Commissioners of Inland Revenue v Pollock & Peel, Ltd ((in Liquidation))
| Jurisdiction | England & Wales |
| Judgment Date | 24 May 1957 |
| Date | 24 May 1957 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Profits Tax - Capitalisation of profits followed by liquidation and reconstruction - Distributions by liquidator - Whether gross relevant distributions - Finance Act, 1947 (10 & 11 Geo. VI, c. 35), Section 35 (1); Finance Act, 1951 (14 & 15 Geo. VI, c. 43), Section 31.
The paid-up share capital of the Respondent Company was increased in 1952 from £2,004 to £30,060 by the application of part of the amount standing to the credit of capital reserve and profit and loss appropriation accounts. On 31st October, 1953, the Company went into voluntary liquidation. A new company subsequently took over the assets of its business, except a sum of cash, in consideration for shares in that company, the distribution of which to the members of the Respondent Company did not, by virtue of an election by the two companies under Section 36(4), Finance Act, 1947, affect its liability to Profits Tax. After paying all debts, etc., and the costs of the winding-up the liquidator was left with £15,030 in cash, which he distributed to the members of the Company as a final step in the liquidation.
The amount of £15,030 was included in the gross relevant distributions in an assessment to Profits Tax made on the Company for the last chargeable accounting period of its trade or business, ending on 31st October, 1953, on the footing that Section 31, Finance Act, 1951, applied. On appeal to the Special Commissioners, the Company contended (inter alia) (a) that Section 31 did not override the provisions of Section 35(1), Finance Act, 1947, limiting the amount of distributions made after the last chargeable accounting period which might be treated as gross relevant distributions to the excess over the nominal amount of the paid-up share capital, and (b) that the sum in question was not applied in reducing share capital so as to give rise to a distribution under Section 31. For the Crown it was contended that the provisions of Section 35(1) specifying the distributions to be treated as distributions of capital had no application to sums deemed to be distributions under Section 31. The Special Commissioners upheld the Company's first contention and allowed the appeal.
In the High Court it was further contended for the Crown that distributions by a liquidator should be divided for the purposes of Section 35(1) (c) into distributions of capital and income respectively.
Held, that the payment was not a repayment or return of share capital so as to be a "sum applied in reducing capital" within Section 31, Finance Act, 1951, and was a "distribution of capital" within Section 35(1), Finance Act, 1947.
Stated under the Finance Act, 1937, Fifth Schedule, Part II, Paragraph 4, and the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 21st January, 1955, Pollock & Peel, Ltd. (in liquidation) (hereinafter called "the Respondent Company"), appealed against an assessment to Profits Tax as follows:
Chargeable accounting period 1st January, 1953, to 31st October, 1953: distribution charge of £22,033 10s. 2d. at 20 per cent.; Profits Tax payable £4,406 14s. 10d.
2. The only matter in dispute was whether an amount of £15,030 cash distributed by the liquidator of the Respondent Company to its members was a "gross relevant distribution" within the meaning of Section 35(1) of the Finance Act, 1947, having regard to the terms of Section 31(1) of the Finance Act, 1951.
3. The following documents were produced and admitted:
A. Memorandum and articles of association of the Respondent Company.
B. Special resolutions of the Respondent Company passed on 6th November, 1952, relating to capitalisation of profits.
C. Agreement made on 6th November, 1953, between the Respondent Company acting by its liquidator, of the one part, and a new company called Pollock & Peel, Ltd., of the other part.
The above documents are not attached to and do not form part of this Case, but are available for the use of the High Court if required.
4. On the evidence before us in the aforesaid documents and on common ground between the parties to the appeal, we found the following facts admitted:
(2) The Respondent Company was incorporated on 12th May, 1942, to acquire and carry on an engineering business. Its share capital was £2,500 divided into 2500 shares of £1 each, of which 2004 shares were issued.
