Taxpayer seeks nullification of a company amalgamation
2005 case note - taxpayer unsuccessful in application to nullify company amalgamation therefore has 'lost' substantial tax losses - loss of shareholder continuity.
The taxpayer was unsuccessful in its application to nullify a company amalgamation and as a result has "lost" substantial tax losses.
The plaintiff company and Kororia Services Limited (KSL) were companies whose director was Mr Jon Rivers Lamb. In March 1996 the plaintiff had accumulated tax losses available to it in excess of $5.6 million. KSL was not trading and was not otherwise used by Mr Lamb. Mr Lamb was advised by his accountants of an easy way to "get rid of" an unwanted company by amalgamation. Mr Lamb instructed the accountants to go ahead with the intention of dispensing with KSL.
The accountants prepared documentation for the short-form amalgamation of the plaintiff and KSL. Mr Lamb executed the documents as director of both the plaintiff and KSL. These documents were lodged with the Registrar of Companies (first defendant).
On 28 March 1996 the Registrar of Companies issued a Certificate of Amalgamation under section 209F of the Companies Act 1955 (the Act applicable to the companies at the relevant time). As a consequence KSL was deemed to be dissolved and struck off the Companies Registry.
Subsequently, the Commissioner of Inland Revenue investigated the plaintiff's tax affairs. The plaintiff had claimed accrued tax losses based on the accumulated losses. The CIR disallowed the plaintiff's claim for those accrued tax losses on the grounds that the amalgamation of the plaintiff and KSL broke the necessary shareholder continuity.
The plaintiffs sought declarations that:
- The amalgamation was a nullity and of no legal effect;
- The Certificate of Amalgamation be withdrawn;
- KSL be reinstated to the Register of Companies.
The plaintiff argued that the plaintiff and KSL were not able to use the short-form amalgamation as a matter of law and therefore the amalgamation was a nullity or of no effect.
For the plaintiff to use the short-form amalgamation they needed the companies to be directly or indirectly owned by the same, third company. In the present case the shareholders in the plaintiff were Mr Lamb and Fermata Holdings Limited. In the case of KSL the shareholders were the two Lamb family trusts. The amalgamating companies were not owned by the same company, neither was owned by a company at all.
The plaintiff argued that the long-form amalgamation process should have been followed. That process required certain conditions to be satisfied and that these conditions were not satisfied, therefore the amalgamation was a nullity.
The Judge found:
The amalgamation was effected by the issue of the Certificate of Amalgamation and therefore the issue was whether the Registrar's actions rather than the actions of the company were a nullity.
The Judge also found that the necessary conditions to amalgamate had been met and that the actions of the Registrar in accepting the amalgamation documents were correct, therefore the Registrar's actions were not a nullity. Therefore the issue of the Certificate of Amalgamation was not a nullity.
The Judge concluded that the documents presented to the Registrar did not have defect, such that the Registrar should have been put on enquiry, and that there was no basis for the declaration that the amalgamation was a nullity, void and of no effect as sought by the pleadings.
The plaintiff argued that if the amalgamation was not a nullity, the Registrar's decision to issue the amalgamation certificate is in any event amenable to review.
Section 209 F of the Companies Act 1955 states that the Registrar must, after receipt of documents required under section 209E issue a Certificate of Amalgamation. The issue was whether there were documents presented to the Registrar as required by section 209E. If there were then prima facie the Registrar had no discretion and was bound to issue the certificate which completed the process.
The Judge did not accept that the defects in the documentation presented to the Registrar were such as to prevent registration. The Registrar was not required to be satisfied as to the underlying facts behind the documents presented to him or to form a view in respect of them.
In the absence of a defect in the process adopted by the Registrar, the Certificate of Amalgamation once issued by the Registrar is effective. In this case there was nothing illegal or defective in the action of the Registrar in issuing the certificate. Prima facie the issue of the certificate is not amenable to review.
The Judge then considered that in the exercise of the Court's discretion should the decision be set aside on Judicial Review? The Court took many things into consideration including the prejudice to other parties. It was found that the Commissioner would be affected by the decision to set aside the decision, the Judge also pointed out the significant time period of nine years since the effective amalgamation.
The Judge concluded that he did not consider that there was a basis to review the first defendant's decision in the case. The plaintiff's application was dismissed.
The Judge indicated that perhaps the appropriate remedy for the Plaintiff was against its accountants.
Companies Act 1955