Clifford Development Pte Ltd v Commissioner of Stamp Duties

Chan Sek Keong CJ (delivering the grounds of decision of the court):

[1] This is an appeal from the decision of the High Court which held that a transfer of two immovable properties (“the subject properties”) to Clifford Development Pte Ltd (“Clifford”) pursuant to an agreement dated 11 May 2006 (“the Reconstruction Agreement”) between Clifford and Overseas Union Enterprises Ltd (“OUE”) was not entitled to stamp duty relief under s 15(1)(a) of the Stamp Duties Act (Cap 312, 2006 Rev Ed) (“the Act”): see Clifford Development Pte Ltd v Commissioner of Stamp Duties [2009] 1 SLR 607 (“the GD”).

[2] The facts leading up to the present appeal are not disputed and are as follows. Clifford was incorporated in 1990 as a wholly-owned subsidiary of OUE. It was a dormant company until it entered into the Reconstruction Agreement. By way of a letter dated 4 January 2006, PricewaterhouseCoopers Services Pte Ltd (“PwC”) wrote to the Commissioner of Stamp Duties (“the Commissioner”) on behalf of OUE stating, inter alia, that the OUE group of companies would be entering into a scheme for the reconstruction of its business operations. As part of this scheme, OUE would transfer its undertaking of operating and leasing the subject properties to Clifford. The letter requested that relief from ad valorem stamp duty be granted on the instruments executed in furtherance of the transfer of “this undertaking”. The letter also stated that Clifford would:

[3] The Commissioner replied on 26 January 2006 and requested for further information. Meanwhile, on 11 March 2006, OUE and Clifford entered into a joint-venture agreement (“the JVA”) with United Overseas Land Limited (“UOL”). Clause (B) of the recitals to the JVA read as follows:

The other material terms of the JVA were as follows:

[4] On 23 March 2006, PwC replied to the Commissioner and provided the requested information. The reply also informed the Commissioner that:

[5] On 4 May 2006, the Commissioner replied to PwC informing the latter that the application for stamp duty relief under s 15(1)(a) of the Act for the proposed reconstruction exercise was not approved and that ad valorem stamp duty had to be paid on the transfer of the subject properties. A week later, on 11 May 2006, OUE and Clifford entered into the Reconstruction Agreement whereby OUE transferred the subject properties to Clifford. The consideration of $73m, being the value of the subject properties, was satisfied by an issuance of shares by Clifford to OUE and the entry in Clifford’s books of a shareholder’s loan of $7.3m.

[6] On 22 May 2006, pursuant to the JVA, Clifford allotted to UOL new shares which amounted to 33.33% of its enlarged share capital. Slightly more than a week later, on 30 May 2006, UOL exercised its call option under the JVA and raised its stake in Clifford to 50%. Sometime in October 2006, as a result of a deadlock between OUE and UOL, the deadlock mechanism provided for in the JVA was triggered and OUE purchased UOL’s entire 50% shareholding in Clifford for a consideration of $212m.

[7] Throughout the period of May 2006 to February 2007, Clifford, through either PwC or its solicitors, continued to make representations to and/or correspond with the Commissioner. However, the latter maintained his stance throughout, ie, that the Reconstruction Agreement did not come within the ambit of a “scheme for the reconstruction of any company” under s 15(1)(a) of the Act. Finally, on 10 March 2008, the Commissioner issued a formal notification pursuant to s 39A(5) of the Act and informed Clifford of the reasons for his decision. Clifford then appealed to the High Court. The High Court judge (“the Judge”) held that the Reconstruction Agreement did not qualify for stamp duty relief. Dissatisfied, Clifford appealed to this court. After hearing counsel for Clifford and for the Commissioner, we dismissed the appeal. We now give our reasons for dismissing the appeal.

[8] Section 15(1) of the Act provides relief from ad valorem stamp duty in respect of instruments giving effect to two types of transactions, as follows:

Section 15(1)(b) of the Act has since been simplified to exempt “the transfer, conveyance or assignment of any beneficial interest in any asset between such entities that are associated in such manner as may be prescribed” from stamp duty. Article 3(a) of the First Schedule to the Act provides that stamp duty is chargeable on instruments relating to the conveyance, assignment or transfer “on sale of any immovable property or any interest thereof”.

