Dunstan v Young, Austen & Young Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 19 December 1988 |
| Date | 19 December 1988 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal.
Lloyd and Balcombe L.JJ. and Sir George Waller.
Mr. Andrew Thornhill Q.C. (instructed by Ashurst Morris & Crisp) for Young, Austen & Young Ltd.
Mr. C.H. McCall Q.C. (instructed by the Solicitor of Inland Revenue) for the Crown.
The following case was referred to in the judgment of the court:
W.T. Ramsay Ltd. v. I.R. Commrs. ELR[1982] A.C. 300
Corporation tax - Reorgansiation of company's share capital - Increase in capital of company by issue of new shares - All new shares allotted to taxpayer company which held all existing shares except one - One remaining share held as nominee for taxpayer company - Whether reorganisation of share capital - Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4(1) (see now the Capital Gains Tax Act 1979 section 77 subsec-or-para (1) section 77 subsec-or-para (2)Capital Gains Tax Act 1979, sec. 77(1), (2)).
This was an appeal by the taxpayer company from a decision of Warner J. ([1987] BTC 530) allowing an appeal by the Crown against the determination of a Special Commissioner that an increase in the capital of a company by the issue of shares allotted to the holder of all but one of the company's existing shares was not a "reorganisation of the company's share capital" within the meaning of theFinance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4(1).
In 1977, shortly before becoming a member of the Trafalgar House group, the taxpayer company ("YAY") acquired all the 1000 issued shares of £1 each in a company ("Jones") for £16,100. On becoming a member of the group one share in Jones was registered in the name of a group service company ("THIGS"), as nominee for YAY.
It was decided that Jones, which had never traded profitably, should be sold, but first, debts owing by Jones to YAY amounting to £200,911 had to be eliminated. The method adopted for that purpose was an increase in the share capital of Jones and the amount subscribed for the new shares to be applied in repaying the debt. Jones's capital was increased by the creation of 200,000 new ordinary shares of £1 each allotted to YAY for £200,000 which Jones paid to YAY in satisfaction of the debt. No shares were allotted to THIGS.
On 29 June 1979 the sale of Jones was completed by the transfer by YAY of 200,999 shares and one share by THIGS to an outside purchaser for £38,000.
YAY claimed a capital loss based on an acquisition price of £216,100. The issue of the shares and their allotment to YAY constituted a reorganisation of Jones's share capital within the Finance Act 1965 schedule 7 subsec-or-para 4Finance Act 1965, Sch. 7, para. 4 with the result that the £200,000 given for the new shares would be treated as given for the original shares.
The Revenue's view was that the new shares were acquired by YAY "otherwise than by way of bargain at arm's length" so that they were deemed by virtue of Finance Act 1965 section 22 subsec-or-para (4)sec. 22(4) of the 1965 Act to have been acquired for a consideration equal to their market value of £38,000.
A Special Commissioner decided that there had been a reorganisation but the High Court allowed an appeal by the Crown, YAY appealed to the Court of Appeal.
It was common ground that had the new issue taken the form of a rights issue with THIGS being allotted its due proportion of the new shares, the case would have fallen within Finance Act 1965 schedule 7 subsec-or-para 4para. 4(1)(a)(i).
YAY contended first that the issue and allotment of the new shares were transactions within Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4(1)(a)(i), and alternatively, that the transactions were in any event covered by the natural meaning of the phrase "a reorganisation of a company's share capital" inFinance Act 1965 schedule 7 subsec-or-para 4para. 4(1), the specific transactions described in Finance Act 1965 schedule 7 subsec-or-para 4 schedule 7 subsec-or-para 4subpara. (a)(i) and (ii) being merely examples rather than an exhaustive definition of a reorganisation.
The Revenue contended that, while Finance Act 1965 schedule 7 subsec-or-para 4subpara. (1)(a)(i) was not an exhaustive definition of a reorganisation, it was an exhaustive definition of those increases of capital which constituted a reorganisation of share capital within the paragraph. It required the allotment of shares to be in proportion to existing holdings and because THIGS was not allotted any shares that requirement was not met.
Held, allowing YAY's appeal:
1. The essential feature of the issue and allotment of the new shares was the continued identity of the shareholders, holding their shares in the same proportions. An increase of share capital could be a reorganisation of that capital, notwithstanding that it did not come within the precise wording of Finance Act 1965 schedule 7 subsec-or-para 4subpara. (1)(a)(i), provided that the new shares were acquired by existing shareholders because they were existing shareholders and in proportion to their beneficial holdings.
2. YAY was to be regarded as the beneficial holder of the one share held by THIGS as nominee for YAY (see Finance Act 1965 section 22 subsec-or-para (5)sec. 22(5) of the 1965 Act). After the issue and allotment of the new shares, YAY remained the beneficial owner of all the shares in Jones. Therefore the transaction amounted to a reorganisation of Jones's share capital within the natural meaning of that phrase in Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4(1). Consequently, it was unnecessary to decide whether the transactions fell within the specific provisions ofFinance Act 1965 schedule 7 subsec-or-para 4para. 4(1)(a)(i).
Judgment of the court delivered by Balcombe L.J.
By a notice of appeal dated 16 December 1987 the taxpayer company ("YAY") appealed on the following grounds:
1. the judge erred in law in finding that Finance Act 1965 section 22 subsec-or-para (5)sec. 22(5) of the Finance Act 1965 ("the Act") did not have the effect of making it immaterial for the purposes of Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4(1)(a)(i) to the Act, where there is a nominee holding, whether an allotment in respect of that holding is made to the nominee or to the beneficial owner;
2. further or alternatively that the judge erred in law in limitingFinance Act 1965 schedule 7 subsec-or-para 4para. 4(1)(a)(i) to transactions where the number of new shares allotted depended on the number of shares already held;
3. further or alternatively that the judge erred in law in finding that the natural meaning of the phrase "reorganisation of a company's share capital" in Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4(1)(a) to the Act did not include an increase in the share capital of that company where the shareholders of that company remained the same; and further that the judge erred in law in finding that Finance Act 1965 schedule 7 subsec-or-para 4Sch. 7, para. 4(1)(a)(i) to the Act was virtually exhaustive where the reorganisation took the form of an allotment of new shares.
In 1977 the appellants, Young, Austen & Young Ltd. ("YAY"), acquired for £16,100 all the 1000 issued shares of £1 each in the capital of Jones Refrigeration Ltd. ("Jones"). Shortly thereafter YAY became a member of the Trafalgar House group of companies. Within that group there is a company, T.H.I. Group Service Ltd. ("THIGS"), which provides professional services to members of the group. When YAY became a member of the Trafalgar House group, one share in Jones was registered in the name of THIGS as nominee for YAY; the remaining 999 shares in Jones were registered in the name of YAY.
Jones had not been trading profitably...
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