Commissioners of Inland Revenue v F.P.H. Finance Trust, Ltd ((in Liquidation)) (No. 2)
| Jurisdiction | England & Wales |
| Judgment Date | 22 March 1945 |
| Date | 22 March 1945 |
| Court | King's Bench Division |
NO. 1377-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Sur-tax - Undistributed income of company - Preference shareholders with voting control and rights to all surplus assets in a winding up - Apportionment among members "…in accordance with the respective interests of the "members…" - Application of Finance Act, 1928 (18 & 19 Geo. V, c. 17), Section 18 - Finance Act, 1922 (12 & 13 Geo. V, c. 17), Section 21 and First Schedule, Paragraph 8.
The Respondent Company, which was incorporated in the United Kingdom, was at all material times a trading company. Its capital of £10,000 in £1 shares was, in the early part of 1936, held by a company incorporated in Southern Rhodesia, the shares in which were held by Mrs. L. and her two daughters, in approximately equal amounts.
With a view to avoiding possible liability to Sur-tax which might attach to the shareholders of the Rhodesian company in consequence of certain provisions of the Finance Act, 1936, the following transactions were carried out:-
(a) On 27th November, 1936, the share capital of the Respondent Company was reconstituted and increased; the existing 10,000 £1 shares were converted into preference shares, carrying a 5 per cent. dividend and the right to surplus assets on a winding up, and 1000 ordinary shares of £1 each were created carrying a right to sums declared by way of dividend, but with the right, on a winding up, to repayment of capital and no more. Shareholders of either class were entitled to one vote per share. The 1000 ordinary shares were taken up, at the instance of the Respondent Company, by a public company to which Section 21 of the Finance Act, 1922, did not apply. Mrs. L's husband was a director of this company and had effective control in its management.
(b) In December, 1936, the Rhodesian company was wound up and its holding of shares of the Respondent Company was distributed to the members; the shareholders of the Respondent Company thus became Mrs. L. and her two daughters, holding the 10,000 preference shares in, as nearly as possible, equal amounts, and the public company, holding 1000 ordinary shares.
(c) On 1st April, 1938, the Respondent Company went into liquidation, the public company was repaid £1,000, the amount subscribed for its holding of ordinary shares, and the balance of assets was distributed to Mrs. L and her daughters.
Up to the end of 1936 the Respondent Company had distributed no dividends and had accumulated profits exceeding £900,000. Under the powers conferred on them by Paragraph 4 of the First Schedule to the Finance Act, 1922, the Special Commissioners, in May, 1937, issued to the Company a formal notice calling for certain statements (as to actual income of the Company, etc.) in respect of each year or period ended after 31st March, 1935. The Company's accountants furnished certain information on 5th October, 1937, and stated that an annual general meeting would be held on 12th October, 1937. At this meeting accounts for the period 1st April, 1935, to 31st December, 1936, which showed a profit of £645,192, were adopted, and dividends were declared amounting in the aggregate to £46 11s. 6d. in respect of the period 27th November to 31st December, 1936, on the preference shares and to £100 in respect of the period to 31st December, 1936, on the ordinary shares. The declaration of these dividends was notified to the Special Commissioners on 8th February, 1938. Copies of the accounts as adopted by the Company were not sent to them, and no indication was given that the Company relied on Section 18 of the Finance Act, 1928.
On 2nd September, 1940, the Special Commissioners issued a direction under Section 21, Finance Act, 1922, for the period 1st April, 1935, to 31st December, 1936, and apportioned the Company's income thus: £100 to the public company and the balance in approximately equal amounts to Mrs. L and her two daughters.
On appeal it was contended on behalf of the Respondent Company that, since the Company had furnished the Special Commissioners with all the information necessary to enable them to consider the Company's position in relation to Section 21 of the Finance Act, 1922, there had been substantial compliance with Section 18(1) of the Finance Act, 1928, and as the Special Commissioners had taken no further action within the prescribed period of three months their power to issue a direction under Section 21 had lapsed by virtue of Section 18 (3) of the Finance Act, 1928. It was also contended that the apportionments to Mrs. L and her two daughters were not made in accordance with Paragraph 8 of the First Schedule of the Finance Act, 1922, because they were made with regard to their rights in a winding up on cessation of the Company's trading, and not by having regard only to the dividend rights of the shareholders while the Company was actively trading. The Appeal Commissioners held that the provisions of Section 18 of the Finance Act, 1928, did not apply to the case. They also held that the apportionment to Mrs. L and her two daughters could not be sustained.
