Fendoch Investment Trust Company v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 17 May 1945 |
| Date | 17 May 1945 |
| Court | House of Lords |
No. 1332-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Sur-tax - Undistributed income of investment company - Apportionment - Ability to secure income or assets - Shareholder with overriding powers - Alteration of shareholding during year of assessment - Finance Act, 1922 (12 & 13 Geo. V, c. 17), Section 21; Finance Act, 1937 (1 Edw. VIII & 1 Geo. VI, c. 54), Section 14 and Third Schedule, Paragraph 1 (b); Finance Act, 1939 (2 & 3 Geo. VI, c. 41), Section 15.
(1) The Appellant Company, an "investment company" within the meaning of the relevant statutory provisions, was formed on 23rd September, 1935, by M who transferred to it substantial investments. Under the articles, as amended by a special resolution three days later, (i) the share capital of 100,000 £1 shares was divided into 10,000 "A" ordinary shares, 45,000 "B" ordinary shares and 45,000 "C" ordinary shares; (ii) so long as all the "A" shares belonged to M, each class of share was entitled only to such dividends, if any, as the Company should determine in general meeting; (iii) the "A" shares carried rights of ten votes each on a poll, and the "B" and "C" shares carried one vote for every five shares; and (iv) M was made chairman and governing director of the Company for life, with complete controlling powers. The "A" shares were issued to him, the "B" shares to his daughter, E, and most of the "C" shares to the trustees of a settlement which he had executed shortly before the formation of the Company for the benefit of his daughter's children. Further "C" shares were purchased from the settlement funds from time to time.
M died in September, 1937, leaving the "A" shares to his daughter, E, who thereupon held all the 55,000 "A" and "B" shares, the settlement trustees' holding being 42,920 "C" shares. Under the articles, on M's death the "A", "B" and "C" shares merged in one class of share ranking pari passu in all respects, but, on 4th April, 1938, by special resolution the share capital of the Company was reconverted into "A", "B" and "C" shares in the same manner as before M's death, and E was appointed governing director with the same powers as her father had held. She therefore had power to allocate the whole income of the Company to the "A" and "B" shares held by herself to the total exclusion of the "C" shares held by the settlement trustees.
This position continued until 8th December, 1939, when, by special resolutions the issued capital of the Company (which had been increased to £110,000 by the creation of a further 10,000 "C" shares) was reduced to
£70,000 by the redemption of the "A" shares and 30,000 of the "B" shares, and the remaining "B" and "C" shares were converted into one class of ordinary shares ranking pari passu, each carrying one vote. Of these shares E then held 15,000 and the settlement trustees 42,920The whole of the actual income of the Company for the years 1938-39 and 1939-40 was apportioned to E under the provisions of Section 15 of the Finance Act, 1939. On appeal before the Special Commissioners against the apportionments for both years, the Company contended (inter alia) that E was not at any time during those two years able to secure that income or assets of the Company should be applied for her benefit to a greater extent than was represented in the value for apportionment purposes of her relevant interests in the Company in relation to those of the beneficiaries of the settlement. As regards the apportionment for 1939-40 it was also contended that, in considering for the purpose of Section 15 whether any person is or is likely to be able to secure that assets or income of the Company would be applied for his benefit, regard must be had to the position as it existed on the last day of the year of assessment the income of which was to be apportioned, and that, having regard to the resolutions of 8th December, 1939, E was not on 5th April, 1940, in a position to secure that the income or assets of the Company would be applied for her benefit. The Commissioners confirmed the apportionments for both years, holding that, as regards the year 1939-40, they were entitled to review the position over the whole period.
(2) The facts in the second case and the decision of the Commissioners were similar to those in the first case.
Held, (Court of Appeal) that the decision of the Commissioners in each case was correct, and (House of Lords), as regards the year 1939-40, that the Special Commissioners can make an apportionment under Section 15 of the Finance Act, 1939, against a person of whom it could be predicated at any time in the relevant year of assessment that he was "able to secure", etc.
(1) Fendoch Investment Trust Co. v. Commissioners of Inland Revenue
CASE
Stated under the Finance Act, 1922, First Schedule, Paragraphs 1, 2 and 3, 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 a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 27th January, 1941, the Fendoch Investment Trust Company (hereinafter referred to as "the Company") appealed against apportionments made under Section 15 of the Finance Act, 1939, for the years 1938-39 and 1939-40.