[9] This appeal turned on the meaning of the expression “reconstruction” contained in s 15(1)(a) of the Act, a provision which was derived from the stamp duty legislation of England and which has been interpreted in many judicial decisions in that jurisdiction. Although the English equivalent of s 15 of the Act (viz s 55 of the Finance Act 1927 (c 10) (UK), which has since been replaced by s 75 of the Finance Act 1986 (c 41) (UK)) had been described in B J Sims, Sergeant on Stamp Duties (Butterworths, 5th Ed, 1968) at p 252 as “one of the longest and most complicated sections in revenue legislation”, and the section “remains a formidable challenge to the advisory skills of solicitors and accountants, and a problem for judges” (see Scarman LJ in Crane Fruehauf Ltd v Inland Revenue Commissioners [1975] 1 All ER 429 (“Crane Fruehauf”) at 436), the meaning of the provision is now largely settled.

[10] In In re South African Supply and Cold Storage Company [1904] 2 Ch 268, Buckley J said at 281 that the word “reconstruction” was a commercial term bearing no definite legal meaning. He then described reconstruction in general as follows (at 286):

[11] In Brooklands Selangor Holdings Ltd v Inland Revenue Commissioners [1970] 1 WLR 429 (“Brooklands Selangor”), Pennycuick J said, at 445, in relation to s 55 of the Finance Act 1927, that its purpose and intent was “to grant relief from duty where the underlying ownership of the undertaking transferred remains substantially unaltered”. In Crane Fruehauf, Scarman LJ reiterated the judicial view that “substantiality” in the context of relief from stamp duty would require a capital-ownership retention of at least 90% by the shareholders of the previous entity, and that the introduction of new capital or a change in shareholding beyond a 10% tolerance might result in relief being denied. At 436–437, Scarman LJ said:

[12] In the court below, Clifford argued that the scheme for reconstruction proposed by and eventually completed under the Reconstruction Agreement was entitled to relief from stamp duty under s 15(1)(a) of the Act on the following grounds:

(a) Stamp duty was chargeable on instruments and not on transactions, and the liability of an instrument arose at the moment it was executed and depended on the law in force and the circumstances which existed at that time. Clifford’s case was that the Commissioner should not have taken into account the issuances of shares in Clifford to UOL under the JVA as they took place after the Reconstruction Agreement was concluded.

(b) Alternatively, relying on the definition of substantiality in the Income Tax Act (Cap 134, 2008 Rev Ed), so long as 50% or more of the shareholding was owned by the same persons before and after the transaction, then “substantially the same persons” would be involved, thereby fulfilling the requirement of a scheme for reconstruction.

[13] The Judge rejected these arguments. He held that the Reconstruction Agreement was not a scheme for reconstruction as he was of the view that:

(a) the JVA was relevant in determining whether there was in fact a scheme for reconstruction;

(b) the phrase “substantially the same persons” was not a statutory requirement but an interpretation that had been adopted by the English courts to determine the meaning of “reconstruction”, and it was “not proper to use inapplicable statutes to interpret case law” (at [92] of the GD).

[14] In the appeal before us, apart from the further submission that it would also be eligible for relief under s 15(1)(b) of the Act, Clifford relied substantially on the same grounds and reiterated all the arguments which the Judge had rejected. Although we agreed with the conclusion of the Judge that the transfer of the undertaking of operating and leasing the subject properties from OUE to Clifford was not for the purpose of or in connection with a scheme for reconstruction, we have decided to give our reasons herein to clarify a number of propositions of law stated by the Judge which went further than necessary for his decision, and which are not correct in law.

[15] Clifford’s main argument before us was that stamp duty was a tax on instruments and not a tax on transactions, and that the Commissioner should only have looked at and have had regard to the terms of the Reconstruction Agreement and should not have looked at events that occurred after that date, which in turn meant that he should have ignored the two subsequent issuances of shares in Clifford to UOL made pursuant to the terms of the JVA. On that basis, Clifford contended that there was clearly a scheme of reconstruction falling within s 15(1)(a) of the Act.

