Re KAHN v Commissioners of Inland Revenue sub nom TOSHOKU FINANCE UK Plc
| Jurisdiction | England & Wales |
| Judgment Date | 30 July 1999 |
| Date | 30 July 1999 |
| Court | Chancery Division |
Chancery Division.
Evans-Lombe J.
Mark Philips QC (instructed by Linklaters) for the liquidators.
Philip Jones (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
ABC Coupler & Engineering Co Ltd, Re (No. 3) WLR[1970] 1 WLR 702
Atlantic Computer Systems plc, Re ELR[1992] Ch 505
Beni-Felkai Mining Co Ltd, Re ELR[1934] Ch 406
Downer Enterprises Ltd, Re WLR[1974] 1 WLR 1460
Exchange Travel (Holdings) Ltd, Re UNK[1996] BCC 933
Kentish Homes Ltd, Re UNK[1993] BCC 212
Mesco Properties Ltd, Re WLRWLR[1979] 1 WLR 558; [1980] 1 WLR 96 (CA)
Oak Pits Colliery Co, Re ELR(1882) 21 Ch D 322
RS & M Engineering Co Ltd, Re 15 January 1999 (unreported)
Corporation tax - Company liquidation - Priority of claims - Interest payable by company in creditors' vountary liquidation - Whether tax arising from a loan relationship on interest payable but not paid was an expense "properly incurred in the winding up, including the remuneration of the liquidator out of the company's assets" - Whether court should order payment of the tax before the remuneration of the liquidator -Insolvency Act 1986, s. 115; Finance Act 1996 section 80 subsec-or-para (1)Finance Act 1996, s. 80(1);Insolvency Rules 1986 (SI 1986/1925), r. 4.218; 12.2.
This was an originating application by a company in liquidation seeking a declaration whether a liability to corporation tax arising underFinance Act 1996 section 80 subsec-or-para (1)s. 80(1)of the Finance Act 1996 ("the 1996 Act") was an expense of the liquidators.
Toshoku Finance plc ("the company") was a company incorporated in England. It was a member of a group whose business was the import and export of food to and from Japan. On 26 January 1998 the company was put into creditors' voluntary liquidation. On 26 January 1998, $1.56m was outstanding on a loan to another member of the group, Toshoku Europa Establishment Ltd ("TEE"). On 25 November 1998 TEE's debt to the company was released in return for a percentage of the net proceeds of sale of its assets.
The liquidators sought directions from the court as to whether they were required to discharge any liability for corporation tax on interest payable by TEE after 26 January 1998 on the outstanding loan pursuant to the Finance Act 1996 section 80Finance Act 1996, s. 80(taxation of loan relationships) out of the assets of the company in priority to all other claims as an expense of the winding up pursuant to the Insolvency Act 1986, s. 115 and r. 4.218 of the Insolvency Rules 1986.
The liquidators contended that only liabilities incurred by the liquidator for the purposes of the liquidation fell to be paid as an expense of the winding up within the Insolvency Act 1986, s. 115 and the tax in question here was not a liability incurred by the liquidators, but a liability incurred by the company, and as such, it was not an expense of the liquidation.
The Revenue contended that corporation tax on an amount representing interest charged at the contractual rate for the period from the commencement of the liquidation to 25 November 1998 was payable as an expense of the liquidation in priority to all other claims pursuant to the Insolvency Act 1986, s. 115.
Held, ruling accordingly:
Since corporation tax generally was not within the scheme of r. 4.218, nor was it one of the matters specifically mentioned in r. 12.2, the question was whether the tax in question could be regarded as "other expenses" within r. 12.2. Tax liability on the notional interest arising, which the liquidators had not received nor sought to obtain, was not a consequence of any realisation of or use of property of the company by the liquidators. Payment of the tax would not be a "disbursement" rendered necessary by the proper performance of the liquidator's duties. It followed that the tax was not to be treated as an expense of the winding up: Re Mesco Properties Ltd WLR[1980] 1 WLR 96 distinguished; Re Atlantic Computer Systems plc ELR[1992] Ch 505 applied; Re Kentish Homes Ltd UNK[1993] BCC 212 followed.
Evans-Lombe J: The issues raised in this case arise in the winding up of Toshoku Finance plc ("the company"), a company incorporated in England. The company is a subsidiary of Toshoku Finance Ltd, a company incorporated in Japan which is in turn a subsidiary of Toshoku Ltd, also incorporated in Japan. A fellow subsidiary of Toshoku Ltd was Toshoku Europa Establishment Ltd ("TEE"), a company incorporated in Liechtenstein.
