Stanton v Drayton Commercial Investment Company Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Fraser of Tullybelton,Lord Russell of Killowen,Lord Keith of Kinkel,Lord Roskill,Lord Brandon of Oakbrook |
| Judgment Date | 08 July 1982 |
| Judgment citation (vLex) | [1982] UKHL J0708-3 |
| Date | 08 July 1982 |
| Court | House of Lords |
[1982] UKHL J0708-3
House of Lords
Lord Fraser of Tullybelton
Lord Russell of Killowen
Lord Keith of Kinkel
Lord Roskill
Lord Brandon of Oakbrook
My Lords,
This appeal concerns the computation of chargeable gains for the purpose of Corporation Tax. They have to be computed in accordance with the rules for Capital Gains Tax, although they are actually assessed to Corporation Tax, because the taxpayer is a company—see Income and Corporation Taxes Act 1970, section 238 and section 265.
The respondent is Drayton Commercial Investment Company Limited ("Drayton"). In 1972 Drayton (then called Union Commercial Investment Company Limited) acquired from the Eagle Star Insurance Company Limited ("Eagle Star") a portfolio of investments at the price of £3,937,962 (which I shall refer to as £3.9 million). The price was satisfied, in accordance with the agreement between the companies, by the allotment by Drayton to Eagle Star of 2,461,226 ordinary shares of 25p each in Drayton, the issue price of each share being 160p. I shall refer to the number of shares allotted as 2.4 million. Drayton subsequently disposed of some of the investments, so that it became material, in order to ascertain the amount of its capital gains, to determine the amount or value of the consideration which it had given for the investments. Drayton contends that the value of the consideration was the issue price of the shares allotted to Eagle Star (160p) multiplied by the number of shares allotted (2.4 million). The appellant, on behalf of the Inland Revenue, originally contended that the consideration was the market price of the Drayton shares allotted on the day when they were first quoted, which was the day after their allotment, multiplied by 2.4 million. That price was 125p. During the hearing in your Lordships' House the appellant departed from that contention to some extent and submitted that the value of the consideration fell to be ascertained by the best evidence, and that, although the market value on the day the shares were first quoted would be some evidence, it was not conclusive. The market value was probably the price paid for comparatively small parcels of shares, and evidence might well show that the price that could have been obtained for 2.4 million shares, if they had all been offered for sale on the day they were first quoted, would have been substantially lower. It was common ground between counsel that the only question for decision at this stage was whether Drayton's contention was sound in principle, and that, if not, (i.e. if the appeal succeeds on the question of principle) the matter must be remitted to the Special Commissioners to ascertain the true value of the consideration and to make any necessary amendment in the assessment consequent thereupon.
The Special Commissioners upheld Drayton's contention. Vinelott J. reversed their decision and remitted the case to them to value the consideration. The Court of Appeal (Waller, Oliver, and Fox L.JJ.) allowed the appeal and restored the decision of the Special Commissioners.
The agreement under which the portfolio was acquired by Drayton was dated 21st September 1972. By clause 1 it provided inter alia as follows:
"1. The vendor [Eagle Star] will sell and the purchaser [Drayton] will purchase all the securities in the said portfolio at the price of £3,937,962 to be satisfied by the allotment by [Drayton] to [Eagle Star] of 2,461,226 ordinary shares of 25p each in [Drayton] the issue price of each such share for the purpose of satisfying the consideration being 160p. The said ordinary shares in [Drayton] when issued will be credited as fully paid up …"
The agreement was subject to two conditions set out in clause 2 which provides as follows:
"This agreement is conditional upon:
(i) The members of [Drayton] passing the necessary resolution of the company in general meeting creating the new shares in [Drayton] required to satisfy the consideration above mentioned
(ii) the Stock Exchange London granting permission to deal in and quotation for such new shares (subject to allotment) before the 31st October 1972"
The necessary resolution was passed at a general meeting of Drayton's shareholders on 9th October 1972, and Stock Exchange permission was granted on the 11th October. The new shares were allotted on 11th October, and were first quoted on the Stock Exchange on 12th October 1972. I should mention that the portfolio had been valued at middle market quotation on 31st August 1972, and that is stated in clause 4 of the agreement.
