Chong Barbara v Commissioner of Estate Duties

• Jurisdiction: Singapore
• Judge: Lai Siu Chiu J
• Judgment Date: 16 September 2005
• Neutral Citation: [2005] SGHC 172
• Docket Number: Originating Petition No 5 of 2004
• Date: 16 September 2005
• Published date: 20 September 2005
• Year: 2005
• Plaintiff Counsel: K Shanmugam SC, Stanley Lai, Kevin O'Shea and Nicholas Lum (Allen and Gledhill)
• Citation: [2005] SGHC 172
• Defendant Counsel: Andre Yeap SC and Lai Yew Fei (Rajah and Tann)
• Court: High Court (Singapore)
• Subject Matter: Revenue Law,Whether deferred income taxation liability to be considered in calculation of net asset value of company,Recovery of duty,Estate duty,Section 24 Estate Duty Act (Cap 96, 2001 Rev Ed),Whether greater discount applicable to valuation of minority shareholdings in private companies,Whether dividend yield method or net asset value method of valuation of estate's shares in private companies appropriate

16 September 2005 Judgment reserved.

Lai Siu Chiu J:

1 This Petition was an application by Barbara Chong (“the Petitioner”), who is the administratrix of the estate of the late Tan Keng Siong (“the Estate”), under s 47(1) of the Estate Duty Act (Cap 96, 2001 Rev Ed) (“the Act”). Section 47(1) of the Act states:

An executor or other accountable person aggrieved by —

(a) any claim by a notice of assessment by the Commissioner for payment of estate duty, interest thereon or penalty; or

(b) the refusal of the Commissioner to return any estate duty, interest thereon or penalty alleged to have been overpaid,

may, on payment of, or giving security under subsection (5) for, the amount claimed by the Commissioner or such portion of it as is then payable by him, apply to the High Court within 3 months from the date of the claim or refusal, as the case may be.

2 The dispute relates to the valuation of 200,000 shares in Siong Lim Pte Ltd (“Siong Lim”) and 20,000 shares in Chulin Pte Ltd (“Chulin”) (known collectively as “the Companies”) as at 29 March 2001, owned by the late Tan Keng Siong (“the Deceased”). The Petition prayed inter alia for the following reliefs:

(a) a declaration that the estate duty payable assessed for the Estate’s shareholding in Siong Lim and Chulin was incorrect; and

(b) a declaration that the Commissioner should give a discount of between 31% to 50% in his valuation of the Estate’s shareholding in Siong Lim and Chulin.

Background facts

3 The Deceased died intestate on 29 March 2001 and Letters of Administration were granted by the court to the Petitioner and Kenneth Boon Beng Tan on 1 October 2001. On 26 July 2004, Kenneth Boon Beng Tan withdrew as the administrator of the Estate, leaving the Petitioner (who is the Deceased’s widow) as the sole administratix of the Estate.

The Companies

4 The Deceased had amongst his assets, the aforementioned 200,000 shares in Siong Lim and 20,000 shares in Chulin. The Companies are private limited companies registered in Singapore, with their principal activity being the holding of investments. They are essentially family-owned companies controlled by the Deceased’s father, Tan Sri Tan Chin Tuan (“Tan”).

5 The Deceased’s shareholdings in Siong Lim and Chulin formed only 14.7% and 4% of the issued capital and only 3.5% and 4% of the voting rights respectively, in the Companies. The detailed shareholding structures of the Companies, as at 29 March 2001, were as follows:

Siong Lim

Shareholders in Siong Lim	Shares	Total Votes	Percentage of votes (%)
Founder’s shares to Tan Sri Tan Chin Tuan	70,000	2,100,000	36.8
Ordinary shares to Tan Sri Tan Chin Tuan	599,150	599,150	10.5
Founder’s shares to Kambau Pte Ltd	80,000	2,400,000	42.0
Ordinary shares to Kambau Pte Ltd	213,000	213,000	3.7
Ordinary shares to Tiong Cheng Pte Ltd	175,000	175,000	3.1
Ordinary shares to the Deceased	200,000	200,000	3.5
Ordinary shares to Tan Kheng Choo	25,000	25,000	0.4
Total	1,362,150	5,712,150	100

Chulin

Shareholders in Chulin	Shares	Percentage (%)
Shares held by Kambau Pte Ltd	90,000	18
Shares held by Tan Chin Tuan Pte Ltd	90,000	18
Shares held by Tiong Cheng Pte Ltd	100,000	20
Shares held by Integrated Holdings Pte Ltd	90,000	18
Shares held by Consultant Services Pte Ltd	90,000	18
Shares held by the Deceased	20,000	4
Shares held by Tan Kheng Choo	20,000	4
Total	500,000	100

6 It is not disputed that both Kambau Pte Ltd (“Kambau”) and Tiong Cheng Pte Ltd (“Tiong Cheng”) are controlled by Tan. It is also worth mentioning that Tan Kheng Choo is the daughter of Tan. The shareholding structures of the Companies are reflective of Tan’s philosophy of keeping the Companies within the family.