Held, (1) that the Company had not strictly complied with the requirements of Section 18 of the Finance Act, 1928, and was not entitled to the benefit of that Section, and
(2) that in apportioning income of a company "in accordance with the "respective interests of the members" for the purposes of Section 21 (and Paragraph 8 of the First Schedule) of the Finance Act, 1922, there was no justification for restricting the "interests" which might be taken into consideration to rights in declared dividends; that the Special Commissioners should have regard to all the different interests of the members, including their rights to undistributed profits in a winding up; and that in considering these interests and apportioning the income among them the Commissioners may properly be guided by the preamble to Section 21 and endeavour to make an apportionment, appropriate to their interest, to those members for whose benefit, in relation to the avoidance of Sur-tax, the distribution of income has been obviously withheld.
Stated under the Finance Act, 1927, Section 42 (7), and Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on 22nd and 31st July, 1941, F.P.H. Finance Trust, Ltd. (in liquidation) (hereinafter called "the Respondent Company") appealed against a direction and apportionments made under the provisions of Section 21 of the Finance Act, 1922, and Paragraph 8 of the First Schedule thereto, in respect of the period 1st April, 1935, to 31st December, 1936.
2. The Respondent Company was incorporated on 13th September, 1912, under the style of the Rhoex Development Co., Ltd., with a nominal capital of £100 divided into 100 shares of £1 each.
By extraordinary resolution dated 20th January, 1927, the capital of the Company was increased to £10,000 divided into 10,000 shares of £1 each.
On 4th February, 1927, by special resolution the Company adopted new articles of association.
By special resolution confirmed on 2nd April, 1927, the name of the Company was changed to F.P.H. Finance Trust, Ltd.
3. Annexed hereto and forming part of this Case are copies of the following documents, marked "A", "B" and "C" respectively(1):-
(A) Memorandum of association.
(B) Articles of association adopted 4th February, 1927.
(C) Special resolution relating to change of name.
4. Since its reorganisation in 1927 the Respondent Company has been a trading company, the business of which has consisted mainly in financing and dealing in the shares of gold mining and mining development companies. The Company held a leading position in a group of companies, many of them mining companies, all housed in the same office with a common staff and secretariat, and had sponsored in the course of its business most of the West African mining propositions floated during the period. Mr. H.G. Latilla was the most important personage in the group. It was not an "investment "company" within the meaning of Section 20 (1) of the Finance Act, 1936, Section 14 (3) of the Finance Act, 1937, or Section 15 of the Finance Act, 1939.
5. Prior to 19th March, 1934, the issued capital of the Respondent Company (£10,000) was in the beneficial ownership of Mrs. E.M. Latilla, the wife of Mr. H.G. Latilla. On that date Mrs. Latilla sold her beneficial interest to Marlands Trust, Ltd., a company incorporated in Southern Rhodesia, in exchange for £100,000 debentures in the purchasing company, and on 5th July, 1934, 9890 of the shares were transferred to Marlands Trust, Ltd. (hereinafter called "the Trust"), the remaining 110 shares being held by that company's nominees. The Trust (the shares in which were held by Mrs. Latilla and her two daughters) retained until 23rd December, 1936, the beneficial interest in the issued capital of the Respondent Company. During that time no dividends were paid thereon and a very large income was accumulated for the benefit of the Trust which was not assessable to Sur-tax. The profit and loss account of the Company for the year ending 31st March, 1934, showed a profit of £152,000, and that for the year ending 31st March, 1935, showed one of £135,000, and the carry-forward to the accounts for the period ending
31st December, 1936, amounted to £293,000. A copy of the accounts of the Company for the period ending 31st December, 1936, is annexed hereto, marked "D", and forms part of this Case(1).6. In 1936 Mrs. Latilla and the other shareholders in the Trust became apprehensive that as a result of recent financial legislation the income of the Respondent Company might be regarded as the income of the shareholders...
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