Leisureking Ltd v Cushing (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 18 November 1992 |
| Date | 18 November 1992 |
| Court | Chancery Division |
Chancery Division.
Chadwick J.
David Milne QC and Jeremy Woolf (instructed by Eversheds Daynes Hill & Perks, Norwich) for the taxpayer.
Launcelot Henderson (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Commr of Inland Revenue (Hong Kong) v Hang Seng Bank Ltd ELRTAX[1991] 1 AC 305; [1990] BTC 482.
Davies v Humphreys ENRENR(1840) 6 M & W 153; 151 ER 361
Kirkness (HMIT) v John Hudson & Co Ltd ELR[1955] AC 696
Lowe & Sons v Dixon & Sons ELR(1885) 16 QBD 455
Westcott (HMIT) v Woolcombers Ltd TAX[1986] BTC 130.
Wolmershausen v Gullick ELR[1893] 2 Ch 514
Corporation tax - Capital loss relief - Loans guaranteed by taxpayer company - Cross guarantees between taxpayer and ten other group members - Loans to two companies called in by bank - Payment of whole debt under guarantee made by taxpayer - No steps taken to recover from co-guarantors - Whether relief available in respect of whole amount paid under guarantee or part or none - Capital Gains Tax Act 1979 section 136 subsec-or-para (4)Capital Gains Tax Act 1979, sec. 136(4) (replaced by Taxation of Chargeable Gains Act 1992 section 253 subsec-or-para (4)Taxation of Chargeable Gains Act 1992, sec. 253(4)).
This was an appeal by the taxpayer against the decision of a special commissioner that loss relief under the Capital Gains Tax Act 1979 section 136 subsec-or-para (4)Capital Gains Tax Act 1979, sec. 136(4) to which a co-guarantor was entitled was limited to the amount which he had repaid to the lender divided among the solvent co-guarantors.
The taxpayer was a member of a group together with ten other companies. On 29 November 1985 all the members of the group entered into a composite joint and several agreement with a bank whereby the liabilities of each of the companies were guaranteed by all the others as co-guarantors.
When the bank made demands against two of the companies which were not in a position to meet their obligations to the bank, the taxpayer transferred the amounts demanded to the accounts of the two companies. In fact eight of the ten companies in the group, other than the taxpayer, were insolvent.
The taxpayer claimed relief under the Capital Gains Tax Act 1979 section 136 subsec-or-para (4)Capital Gains Tax Act 1979, sec. 136(4) in respect of the whole amount transferred to the accounts of the two companies. However, only one tenth of the amount claimed was allowed by the inspector on the ground that as one of ten co-guarantors of each of the two principal debts in respect of which payment under the guarantee was made, the taxpayer was entitled to relief only to the extent of its own pro-rata share.
A special commissioner rejected the Revenue's contention that equal contributions from all the companies should be taken into account in calculating relief under Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) resulting in relief for only one-tenth of the repayment. Having found that the only reason why contributions had not been obtained from the two solvent companies was that the taxpayer had not sought any, he held that contributions could have been obtained from both of them if demands had been made. In those circumstances he held that the payment should be apportioned between the taxpayer and the two solvent companies, ignoring any possibility of contribution from the insolvent companies. The commissioner's decision was therefore that the relief was restricted to one-third of the full amount claimed, contributions being "payable" by the two solvent companies within the meaning of Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4).
The taxpayer appealed to the High Court but there was no cross-appeal by the Revenue. While it was accepted that conditions (a) to (d) ofCapital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) were fulfilled, the question identified by the commissioner was whether he had erred in holding that contributions were "payable" to the taxpayer by the two solvent companies.
The taxpayer and the Revenue both contended that the possibility of recovery was irrelevant. The taxpayer argued that only actual recovery from co-guarantors at the time when the inspector allowed the claim was to be considered. If the taxpayer did not choose to enforce its rights of contribution against any co-guarantors and had not received any contribution, then the allowable loss to which the taxpayer was entitled would be the whole amount paid out by him under the guarantee. Further, sinceCapital Gains Tax Act 1979 section 136 subsec-or-para (5)sec. 136(5) provided that where relief had been granted and any outstanding amount mentioned in Capital Gains Tax Act 1979 section ubsecsubsec. 4(a) was recovered, it should be regarded as a capital gain, to hold otherwise would deprive that provision of any intended effect.
