Bridges (Inspector of Taxes) v Hewitt
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE JENKINS,LORD JUSTICE MORRIS,LORD JUSTICE SELLERS |
| Judgment Date | 11 April 1957 |
| Judgment citation (vLex) | [1957] EWCA Civ J0411-1 |
| Date | 11 April 1957 |
| Court | Court of Appeal |
[1957] EWCA Civ J0411-1
In The Supreme Court of Judicature
Court of Appeal
Lord Justice Jenkins
Lord Justice Morris
Lord Justice Sellers
MR F.N. BECHER, Q.C., and SIR REGINALD HILLS (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, W.C.2) appeared as Counsel for H.M. Inspector of Taxes.
MR N.E. MUSTOE, Q.C., and MR H.H. MONROE (instructed by Messrs Lightbounds, Jones & Company, Bevis Marks House, London, E.C.3, Agents for Messrs Owen, Dawson & Wynn-Evans, Liverpool) appeared as Counsel for Mr Walter Manning Hewitt and Mr Ernest Bearsley.
: These are two appeals by Mr Walter Manning Hewitt and Mr Ernest Bearsley respectively from Orders made by Mr Justice Danckwerts on the 5th December, 1956, reversing determinations of the Special Commissioners in favour of the Appellants on their respective appeals against assessments to Income Tax Schedule made upon them for the year 1953–54.
Each of the two appeals raises on substantially identical facts three questions in regard to certain transfers of fully paid shares in Meccano Limited (hereinafter called "the Company") made to the Appellants by Messrs Roland and Douglas Hornby, the sons of the late Mr Frank Hornby, who was the founder of, and principal shareholder in, the Company. The three questions (in which I make the substitution of "Appellant" for "Respondent" appropriate to the present position) arc thus formulated in paragraph 2 of the Case Stated by the Special Commissioners with respect to Mr Bearsley:
"(a) whether £36,000, the value at 27th July, 1953, of 8,000 shares "in Meccano Limited transferred on that day to the Appellant by" the brothers Roland and Douglas Hornby was income, assessable "under Schedule E, from the Appellant's office or employment as" Managing Director of Meccano Limited;
"(b) if the value of the said shares did not represent such income, "whether the value of covenants to transfer them made by the" Hornby brothers on 30th December, 1945, represented such income;
"(c) if any income was assessable, whether such income was properly "assessable for the year 1953–54."
The Case Stated in respect of Mr Hewitt formulates the three questions in similar terms, the only material difference being that the Appellant's office or employment is referred to as that of Director, not Managing Director, of the Company.
Mr Hewitt's appeal raises a subsidiary issue to the effect that the relevant office or employment in his case was that of Secretary to the Company, which office he had ceased to hold before the shares were transferred to him.
The facts relevant to the two appeals are fully set out in the Case Stated with respect to Mr Bearsley, and I will endeavour to avoid repeating them at undue length.
The salient matters of fact may be thus summarised:
(i) The two Appellants and the late Mr George Jones were old servants of the Company, which had been formed in 1908 to take over a business founded and theretofore carried on by Mr Frank Hornby. Mr Bearsley had joined the business in 1907, becoming a Director of the Company in 1919 and Managing Director on the works side as from 1st October, 1936. Mr Jones had joined the business in 1908, becoming Managing Director of the Company on the sales side as from let October, 1936. Mr Hewitt had joined the Company as Secretary in 1913, becoming a Director in 1932. At the date of the Deeds of Covenant mentioned above (namely, 30th December, 1945) Mr Bearsley and Mr Jones held their respective offices as Managing Directors, and Mr Hewitt held his office as Secretary, for the term of ten years from the 1st October, 1936, under an Agreement dated the 15th February, 1937, with respect to Mr Bearsley and Mr Jones, and an Agreement dated 1st April, 1937, with respect to Mr Hewitt. Mr Jones became incapacitated from business in the autumn of 1945 and died in 1949. Mr Hewitt ceased to be Secretary in January, 1951, and he resigned his directorship through ill health in October, 1953. By the Agreement of 15th February, 1937, Messrs Bearsley and Jones were precluded from engaging in a similar business in Great Britain without the consent of the Company for three years after they should respectively cease to hold office as Directors, and Mr Hewitt by the Agreement of 1st April, 1937, was subjected to a like restriction for three years after ceasing to hold office as Secretary. No new Service Agreements were entered into after those I have referred to expired, but at a Board Meeting held on the 8th and 11th October, 1946, Messrs Bearsley and Hewitt were continued as Managing Director and as Director and Secretary respectively at increased rates of remuneration on the footing that they now had to perform the duties formerly discharged by Mr Jones.
