Commissioners of Inland Revenue v R Woolf (Rubber) Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE PEARCE,LORD JUSTICE DONOVAN |
| Judgment Date | 10 May 1961 |
| Judgment citation (vLex) | [1961] EWCA Civ J0510-1 |
| Date | 10 May 1961 |
| Court | Court of Appeal |
[1961] EWCA Civ J0510-1
In The Supreme Court of Judicature
Court of Appeal
Lord Justice Pearce,
Lord Justice Upjohn, and
Lord Justice Donovan.
MR F. HEYWORTH TALBOT Q.C., MR J.G. STRGM, Q.C., MR D. MILLER, Q.C., and MR J.M. PRICE (instructed by Allen & Overy) appeared as Counsel for the Appellant Company.
MR F.N. BUCHER, Q.C., MR E.B. STP and MR A.S. ORR (instructed by The Solicitor of Inland Revenue) appeared as Counsel for the Respondents.
I will ask Lord justice Donovan to give the first Judgment.
The Appellant Company, which is a trading company and not an investment company, possesses a constitution which was clearly arranged so as to take the company outside the reach of those provisions in the Income Tax Act, 1952, which impose surtax, subject to certain conditions, on the undistributed profits of companies. Thus no five or fewer shareholders together control the Company by their shareholding; nor is such control in the hands of five or fewer persons according to the extended definition of control which is contained in section 256, subsection 2, subparagraphs (a) and (b), of the 1952 Act.
At its inception, however, the Company issued debentures for a total of £600,000 to a number of individuals for a consideration net alleged to be otherwise than full and bona fide. How this came about is sot out in the Case Stated and in the Judgment appealed from and need not, I think, be again repeated.
If the Company is right in its contention that it is not amenable to the surtax provisions I have quoted it follows that it could use its income in redeeming its debentures rather than in paying dividends without laying itself open to a surtax direction under section 245 of the 1952 Act. In fact, to some extent that is what has been done.
The Crown: however, contends that five or fewer persons still control the Company and that a direction under section 245 can therefore still be made upon it if it fails to distribute reasonable dividends from its profits as, according to the Crown, it has failed for the three years under consideration.
The contention concerning control is based on section 256(2)(c) of the 1952 Act, which perhaps I should quote: "(1) Section 245 of this Act shall apply to any company which is under the control of not more than five persons and which is not a subsidiary company or a company in which the public are substantially interested.
"(2) For the purposes of this section, a company shall be deemed to be under the control of not more than five persons… (c) if - (i) on the assumption that the company is a company to which the said section 245 applies…more than half the income of the company…could be apportioned for those purposes among not more than five persons". I have not read the whole of subparagraph (c); I have omitted certain parts which do not apply in this case.
Applying the provisions I have just read, it is said by the Crown that five or fewer debentureholders could have apportioned to them, on the statutory assumption, more than one half of the income of the Company and therefore "control" the company for present purposes. It is not alleged that five or fewer persons control the Company in any other way.
The Company's reply is that in the case of a trading company such as this a debentureholder is not a member and that section 245 therefore has no application.
This accordingly is the first issue in the case.
If the Company are wrong about it a secondary contention is raised on its behalf, namely, that more than one half the income cannot be apportioned to five or fewer debentureholders, and on that ground therefore the Company escapes the section.
Dealing, however, with the first point, all depends upon the true interpretation of the definition of "member", to be found in section 255(2) of the 1952 Act. It reads thus; "In this Chapter, 'member', in relation to any company, shall include any person having a share or interest in the capital or profits or income of the company".
These debentureholders, says the Crown, have a fixed charge on the Company's freehold property (which is right), and a floating charge on its general assets (which is also right), and each such charge constitutes an interest in the capital or profits or income of the company within the meaning of the definition of "member" which I have just read.
The Company's answer is that this contention is unsound and that a debentureholder may have an interest in the assets of the company but not an interest in the capital or profits of income as such. These words, it is said, connote such an interest as could be expected to fructify in a dividend, not an interest which is simply that of a creditor.
The surtax code, if I may call it that, in relation to companies is now to be found in the self-contained Chapter, Chapter III of Part IX of the Income Tax Act, 1952; but it grew up over the years from 1922, being amended and strengthened as the taxpayer discovered loopholes and the Crown, after an interval, stopped them up, or tried to. The Act of 1952 has brought all these provisions together but, being a Consolidating Act, did not purport to alter them. The definition of "member" has remained unchanged since 1922, and if the Crown is right in its contention today it has admittedly been right ever since 1922.
In 1936 the Legislature specifically introduced loan creditors into the circle of members of a company for surtax purposes, but confined this operation to investment companies as distinct from trading companies. Moreover, in the relevant enactment, being section 20(4) of the 1936 Act, the Legislature described what it was doing as an extension of the original definition of member.
It is therefore important, as Mr Bucher says, to look at the original legislation to see how matters developed.
The original definition of "member", which so far as concerns trading companies has not been altered, is contained in section 21(7) of the Finance Act, 1922, and reads: "In this section the expression 'member' shall include any person having a share or interest in the capital or profits or income of a company".
This definition was, and still is, wide enough to include not merely members on the registers of companies but members who were simply nominees of others and members who were trustees for others also; and since surtax is concerned with the beneficial ownership of income some provision was necessary to enable the Special Commissioners to find out who they were, and one finds such power given in section 21(8) of the 1922 Act, combined with the provisions of the First Schedule.
These read as follows. Section 21(8): "The provisions contained in the First Schedule to this Act shall have effect as to the computation of the actual income from all sources of the company, the apportionment thereof amongst members of the company, and otherwise for the purpose of carrying into effect, and in connection with this section".
Paragraph 11 of the First Schedule to the Act provides: "Any person in whose name any shares of a company are registered shall, if required by notice in writing by the Special Commissioners, state whether or not he is the beneficial owner of those shares, and if not the beneficial owner of those shares or any of them shall furnish the name and address of the person or persons on whose behalf the shares are registered in his name".
If, as the Crown asserts, the definition of "member" included from the first a loan creditor with a fixed charge it is, to say the least of it, odd that a similar power was not given to the Special Commissioners to discover the beneficial owner of debentures held by a nominee or a trustee.
Mr Bucher and Mr Stamp both give answers to this point which, if I may say so, do not wholly blunt it, but I will not take up time by elaborating the matter since to do so might give the impression that I regard the point as crucial, which of course it is not, although it does, I think, possess at least some significance, particularly when one finds that even today machinery is still lacking, in the case of trading companies, to discover the beneficial ownership of debentures held by a nominee although such machinery has been supplied in the case of debentures held in an investment company.
Moving on, however, to the year 1936, one finds the Legislature clearly minded to put a stop to surtax evasion by those who formed investment companies, transferred their assets to it in return for debentures, and thereafter enjoyed the company's income, surtax-free, in the shape of capital, namely moneys which had come to them through the debenture redemptions by the investment company.
Section 20(4) of the Act of 1936 said this: "Where an investment company is deemed by virtue of the last foregoing subsection to be under the control of not more than five persons by reason that any five or fewer persons would, if the company were wound up, be entitled as loan creditors to receive more than one-half of the assets therein referred to (whether or not it would otherwise be deemed to be under such control) - (a) the definition of the expression 'member' shall, for the purposes of the said section 21 and any provisions of this or any other Act relating thereto, be extended so as to include any loan creditor of the company".
Subparagraph (b)...
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