[16] We rejected this argument for two reasons. First, s 15(1)(a) provides relief from ad valorem stamp duty on an otherwise chargeable instrument only if it was “made ... for the purposes of or in connection with the transfer of [an] undertaking ... in respect of a scheme for the reconstruction of any company or companies” [emphasis added]. Section 15(1)(a) refers to “a scheme for ... reconstruction” and not merely to any “instrument of reconstruction” presented for adjudication for relief from stamp duty. If a purported scheme for reconstruction is set out in two or more instruments or documents, then there should be no reason why the Commissioner cannot look at all of them to determine what the true purpose of the scheme is. The second reason is that s 5(1) of the Act requires all the facts and circumstances affecting the liability of any instrument to duty, or the amount of the duty with which it may be chargeable, to be fully and truly set forth in the instrument. The inquiries made by the Commissioner showed that the JVA was part and parcel of the purported scheme for reconstruction, and therefore the Commissioner was entitled to look at its terms to determine the purpose of the adjudicated instrument, ie, the Reconstruction Agreement.

[17] The legal position under the corresponding law in England is also the same. In Swithland Investments Ltd v Inland Revenue Commissioners [1990] STC 448 (“Swithland”), Mr and Mrs Page and Mr Reece were shareholders in Swithland Estates Ltd (“Estates”). The original shareholding proportions were 75%, 15% and 10% respectively. A third party, Whitbread & Co plc (“Whitbread”), wished to acquire most of Estates’ assets, and all of Estates’ shareholders agreed to sell. They, however, differed on how the sale proceeds would be used. In order to accommodate the differing wishes of Estates’ shareholders, a scheme, entailing various components, was devised. In this regard, three new companies were incorporated, namely Newco, Swithland Investments Ltd (“Investments”) and Swithland Leisure Ltd (“Leisure”), and the following transactions were carried out:

(a) Newco acquired the assets desired by Whitbread from Estates and its shares were sold to Whitbread.

(b) Mr and Mrs Page exchanged their holding of 1,800 shares in Estates for 1,800 new shares in Investments.

(c) Mr Reece transferred his holding of 200 shares in Estates to Leisure in return for 2,105 new shares in Leisure and £100,000.

(d) Investments exchanged 600 of the Estates shares it held for 7,894 shares in Leisure.

(e) Leisure then transferred its entire holding of 800 Estates shares to Investments for £2m.

(f) Mr Page sold to Investments one share in Leisure for £1.

[18] The effect of the above transactions was that Whitbread would acquire the assets of Estates it desired, while Mr and Mrs Page retained Estates, through their 100% ownership in Investments, as a vehicle for their own activities, and jointly controlled Leisure with Mr Reece for the activities which they wished to continue together. As a result, Mr Reece was able to extract some cash, while at the same time, Mr and Mrs Page would end up with 78.95% of Leisure and Mr Reece with the remaining 21.05%. On these facts, Ferris J said, at 459:

[19] Clifford had also argued that the subsequent issues of shares to UOL need not be taken into consideration for the purposes of s 15(1)(a) of the Act as these subsequent events could be dealt with by the anti-avoidance provision set out in s 33A of the Act or the “subsequent disallowance” provision set out under r 7 of the Stamp Duties (Relief from Stamp Duty upon Reconstruction or Amalgamation of Companies) Rules (Cap 312, R 3, 2002 Rev Ed) (“the Reconstruction Rules”). We likewise rejected this submission on the ground that it was not necessary for the Commissioner to rely on the anti-avoidance or subsequent disallowance provisions for the purposes of this case, given that the Reconstruction Agreement was not, to begin with, a scheme for reconstruction under s 15(1)(a) of the Act (see [20] below).

[20] We now consider whether the Reconstruction Agreement, when read with the JVA, was a scheme for reconstruction falling within s 15(1)(a) of the Act. Counsel for Clifford and for the Commissioner agreed that a transfer of a company’s undertaking would amount to a scheme for reconstruction if both the transferor and transferee consisted of substantially the same persons and the same shareholding, and substantially the same business was carried on after the transfer. The parties, however, disagreed on what “substantially” meant in relation to the same shareholders or shareholding, and on the definition of “business”.

