Re KAHN v Commissioners of Inland Revenue sub nom TOSHOKU FINANCE UK Plc
| Jurisdiction | England & Wales |
| Judgment Date | 23 March 2000 |
| Date | 23 March 2000 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Sir Richard Scott V-C, Chadwick and Buxton LJJ.
Philip Jones (instructed by the Solicitor of Inland Revenue) for the Crown.
Mark Philips QC and Felicity Toube (instructed by Linklaters) for the liquidators.
The following cases were referred to in the judgment:
Atlantic Computer Systems Ltd, Re ELR[1992] Ch 505
Beni-Felkai Mining Co Ltd, Re ELR[1934] Ch 406
Kentish Homes Ltd, Re UNK[1993] BCC 212
Lundy Granite Co, ex parte Heavan, Re (1871) Ch App 462
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
Corporation tax - company liquidation - Priority of claims - Creditors' voluntary liquidation - Interest due to company on loan made to another member of the group - Whether tax liability arising from a "loan relationship" on interest payable but not paid was an expense of liquidation - Insolvency Act 1986 section 115Insolvency Act 1986, s. 115; Finance Act 1996 section 80 section 84Finance 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 relationship between members of a group of companies, was not an expense in the winding up of the company.
Toshoku 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 products to and from Japan. On 26 January 1998 the company was put into creditors' voluntary liquidation when US$156m was outstanding on a loan to another member of the group ("TEE"). On 25 November 1998 that debt was released in return for a percentage of the net proceeds of sale of the company's assets.
The liquidators sought directions from the court as to whether they were required to discharge a liability for corporation tax on interest payable in the accounting period starting on 26 January 1998 when the company was put into liquidation and the release of the debt on 25 November pursuant to FA 1996, s. 80 (taxation of loan relationships) notwithstanding that no interest had been paid.
The liquidators contended that since r. 4.218(1)(p) of the Insolvency Rules 1986 specifically conferred priority for tax on chargeable gains realised in the liquidation, tax on a company's profits generally were not intended to be included as an expense of the winding up. If it was intended that all profits should be included, there would be no need for r. 4.218(1)(p). Moreover, it would be unfair if they were liable to a pay tax on interest which had not been, and would never be, received.
Held, allowing the Revenue's appeal:
1. Corporation tax on post-liquidation profits generally was not prevented from being an expense properly incurred by the liquidators by the fact that corporation tax on chargeable gains accruing on the realisation of assets of the company were expressly included as an expense of the liquidation by r. 4.218(1)(p) of the Insolvency Rules 1986. Tax on the interest payable was a necessary disbursement of the liquidators within r. 4.218(1)(m) because it had become chargeable as a consequence of what had occurred in the course of the winding up: judgment of Brightman J in Re Mesco Properties Ltd WLRWLR[1979] 1 WLR 558, approved by the Court of Appeal [1980] 1 WLR 96, followed; Re Kentish Homes Ltd UNK[1993] BCC 212 overruled.
2. While the court had a discretion to decide whether a payment would be an expense in a winding up, it could not frustrate the intention of Parliament, in this case the Finance Act 1996, that corporation tax on interest payable should be paid. If it was unfair to the company's pre-liquidation creditors, that was a consequence of the legislation. The tax should be paid out of the assets of the company as an expense of the liquidation under Insolvency Act 1986 section 115s. 115 of the Insolvency Act 1986.
Chadwick LJ:
1. This is an appeal against an order made on 30 July 1999 by Evans-Lombe J on an application made pursuant to Insolvency Act 1986 section 112 subsec-or-para (1)s. 112(1) of theInsolvency Act 1986 by the joint liquidators of Toshoku Finance UK plc ("the company") for directions in relation to the discharge of an alleged liability to corporation tax on interest receivable after the commencement of the winding up. The Commissioners of Inland Revenue were respondents to that application. The judge held that the liquidators were not required to discharge any liability for corporation tax upon post-liquidation income out of the company's assets as an expense of the winding-up. But he took the view that the application had raised a point of general importance in insolvency law; and so gave permission to appeal to this court.
