Deeny and Others v Gooda Walker Ltd (in voluntary liquidation) and Others
| Jurisdiction | England & Wales |
| Judgment Date | 11 January 1995 |
| Date | 11 January 1995 |
| Court | Queen's Bench Division (Commercial Court) |
Potter J.
Queen's Bench Division (Commercial Court).
This was an application in an action whereby the plaintiffs, 3062 Lloyd's underwriting members ("the names"), were awarded damages against their former managing agents (see [1994] CLC 1224). The defendant managing agents claimed a reduction of the damages following the principle in British Transport Commission v Gourley ELR[1956] AC 185. The Revenue, who were joined in the application, claimed that the damages were taxable in the hands of the names.
On 4 October 1994 Phillips J awarded damages against the defendants for failure to exercise reasonable skill and care in conducting the business of underwriting on behalf of the names. The losses in respect of which damages were awarded were those suffered by the names in 1988 and 1989.
Phillips J assessed the damages 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.
Each name, as an underwriting member of Lloyd's, was a sole trader conducting the business of underwriting through managing agents. Each name would be a member of one or more syndicates. He would be only liable for his proportionate share of any expenses and losses of a syndicate to which he belonged and would receive only his proportionate share of any profits. The profits of a syndicate went entirely to the members: the syndicate itself was not taxed.
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 various trading conditions imposed on participating 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), after defining a member, 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 apportionment of a syndicate's profits and losses to a member formed the basis of his assessment to tax on his Lloyd's business.
The first question was whether the damages recoverable by the names were subject to tax in their hands. That depended on whether the damages constituted revenue receipts of the names' business as an underwriter at Lloyd's within the Finance Act 1992 section 184 subsec-or-para (1)Finance Act 1992, s. 184(1). If they were, then they would be taxable as "other profits" under Finance Act 1993 section 172 subsec-or-para (1)s. 172(1)(c).
The second question was whether the damages 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. 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. The defendants contended that the damages were not taxable in the names' hands and therefore a Gourley reduction should be made.
The Revenue submitted first that the damages were awarded as compensation for the names' liability to make payments in respect of insurance claims for which they ought never to have been liable, under policies negligently written by the defendants. The yardstick by which such damages were assessed would be, in effect, such sums (less appropriate deductions) as would compensate for non-receipt of indemnity under reinsurances.
Secondly, the underwriting business was the name's personal business in respect of which he was personally taxable, even though the rules of Lloyd's required that it be conducted on the name's behalf by agents. If a name incurred expenditure wholly and exclusively for the purposes of that business, or received payments arising from that business, they were to be brought into account in the computation of his profits on the basis of his personal tax return, whether or not they passed through the hands of his agents.
Thirdly, the legislation recognised that various expenses might be incurred and would be allowable outside the scope of the business conducted through a syndicate.
Finally, the Revenue pointed out that in past years the names had claimed tax relief for losses, and it followed that compensation which the names were to receive to indemnify them against those losses should similarly be brought into accou nt for tax purposes.
The managing agents contended that, under the Finance Act 1993 section 171 subsec-or-para (1)Finance Act 1993, s. 171(1), tax was assessed on the profits "arising from a member's underwriting business". In bringing the action for damages, the names were acting personally and in no sense in pursuance of the business of their syndicates. They were not pursuing the business of a Lloyd's underwriter but were bringing actions in their personal capacity to obtain compensation payable directly to them. Moreover, the damages were compensation for losses, not the losses themselves.
The managing agents further contended that, even if they were wrong on the taxability issue, a deduction still fell to be made to the extent that a gross recovery might bring a "windfall" to individual names who had secured tax relief in a year of loss at a higher rate than the tax rate chargeable on the damages received in the year of recovery.
Held, ruling that the damages were taxable in the hands of the names and that no deduction was to be made following the principle in British Transport Commission v Gourley.
1. If a relationship or cause of action arising from the carrying on of the business of underwriting were relied on for the purpose of recovering damages which represented compensation for lost profits from the business of the taxpayer/underwriter, then for tax purposes, that was how they were to be treated. In the instant case compensation was payable for the individual name's loss as a trader. Therefore, since the damages were to be regarded as receipts of the underwriting business, they were taxable in the hands of the names. London & Thames Haven Oil Wharves Ltd v Attwooll (HMIT) TAX(1966) 43 TC 491 at p. 515, per Lord Diplock followed.
2. In commercial or breach of contract cases, rough justice was done and a great expenditure of time and costs was saved by ignoring the tax on both sides so that in effect the tax on the lost earnings was set off against and cancelled out by the damages. No principle could be derived from Gourley's case requiring taxation to be taken into account in assessing damages in a situation where both lost earnings or profits and the damages were taxable. Parsons v BNM Laboratories Ltd ELR[1964] 1 QB 95 at p. 135 per Pearson LJ followed.
The following cases were referred to in the judgment:
British Transport Commission v Gourley ELR[1956] AC 185
Fisher (Donald) (Ealing) Ltd v Spencer (HMIT) TAX[1989] BTC 112
John & Ors v James & Ors TAX[1986] BTC 261
London & Thames Haven Oil Wharves Ltd v Attwooll (HMIT)TAX(1966) 43 TC 491
Napier and Ettrick (Baron) & Ors v Kershaw & OrsUNK(unreported, 14 May 1992)
Parsons v BNM Laboratories Ltd ELR[1964] 1 QB 95
Praet (Julien) et Cie SA v HG Poland Ltd UNK[1962] 1 Lloyd's Rep 566
Shove v Downs Surgical plc UNK[1984] 1 All ER 7
Society of Lloyd's v Morris & Ors UNK(unreported, 15 March 1993; 28 May 1993 (CA))
David Goldberg QC, Simon Bryan and Hugh McKay (instructed by Elborne Mitchell) for the managing agents.
Andrew Park QC and David Lord (instructed by Wilde Sapte) for the names.
Ian Glick QC and Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
Potter J: Introduction:
The taxation issues before me arise out of the judgment given by Phillips J on 4 October 1994 when he awarded damages to the plaintiff underwriters ("the names") against the defendants, their former managing agents, now in liquidation. The damages claimed and awarded were for a failure to exercise reasonable skill and care in conducting the business of underwriting on behalf of the names. The losses in respect of which damages were awarded were those suffered by members of Syndicate 298 in the underwriting years 1988 and 1989, Syndicate 299 in the same years, Syndicate 290 in 1989 and 1990 and Syndicate 164 in 1989.
In giving judgment in relation to the assessment of damages Phillips J decided that the plaintiffs were entitled to that award of damages which would place them in the same position as if the underwriting carried out on their behalf by each syndicate had been competently performed. Having observed that such a basic test was easy to state but difficult to apply to the facts before him, he set out the methods which should be adopted and the matters to be considered and disregarded in applying the basic test when damages come to be assessed. He rejected the names' argument that he should first consider the results of a notional "paradigm syndicate" over the relevant years and award such damages as would place the names in the same position as if they had been members of that syndicate, as being an artificial and unrealistic exercise. He pointed out that, in relation to the "five central catastrophes" of which complaint had been made in the action as the principal source of the names' exposure and damage, the losses had been suffered because the defendants had failed to put in place, whether on a first loss or reinstatement basis, cover that extended sufficiently high to cover the claims arising out of that catastrophe. Accordingly, he decided that:
The plaintiffs should recover by way of damages such sums as will put them in the same position as if this exposure had been protected by reinsurance.
So far as the assessment of...
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