Maroshini K Morgan explains a recent decision of the Federal Court on stamp duty.
 
In Pemungut Duti Setem, Pulau Pinang v Malaysia Smelting Corporation Berhad [2012] 5 CLJ 273, the Federal Court was called upon to consider the principles that are to be applied by the Stamp Office in assessing the stamp duty chargeable on a share transfer form in respect of shares in a loss making company.
 
BACKGROUND FACTS
 
Rahman Hydraulic Tin Sdn Bhd (“Company”) was a private limited company with a paid-up capital of RM97,232,142 which comprised of 97,232,142 ordinary shares of RM1 each. The Company was a loss making company and its entire paid-up share capital was held by Anggun Pintas Sdn Bhd (“Vendor”).
 
Following an open tender exercise, the Vendor sold the entire paid-up share capital of the Company to Malaysia Smelting Corporation Bhd (“Respondent”) for a purchase price of RM15,000,000.
 
The Respondent submitted the share transfer form, Form 32A, dated 22 November 2004 to the Stamp Office for stamping. The Form 32A stated that 97,232,142 ordinary shares of RM1 each in the Company were being transferred by the Vendor to the Respondent for the abovementioned purchase price.
 
The Deputy Collector of Stamp Duty valued the shares at RM97,232,142 based on the par value of RM1 per share and assessed the stamp duty on the Form 32A at RM291,699. The Respondent objected to the assessment and contended that the duty should be RM45,000, based on the purchase price of RM15,000,000.
 
The Deputy Collector rejected the Respondent’s objection, relying primarily on Item 32(b) of the First Schedule of the Stamp Act 1949 (“Item 32(b)”), which states:
 
“(b) On sale of any stock, shares or marketable securities, to be computed on the price or value thereof on the date of transfer, whichever is the greater.”
 
The Deputy Collector also relied on paragraph 3.2 of the Stamp Office’s Guidelines on the Stamping of Share Transfer Instruments for Shares that are Not Quoted on the Kuala Lumpur Stock Exchange (“Guidelines”) which states:
 
“For cases of companies incurring losses, the Par Value or Net Tangible Assets or sale consideration whichever is the highest is to be used for the purpose of computation of the stamp duty payable.”
 
The Appendix to the Guidelines also contains an example that expressly stated that the stamp duty payable would be calculated based on par value where the par value of the shares transferred is higher than the sale consideration.
 
Dissatisfied with the decision of the Deputy Collector, the Respondent appealed to the High Court by way of a Case Stated under Section 39 of the Stamp Act 1949.
 
DECISION OF THE HIGH COURT
 
The questions for determination by the High Court were:
 
(1)   Whether the par value of RM1 per share (RM97, 232,142 for the entire share capital) of the company is the actual value of the company’s shares?
           
(2)   If not, what is the value of the company’s shares at the date of the transfer?
 
(3)   What is the duty chargeable on the Form 32A?
 
In essence, the issue was whether stamp duty is to be assessed on the aggregate of the par value of the shares or the purchase price of RM15,000,000.
 
The High Court dismissed the appeal, holding that the par value was the actual value of the shares. The Respondent appealed to the Court of Appeal.
 
DECISION OF THE COURT OF APPEAL
 
The Court of Appeal answered the first of the questions posed to the High Court in the negative. Abdul Wahab Patail JCA opined that the par value is “only a face value, while the value of a company waxes and wanes according to its performance and outlook.”
 
The Court noted that no evidence was produced that anyone else was willing to pay more than RM15,000,000 for the shares in the Company.
 
As to the second question, the Court of Appeal noted that the shares of a company represent units of shareholding in a company and that the value of each share is the value of the company divided by the number of shares issued. The Court held that the most widely-accepted approaches to determine the value of a company are the comparable worth method, the asset valuation method and the financial performance method. As no evidence had been adduced of any comparable company and its valuation and as the Company was not a going concern with an income stream or bright business outlook, the only method left to be considered was the asset valuation method.
 
The Court held that the price obtained in an arm’s length transaction between a willing buyer and a willing seller who are not otherwise obliged or pressed to buy or sell, would be an accurate reflection of the asset value.
 
The Court noted that there was no dispute as to whether the open tender sale was at arm’s length or not, or whether the Vendor was hard pressed to sell. The Court then concluded that, based on the best available evidence, the value of the shares on the date of transfer was the purchase price of RM15,000,000. Accordingly, the Respondent’s appeal was allowed.
 
DECISION OF THE FEDERAL COURT
 
The Collector of Stamp Duties was granted leave to appeal to the Federal Court against the decision of the Court of Appeal.
 
The sole question to be determined by the Federal Court was whether, for the purpose of determining the stamp duty payable on the Form 32A, the value of the Company’s share is the nominal value of RM1 per share or the value based on the balance sheet of the Company as at 31 December 2003.
 
The Federal Court held that the par value was not indicative of the actual value of the shares for the purpose of ascertaining stamp duty. It noted that Form 32A did not state that the value of each share is RM1 but rather that the par value of each share is RM1.
 
The Federal Court concurred with the Court of Appeal that the par value is merely a face value which may not reflect the actual value of the shares once a company commences business as it may make profits or incur losses or its assets may appreciate or depreciate.
 
The Federal Court held that the figures from the Company’s balance sheet for its financial year ended December 2003 (“Balance Sheet”) was relevant for determining the value of the shares as the Balance Sheet formed the basis of the tender and the sale of the shares. The Court noted that based on the Balance Sheet, the Company’s shares would not have any value as the total liabilities of the Company exceeded its total assets by about RM311,000,000.
 
The Federal Court found that as there was no dispute as to whether the open tender sale was at arm’s length or not, the best available evidence of the value of the shares on the date of transfer was the purchase price of RM15,000,000.
 
The Court also noted that the fact that the purchase price was arrived at pursuant to an open tender exercise indicated that such price represented the market value. As the purchase price of RM15,000,000 was higher than the value of the shares based on the Balance Sheet, stamp duty would be assessed based on the purchase price pursuant to Item 32(b).
 
Accordingly, the appellant’s appeal was dismissed.
 
CONCLUSION
 
The decision of the Federal Court in Pemungut Duti Setem, Pulau Pinang v Malaysia Smelting Corporation Berhad is to be welcomed as it authoritatively decides that the par value of the shares cannot be equated to the market value of those shares for the purpose of assessing stamp duty payable on a share transfer form for shares in a loss making company. In coming to this decision, the Federal Court has done away with a practice of the Stamp Office that is unrealistic and without commercial basis.