2. The company was incorporated in 1990 under the Companies Act1985. At all material times it was a wholly-owned subsidiary of Toshoku Finance Ltd, a company registered and incorporated in Japan. Toshoku Finance Ltd was itself a wholly-owned subsidiary of Toshoku Ltd - the ultimate holding company of the Toshoku group of companies. The Toshoku group comprised in excess of 150 companies, of which most traded within Japan. In so far as the group traded outside Japan it was engaged, principally, in the import and export of foodstuffs. The role of the company was to raise finance and provide funding for other overseas subsidiaries in the group. The company raised funds by borrowing from Japanese banks on the London market. It provided funding for the group by lending, principally, to Toshoku Europa Establishment ("TEE") - a company incorporated in Liechtenstein.
3. By late 1997 the Toshoku group was in financial difficulties. On 18 December 1997 the directors of Toshoku Ltd filed a petition for re-organisation in Japan. At or about the same time Toshoku Finance Ltd was placed in liquidation in Japan. The company itself went into creditors' voluntary liquidation under the Insolvency Act 1986 pursuant to resolutions passed on 26 January 1998. The estimated deficiency as regards creditors was shown in the statement of affairs prepared by the directors at US$157m or thereabouts. Mr Neville Kahn and Mr Nigel Vooght, licensed insolvency practitioners and partners in PricewaterhouseCoopers, were appointed joint liquidators.
4. The principal asset of the company on liquidation was a debt owed to it by TEE. That debt was quantified at US$156.3m (including interest accrued prior to 26 January 1998). The whole of that debt remained outstanding until 25 November 1998. On that date it was discharged by an agreement made between the company (acting through its liquidators) and TEE. Under the terms of that agreement the company agreed to accept payment of a sum equivalent to a little over 54 per cent of the funds available for distribution to TEE's creditors in accordance with the terms of an arrangement (described as a "Dividend Plan") approved by those creditors, on or about 21 October 1998 following mediation in Tokyo, "in full and final settlement of its claim as at 26 January 1998". The agreement of 25 November 1998 declared "for the avoidance of doubt" that the sum to be paid to the company represented "the repayment of the principal only, and does not include any amounts in respect of such interest as may hitherto have accrued thereon but have remained unpaid". In the event the company became entitled to receive a payment under that agreement of approximately US$23m.
5. The joint liquidators have reserved the right to argue that TEE was under no contractual obligation to pay interest on the loans made to it by the company. That contention faces obvious difficulties. What may be seen as an attempt to meet those difficulties is found in cl. 2 of the agreement of 25 November 1998; which provides, without prejudice to the liquidators' contention that interest may not be contractually payable in any event, that no interest will be payable by TEE in respect of the outstanding loan to the company for the period after 26 January 1998. It is unnecessary for this court to decide whether that attempt can succeed; or whether the difficulties which the liquidators face in resisting the conclusion that the TEE debt was interest-bearing can be overcome in some other way. The question whether or not TEE was under a contractual liability to pay interest on the moneys borrowed from the company does not arise for decision on this appeal. This appeal has been argued - as was the application before the judge - on the basis that there was a contractual obligation on TEE to pay interest on its borrowing from the company; and, in particular, that there was a contractual liability to pay interest on the whole of the loan outstanding (US$156.3 million) at the date of commencement of the liquidation of the company, 26 January 1998, until the discharge of that loan on 25 November 1998.
6. The reason why the liquidators are concerned to resist (if they can) the conclusion that TEE was under a contractual liability to pay interest on the moneys which it had borrowed from the company lies in the fact that it is accepted on their behalf (at least for the purposes of the present application) that the effect of the applicable provisions in the Income and Corporation Taxes Act 1988 and theFinance Act 1996 is to impose on the company a liability to corporation tax on the interest payable by TEE notwithstanding that no interest has actually been paid.
7. The commissioners contend not only that the company is liable to corporation tax on the interest payable by TEE after 26 January 1998 - notwithstanding that the company has not received, and never will receive, the whole or any part of that interest - but, further, that that liability to tax must be discharged out of the company's assets as...
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