General Electric Company Ltd v Price Commission
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE ROSKILL,Sir John Pennycuick,The Master Of The Rolls |
| Judgment Date | 22 November 1974 |
| Judgment citation (vLex) | [1974] EWCA Civ J1122-1 |
| Date | 22 November 1974 |
| Court | Court of Appeal (Civil Division) |
[1974] EWCA Civ J1122-1
In The Supreme Court of Judicature
Court of Appeal
Appeal by plaintiffs from order of Mr. Justice Mocatta on 17th June 1974.
The Master of the Rolls (Lord Denning),
Lord Justice Roskill and
Sir John Pennycuick.
Mr. LEONARD LEWIS, Q. C., and Mr. LAURENCE LIBBERT (instructed by Messrs. Lewis Lewis & Co.) appeared on behalf of the Appellant Plaintiffs, the General Electric Co. Ltd.
Mr. T. H. BINGHAM, Q. C., Mr. DENIS HENRY and Mr, MICHAEL LEREGO (instructed by the Treasury Solicitor) appeared on behalf of the Respondent Defendants, The Price Commission.
Inflation has put our financial system in peril. To fight it, Parliament has passed a statute called the Counter-Inflation Act 1972. Its object is to control prices so that they should not rise too high. A Code has been enacted which sets limits to prices. It is to be implemented by an agency called the Price Commission which is given powers for the purpose.
Lord Justice Roskill has analysed the provisions of the Act and Code in the judgment which he will deliver. I will first give an outline of their effect.
(1) ALLOWABLE COST INCREASES
The first thing is that the Price Commission can allow increases in prices when costs increase. For instance, if a manufacturer has to pay more wages to his workmen, or has to pay more for his raw materials, or more rent or rates, he can pass all these on to the purchaser. These are called "allowable cost increases." They are calculated by taking the cost of making a particular unit of output, e. g., a washing machine as at the base date 30th April, 1973: by seeing how much the cost has increased since that date: and then allowing the manufacturer to increase the selling price of that machine in the same proportion. If his costs per unit have increased by 20%, he can increase his selling price for that unit by 20.
(2) A REFERENCE LEVEL FOR PROFITS
The second thing is that the Price Commission can stop a manufacturer or trader from making too much profit. It is done by means of a "reference level". He is not allowed to make a greater level of profit than he did in the base period, that is, in the five years before 30th April, 1973. To get at this "reference level" you have first to ascertain his "net profit margin". On the one side you take the expenses he incurs on the trading operations of his whole enterprise; including not only the costs of his labourand materials, but also the expense of conducting and financing his trading operations, directors' salaries, overheads, and the like. On the other side you take his receipts from all his sales. The difference is his "net profit". Out of it he pays taxes, distributes dividends, and so forth. Once having ascertained his "net profit" in cash terms, you have to measure the extent of it. This is done by means of the "net profit margin". It is found by taking the proportion which net profit bears to the sales. For instance, if the sales were £1,000,000 and the net profit was £120,000, the "net profit margin" would be 12%.
The Code restricts a manufacturer in this way:- He is not to make a higher level of profit than he did on an average in the five years before 30th April 1973. He is to take his best two years out of those five; then take the net profit margin for those two years, add them together and divide by two. This gives the "reference level". Having ascertained the "reference level", he must so fix his prices that his net profit margin does not exceed the "reference level". If he does exceed it, or is likely to exceed it, he must reduce his prices so as to bring his "net profit margin" down to the reference level: or he must suffer an abatement in the allowable cost increases.
If the business has remained steady over the five years, it should be possible for accountants to calculate the "reference level" without too much difficulty. But in recent years there have been mergers and take overs and changes on a large scale. In such cases the Commission is empowered to permit a "departure" from the reference level.
In order to enable the Price Commission to implement the Code, the manufacturer has to make returns to the Commission giving his profit margins and the reference level. He has to give them notice of any increase that he proposes to make in his prices to customers.
It is for the Commission then to approve or reject the increase. In order to do this, they are able to check his return and his figures. If they approve it, he can raise his prices accordingly. If they reject the increase, he cannot raise his prices. Or, if he does, he is subject to penalties: and, I expect, to an injunction.