(3) In November, 1952, the Respondent Company's issued capital was increased from 2004 shares of £1 each to 30,060 of £1 in pursuance of a special resolution passed on 6th November, 1952, as follows:
Capitalisation of Profits:-That it is resolved that it is desirable to capitalise the sum of £28,056 being part of the amount standing to the credit of a Capital Reserve Account and a Profit and Loss Appropriation Account and that such sum be capitalised accordingly and used for the purpose of paying up as fully paid Bonus Shares 28,056 Ordinary Shares of £1 each and that such Bonus Shares be issued and allotted to the existing shareholders of the Company on the basis of fourteen new Bonus Shares for each Ordinary Share now held.
(4)
(5) At all material times the only directors of the Respondent Company were Mr. J.C. Pollock and his wife and they were the only shareholders until the death of Mr. J.C. Pollock on 8th November, 1953.
(6) On 31st October, 1953, the Respondent Company went into voluntary liquidation.
(7) As part of a scheme of reconstruction the Respondent Company's trade or business was transferred on 6th November, 1953, to a new company called Pollock & Peel, Ltd., in pursuance of an agreement made on that date between the liquidator of the Respondent Company, of the one part, and the said new company, of the other part. Apart from a sum of cash (referred to hereafter) which was excluded from the said transfer on 6th November, 1953, the new company took over all the assets of the Respondent Company's trade or business. The consideration for the said transfer of assets consisted wholly of shares in the new company, and those shares were received by the executors of J.C. Pollock and Mrs. Pollock, the sole members of the Respondent Company. It was common ground between the parties to the appeal that the distribution of the said shares to the executors of J.C. Pollock and Mrs. Pollock, being a distribution of shares in the new company in the course of the winding-up of the Respondent Company, did not give rise to any liability to Profits Tax because of a joint election by the two companies within the terms of Section 36 (4) of the Finance Act, 1947.
(8) After the aforesaid transfer of assets to the new company, and after the liquidator had paid all debts and liabilities of the Respondent Company including costs of winding it up, and after the aforesaid distribution of shares in the new company, there remained a sum of cash belonging to the Respondent Company amounting to £15,030. As a final step in the liquidation proceedings, and subsequent to the date at which the Respondent Company ceased to carry on its trade or business, the liquidator distributed the said sum of £15,030 cash to the executors of J.C. Pollock and Mrs. Pollock, the only members of the Respondent Company.
(9) Article 23 of the articles of association of the Respondent Company is as follows:
In a winding up the Liquidator may, with the sanction of an Extraordinary Resolution, distribute all or any of the assets in specie among the members in such proportions and manner as may be determined by such resolution, provided always that if any such distribution is proposed to be made otherwise than in accordance with the existing rights of the members, every member shall have the same right of dissent and other ancillary rights as if such resolution were a Special Resolution passed pursuant to Section 23 of the Companies Act, 1929.
(10) No extraordinary resolution pursuant to the said article was passed by the Respondent Company.
5. It was contended on behalf of the Respondent Company that:
(2) Section 35(1) of the Finance Act, 1947, provides, in relation to a distribution made by a body corporate with a share capital after the end of the last chargeable accounting period in which a trade or business is carried on, that so much only of that distribution as is in excess of the nominal amount of the body corporate's paid-up share capital may be treated as a gross relevant distribution;
(3) the Respondent Company's last chargeable accounting period was the period from 1st January, 1953, to the date of liquidation, 31st October, 1953; as the sum of £15,030 paid by the liquidator to the members of the Respondent Company after 31st October, 1953, was less than the nominal amount of its paid-up share capital (£30,060), the said sum of £15,030 (even if, which was not admitted, it was a distribution for Profits Tax purposes) was not a gross relevant distribution;
(4) the provisions of Section 31 of the Finance Act, 1951, on which the Commissioners of Inland Revenue relied and which provide that in certain events certain sums are to be deemed to be distributions for the purpose of Section 35 of the Finance Act, 1947, do not override those provisions of the said Section 35 which limit the amount of the distributions made after the end of the last chargeable accounting period which may be treated as gross relevant distributions;
(5) the said sum of £15,030 paid by the liquidator of the Respondent Company to its members was not for the purpose of Section 31(1) of the Finance Act, 1947, a sum applied in reducing the share capital of the Respondent Company; accordingly that provision did not operate to make the said sum of £15,030 a distribution for Profits Tax purposes;
(6) alternatively, only...
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