Lawson v Johnson Matthey Plc
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE FOX,LORD JUSTICE McCOWAN,LORD JUSTICE BELDAM |
| Judgment Date | 27 March 1991 |
| Judgment citation (vLex) | [1991] EWCA Civ J0327-1 |
| Docket Number | 91/0260 |
| Court | Court of Appeal (Civil Division) |
| Date | 27 March 1991 |
[1991] EWCA Civ J0327-1
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE VINELOTT)
Royal Courts of Justice
Lord Justice Fox
Lord Justice McCowan
Lord Justice Beldam
91/0260
MR ANDREW PARK Q.C. and MR T.P.G. IVORY, instructed by Messrs Taylor Joynson Garrett, appeared for the Appellants (Respondents).
MR JONATHAN PARKER Q.C, instructed by the Solicitor of Inland Revenue, appeared for the Respondent (Appellant).
This is an appeal by Johnson Matthey Plc ("PLC") from a decision of Vinelott J. that a payment of £50 million by PLC to its subsidiary Johnson Matthey Bankers Ltd ("JMB") at the time when the shares of JMB were sold to the Bank of England is not an allowable expense in computing the profits of PLC's trade for tax purposes.
The facts as found by the General Commissioners were as follows.
PLC is a U.K. quoted company which carries on business in refining and selling precious metals, particularly platinum. It also manages a number of subsidiaries in the U.K. and abroad. Prior to October 1984 one of PLC's wholly owned U.K. subsidiaries was JMB, which carried on the business of bankers including the merchanting of bullion.
In August 1984 JMB got into difficulties on its commercial loan business. Large advances had been made on what turned out to be inadequate security.
A Board Meeting of PLC was held at the Bank of England ("the Bank") on the night of 30th September/lst October 1984 to deal with the resulting crisis. At about 12.30 a.m. on 1st October the Board reached the following conclusion:
"(i) That JMB was insolvent and could not open its doors for business later that day unless further financing, which PLC could not afford to supply, was made available;
(ii) That the cessation of business by JMB, and resulting damage to confidence in PLC, was likely to lead to demands by lending institutions for the repayment of metals and monies owing to them by PLC and that PLC would be unable to meet its obligations as they fell due in the absence of further financial support, which did not seem to be available: PLC would therefore have to cease trading;
(iii) That there was no alternative to the winding up of JMB and that a liquidator should be appointed;
(iv) That they should however do everything in their power to protect the interests of PLC's shareholders and employees and to facilitate the orderly disposal of PLC's assets in which unsecured creditors would be dealt with on an equitable basis, and that therefore they would ask for the appointment of a receiver for PLC;
(v) That these decisions to ask for a liquidator for JMB and a receiver for PLC should be implemented an hour later at 1.30 am."
The Bank was told of these decisions at once. The Bank at once made the following offer, which was not negotiable, to the Board of PLC.
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(1) The Bank would acquire the issued share capital of JMB for the sum of £1.
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(2) Prior to this sale, which would be free of all warranties, PLC would inject £50 million into JMB.
The Bank also informed PLC that it was assisting in actively pursuing the provision of a stand-by facility for PLC in the event of the Bank purchasing the JMB shares. Later that night JMB assessed the necessary facility as £250 million.
In consequence of these arrangements, on the advice of its legal and financial advisers the Board of PLC recognised that:
"(i) JMB was insolvent on the advice given by its advisers of the proper level of provision for bad and doubtful debts;
(ii) PLC would be unable to provide sufficient capital for JMB to enable the latter to maintain the prudential ratios appropriate for a recognised bank;
(iii) JMB would be unable to open its doors for business while it remained a subsidiary of PLC;
(iv) If the proposal were not acceptable PLC would not be able to meet its obligations if called;
(v) The making of the £50 million loan to JMB and the waiver of repayment of such loan (the form proposed by the Bank for the £50 million repayment) was necessary to retain goodwill and confidence in all the remaining group companies and enable them to stay in business;
(vi) The only practical alternative to the Bank's proposals was to implement their previous decision to ask for the appointment of a receiver for PLC and a liquidator for JMB."
The Board of PLC resolved conditionally upon a stand-by facility of at least £250 million being agreed and existing drawings by PLC of monies and metals remaining in place, to accept the Bank's proposals for the acquisition by the Bank of the whole of the issued share capital of JMB by the Bank for £1 and for PLC to make the £50 million loan and waiver to JMB.
