Re Toshoku Finance UK Plc
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE CHADWICK,LORD JUSTICE BUXTON,THE VICE-CHANCELLOR |
| Judgment Date | 23 March 2000 |
| Judgment citation (vLex) | [2000] EWCA Civ J0323-15 |
| Docket Number | case no: CHANF 99/0937/a3 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 March 2000 |
[2000] EWCA Civ J0323-15
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE EVANS-LOMBE
ROYAL COURTS OF JUSTICE
STRND, LONDON WC2A 2LL
The Right Honourable The Vice-chancellor
Lord Justice Chadwick and
Lord Justice Buxton
case no: CHANF 99/0937/a3
Mr Philip Jones (instructed by the Solicitor of Inland Revenue for the Appellants)
Mr Mark Philips QC & Miss Felicity Toube (instructed by Messrs. Linklaters for the Respondents)
This is an appeal against an order made on 30 July 1999 by Mr Justice Evans-Lombe on an application made pursuant to section 112(1) of the Insolvency 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.
The underlying facts
The Company was incorporated in 1990 under the Companies Act 1985. At all material times it was a wholly owned subsidiary of Toshoku Finance Limited, a company registered and incorporated in Japan. Toshoku Finance Limited was itself a wholly owned subsidiary of Toshoku Limited —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.
By late 1997 the Toshoku group was in financial difficulties. On 18 December 1997 the directors of Toshoku Limited filed a petition for re-organisation in Japan. At or about the same time Toshoku Finance Limited 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$157 million or thereabouts. Mr Neville Kahn and Mr Nigel Vooght, licensed insolvency practitioners and partners in PricewaterhouseCoopers, were appointed joint liquidators.
The principal asset of the Company on liquidation was a debt owed to it by TEE. That debt was quantified at US$156.3 million (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% 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$23 million.
The issue raised on this appeal
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 clause 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 monies 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.
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 monies 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 (" ICTA 1988") and the Finance Act 1996 (" FA 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.
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 an expense of the winding-up. It is that latter contention which gave rise to the application by the liquidators under section 112(1) of the Insolvency Act 1986; and which is in issue on this appeal.
The Company's liability to corporation tax in respect of loan interest
Although it is not in dispute that that the effect of the applicable provisions in the taxing statutes 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, it is necessary, for the purposes of this appeal, to understand how that liability arises.
It is convenient, first, to rehearse the basic structure by reference to which a charge to corporation tax is imposed by ICTA 1988. Section 6(1) provides for corporation tax to be charged on profits of companies. In that context "profits" means income and chargeable gains —see section 6(4)(a). Section 8(1) provides that a company shall be chargeable to corporation tax on all its profits whenever arising. Section 8(2) provides (in terms) that a company shall be chargeable to corporation tax on profits arising in its winding up. Section 8(3) provides that corporation tax for any financial year shall be charged on profits arising in that year; but that the tax is to be computed and chargeable by reference to accounting periods. Section 12(1) requires that the tax shall be assessed and charged for any accounting period of the company on the full amount of the profits arising in that period (whether or not received in or transmitted to the United Kingdom) without any deduction; other than deductions authorised by the Corporation Taxes Acts – meaning the enactments relating to the taxation of the income and chargeable gains of companies.
Sections 12(2) and (3) ICTA 1988 set out the basic rules for determining what shall be an accounting period of a company. Section 12(7) contains special rules applicable to companies in winding-up. It is in these terms:
"12(7) Notwithstanding anything in sub-sections (1) to (6) above, where a company is wound up, an accounting period shall end and a new one begin with the commencement of the winding up, and thereafter … an accounting period shall not end otherwise than by the expiration of twelve months from its beginning or by the completion of the winding up."
The effect, in the present case, is that the Company is chargeable to corporation tax on profits arising in the accounting period which commenced on 26 January 1998. That accounting period extended over the twelve months from that date; and so covered the whole of the period from 26 January to 25 November 1998.
Chapter II in Part IV FA 1996 contains provisions governing the corporation tax chargeable on profits and gains arising to a company from its "loan relationships". All profits and gains arising to a company from its loan relationships are chargeable to corporation tax as income —see section 80(1). In that context a company has a loan relationship wherever it stands in the position of a creditor (a "creditor relationship") or a debtor (a "debtor relationship") as respects any money debt; and that debt is one arising from a...
To continue reading
Request your trial
-
Re Nortel GmbH
...as the responsible officer for that purpose, it achieved the result that, by the application of technical insolvency law (specifically the Toshoku principle) that obligation had the super-priority of a liquidation 62 Finally, Parliament may make specific provision as to the priority of a fi......
-
(1) Alan Robert Bloom (2) Alan Michael Hudson (3) Christopher John Wilkinson Hill (4) Stephen John Harris (5) David Martin Hughes v (1) The Pensions Regulator and Others
... ... , or otherwise for the benefit of the insolvent estate: see Re Lundy Granite Co , ex parte Heavan (1871) LR 6 Ch App 462 , Re Toshoku Finance UK plc [2002] UKHL 6 , [2002] 1 W.L.R. 671 , ( Toshoku ) per Lord Hoffmann at paragraphs 25 to 29, and for an example close to home, so ... ...
-
Rohl v Bickland Ltd ((in Administration))
... ... Briggs J and Judge Purle considered that it is. In re Toshouku Finance PLC [2002] 1 WLR 671 Lord Hoffman held that the winding-up equivalent (Rule 4.218) did contain a complete enumeration of liquidation expenses. It ... ...
-
Goldacre (Offices) Ltd v Nortel Networks UK Ltd ((in Administration))
...In that case David Richards J, after a careful analysis both of the rules and of the previous decision of the House of Lords in In Re Toshoku Finance UK Plc [2002] 1 WLR 671 (which related to a company in liquidation) held that the expenses regime set out in the rules is mandatory in the ca......