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01 Jun 11 Limited recourse loan: High Court dismisses Commissioner’s appeal - BHP Billiton

The High Court has unanimously dismissed the Commissioner’s appeal from a decision of the Full Court of the Federal Court which concerned the construction of s 243-20(2) ITAA 1997. The High Court held that a debt owed by BHP Billiton Direct Reduced Iron Pty Ltd, an operating company which was part of the BHP Billiton group, to BHP Billiton Finance Limited, a company within the group which provided finance to group members, was not a “limited recourse debt” and therefore the respondents were not liable to an increase in assessable income under Div 243 ITAA 1997 (French CJ, Heydon, Crennan and Bell JJ; Gummow J delivered a separate judgment also dismissing the appeal).

At first instance and on appeal in the Federal Court there were a number of issues for decision. The appeal to the High Court, however, was confined to the limited recourse debt issue.

Division 243 applies if limited recourse debt has been used wholly or partly to finance or refinance expenditure. The dispute between the parties was whether limited recourse debt had been used. Section 243-20(2) provides that an obligation imposed by law on a debtor to pay an amount to the creditor is limited recourse debt if it is reasonable to conclude that the rights of the creditor as against the debtor in the event of default in payment of the debt or interest are “capable of being limited” in the way mentioned in s 243-20(1) having regard to certain specified matters.

The High Court held that the operating company’s debt to the finance company was not a “limited recourse debt” within the meaning of Div 243. The Court held that s 243-20(2) is not directed to possibilities for limitation of a creditor’s rights of recourse which may arise in the future.

In their joint judgment, French CJ, Heydon, Crennan and Bell JJ observed that:

“To describe a creditor’s rights of recourse as ‘capable of being limited’ is to refer to a power of a person to limit or bring about a limitation on those rights. ... It is the certain liability of the creditor’s rights of recourse to limitation – by the exercise by a person of a power to limit, or to cause a limitation to those rights – which has the effect that a debtor has not been fully at risk in relation to an amount of expenditure. Such a power must exist at the inception of the loan, whether it arises as a result of an arrangement or a circumstance or conduct (from which an arrangement may be inferred) or in some way other than the way covered by sub-s (1). It follows that s 243-20(2) would not be satisfied by the existence, at the inception of the loan, of a possibility of a person acquiring a capacity (that is a power) to limit, or a power to cause the relevant limitation of, a creditor’s rights of recourse at some point in the future.”

FCT v BHP Billiton Limited; FCT v BHP Billiton Petroleum (North West Shelf) Pty Ltd; FCT v The Broken Hill Proprietary Company Pty Ltd; FCT v BHP Billiton Minerals Pty Ltd [2011] HCA 17 (High Court; French CJ, Gummow, Heydon, Crennan and Bell JJ; 1 June 2011).