F.P.H. Finance Trust Ltd v Commissioners of Inland Revenue (No. 2)
| Jurisdiction | England & Wales |
| Judge | Lord Russell of Killowen,Lord Macmillan,Lord Porter,Lord Simonds |
| Judgment Date | 22 March 1945 |
| Judgment citation (vLex) | [1945] UKHL J0322-1 |
| Date | 22 March 1945 |
| Court | House of Lords |
[1945] UKHL J0322-1
House of Lords
Lord Russell of Killowen
Lord Macmillan
Lord Porter
Lord Simonds
After hearing Counsel, as well on Wednesday the 7th, as on Thursday the 8th, Monday the 12th, Tuesday the 13th, Wednesday the 14th, Thursday the 15th and Monday the 19th days of February last, upon the Petition and Appeal of F.P.H. Finance Trust, Limited (in liquidation), of Finsbury Pavement House, Moorgate, in the City of London, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of His Majesty's Court of Appeal, of the 14th of December 1943, might be reviewed before His Majesty the King, in His Court of Parliament, and that the said Order may be reversed, varied, or altered, or that the Petitioners might have such other relief in the premises as to His Majesty the King, in His Court of Parliament, might seem meet; as also upon the printed Case of the Commissioners of Inland Revenue, lodged in answer to the said Appeal, and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of His Majesty the King assembled, That the said Order of His Majesty's Court of Appeal, of the 14th day of December 1943, complained of in the said Appeal, be, and the same is hereby, Affirmed, and that the said Petition and Appeal be, and the same is hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeal, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
This appeal is concerned with the provisions of section 21 of the Finance Act, 1922, as amended by subsequent legislation, dealing with the imposition of Sur-tax upon the income of certain companies which fail to distribute reasonable dividends. The facts of the case which are relevant to the determination of the legal questions involved in the appeal must first be stated.
The appellant company (which I will refer to simply as the company) was incorporated on the 13th September, 1912, under the name Rhoex Development Company Limited with a nominal capital of £100 divided into 100 shares of £1 each. Although its objects as stated in its Memorandum of Association cover innumerable fields of activity, the company for many years seems to have lived quietly with its modest capital apparently doing nothing in particular. In the year 1927, however, it developed considerable activity. Its capital was increased to £10,000 divided into 10,000 shares of £1 each; it adopted new Articles of Association; it changed its name to F.P.H. Finance Trust Limited; and it became a trading company the business of which consisted mainly in financing and dealing in the shares of gold mining and mining development companies. The whole of its capital was issued, and belonged beneficially to Mrs. Latilla, the wife of one H. G. Latilla. In the year 1934 Mrs. Latilla sold her shares to Marlands Trust Limited (a company incorporated in Southern Rhodesia) in exchange for debentures in the purchasing company, the shares in which were held by Mrs. Latilla and her two daughters, Mrs. Mayo and Mrs. Campbell. The 10,000 shares in the company were transferred to the Rhodesian company and its nominees. No dividends were paid on the shares so transferred, but a very large income was accumulated by the company for the benefit of the Rhodesian company, which was not assessable to sur-tax. The individuals, however, who owned the shares in the Rhodesian company, became apprehensive in the year 1936, that, as a result of recent financial legislation, the income of the company might be regarded as income of the shareholders of the Rhodesian company and thus become assessable to sur-tax. With a view to avoiding the possibility of their thus being called upon to bear a share of the country's taxation, they decided to act.
