Deeny and Others v Gooda Walker Ltd (in voluntary liquidation) and Others
Jurisdiction | England & Wales |
Judgment Date | 05 October 1995 |
Date | 05 October 1995 |
Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Simon Brown, Peter Gibson and Saville L JJ.
Bernard Eder QC, Philip Baker and Simon Bryan (instructed by Elborne Mitchell) for the appellants (Gooda Walker).
Geoffrey Vos QC, David Lord and John Walters (instructed by Wilde Sapte) for the respondents (the names).
Ian Glick QC and Launcelot Henderson QC for the Inland Revenue.
The following cases were referred to in the judgment:
Arbuthnott v Fagan [1995] CLC 1396
British Transport Commission v Gourley ELR[1956] AC 185
Cape Brandy Syndicate v IR Commrs ELR[1921] 1 KB 64
Fisher (Donald) (Ealing) Ltd v Spencer (HMIT) TAX[1989] BTC 112
Glenboig Union Fireclay Co Ltd v IR Commrs TAX(1922) 12 TC 427
Gliksten (J) & Sons v Green ELRELR[1928] 2 KB 193; [1929] AC 381
Gray (HMIT) v Lord Penrhyn TAX(1937) 21 TC 252
IR Commrs v Newcastle Breweries Ltd TAX(1927) 12 TC 927
IR Commrs v W Andrew Biggar (a firm) TAXTAX(1982) 53 TC 254; [1982] BTC 332
Koenigsberger v Mellor (HMIT) TAX[1995] BTC 292
London and Thames Haven Oil Wharves Ltd v Attwooll (HMIT)ELR[1967] Ch 772
Napier and Ettrick (Baron) v Kershaw & Ors UNK(unreported, 14 May 1992)
R v BC Fir and Cedar Lumber Co Ltd ELR[1932] AC 441
Raja's Commercial College v Gian Singh & Co Ltd ELR[1977] AC 312
Rubber Improvement Ltd v Daily Telegraph Ltd ELR[1964] AC 234
Society of Lloyd's v Morris UNK(unreported, 15 March 1993)
White v G & M Davies WLR[1979] 1 WLR 908
Williams' Executors v IR Commrs TAX(1944) 26 TC 23
This was an appeal by the defendants in an action in negligence, in which the Revenue were joined, against a judgment of Potter J ([1995] BTC 71). The judge refused to reduce damages awarded to the plaintiffs to take account of tax which would have been payable had the plaintiffs received the sums for which the damages were compensation.
On 4 October 1994 Phillips J ([1994] CLC 1224) had awarded damages against the defendants, who were agents for "names" at Lloyd's, for losses resulting from the plaintiffs' failure to exercise reasonable skill and care in conducting the business of underwriting on behalf of the names. The damages were assessed on the basis that the names were entitled to be put in the same position as if the underwriting carried out on their behalf had been competently performed, in effect as if their exposure to liability had been protected by reinsurance.
Income tax under Sch. D, Case I was chargeable on the annual profits of each name as a sole trader pursuant to a special regime for taxing Lloyd's underwriters who were subject to trading conditions imposed on participating underwriting syndicates by Lloyd's. One of those trading conditions was that business had to be carried on through managing agents. However, the Finance Act 1993 section 184 subsec-or-para (1)Finance Act 1993, s. 184(1) defined a member's underwriting business as "Underwriting business as a member of Lloyd's whether carried on personally or through an underwriting agent".
The damages recoverable by the names would be subject to tax in their hands if the damages constituted revenue receipts of the names' business as underwriters at Lloyd's within the Finance Act 1993 section 184 subsec-or-para (1)Finance Act 1993, s. 184(1). If they were, then they would be taxable as "other profits" under theFinance Act 1993 section 172 subsec-or-para (1)Finance Act 1993, s. 172(1)(c).
The defendants contended that the damages were not taxable in the names' hands and therefore should be reduced by an amount representing any tax saving achieved by the names in connection with their Lloyd's underwriting business under the rule in British Transport Commission v Gourley ELR[1956] AC 185 ("the Gourley principle").
The defendants contended that the damages did not arise "from the trade" of a name, within the meaning of the Income and Corporation Taxes Act 1988 section 18 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 18(1), namely from his underwriting business (Finance Act 1993 section 171 subsec-or-para (1)Finance Act 1993, s. 171(1)). They relied on the unique features of underwriting at Lloyd's and the statutory framework set up for the carrying on of underwriting business. By section 83s. 83 of the Insurance Companies Act 1982 every name was required to carry to a trust fund in accordance with a trust deed approved by the Secretary of State all premiums received by him or on his behalf in respect of any insurance business. The defendants relied on cases where the construction of premiums trust deeds were in issue.