(3) THE BACKGROUND TO THE PRESENT DISPUTE
The General Electric Company is a large concern. It is the principal manufacturer of electrical goods in Britain. It has submitted its accounts to the Price Commission. In a letter of 19th December 1973 it prepared a reference level of 14. 25, afterwards amended to 12.11. But the Price Commission did not accept this proposal. On 17th January 1974 they decided that the reference level should be only 11.77 and they have since adhered to that figure. In January 1974 the G. E. C. wished to increase the prices of several of their products. They gave notice to the Price Commission of their proposals. But the Price Commission refused to permit these increases. They say that, if permitted, the G. E. C. would be making a profit which exceeded the reference level of 11.77.
This difference in reference level is due to two particular items in the accounts. One item is the interest payable by G. E. C. on its loan stock. At the time of the agreed Statement of Facts it came to over £5,000,000 a year, though I believe it has been reduced very considerably since then. The other is the interest received by G. E. C. on loans it has made. It comes to £8,000,000 a year, and is increasing greatly each year. G. E. C. contend that these items should not be included in calculating its profit margin. The Price Commission contend that they should be taken into account. I will take the two in order:
(i) Interest payable by G. E. C. to holders of loan stock
To get to its present size, G. E. C. has swallowed up other big companies. On 1st January, 1968, it took over the business of Associated Electrical Industries Ltd. It acquired all the shares in that oompany and, in return, issued to its shareholders some ordinary stock of G. E. C. and also some convertible loan stock. On 28th November, 1968, G. E. C. merged with the English Electric Co. Ltd. G. E. C. acquired all the shares in that company and in return issued to its shareholders some ordinary stock of G. E. C. and also some convertible loan stock, and some unsecured loan stock. Since that time some of the convertible loan stock has been converted into ordinary shares of G. E. C. But there is still a good deal of convertible loan stock outstanding, and also the unsecured loan stock. G. E. C. have to pay interest to the stockholders in a very considerable sum each year.
(ii) Interest receivable by G. E. C.
The reasons for those mergers were manifold. There were too many small factories producing goods in competition with one another. By being brought into one big concern, the whole industry could be rationalised into a more efficient organisation. That is what happened. In the years between 1968 and 1972, many establishments were closed and their work transferred to other places: 17 in 1968: 9 in 1969: 10 in 1970: 18 in 1971: and 16 in 1972. The work force was reduced from about 200,000 to 140,000 persons.
G. E. C. sold the premises which were closed and got much money for them. They made good earnings from their business which they did not need immediately to use. This meant that they bad large funds in hand. They placed money in short term deposits. They acquired Government and other dated securities. They made loans to companies in which they had a shareholding, but which were not subsidiaries. These brought in a great deal of interest. G. E. C.received £1,432,452 in the year ended 31st May, 1972: and £8,396,623 in the year ended 31st March, 1973. The interest receivable is rapidly increasing. It was about £13,000,000 in the nine months to December 1973. It may increase soon to £50,000,000 in a year.
(4) THE CONSTITUTIONAL ISSUE
The dispute between the parties is as to the application of two paragraphs in the Code, numbers 57 and 58:
" Prices and Profit Margins
57. Prices should be determined so as to secure that net profit margins, as defined in paragraph 58, do not exceed the average level of the best two of the last five years of account of the unit to which net profit margin control applies ending not later than 30th April, 1973, (the 'reference level')
58. 'Net profit margin' means the margin of net profit expressed as a percentage of sales or turnover. 'Net profit' means the net profit, determined in accordance with generally accepted accounting principles consistently applied by the enterprise concerned, which arises from trading operations within the control after taking into account all expenses of conducting and financing them, including depreciation and interest as defined in paragraphs 28 and 31, but before deducting corporation tax or income tax."
The difference is as to what is the "reference level" for G. E. C. This depends on what was the "net profit margin" in the base period. This in turn depends on how the "net profit" is to be ascertained, in particular, what expenses are to be allowed and what receipts are to be included.
The constitutional issue is how...
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