7 The Companies’ memorandum and articles of association also maintained the status quo. To ensure that only the family members of Tan and/or other approved persons hold the shares, the Companies’ memorandum and articles of association contain severe restrictions on the transfer of the shares. Not only do the articles give the directors the right in their absolute discretion, without assigning any reason, to refuse to register a transfer of shares, they also provide that where there is a refusal to register, but where there is an entitlement to the shares by transmission, the representative of the estate is only entitled to receive dividends but cannot receive notices of or attend or vote at any meeting or exercise any of the other rights and privileges of a member.

8 In addition, Siong Lim’s articles of association entrench the control of Tan by conferring on the holder of founder’s shares 20 votes for each founder’s share. This is to be contrasted with the one vote conferred by each ordinary share. The effect of this provision can clearly be seen from the table above in [5], with Tan being entitled to 47.3% of the total votes of Siong Lim. The articles also confer on Tan the right to demand that the remaining founder’s shares be issued to him at par.

9 It should further be noted that, for the purposes of accumulating wealth in the Companies, the Companies are obliged to transfer the gains on the sale of investments in shares and properties to the capital reserve account, and are not allowed to distribute the gains by way of dividends to the shareholders.

Sale of shares of the Companies

10 There have only been two transactions each in the shares of Siong Lim and Chulin since their incorporation on 21 June 1957 and 9 January 1976 respectively. The first transaction occurred when the estate of Helene Tan (who is the Deceased’s mother and Tan’s wife) disposed of its shareholdings of 175,000 shares in Siong Lim and 100,000 in Chulin to Tiong Cheng for $25.50 and $2.65 per share respectively, on 22 April 1999 and 29 May 2000. The second occurred when the Estate sold the Deceased’s shares to Amberlight Pte Ltd (“Amberlight”) on 21 January 2003. The shares in Siong Lim and Chulin were similarly sold for $25.50 and $2.65 per share respectively.

The respondent’s valuation of the shares

11 On 3 October 2002, the respondent valued the Estate’s shareholdings in Siong Lim and Chulin at $177.74 and $6.49 per share respectively. This valuation was based on the audited accounts of Siong Lim and Chulin as at 30 June 2001 and 31 March 2001 respectively, with adjustments being made to the value of immovable properties and quoted investments and allowing a 30% discount on the adjusted net assets value of each share for non-marketability. In total, the Estate’s shareholdings in Siong Lim and Chulin were valued at $35,548,000 and $129,800 respectively.

12 At the date of the valuation by the respondent, there were no audited financial accounts of Siong Lim as at 31 March 2001, which is the period just after the date of the death of the Deceased. Pursuant to the Petitioner’s requests to Siong Lim to carry out an audit of the company as at 31 March 2001, Siong Lim’s auditors, Ernst & Young, finally produced the audited accounts on 1 July 2005, barely a week before this application was heard.

The dispute

13 The Petitioner’s position was that the respondent’s valuation of the Estate’s shareholdings in the Companies was manifestly excessive. The Estate had to pay estate duty on the shares at the respondent’s valuation of $35,548,000 and $129,800 on its shareholdings of Siong Lim and Chulin respectively, when it only realised $5,100,000 and $53,000 from the sale of its shareholdings in Siong Lim and Chulin respectively.

14 The Petitioner contended that:

(a) the respondent’s method of valuation of the Estate’s shareholdings in Siong Lim and Chulin based on the net asset value of the respective companies was not appropriate;

(b) a valuation based on the last transacted prices of the shares of Siong Lim and Chulin at $25.50 and $6.49 respectively should have been used; and

(c) a discount of 90% should have been applied to the valuation of the Estate’s shareholdings in Siong Lim and Chulin instead of the 30% discount applied by the respondent.

The law

15 At this juncture, it would be useful to set out the relevant provisions for the valuation of shares under the Act. There were two main provisions raised by the parties as being helpful in this case, viz ss 22 and 24 of the Act. Section 22(1) states:

Where there pass on the death of any person dying after 22nd April 1940 any shares (not being preference shares) in any company to which this Part applies, then if either —

(a) there is deemed by virtue of the provisions of this Part to pass on the death a sum of money computed by reference to the value of the total assets of the company; or

(b) the control of the company was immediately before the death in the hands of the deceased,

the principal value of those shares for the purposes of estate duty shall not be ascertained in the manner provided by section 24, but shall be ascertained by reference to the value of the total assets of the company.

[emphasis added]

16 Section 24(1) of the Act states:

The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioner, that property would fetch if sold in the open market at the time of the death of the deceased. [emphasis added]

17 It was common ground that the Estate’s shareholdings in the Companies were minority shares and that the Deceased did not have any influence or control in the Companies. Accordingly, there was no disagreement between the parties that s 22 of the Act did not apply to the valuation of the Estate’s shareholdings in the Companies; it was agreed that s 24 of the Act was the applicable provision.

18 However, the parties held differing views on the interpretation of s 24 of the Act and how it should be applied to determine the value of shares in a company. This consequently formed the crux of the dispute between the Petitioner and the respondent. It did not help that there is a dearth...