(ii) The Company's business was remarkably successful, and its success, which was largely due to the skill and energy of Messrs Bearsley, Jones and Hewitt in the conduct of its affairs, enured chiefly for the benefit of Mr Frank Hornby, who had at all times been by far the largest shareholder. In these circumstances Messrs Bearsley, Jones and Hewitt thought it no more than their due that Mr Frank Hornby should provide them with fairly substantial holdings of shares in the Company. To quote the Case, paragraph 6(a): "They wanted these shares for reasons of security, "and also as giving them a standing with the employees of the Company "commensurate with their respective important positions; for they were in "fact the backbone of the Company, had helped Frank Hornby to build up "the Company's business, and were very largely in their different capacities responsible for its successful running once it had been firmly "established." Mr Frank Hornby did from time to time transfer to them comparatively small batches of shares during his lifetime, but not the number of shares "to which" (quoting again from the Case) "these three "gentlemen thought they were in justice entitled". They made representations on the subject from time to time to Mr Frank Hornby, who said he would look after them; but except as mentioned above he gave them no shares. Mr Frank Hornby was apparently inclined to put off Mr Bearsley's requests for shares with some increase in remuneration which (to quote the Case, paragraph 6(b)) "was not what" he "wanted; for he was satisfied "with Ms remuneration, and what he wanted was an increased shareholding "so that people might know what he was in the Company." In the end, Mr Frank Hornby gave Messrs Bearsley, Jones and Hewitt to understand, or at all events left them under the impression, that he would leave each of them a reasonable number of shares by his Will.
(iii) Mr Frank Hornby died on the 12th September, 1936, having by his Will left all his shares in the Company to his wife, Mrs Clara Hornby, for life with remainder to his two sons in equal shares.
(iv) Messrs Bearsley, Jones and Hewitt were surprised and disappointed that Mr Frank Hornby had left them no shares, and decided to approach the two sons. For some unexplained reason they did not do this until 1945, when they asked Mr Roland Hornby for 20,000 shares between the three of them. The approach was made at a meeting between Mr Roland Hornby and Messrs Bearsley and Hewitt. To quote the Case, paragraph 9(b): "Roland Hornby" agreed at once that the Respondent, Hewitt and Jones should have 20,000 "shares between them. Roland Hornby's view was that his father had been" remiss in not leaving shares by his will to these three gentlemen. Nothing "was said suggesting that the shares were to be a reward or remuneration for" past services, but Roland Hornby thought the shares should have been left "in recognition of the work of these three gentleman with the Company. No" condition was suggested that the Respondent and Hewitt should continue in "the service of the Company (their service agreements were due to expire" on 30th September, 1946), or that the shares were remuneration."
(v) The agreement ultimately reached in oral discussion was that after the death of Mrs Hornby 20,000 of the shares subject to the trusts of the Will should be provided in equal proportions by the two sons and transferred as to 8,000 to Mr Bearsley, as to 8,000 to Mr Hewitt and as to the remaining 4,000 to Mr Jones. In view of the fact that the transfers of the shares were not to be made until Mrs Hornby's death it was thought desirable that the arrangement should be recorded in a formal document, and it was left to Mr Hewitt to see to this.
(vi) Mr Hewitt accordingly consulted his solicitor, Mr Dawson, who produced a draft form of Deed of Covenant which with certain alterations made by the sons' solicitors was adopted as the form actually used in the Deeds as executed. There were six Deeds in all whereby the sons covenanted to transfer 4,000 shares each to Mr Bearsley, 4,000 shares each to Mr Hewitt and 2,000 shares each to Mr Jones. The Deed between Mr Roland Hornby (the covenantor) and Mr Bearsley (the covenantee), which is annexure E to the Case, may be quoted as showing (so far as material for the present purpose) the form of all six Deeds as executed. It is a Deed of Covenant made the 30th December, 1945, between Roland Hornby and Ernest Bearsley, and there were those recitals: "Whereas the Covenantor" (that was Mr Roland Hornby) "now holds Ordinary Shares in Meccano Limited to a number in excess of" four thousand and under the Will of his decessed father Frank Hornby will "on the death of his mother Clara Hornby become absolutely entitled to" further Ordinary Shares in the said Company. And Whereas the Covenantor "desires to mark his appreciation of the past services of the Covenantee" in the...
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