Lawson (HM Inspector of Taxes) v Hosemaster Machine Company Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 19 May 1966 |
| Date | 19 May 1966 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
Income tax - Repayment of tax - Company in debenture-holders' receivership - Agency - Shares purchased without receiver's authority - Whether ostensible authority given-Whether ratification by subsequent receiver valid-Dividends actually received by company-Whether tax suffered by company.
The Respondent Company had incurred heavy trading losses for years up to 1956-57, and it appeared unlikely that its assets would exceed the amounts due to the debenture-holders. In 1955 A was appointed receiver and manager for debenture-holders; he delegated the conduct of the receivership to his partner G. In January 1956, G, through one C, negotiated the sale of the debentures to a company associated with S, who intended to increase their value by a dividend-stripping transaction; thereafter G handed over to C, who was solicitor to the purchasers of the debentures, the responsibility of realising the Company's assets and of its running expenditure. C, regarding himself as de facto receiver and manager by A's authority, arranged with S, without the knowledge of A or G, for E Ltd. (another company associated with S) to buy on behalf of the Respondent Company the share capital of F Ltd., a company with large accumulated taxed profits. According to S, C had never told him that he had A's authority to purchase the shares, but he believed that C had such authority. The purchase was carried out, with funds borrowed on overdraft, on 20th March 1956, by an agreement on the face of which E Ltd. appeared as principal. On 28th March 1956 A was replaced as receiver by a nominee of the new debenture-holders.
On 5th April 1956 and 2nd April 1957 F Ltd. paid dividends which were received by the Company and included in the abstract of receipts and payments filed under the Companies Act 1948 by the receiver. On 5th April 1956 an amount equal to the net dividend of that day was paid by the Company to E Ltd. in part repayment of the sum borrowed to finance the purchase. In 1958 the Company paid to E Ltd. the balance of the purchase price and an agency fee. In 1960 the then receiver, on being informed that the Revenue were suggesting that E Ltd. had not been authorised to purchase the shares on behalf of the Company, purported to ratify the purchase in conversation with C and with S. In 1963 the receiver sold the shares and paid the proceeds into the Company's account.
The Respondent Company claimed repayment under s. 341, Income Tax Act 1952, for the years 1955-56 and 1956-57 of tax deducted from the dividends paid by F Ltd. On appeal, it was contended for the Company (a) that C had authority, either actual or ostensible, from A to buy the shares; (b) alternatively, that the purchase had been ratified; (c) alternatively, that the Company, having in fact
received the dividends and suffered tax on them, was entitled to repayment; (d) alternatively, that the dividends belonged to the Company because all those concerned in paying them agreed thereto. For the Crown it was contended (i) that C had no authority to buy the shares; (ii) that, since a contract could only be ratified by a person qualified to act as principal when it was made, only A or G could have ratified the purchase and neither had done so. The Special Commissioners found that C had ostensible, though not actual, authority to buy the shares, and, alternatively, that there was valid ratification of the purchaseHeld, that the purchase of the shares had been validly ratified by the conduct of the receiver after March 1956, and the Company was entitled to the repayment claimed.
Stated under the Finance Act 1953, s. 15(4), and the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At meetings of the Commissioners for the Special Purposes of the Income Tax Acts held on 18th, 19th, 20th and 25th February 1963 Hosemaster Machine Co. Ltd. (hereinafter called "Hosemaster") claimed, under s. 341 of the Income Tax Act 1952, an adjustment of its liability to tax under Schedule D by reference to losses incurred in the years 1955-56 and 1956-57, the Inspector of Taxes having objected to the claim.
2. Shortly stated, the question for our decision was whether certain dividends from which tax had been deducted were income of Hosemaster. The answer to this question depends upon the answers to the following questions:
(2) Were the shares on which the dividends were declared bought by a Mr. Sebag Cohen as agent for Hosemaster with either actual or ostensible authority to buy them?
(3) If Mr. Cohen had neither type of authority, was the purchase of the shares ratified by or on behalf of Hosemaster?
(4) Assuming answers to the above are unfavourable to Hosemaster, were the dividends nevertheless the income of Hosemaster for the purposes of the Income Tax Act 1952?
3. The following gave evidence before us on behalf of Hosemaster:
(2) Mr. Brian Sandelson, a solicitor of the Supreme Court, a partner in the firm of Brian Sandelson & Co. and a director of a company called Hallamshire Industrial Finance Trust Ltd. ("Hallamshire") and also of a company called Eastlandia Ltd. ("Eastlandia").