The Commissioners found that the sole purpose for which (or to serve which) PLC resolved to make the payment of £50 million was to enable PLC to open the doors of its platinum trade on the Monday morning.
The Board's decisions were communicated to the Bank and were implemented by the opening of business later that day and confirmed by a formal agreement between PLC and the Bank on 2nd October 1984.
In PLC's accounts to 31st March 1985 it deducted the £50 million as an expense of its platinum trade. The Revenue disputed that deduction on two grounds:
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1) that it was an expense of a capital nature;
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2) that it was not paid out wholly and exclusively for the purposes of the trade.
The Commissioners stated:
"We, therefore, find on the evidence and arguments put before us, that the £50 million payment was made to preserve the trade of PLC from collapse, that it did, in fact, preserve the trade from collapse and, as a payment to preserve an existing business, it was of a revenue nature. We further find that [it] was not converted into a payment of a capital nature by the circumstance that it was associated with the disposal of the JMB shares."
Thus, the Commissioners decided both those points in favour of the taxpayer.
The Revenue appealed to the High Court. On the appeal the Revenue did not dispute that the monies were laid out wholly and exclusively for the trade. The Revenue did (and do), however, contest the decision that the payment was a revenue expense. The judge accepted the Revenue's contention as to that. He said:
"The purpose of the board of [PLC] in agreeing to make that payment was no doubt to preserve the business of [PLC]. But the means by which that purpose was achieved and indeed in the situation of crisis in the early hours of 1st October the only means by which it could be achieved was to transfer the shares of JMB to the Bank and as part of a single transaction or arrangement to pay £50 million to JMB and to release JMB from any obligation to repay it. These two elements cannot be severed, the one being treated as the disposal for a nominal consideration of a worthless but not an onerous asset and the other as a payment made to preserve the business of [PLC]."
Accordingly, the judge concluded that the £50 million was a capital payment. From that decision PLC appeals.
The question arises in determining whether a payment is to be treated as being of an income nature, the court should look at the matter subjectively (what was the purpose of the transaction) or objectively (what did the transaction actually do). The authorities are not conclusive. In Atherton v. British Insulated & Helsby Cables Limited [1926] A.C. 205 at 213
Lord Cave said:
"But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."
That, as Lord Wilberforce observed in Tucker v. Granada Motorway Services Limited 53 T.C. 92 at 107, was regarded as having quasi-statutory force until it was revealed that it might cover an advance more of a revenue character.
In Commissioners of Inland Revenue v. Carron Company 45 T.C. 18 Lord Reid said: "In a case of this kind what matters is the nature of the advantage for which the money was spent". And Lord Guest at p. 70 said: "It is legitimate, in my view, to consider what the expenditure was intended to effect."
On the other hand, Lord Radcliffe giving the advice of the Board (Lord Radcliffe, Lord Morris and Lord Upjohn) in Commissioner of Taxes v. Nchanqa Consolidated Copper Mines Ltd [1964] A.C. 948 at 658 refers to "…the undesirability of determining the nature of a payment by the motive or object of the payer."
It seems to me that the court has to consider all the circumstances of the case, one of which is the purpose of the transaction.
In Commissioners of Inland Revenue v. Carron (supra) Lord Wilberforce at p. 74 said: "To make the distinction between capital and revenue, by nature a commercial distinction, it is necessary to go further and to ascertain the nature and purpose of the changes made."
Although it is necessary to consider all the circumstances, the problem in the end is the true nature of the transaction. Intentions may throw some light on the matter, but cannot relieve the court from analysing in terms of capital and income account the true nature of what the parties actually did.
There are numerous decided cases on the question whether a payment is to be treated as being a capital or revenue account. They vary widely in their facts. The facts in the present case are unusual and derive from very special circumstances. Authorities are accordingly of limited...
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Lawson v Johnson Matthey Plc
...made to preserve the business of the taxpayer company." 12 In the Court of Appeal Fox L.J. delivering the leading judgment said at [1991] S.T.C. 259 at p. 265: "J.M.B. was a capital asset of the taxpayer company … the payment seems to me to be a payment by the taxpayer company to enable it......
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Lawson v. Johnson Matthey plc, (1992) 145 N.R. 241 (HL)
...made to preserve the business of the taxpayer company." In the Court of Appeal Fox, L.J., delivering the leading judgment said at [1991] S.T.C. 259, at p. 265: "J.M.B. was a capital asset of the taxpayer company ... the payment seems to me to be a payment by the taxpayer company t......