In this case, Edmonds J considered the application of the debt-equity rules in Division 974 to an aggregated scheme, arising under a deferred compensation plan, whereby the employee was issued with both profit sharing certificates in his employer company and shares in the holding company of his employer. Somewhat surprisingly, the court held that no financing arrangement existed because the scheme didn’t have the purpose of raising finance – notwithstanding that capital was raised and shares issued.
Edmonds J’s reasoning included comments that raising finance was not coterminous with raising capital; that the fact that capital is paid to a company does not, without more, lead to the conclusion that the scheme was a financing arrangement; and that a scheme entered into or undertaken to raise capital for prudential, management or other good governance reasons will not be entered into or undertaken to raise finance which contemplates, sooner or later, expenditure of the amount raised. The last of those comments may perhaps surprise banks which raised Basel III compliant Tier 2 capital.
Edmonds J suggests there are ‘common indicia’ to consider when assessing the relevant facts and circumstances of a capital raising, including the intention of the issuer, objectively discerned; the size and nature of the issuer’s business, its other debt obligations and the capital raised under the scheme; and the existence and extent of any non-financing purposes of the scheme.
This somewhat surprising and important case should give cause for reflection on some transactions which have been assumed to be financing arrangements under the debt-equity rules.