[21] In the present case, as a direct consequence of the JVA which the Reconstruction Agreement gave effect to, UOL acquired 33.33% of the enlarged share capital of Clifford. The JVA also resulted in OUE’s 100% ownership in Clifford being reduced to 66.67%. It was on that basis that the Commissioner notified PwC on 4 May 2006 that the Reconstruction Agreement was not entitled to relief from ad valorem stamp duty as the reconstruction scheme did not fulfil the requirement of substantiality under a scheme for reconstruction. Clifford’s alternative argument before us was that the requirement of substantiality was fulfilled so long as OUE’s shareholding in the reconstructed entity, ie, Clifford, was maintained at not less than 50%. Clifford urged the court to depart from the decided meaning of “substantially the same persons” in the English cases, on the ground that, in Singapore, there are provisions in the Income Tax Act which have defined “substantially the same” to mean “not less than 50%”, and that, in order that the two statutes be “fiscally aligned” and to maintain consistency of meanings of the same expression in revenue legislation, the court should give a similar meaning to the requirement of “substantiality” in s 15(1)(a) of the Act. Counsel also argued that, in the context of the current pro-business laws, the courts should construe the requirement of substantiality in s 15(1)(a) more favourably to assist companies in synergising the operations of reconstructed companies. We rejected both arguments.

[22] With regard to the first argument, it is trite law that the same word may have different meanings in different legislation as the objectives of the different legislation may not be the same. This was made clear in Ong Chay Tong & Sons (Pte) Ltd v Ong Hoo Eng [2009] 1 SLR 305 at [67]. In that case, this court declined to apply the definition of “interest” in the Residential Property Act (Cap 274, 1985 Rev Ed) to define the same word in s 115 of the Land Titles Act (Cap 157, 2004 Rev Ed). It also emphasised that the ambit of “interest” in s 115 of the Land Titles Act should not be obtained outside the function and object of the said section (at [68]).

[23] In the case of the Income Tax Act provisions, a company is allowed to carry forward its unabsorbed losses for set-off against its income in subsequent years subject to the condition that the shareholders of the company on the last day of the year in which the trade loss was incurred must be “substantially the same” as the shareholders of the company on the first day of the year in which such trade loss is used for set-off against the company’s income. This requirement was an anti-tax avoidance measure introduced in the 1970s to prevent loss credits from being freely transferred and abused, and Parliament had in this instance specifically set substantiality at 50%. However, the objective of s 15(1)(a) of the Act is quite different. Stamp duty is prima facie payable on all instruments which have the effect of passing property from one person to another. Section 15(1)(a) is intended to grant relief for such an instrument only if there is a scheme for the reconstruction of a company or companies. Having given due regard to the purpose and intent of that particular section, the courts have imposed a high threshold of 90% substantiality in the same shareholding after the reconstruction before the instrument can qualify for stamp duty relief.

[24] With regard to the second argument, Clifford referred to the Second Minister for Finance’s speech at the second reading of the Stamp Duties (Amendment) Bill (Bill 31 of 2000) (“the 2000 amendments”) as follows (see Singapore Parliamentary Debates, Official Report (22 November 2000) vol 72 at col 1212 (Lim Hng Kiang, Second Minister for Finance)):

[26] However, the 2000 amendments were introduced to give effect to the Government’s fiscal programme as set out in the 2000 budget speech where the Minister for Finance said (see Singapore Parliamentary Debates, Official Report (25 February 2000) vol 71 at cols 1111–1112 (Dr Richard Hu Tsu Tau, Minister for Finance)):

The emphasised portion of the above speech is a restatement of the requirement of substantiality under s 15(1)(a) of the Act. The legislative intention was to lift the two conditions for the transfer of assets between associated companies, defined by r 4 of the Stamp Duties (Relief from Stamp Duty upon Transfer of Assets between Associated Companies) Rules (Cap 312, R 2, 2002 Rev Ed) (“the Asset Transfer Rules”) as companies where one company owns 75% or more of the other company’s issued share capital. The undertaking of a company may consist of, inter alia, assets, such as movable or immovable property, but in law an undertaking is not the assets of the company and vice versa. The amended s 15 introduced, via s 15(1)(b), a new avenue of relief for transfers of assets between associated companies (as defined), but it neither abrogated the original requirements for a scheme for reconstruction, nor did it alter or redefine the established meaning of “reconstruction”. In our view, the requirement of substantiality with respect to the reconstruction of an undertaking (or part of an undertaking) to qualify for stamp duty relief was not affected by the 2000 amendments (see [24] above).