The Revenue contended that the damages recovered were subject to tax and, supported by the names, that they should not be subject to a reduction.
Held, dismissing the appeal, Saville LJ dissenting:
By reason of the negligence of their agents, the names made losses, which could be claimed as allowable losses for tax purposes, being losses incurred in their underwriting businesses. If they had insured against losses resulting from the negligence of their agents, the insurance moneys received would have arisen from the names' underwriting businesses. There was no material difference between such insurance recoveries and the actual recovery made in this case through an action for damages against the agents. Once the source of the right to damages was identified as the negligence of the defendants as agents of the names in conducting the underwriting businesses of the names, it was established that the compensation arose from the trade. London and Thames Haven Oil Wharves Ltd v Attwooll (HMIT) ELR[1967] Ch 772 and Donald Fisher (Ealing) Ltd v Spencer (HMIT) TAX[1989] BTC 112 followed.
2. It followed that the damages were taxable in the hands of the plaintiffs and no deduction should be made to reflect tax liabilities:British Transport Commission v Gourley ELR[1955] AC 185 not applicable.
3. The context of premiums trust deeds and the relevant fiscal provisions could not be regarded as the same. Not only was the language of premiums trust deeds different from the statutory language, but it was apparent from the Finance Act 1988 section 172 subsec-or-para (1)Finance Act 1988, s. 172(1)(c), which included "other profits or losses", that profits and losses arising otherwise than directly from assets in the premiums trust fund were intended to be within the charge to tax. The purpose of premiums trust deeds was to identify which sums should go into a trust fund while the Finance Act 1993 was concerned with liability to tax. Baron Napier and Ettrick v Kershaw & Ors (unreported, 14 May 1992) and Society of Lloyd's v Morris (unreported, 15 March 1993) distinguished.
Per Saville LJ: The test in determining whether the receipt of compensation was or was not a trading receipt was to ask whether the sum received was itself a trading receipt, not whether it was compensation for a trading receipt. The test should be, simply, as the statute provided, whether the receipt in question arose from the underwriting business of each member. The damages in the present case did not arise from the members' "underwriting business" as defined in the statute.
Peter Gibson LJ: In Baron Napier and Ettrick v Kershaw & Ors 13 May 1992 (unreported) Saville J refused to consider whether money received by a name in settlement of Lloyd's litigation was to be taken into account in assessing the name's liability for tax, as the meaning and effect of tax statutes and regulations represented a quagmire into which one should avoid treading unless absolutely necessary. On this appeal absolute necessity has driven this court into that quagmire. But it is appropriate that I should express my gratitude for the brave rescue efforts of Mr Eder QC for the appellants (defendants), Mr Glick QC for the Commissioners of Inland Revenue ("the Revenue") and Mr Vos QC for the plaintiffs. Their admirable arguments, both written and oral, have enabled me to reach what I hope is solid ground for the decision which I have reached.
This appeal raises the question of how damages should be treated for tax purposes in the hands of plaintiffs to whom they have been awarded. That question has been considered and answered before but in other contexts. The context in which the question arises in the present case differs from that of any of the earlier cases. Potter J however applied principles laid down in certain earlier cases in upholding the arguments of the Revenue, supported as they were by the plaintiff names, (i) that damages recovered in the plaintiffs' action against the defendant managing agents and members' agents are subject to income tax under Sch. D in the plaintiffs' hands and (ii) that such damages are not to be reduced by the amount of any tax saving achieved by the plaintiffs in connection with their Lloyd's underwriting business. Certain of the defendants, namely most of the members' agents but not the managing agents who are in liquidation, now appeal on the first point alone.
Lloyd's is a society of individual underwriting members, known as names. Insurance is effected by names grouped in syndicates. Some names are themselves underwriting agents and are known as working names. The vast majority effect contracts of insurance through underwriting agents, acting for the names who are known as external names. Members' agents are underwriting agents who advise names on their choice of syndicates, place names on the syndicates chosen by them and give them general advice. Managing agents are underwriting agents who manage one or more Lloyd's syndicates, underwriting contracts of insurance at Lloyd's on behalf of the names in their syndicates and reinsuring contracts of insurance. Some underwriting agents combine the roles of members' agents and managing agents.
The plaintiffs were the majority of the names on syndicates 164, 290, 298 and 299 and suffered heavy underwriting losses -
as members of syndicates 298 and...
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