It was the business of the Toshoku Group to import and export food to and from Japan. It was the business of the company to raise money in England to be lent to the trading subsidiaries of the Toshoku Group. It did so by borrowing from Japanese banks operating in the London market. In practice substantially the only borrower from the company was TEE.
On 26 January 1998 the company was placed in creditors' voluntary liquidation and Mr Kahn and Mr Vooght were appointed liquidators. Amongst the documents found by the liquidators was a loan agreement dated 2 April 1990 made between the company and TEE. By this agreement the company gave TEE a borrowing facility with an upper limit of US$ 200m. It also contained provisions for payment of interest by TEE to the company on the amount outstanding lent by the company to TEE from time to time. It is not clear from the provisions of this agreement whether it applied to all or any part of the amount outstanding from TEE to the company at the date of the company's liquidation.
As at 26 January 1998, $156m was outstanding on loan by the company to TEE and represented capital and rolled up interest due at that date. TEE was substantially insolvent. On 25 November 1998 agreement was reached between the creditors of TEE as to how TEE's remaining net assets of approximately $43m should be divided between them. As a result of that agreement the company became entitled to receive slightly more than 54 per cent of TEE's net assets. TEE's creditors having been paid the amounts due to them from the assets of TEE pursuant to the agreement, TEE was placed in liquidation in Liechtenstein on 30 December 1998. Toshoku Finance Ltd, the company's immediate parent, had been placed in liquidation in Japan in 19 December 1997. In March 1998 an administrator for the purposes of a reorganisation plan in respect of Toshoku Ltd was appointed in Japan and a reorganisation plan is currently being formulated.
The applicants before me are the joint liquidators and the respondents are the Revenue. The applicants seek the directions of the court in answer to the following question:
Are the liquidators required to discharge any liability for Corporation Tax upon any interest payable by Toshoku Europa establishment after 26th January, 1998 upon loans made to it by the Company, pursuant to the provisions of Finance Act 1996 section 80 subsec-or-para (1) schedule 8Chapter II and Schedules 8-15 of the Finance Act 1996, out of the Company's assets in priority to all other claims as an expense of the winding-up pursuant to s. 115 of the Insolvency Act 1986 and rule 4.218 of the Insolvency Rules 1986.
By Income and Corporation Taxes Act 1988 section 8 subsec-or-para (2)s. 8(2) of the Income and Corporation Taxes Act 1988:
…A company shall be chargeable to corporation tax on profits arising in the winding-up of the company…
By Income and Corporation Taxes Act 1988 section 6 subsec-or-para (4)s. 6(4) "profits" means income and chargeable gains.
By Finance Act 1996 section 80 subsec-or-para (1)s. 80(1) of the Finance Act 1996 "For the purposes of corporation tax all profits and gains arising in a company from its loan relationships shall be chargeable to tax as income…"
Finance Act 1996 section 84 subsec-or-para (1)Section 84(1) of the Finance Act 1996 provides that:
The credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, in accordance with an authorised accounting method and when taken together, fairly represent, for the accounting period in question:
(a) all profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions: and
(b) all interest under the company's loan relationships and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions.
Authorised accounting method (a) was referred to as the "accruals basis of accounting"
Finance Act 1996 section 87 subsec-or-para (1) section 87 subsec-or-para (2)Section 87(1) and (2) of the Finance Act 1996 provide that where two parties to a loan relationship are connected, the only accounting method authorised for purpose of theFinance Act 1996 for use by the company shall be an authorised accruals basis of accounting under Finance Act 1996 section 84 subsec-or-para (1)s. 84(1)(a).
By Finance Act 1996 section 87 subsec-or-para (3)s. 87(3) of the Finance Act 1996 there is a connection between a company and another company for an accounting period if there is a time in that period, or in the two years before the beginning of that period, when both companies have been under the control of the same person.
Under Finance Act 1996 schedule 9 subsec-or-para 5para. 5(1) of Sch. 9 to the Finance Act 1996 it is provided that:
In determining the credits and debits to be brought into account in accordance with an accruals basis of accounting, a departure from the assumption that every amount payable will be paid in full as it becomes due shall be allowed … to the extent only that
(a) a debt is a bad debt;
(b) a doubtful debt is estimated to be bad…
It was the contention of the Revenue that by reason of these provisions the company was assessable under Income and Corporation Taxes Act 1988 section 8 subsec-or-para (2)s....
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Re KAHN v Commissioners of Inland Revenue sub nom TOSHOKU FINANCE UK Plc
...Act 1996, ss. 80, 84; Insolvency Rules 1986, r. 4.218. This was an appeal by the Revenue against a decision of Evans-Lombe J (TAX[1999] BTC 367) that the tax on interest payable to a company, arising under the Finance Act 1996 section 80Finance Act 1996, s. 80 as a result of a loan relation......
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