The Revenue's view was that the only relevant consideration was whether or not there was a liability on co-guarantors to make a contribution regardless of their ability to pay. The allowable loss which could be claimed under Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) was limited to the amount of the payment less any sums that might be claimed against any co-guarantors, whether or not they were in a position to pay.
Held, dismissing the taxpayer's appeal:
1. The position under the general law was that a co-guarantor who discharged more than his share of a debt had an immediate right to be indemnified by the borrower. To the extent that a co-guarantor had paid more than his due share, he also had the right to contribution from other co-guarantors. Moreover, the rule was that those who could pay had to make good the share of those who could not.
2. A guarantor claiming relief under Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) had to satisfy the inspector that the loan could not be recovered from the borrower but there was no specific requirement to satisfy the inspector that he had taken any steps to recover contribution from co-guarantors. The possibility of recovery from co-guarantors was taken into account in the formula at the end of Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) which prescribed the manner in which the loss was to be computed. However, it would be surprising if a different test applied in relation to the possibility of recovery from a co-guarantor and from the borrower so that a co-guarantor's share of a debt had to be irrecoverable before relief could be granted to another co-guarantor discharging his liability.
3. The contentions of both parties and the reasoning of the special commissioner each led to a result which departed from commercial reality. Each of those contentions, if the language of the provision permitted, should be rejected in favour of a construction which accorded with commercial reality. The taxpayer had lost that part of the payment which he could not recover. He had not lost, in any real sense, that which he could, but did not choose, to recover. Reading the words "contribution payable to him" in Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) in the light of the general law it followed that, unless the special commissioner was satisfied on the evidence that the eight group companies whose contributions he had disregarded were not merely insolvent but had no assets available to meet the claims of unsecured creditors, he was wrong to disregard any possibility of recovery from them. However, since there was no appeal by the Crown against the special commissioner's determination, it would not be appropriate to remit the matter to the commissioners to reconsider whether contributions from other companies in the group ought to be taken into account as a deduction from the loss allowable under Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4).
4. The claw-back provisions of Capital Gains Tax Act 1979 section 136 subsec-or-para (5)sec. 136(5) applied only to repayments by a borrower after relief had been given to a lender or guarantor, not to repayments under Capital Gains Tax Act 1979 section ubsecsubsec. 4(b) by a co-guarantor. The words ofCapital Gains Tax Act 1979 subsec-or-para (5)subsec. (5) were clear and unambiguous but the addition by the Finance Act 1990 of Finance Act 1990 subsec-or-para (5A)subsec. (5A), filling the lacuna left by Capital Gains Tax Act 1979 subsec-or-para (5)subsec. (5), supported that view.
On 4 November 1991 a commissioner for the special purposes of the income tax (Mr THK Everett) heard the appeal of Leisureking Ltd against a decision of the Revenue dated 19 June 1991 reducing an amount of relief claimed under the Capital Gains Tax Act 1979, Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4).
Following the commissioner's decision in principle, figures were agreed between the parties and on 14 January 1992 the commissioner determined the amount of Leisureking's claim. The question of law for the opinion of the court was whether, on the facts found, the commissioner had erred in law in holding that contributions from two co-guarantors of a debt were "payable" pursuant to Capital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4).
Leisureking Ltd ("Leisureking") appeals pursuant to Taxes Management Act 1970 section 42 subsec-or-para (3)sec. 42(3) of the Taxes Management Act 1970 against the decision dated 19 June 1991 of HM Inspector of Taxes on a claim by Leisureking to relief pursuant toCapital Gains Tax Act 1979 section 136 subsec-or-para (4)sec. 136(4) of the Capital Gains Tax Act 1979.
This is a case in which the Inland Revenue has changed its position since the date on which the inspector gave notice of his decision on Leisureking's claim. The company claimed relief in the sum of £2,115,014.66 and the inspector allowed relief in...
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