(3) Mr. Sebag Cohen, a solicitor of the Supreme Court, practising in Sunderland till he moved to Jersey in 1961.
(4) Mr. Bernard Myers, a chartered accountant practising in Manchester. He was appointed receiver of Hosemaster on behalf of debenture-holders on 28th March 1956.
(5) Mr. Robert Cyprian Hope, now a partner in the firm of Brian Sandelson & Co. During the years 1955 and 1956 he was an assistant in the firm of Coward Chance & Co., solicitors, of London.
(6) Mr. Edgar Miskin, a chartered accountant, a partner in the firm of Bright, Grahame, Murray & Co., of London. This firm have been consultants to Hosemaster since early in 1955. Mr. Miskin was appointed receiver and manager of Hosemaster on 17th September 1957, when Mr. Myers gave up his receivership.
4. The following gave evidence before us on behalf of H.M. Inspector of Taxes:
(2) Mr. Gilbert Hamer Eaves, a chartered accountant, a partner in the firm of Harry L. Price & Co., of Manchester, and a brother of Mr. Arthur T. Eaves.
(3) Mr. Arthur T. Eaves, a chartered accountant and a partner in the firm of Harry L. Price & Co. till he retired on 31st March 1962. He was appointed receiver and manager of Hosemaster on 24th June 1955 and was succeeded by Mr. Myers as receiver on 28th March 1956.
5. Hosemaster had carried on the business of manufacturing knitting machines and of general engineering, but the manufacture of knitting machines ceased entirely on 18th July 1956. Four debentures had been issued before 24th June 1955, and were held by Industrial & Commercial Finance Corporation Ltd. ("I.C.F.C.")(1), the Treasury (two), and Lloyds Bank Ltd. On 24th June 1955 Mr. Arthur Eaves was appointed receiver and manager on behalf of I.C.F.C., and on 15th July 1955 receiver on behalf of the Treasury. Hosemaster had incurred big trading losses and the sums secured by the debentures were so large that the shareholders were unlikely to have any interest in its assets.
6. In 1955 Mr. Sandelson, who was a director of Hallamshire, contemplated that Hallamshire should buy the Hosemaster debentures for cash. His idea was that, though Hosemaster's assets might not be sufficient to cover the price he would be prepared to pay for the debentures, Hosemaster should buy shares in a company possessing funds available for distribution by way of dividend, take dividends, and thus have a (loss) repayment claim under s. 341 in respect of the tax suffered by deduction on payment of the dividends. The repayment claim, swelling Hosemaster's assets, would thus produce a profit on the transaction of the purchase of the debentures by Hallamshire.
7. In pursuance of this idea the Hosemaster debentures were bought by Hallamshire for £127,500, by an agreement dated 7th December 1955. A copy of this deed is not annexed hereto, but is available for inspection by the Court if required. It was originally intended that the transfer of the debentures should take place on 17th January 1956, but in the event it did not take place till 30th January 1956. The negotiations for the sale of the debentures were conducted between Messrs. Coward, Chance & Co., acting primarily for I.C.F.C., but also for the Treasury and Lloyds Bank (i.e. for all the debentureholders), Mr. Sandelson and Mr. Cohen, who was acting as one of Hallamshire's solicitors. Mr. Hope had met Mr. Cohen and Mr. Sandelson only in their capacities as solicitors acting for Hallamshire. It was agreed between the parties thereto in the aforementioned agreement that Mr. Arthur Eaves should resign from his receivership within 28 days after the transfer of the debentures had taken place. The debenture-holders, who were selling their debentures,
were content that any administration of the assets should be undertaken by Hallamshire, as they would no longer be interested in this after the sale of the debentures.8. A company of the type necessary for the carrying out of Mr. Sandelson's idea-i.e., one with funds available for distribution by way of dividend, shares in which Hosemaster would buy-was found in Federated Securities Ltd., now F.S. Securities Ltd. (hereinafter referred to as "F.S."). The transactions relating to these F.S. shares are complicated. The case turns very largely on the position and actions of Mr. Cohen, and on these matters there was a conflict of evidence. We have thought that before going into details it might be of assistance to the Court if in the next paragraph we set out shortly Hosemaster's contention as to the position and the Revenue's opposing contention.
(a) Hosemaster's contention was shortly as follows. Mr. Cohen had actual or ostensible authority to buy the F.S. shares for...
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