent is
unsound. While the meaning of the word 'advance'
may be shaded somewhat by the context, it normally
means the furnishing of money for some specified
purpose. The furnishing need not necessarily be by
way of loan, but clearly that is what was in
contemplation here. When cl 14 refers to 'a further
advance' it appears to their Lordships to be
referring to the furnishing of an additional
principal sum. Where the term for repayment of the
original principal sum is extended, it is true to
say that that sum remains advanced for a further
term, but it is a distortion of language to say that
a further advance has been made."

22. Similarly, in the present cases, it would be a distortion of language to say that in March 1984 Mercantile Credits raised loans from Samuel Montagu and Mellon Bank.

23. For these reasons I am of the opinion that the Commissioner erred in arriving at his decisions to refuse to issue certificates under s.128H in respect of the loans made to Mercantile Credits.

24. In matter No. G 60 of 1985 I make a declaration that the interest payable on the loan to the applicant by Mellon Bank N.A. of Hong Kong since 16 March 1984 is interest to which s.128G of the Income Tax Assessment Act applies. In matter No. G 61 of 1985 I make a declaration that the interest payable on the loan to the applicant by Samuel Montagu & Co. Limited since 7 March 1984 is interest to which s. 128G of the Act applies. The respondent must pay the costs of the applic ations which should include the costs of the hearing of the objections to competency and of the proceedings on 17 May 1985. In each matter there will be liberty to apply for further or other relief.