[27] We have earlier referred to Swithland ([17] supra) to show that the Commissioner was entitled to look beyond the Reconstruction Agreement itself to find out what it was really all about and whether the requirement of substantiality was fulfilled. As mentioned earlier, Mr and Mrs Page were the majority shareholders in Estates and Mr Reece was the minority shareholder. The original shareholding proportions were 75%, 15% and 10% respectively. A series of transactions followed. To put things simply, Mr and Mrs Page ended up with 78.95% in Leisure and Mr Reece 21.05%. On these facts, Ferris J took the view that the parties’ interest in Leisure, where joint participation was still evident, had “substantially changed from what they had been” (at 459):

[28] In the present case, when the JVA is read as a contractual prelude under the Reconstruction Agreement, it becomes clear that collectively it was a scheme to transfer OUE’s undertaking in the subject properties to Clifford and to enable UOL to immediately become a 33.33% owner of Clifford. This scheme fell far short of the substantiality requirement (in terms of shareholders and shareholdings) necessary for relief under s 15(1)(a) of the Act. This was further compounded by the fact that, upon the exercise of either of the call and put options pursuant to cl 18 of the JVA (which is discussed in greater detail at [29]–[36] below), UOL’s shareholding in Clifford would be raised to 50%, which eventually actualised when UOL exercised the call option on 30 May 2006, 19 days after the Reconstruction Agreement was signed.

[29] Clifford contended before us that the Judge was wrong to take into account the legal effect of the call and put options in cl 18 of the JVA, as the exercise of the options was not a “done deal” when the Reconstruction Agreement was concluded and there was no certainty at that point that either party would ultimately exercise its respective option. The court below dealt with this issue by holding, at [9] of the GD, that:

[30] We agree that the Judge was, strictly speaking, wrong in law to hold that UOL was “legally bound” to acquire the option shares, as it was theoretically possible that the options would not be exercised. That aside, the Judge was correct to take into consideration the option shares in determining whether there was a scheme for reconstruction. Let us explain why.

[31] In the case of Crane Fruehauf ([9] supra), the appellant company (“Crane”) entered into an amalgamation agreement with another company (“Boden”) to acquire the whole of the latter. The consideration for the acquisition would be satisfied by the allotment of 1,800,000 shares in Crane to Boden’s shareholders and £100,000. The agreement also provided that of the 1,800,000 shares, FIL, a company which held one-third of the share capital in Crane, would have the option to purchase 600,000 shares at £1 each. FIL eventually exercised the option. The question before the English Court of Appeal was whether the amalgamation agreement was entitled to relief under s 55 of the Finance Act 1927.

[32] Scarman LJ accepted that there had been an “amalgamation” in the general sense as the two companies, viz, Crane and Boden, had merged (at 437):

[33] However, it is also evident that Scarman LJ was describing “amalgamation” in its non-technical sense as he had earlier opined that even if a scheme of amalgamation existed, relief would nonetheless be denied if the scheme resulted in a substantial alteration of the shareholdings (ibid):

[34] On the facts of that case, Scarman LJ went on (at 438) to hold that the option must be taken into account for the purposes of s 55 of the Finance Act 1927 as all the parties knew it would be exercised:

[35] Accordingly, the test in determining whether an option should be taken into consideration for the purposes of s 15(1)(a) of the Act is the intention of the parties in relation to the option in the scheme for reconstruction. Such intention may be objectively inferred from the terms of the scheme in the context of the actions of the parties. In Crane Fruehauf, for instance, the option was exercised one day after the amalgamation was effected, and Scarman LJ viewed it as an indication that the parties knew that it would be exercised (see [34] above). Similarly, in Central and District Properties Ltd v Inland Revenue Commissioners [1966] 1 WLR 1015, the House of Lords took into consideration, for the purposes of s 55 of the Finance Act 1927, a transferable option given to the preference shareholders of the acquired company to subscribe for ordinary shares in the acquiring company at below the market price. Their Lordships computed the difference in the value of the market price of the ordinary shares and the exercise price of the option and found that the value implicit in the option formed part of the consideration for the acquisition. The result was that s 55(1)(c) of the Finance Act 1927, viz, the requirement that at least 90% of the consideration be satisfied by an issue of shares in the transferee company, was not fulfilled and the scheme was therefore not entitled to relief. It is clear that by issuing (and accepting) an option with a discounted exercise price, the parties must have intended, at the time of its grant, that it would be exercised.

