Ayerst v C. & K. (Construction) Ltd

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Diplock, Viscount Dilhorne, Lord Kilbrandon, Lord Edmund-Davies
Judgment Date21 May 1975

[1975] UKHL J0521-1

House of Lords

Lord Diplock

Viscount Dilhorne

Lord Kilbrandon

Lord Edmund-Davies

Ayerst (Inspector of Taxes)
(Respondent)
and
C. & K. (Construction) Limited
(Appellants)

Upon Report from the Appellate Committee to whom was referred the Cause Ayerst (Inspector of Taxes) against C. & K. (Construction) Limited, That the Committee had heard Counsel, as well on Monday the 14th, as on Tuesday the 15th and Thursday the 17th, days of April last, upon the Petition and Appeal of C. & K. (Construction) Limited of Highbury House, Highbury Corner, London N.5, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 28th of October 1974, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen in Her Court of Parliament, might seem meet; as also upon the Case of William George Ayerst (Her Majesty's inspector of Taxes), lodged in answer to the said Appeal; and due consideration had this day of what was offered on either side in this Cause:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Order of Her Majesty's Court of Appeal, of the 28th day of October 1974 complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondent the Costs incurred by him in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.

Lord Diplock
1

My Lords, the only question that has been argued in your Lordships' House is whether when a company is ordered to be wound up under the Companies Act 1948 the effect of the winding-up order is to divest the company of the "beneficial ownership" of its assets within the meaning of that expression as it is used in section 17(6)( a) of the Finance Act 1954.

2

Under the Income Tax Acts a trader who has sustained a trading loss in any year of assessment or has incurred expenditure for which he is entitled to claim capital allowances to an amount which exceeds the taxable profits of the trade for that year, is entitled to carry forward the loss or the excess and set it off against his taxable profits of that trade in subsequent years of assessment; but before the Finance Act, 1954, this right of set-off was lost upon his ceasing permanently to carry on the trade. In the case of trading companies section 17 of the Finance Act 1954 allowed some piercing of the corporate veil by providing exceptions to the general rule as to cessation. The effect of the exception that is relevant to this appeal is that where the trade continues to be carried on by a successor that is a subsidiary company of the company that previously carried on the trade, the successor company may avail itself of the right of set-off that would have been available to its predecessor if it had continued to carry on the trade itself.

3

It is not now disputed that upon the true construction of this section a successor company is only to be treated as a subsidiary company of a parent company as predecessor if and so long as not less than three-quarters of its ordinary share capital is in the "beneficial ownership" of the parent company whether directly or through another company or companies or partly directly and partly through another company or companies. This makes it unnecessary to set out again and analyse the various subsections and paragraphs which justify this conclusion. They are quoted in the judgment of Templeman J. None of them throws any light upon the sense in which the expression "beneficial ownership" is used in section 17(6)( a) or lends support to the view that it bears any other meaning than that which would have been ascribed to it in 1954 as a term of legal art as descriptive of the proprietary interest in its assets of a company incorporated under the Companies Act 1948 at successive stages of its existence from incorporation to the commencement of winding up and from the commencement of winding up to dissolution.

4

Nor do I find it necessary to restate the particular facts that give rise to this appeal, beyond saying that it concerns two companies: a parent company which was ordered to be compulsorily wound up and the appellant company of which all the shares were held by the parent company or its nominee. The parent company had carried on a trade. The trade continued to be carried on after the making of the winding-up order until the assets and goodwill of the trade were transferred to the appellent company. After the transfer the shares in the appellant company were sold to a third party and the proceeds of sale distributed in the liquidation of the parent company.

5

The appellant company relies upon section 17 of the Finance Act 1954 as entitling it to set off against its taxable profits from the trade in two years of assessment after the transfer, the trading losses and claims to capital allowances which had accrued to the parent company in the years of assessment before the transfer. It is common ground between the parties that the appellant company's right to do so depends upon whether its shares were still in the "beneficial ownership" of the parent company at the time of the transfer notwithstanding that by then the parent company had been ordered to be wound up.

6

My Lords, the making of a winding-up order brings into operation a statutory scheme for dealing with the assets of the company that is ordered to be wound up. The scheme is now contained in Part V of the Companies Act 1948 and extends to voluntary as well as to compulsory winding up; but in so far as it deals with compulsory winding up its essential characteristics have remained the same since it was first enacted by the Companies Act 1862. The procedure to be followed when a company is being wound up varies in detail according to whether this is done compulsorily under an order of the court or voluntarily pursuant to a resolution of the company in general meeting, and, in the latter case, whether it is a members' voluntary winding up or a creditors' voluntary winding up; but the essential characteristics of the scheme for dealing with the assets of the company do not differ whichever of these procedures is applicable. They remain the same as those of the original statutory scheme in the Companies Act 1862. For the sake of simplicity, in stating the essential characteristics of the statutory scheme I propose to refer only to those sections of the Companies Act 1948 which apply in a compulsory winding up and to omit those sections which have a corresponding effect in the case of a voluntary winding up.

7

Upon the making of a winding up order:

(1) The custody and control of all the property and choses in action of the company are transferred from those persons who were entitled under the Memorandum and Articles to manage its affairs on its behalf, to a liquidator charged with the statutory duty of dealing with the company's assets in accordance with the statutory scheme (section 243). Any disposition of the property of the company otherwise than by the liquidator is void, (section 227.)

(2) The statutory duty of the liquidator is to collect the assets of the company and to apply them in discharge of its liabilities (section 257(1)). If there is any surplus he must distribute it among the members of the company in accordance with their respective rights under the Memorandum and Articles of Association, (section 265.) In performing these duties in a compulsory winding up the liquidator acts as an officer of the court (section 273); and if the company is insolvent the rules applicable in the law of bankruptcy must...

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