The statutory provision which is directly applicable is the Finance Act 1965, Schedule 6, paragraph 4(1)(a) which provides as follows:
"4(1) Subject to the following provisions of this Schedule, the sums allowable as a deduction from the consideration in the computation under this Schedule of the gain accruing to a person on the disposal of an asset shall be restricted to—
(a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition …"
The appellant also relied on the Finance Act 1971, Schedule 10, paragraph 10 on the question of the date on which the consideration should be valued. I shall refer to that matter separately later.
In my opinion, paragraph 4(1)(a) means that the allowable deduction is to be restricted to "the amount of the consideration, if it is in money, or the value in money's worth if it is not in money". In the present case the consideration was in money's worth and it is therefore necessary to ascertain its value. The first stage is to ascertain exactly what was the consideration given by Drayton. This has been the subject of acute controversy at all stages of the appeal. Vinelott J. held that the consideration was the shares in Drayton allotted to Eagle Star. The Court of Appeal held that it was not the shares but "the benefit of an agreement by Drayton (i) to issue and allot the shares and (ii) to credit them as fully paid." They added "We should mention here that, as we understand it, the new shares did not exist at the time when the agreement became unconditional (and when, therefore, the acquisition took place). They were issued later on the same day". When the appeal reached this House counsel for Drayton, while still vigorously rejecting the view that the consideration was the Drayton shares, did not fully accept the Court of Appeal's view but submitted that the consideration was "the credit of £3,937,962 allowed to Eagle Star by [Drayton], which was offset against and extinguished Eagle Star's liability to pay [Drayton] £3,937,962 in consideration of the issue of the new shares in [Drayton] at 160p each."
In my opinion, the consideration was the Drayton shares. That is, I think, how any businessman would have seen the transaction, and it is the commercial reality. Counsel for Drayton argued that the correct legal analysis was not for businessmen, but for lawyers and I agree, subject to this, that the lawyer must have regard to the businessman's view. From the lawyer's point of view, it seems plain beyond argument that what Eagle Star received as consideration for its portfolio was the Drayton shares. It may be possible for Drayton to have given something different from that which Eagle Star received although that seems prima facie unlikely. I would only accept such a comparatively complicated analysis if it was the only satisfactory way of explaining what had occurred. But in this case I do not think it is. It is stated in the agreement that the price of 3.9 million pounds will be satisfied by the allotment of 2.4 million shares and that seems entirely consistent with the view that the shares were the consideration. The view contended for by Drayton, and substantially accepted by the Court of Appeal, was based mainly on two decisions on questions of company law, namely Osborne v. Steel Barrel Co. Ltd. [1942] 1 All E.R. 634 and Craddock v. Zevo Finance Co. Ltd. 27 T.C. 267. Neither of these cases was concerned with the question which arises here.
In Osborne a new company had acquired stock in trade for a consideration consisting partly of cash and partly of shares which it issued as fully paid. The Crown's contention was that the shares had cost the company nothing and that the stock should be entered in its books simply at the amount of cash paid for it. It is perhaps not surprising that that contention failed. In the Court of Appeal Lord Greene M.R. said at p. 638 G that "on the facts of [that] case" the issue of the fully paid shares represented a payment in cash equal to the par value of the shares, mainly because the only alternative would have been that the shares had been issued at a discount which would have been illegal, and no illegality was alleged. In the present appeal no question of issuing shares at discount arises and neither party contends that Drayton's shares should be valued at par. The only part of Lord Green's opinion which seems to bear upon the present appeal is at page 638 A where he said this:
"A company cannot issue £1,000 nominal worth of shares for stock of the market value of £500, since shares cannot be issued at a discount. Accordingly, when fully paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares and must be based on an honest estimate by the directors of the value of the assets acquired." (Emphasis added.)
As regards the nature of the consideration moving from the company, the decision was that the price paid for the stock was cash plus shares and...
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