[36] In the present case, the JVA provided for a call option as well as a put option, the intention being that if UOL did not exercise the option to subscribe for more shares in Clifford, Clifford would exercise the put option to issue more shares to UOL to give effect to the parties’ understanding that they would be equal partners in the enterprise. In other words, it is reasonable to objectively infer from this scheme that the intention of the parties was that UOL would become a 50% shareholder of Clifford eventually, whether through the call option or the put option. It was effectively a done deal. As it turned out, UOL exercised the call option 19 days after the Reconstruction Agreement was signed and became a 50% shareholder of Clifford. These being the facts, it is not unreasonable to infer that this result was exactly what was intended. Therefore, the Judge’s conclusion on the effect of the two options is correct in law although he was wrong in stating that UOL was legally bound to take up the additional shares in Clifford.

[37] In the court below, the Judge accepted the argument of the Commissioner that the business sought to be undertaken by Clifford (which was the redevelopment of the subject properties together with the adjacent land if it were successful in bidding for the land), was not the same as the undertaking transferred to it under the Reconstruction Agreement (which was the operating and letting of the subject properties). He also seemed to have suggested that the transfer of part of OUE’s undertaking was not sufficient for the purposes of s 15(1)(a) of the Act (see [58] of the GD):

[38] In our view, if the Judge meant that the transfer of the undertaking of the operation and letting of the subject properties was not a reconstruction of OUE and therefore did not fall under s 15(1)(a) of the Act, he would be wrong because the exemption was applicable to the transfer of part of the undertaking by virtue of r 2(2) of the Reconstruction Rules (see Baytrust Holdings Ltd v Inland Revenue Commissioners [1971] 1 WLR 1333 at 1353 and the corresponding English legislation which sets out the same position).

[39] As for the requirement of carrying on “substantially the same business”, we assume it to refer to the undertaking that was transferred, which in this case was prima facie the business of operating and letting out the subject properties because those two properties were investment properties of that nature. The JVA also made it clear that the subject properties would be redeveloped, and that Clifford might bid for a piece of adjacent land for integrated development with the subject properties (which it did, but unsuccessfully). In our view, the Judge had taken an excessively narrow and literalist approach in applying the “substantially the same business” test in holding that OUE’s undertaking was different from Clifford’s undertaking, even if it had included the subsequent development of the land which Clifford had failed to acquire. The entire redevelopment would still be for the purpose of operating and letting out the redeveloped properties, either as an integrated development or as separate developments.

[41] The 2000 amendments (see [24] above) provided a new relief from ad valorem stamp duty with respect to the transfer of assets between associated companies by way of the new s 15(1)(b) (see [26] above). Clifford argued before us that the Reconstruction Agreement also qualified for relief under s 15(1)(b) of the Act. This point was addressed by the Judge who held that OUE and Clifford had ceased to remain as associated companies (as defined by r 4 of the Asset Transfer Rules) when, as part of the JVA, Clifford issued shares which gave UOL a 33.33% interest in it. This was later raised to 50% upon UOL’s exercise of its call options. At [45] of the GD, the Judge said:

[42] We agreed with the Judge. As he had pointed out, the fact that Clifford had ceased to be associated with OUE meant that relief, even if granted in the first place, would have been subsequently disallowed. At this point, we would emphasise that r 6(1)(a)(i) of the Asset Transfer Rules is premised on “a change in the percentage of beneficial ownership of the transferor company” [emphasis added] and not simply “a change in beneficial ownership”. The relevant r 6(1)(a) reads:

[43] In other words, a dilutive issuance of new shares to a third party within the two-year period could potentially trigger the said provision (as opposed to s 15(1)(a) of the Act which targets a dilutive issuance if it is part of the purported scheme of reconstruction). In the present case, the issuance of shares to UOL as part of the reconstruction scheme resulted in relief being denied, correctly, under both ss 15(1)(a) and 15(1)(b) of the Act.

[44] In our view, the fact that, in the present case, Clifford had not at the outset sought stamp duty relief under s 15(1)(b) of the Act but only under s 15(1)(a) showed that it was fully aware that it could not comply with the requirements for relief under the former section.