In pursuance of this decision the capital structure of the company was altered, and made to represent a state of affairs in which it would seem that the only persons who were beneficially interested in the profits earned by the company gave up that interest (except to the extent of 5 per cent. upon a capital of £10,000) to new-comers who were prepared to invest in the company the modest sum of £1,000. Accordingly on the 27th November, 1936, special resolutions of the appellant company were passed by which (1) its capital was increased to £11,000 by the creation of 1,000 shares of £1 each (2) the existing 10,000 shares became preference shares, the new shares being ordinary shares (3) the preference shares became entitled to a fixed cumulative dividend of 5 per cent. and, in a winding up to the whole of the surplus assets after payment to the ordinary shareholders of the amounts paid up on their shares and (4) the ordinary shares became entitled as regards profits (subject to the rights of the holders of the preference shares) to have distributed among the holders "the whole of any sums declared for distribution as dividends out of the profits of the company," and (as regards assets) the right in a winding up to a priority repayment of £1,000, but with no further or other participation in the assets of the company. It is however to be noted that the voting power was unaltered. It remained as provided in the Articles adopted in 1927, viz., a vote for every share, a provision which left complete control of the company in the hands of the preference shareholders. These, at this stage, were the Rhodesian company and its nominees, they in their turn being under the complete control of Mrs. Latilla and her daughters.
Attention may, I think, properly be called to the unusual type of ordinary share thus created, a share with no interest in surplus assets on a winding up beyond the repayment of the capital paid up on it, and with no interest in the profits beyond such a dividend as might be allowed to be declared in its favour by those who by their votes control the company. It is not, therefore, surprising to find that no offer of these unattractive shares was made to the public. They were, by arrangement, taken up and paid for by the National Mining Corporation Limited, a public company with the said H. G. Latilla on its Board, one term of the arrangement being that the company would offer the corporation 25 per cent. of any underwriting business which it undertook thereafter. The Special Commissioners say, in the case stated, that it is clear that the ordinary shares were offered to the corporation with conditions attached; they further state that it is clear that the corporation did not seek the investment, but was sought out by the company, and they add a passage in the following terms:—
"The scheme by which the capital structure of the appellant company was reorganised within a month of the end of the accounting period under review, was admittedly designed to continue for the benefit of Mrs. Latilla and her daughters the immunity from liability to sur-tax which they had succeeded in securing under the original evasive design. In our view it is inconceivable that such immunity was to be bought at the price of handing over to the National Mining Corporation Limited any substantial part of the profits the conservation of which was of the very essence of the scheme, and we have come to the conclusion, after considering such evidence as we had before us to a contrary effect, that there was an understanding that any dividend declared on the ordinary shares should be so limited as to be ludicrously incommensurate with the amount of the income available for distribution."
On the 15th December, 1936, the Rhodesian company went into liquidation, and in the same month its 10,000 preference shares in the company were distributed among Mrs. Latilla (3,334 shares) and Mrs. Mayo and Mrs. Campbell (3,333 shares each). The ladies were entered in the company's share register as the respective holders of those shares on the 2nd February, 1937.
On the 12th October, 1937, the company adopted the accounts for the period of 21 months from the 1st April, 1935, to the 31st December, 1936, which showed a profit for the period of £645,192, and authorised the distribution of a sum of £146 11s. 6d. by way of dividends, viz. £46 11s. 6d. in payment of a dividend on the Preference shares at the rate of 5 per cent. per annum from the 27th November, 1936, to the 31st December, 1936, and £100 in payment of a dividend of 10 per cent. on the Ordinary shares for the period to the 31st December, 1936. On the 1st April, 1938, the company went into liquidation. In the winding up the corporation received payment of the £1,000 paid up on the Ordinary shares, and the balance of the assets was distributed among Mrs. Latilla and her daughters.
On the 2nd September, 1940, the Commissioners issued a direction under section 21 of the Finance Act, 1922, that for the purposes of assessment to surtax the income of the company for the period from the 1st April, 1935, to the 31st December, 1936, should be deemed to be the income of the members; and on the 16th May, 1941, they apportioned the actual income (computed at £858,817) as follows: The Corporation £100, Mrs. Latilla £286,296 5s. od., Mrs. Mayo and Mrs. Campbell £286,210 7s. 6d. each. An earlier apportionment, which apportioned practically the whole income to the said H. G. Latilla, was not relied on and may be ignored.
On an appeal by the company against this direction and apportionment, the Special Commissioners discharged the apportionment, but dismissed the appeal against the direction. At the request of the Respondents in your Lordships' House, the Special Commissioners stated a case for the...
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