It was conceded on behalf of the Company that, having regard to previous decisions of the Special Commissioners, it could not resist the apportionment for the year 1938-39 before us, but it desired to test its validity in the High Court.
This appeal was heard at the same time as an appeal by the Executors of Percy A. Molteno, deceased, and an appeal by the Alporteno Investment Trust Company. The appeal by the Alporteno Investment Trust Company is the subject of a separate Case Stated.
2. Percy A. Molteno (who died on 19th September, 1937) on 23rd September, 1935, formed the Fendoch Investment Trust Company to which he transferred investments, valued at cost, of £87,070.
Three days previously, on 20th September, 1935, he had executed a deed of settlement between himself, as settlor, and his daughter Mrs. Elizabeth M. Murray, Lenox B. Murray (husband of Mrs. Elizabeth M. Murray) and Vincent B. Molteno, as trustees.
3. Under this settlement a trust fund was created which was to include all money and properties at any time paid or transferred to and accepted by the trustees. During the lifetime of the settlor the income was to be accumulated. The trust fund was to be appropriated to the children of Mrs. Elizabeth M. Murray and, subject to the trust for accumulation, the income of each share was to be paid to the child. During his life the settlor retained power to vary the investments comprised in the trust funds, and under clause 3 (e) of the settlement power was given to the settlor and Vincent B. Molteno to revoke the trusts and declare new trusts whether in favour of the settlor or otherwise.
4. The original capital of the Company was £100,000 divided into 10,000 "A" ordinary shares of £1 each, 45,000 "B" ordinary shares of £1 each, and 45,000 "C" ordinary shares of £1 each. By a special resolution passed 26th September, 1935, the "A" shares were entitled to ten votes per share on a poll, and the "B" and "C" shares to one vote for every five shares held. At 31st December, 1935, 10,000 "A" ordinary shares had been issued and were held by Percy A. Molteno, 45,000 "B" ordinary by Mrs. Murray, 40,000 "C" ordinary by the trustees of the settlement. Percy A. Molteno therefore during his lifetime controlled the Company by voting power. By the resolution of 26th September, 1935, during the lifetime of Percy A. Molteno and for so long as all the "A" shares were held by him, each class of shares was to be entitled to such dividends as the Company in general meeting should determine-after his death all shares were to be merged into one class ranking pari passu. The articles of association contain a provision that no business should be transacted at any general meeting unless a quorum is present when the meeting proceeds to business and that for all purposes the quorum shall be two members personally present. The articles also contain a provision whereby in a winding up the liquidator may, with the sanction of an extraordinary resolution, divide the assets otherwise than in accordance with the existing rights of the members, but so that if any division is resolved on otherwise than in accordance with such rights the members shall have the same right of dissent and consequential rights as if such resolution was a special resolution passed pursuant to Section 234 of the Companies Act, 1929.
On 26th September, 1935, the settlor added to the settlement the following investment:-
40,000 Fendoch Investment Trust Company "C" ordinary shares of £1 each fully paid.
The trust accounts show that further "C" shares of the Company have been purchased from time to time.
Up to the date of the death of P.A. Molteno (19th September, 1937), and for the accounting period immediately thereafter, the income of the Company and the distributions thereout were as follows:-
£ |
s. |
d. |
|
Net income for period 23rd September, 1935, to 31st |
|||
December, 1935 |
155 |
7 |
8 |
Dividend declared on "C" shares on 31st March, 1936, |
|||
free of tax |
166 |
13 |
4 |
Net income for year ended 31st December, 1936 |
2811 |
12 |
11 |
Dividend declared on "C" shares on 19th March, 1937, |
|||
free of tax |
2761 |
0 |
0 |
Net income for year ended 31st December, 1937 |
2984 |
12 |
3 |
Dividend declared on "C" shares *on 4th April, 1938, free |
|||
of tax |
3004 |
8 |
0 |
The gross investment income for the period 6th April, 1937, to 19th September, 1937, was £1,631 18s. 7d. This sum has been assessed to Sur-tax for the year 1937-38 on the Executors of P.A. Molteno and no question now arises with regard to...
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