Commissioners of Inland Revenue v Goodwin

JurisdictionEngland & Wales
JudgeLord Diplock,Lord Morris of Borth-y-Gest,Lord Kilbrandon,Lord Salmon,Lord Edmund-Davies
Judgment Date28 January 1976
Judgment citation (vLex)[1976] UKHL J0128-2
Date28 January 1976
CourtHouse of Lords

[1976] UKHL J0128-2

House of Lords

Lord Diplock

Lord Morris of Borth-y-Gest

Lord Kilbrandon

Lord Salmon

Lord Edmund-Davies

Commissioners of Inland Revenue
(Appellants)
and
Goodwin
(Respondent)

Upon Report from the Appellate Committee, to whom was referred the Cause Commissioners of Inland Revenue against Goodwin, That the Committee had heard Counsel, as well on Monday the 17th, as on Tuesday the 18th and Thursday the 20th, days of November last, upon the Petition and Appeal of the Commissioners of Inland Revenue of Somerset House, The Strand, London, W.C.2, 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 29th of January 1975, 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 John Goodwin, 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 29th day of January 1975, 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

My Lords,

1

I have had the advantage of reading in advance the speech to be delivered by my noble and learned friend, Lord Kilbrandon.

2

I agree with him and would dismiss the appeal.

Lord Morris of Borth-y-Gest

My Lords,

3

Before the Commissioners it was for the respondent to show that the transactions in question were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments and further that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained. As to this latter matter the Commissioners found that the obtaining of tax advantage was not a main object of any of the transactions. The point of difficulty in the case concerned the question whether in regard to the 1951 transaction (from which the later transactions stemmed and with which they were linked) the conclusion of the Commissioners that its object was a bona fide commercial one was a conclusion which ran counter to and was not warranted by their findings of fact. Was the evidence which was accepted inconsistent with and contradictory of their conclusion? Though a contention to this effect was very forcibly argued and though during our consideration of the appeal I was impressed by the reasoning in the careful judgment of Walton J., I came in the end, though after hesitation, to the view that the reasoning of the Court of Appeal was to be preferred and for the reasons given by my noble and learned friend Lord Kilbrandon�whose speech I have had the advantage of reading in advance�I agree that the appeal should be dismissed.

Lord Kilbrandon

My Lords,

4

R. Goodwin & Sons (Engineers) Ltd. ("The Company") are incorporated for the purpose of carrying on an engineering business established in the Midlands in 1883. The founders were a Mr. Goodwin and his sons. When the incorporation into a private company took place in 1935, two of old Mr. Goodwin's grandsons, Frank and John, were directors; in 1954 the board was joined by a great-grandson, who is the respondent, and another director. Economic history testifies to the fact that such concerns have been the back-bone of English manufacturing prosperity, and this fact may turn out to be important.

5

The ensuing narrative is derived from the findings in fact made by the Special Commissioners in circumstances which will become apparent. The narrative is given in skeleton form, so as, so far as possible, to include only the facts which are essential to a decision of the appeal, because there is a full statement to be found in the judgment of the Court of Appeal, and there is no point in repetition. I may say straight away that I agree with the approach adopted by the Court of Appeal, and the conclusion at which the Court arrived.

6

1. In 1951 consideration was given to the Company "going public", thus obtaining access to fresh capital for expansion purposes. But the time was deemed unpropitious, because inter alia, the recent dividend record had not been such as to make public support probable.

7

2. The shares at that time were held as to 40 per cent. by John Goodwin senior, then aged 55, and by trustees of family settlements made by him, 30 per cent. by Frank Goodwin, then aged 60, and by trustees of family settlements made by him, and 30 per cent. by the respondent. The trust holdings had been constituted so recently as to make the shares aggregable for estate duty with the estates of the settlors on decease. To meet the duty it would probably have become necessary to sell shares, with the danger of family control being lost. The importance of family control will be adverted to later.

8

3. It was therefore decided, and the Company resolved accordingly, to increase the capital of the company by capitalising £44,525 from profit and loss account, to create 6 per cent. preference shares redeemable by the Company at three months notice after 12 months, and to issue those shares to the existing shareholders as a 5 to 1 bonus issue. Thus, on redemption, resources would have become available to meet the threat to the family control. It is important to emphasize that the Commissioners find as a matter of fact that the decision referred to under heading 3 above was taken for the reasons given under heading 2,

"that the main object of the 1951 preference share issue was a bona fide commercial one, and that the obtaining of a tax advantage was not a main object."

9

4. In 1958 it was decided that the history and prospects of the Company were such as to make the time ripe for a public issue. The method by which this was to be effected was described by the Court of Appeal as follows:�

"After a good many varying suggestions, the scheme evolved for a public flotation was as follows, accepted by the Goodwin family and trustees of the settlements: (1) acquisition by the company of the outstanding 71 per cent. shareholding in a company ('Akron') so as to make it a 100 per cent. subsidiary; (2) the 1951 bonus issue of preference shares to be made irredeemable for a period of some five years to enable expanding trade to replace the substantial sum (some £130,000) of working capital required for the Akron acquisition; (3) half the ordinary shares in the company to be converted into deferred ordinary shares, the offer to the public to be made out of the unconverted ordinary shares; the deferred ordinary shares to remain as such until after the redemption of the 1951 preference shares."

10

5. At this stage a crisis arose; it was discovered that the preference shares had been issued pursuant to an ordinary, not a special, resolution of the Company, and that therefore the essential quality of redeemability did not attach to them. The foundation of the scheme was thus insecure.

11

6. Although the danger of shares having to be sold to meet death duties was now less menacing, owing to the efflux of time having released the settled shares from liability to duty, it was still real. It was related now in part to the survivorship of the respondent. Any action which was to be taken had accordingly still to be effective in the two respects of securing the family control and enabling the issue to the public. The obvious thing to do was, by the most convenient means, so to re-structure the capital as to re-make the provision which it was thought had been made in 1951. Again to quote the judgment of the Court of Appeal.

"This was done first by converting the 1951 preference shares into deferred ordinary shares. The company then capitalised the sum of £171,095 from its general reserve and applied that sum in paying up at par: ( a) 44,525 out of 45,000 newly-created £16 per cent. redeemable preference shares; ( b) 81,095 of previously unissued (6,095) and newly-created ordinary shares (75,000); ( c) 45,475 of previously unissued (475) and newly-created (45,000) deferred ordinary shares: the 475 representing the converted unissued 1951 preference shares.

The capital structure of the company for the purpose of the public flotation was thus: issued ordinary £90,000, of which a proportion (£54,000) was to be offered to the public: issued deferred ordinary shares, 90,000: issued 6 per cent. redeemable preference shares, 44,525: unissued redeemable preference shares, 475.

The redeemable preference shares were redeemable at the company's option after April 30, 1963. The deferred ordinary shares were to rank...

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