Unilever (Uk) Holdings Ltd v Smith (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judge | Mr Justice Burton |
| Judgment Date | 14 December 2001 |
| Judgment citation (vLex) | [2001] EWHC J1214-9 |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | Case No: CH/2001/APP137; CH/2001/APP179 |
| Date | 14 December 2001 |
[2001] EWHC J1214-9
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Burton
Case No: CH/2001/APP137; CH/2001/APP179
Mr Robert Venables QC and Mr James Kessler (instructed by James Berkeley for the Appellant)
Mr Nicholas Warren QC and Mr David Ewart (instructed by Solicitor of Inland Revenue for the Respondent)
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
………………………………
Mr Justice Burton
This is an appeal by Unilever (UK) Holdings Ltd ("Unilever"), for whom Robert Venables QC and James Kessler have appeared, as they did below, against a decision given on 19 December 2000 by the Special Commissioners (Stephen Oliver QC and Malachy Cornwall-Kelly) in favour of the Revenue, for whom Nicholas Warren QC appeared below, and also, with David Ewart, before me. The Special Commissioners dismissed an appeal by Unilever against an assessment dated 14 February 2000 in respect of profits chargeable to corporation tax for the period 1 January to 31 December 1998, for which year Unilever sought to set against its chargeable gains a loss on the disposal, on 22 June 1992, of shares held in a company previously known as British Oil and Cake Mills Ltd ("BOCM").
The relevant events requiring to be considered occurred in 1965, because the point at issue is the base cost of Unilever's holdings in BOCM. Unilever had held that stock for many years prior to April 1965, such that the Capital Gains Tax legislation would ordinarily require straight line apportionment of the value of the stocks since actual acquisition, but Unilever claims that the events of 1965 justify a base cost referable to the market value of the stock at the time of the Scheme of Arrangement relating to BOCM, approved by the Court in April 1965.
Immediately before the Scheme of Arrangement BOCM had an authorised share capital of £10,000,000: £9,652,124 was issued and fully paid up, of which £743,103 was 5 1/2% cumulative preference stock and £2,909,021 cumulative preferred ordinary stock ("the preference shares") and £6,000,000 was ordinary stock. The preference shares were held by the public and quoted on the London Stock Exchange, and between them the two classes controlled 37.84% of the votes. The ordinary stock, which was held by Unilever (save for a very small amount of ordinary stock which was held by nominees on its behalf) carried approximately 62% of the votes. Under the Articles the preferential shareholders were entitled to fixed cumulative preferential dividends (Article 8) and on a winding up to return of paid up capital in the same priority as the ranking for dividends (Article 145): every member had one vote for every £1 of nominal amount of capital held by him of whatever class. By Article 51(d) BOCM could reduce its share capital and any capital redemption reserve fund and any share premium account, by Special Resolution.
In January 1965 Unilever and BOCM publicly announced proposals to cancel the preference capital in BOCM, and the Scheme of Arrangement was presented to the Court by BOCM in February 1965, including the following in its preamble:
"(e) The principal object of this Scheme is to cancel the Scheme Preference Stock and to procure the payment by Unilever of cash to the holders of the Scheme Preference Stocks so cancelled.
(f) Unilever has agreed to appear by Counsel on the hearing of the Petitions to sanction this Scheme and to undertake to the Court to be bound thereby and to execute and do and procure to be executed and done all such documents acts and things as may be necessary or desirable to be executed and done by it for the purpose of giving effect to this Scheme."
Three meetings were held on 17 March 1965, two class meetings of the preferential shareholders and an extraordinary general meeting of BOCM, at which appropriate Special Resolutions were passed. The High Court sanctioned the Scheme of Arrangement by an Order dated 12 April 1965, and registration with the Registrar of Companies was made on 29 April 1965. Pursuant to the Special Resolutions, the Scheme of Arrangement and its approval by the Court:
i) the preference capital was cancelled;
ii) Unilever paid cash totalling £6,924,773 to the holders of the issued Preference Capital as provided by the Scheme of Arrangement;
iii) the authorised capital of BOCM was reduced by the cancellation of the two classes of preference stock: it was increased by an equivalent amount of ordinary shares, but such shares were unissued, and remained unissued at the date of the disposal of BOCM;
iv) Clauses 6 and 7 of the Memorandum of Association of BOCM, which recorded the existence of the preference stock, were deleted.
The reduction of the capital of BOCM contemplated by the Special Resolutions and the Scheme of Arrangement took effect from the date of registration of the Court order. So from 29 April 1965 the share capital of BOCM consisted of £10,000,000 authorised share capital by way of ordinary stock, of which the pre-existing £6,000,000 of ordinary stock belonging to Unilever was and remained the only share capital issued and fully paid up. There were what have been called tidying up amendments to the Articles, one example of which was by way of amendment to Article 8(iv) so as to delete the passage in parenthesis:
"(iv) The 3,500,000 ordinary shares at £1 each shall confer on the holders thereof the right (subject to the prior preferential rights as to dividend hereinbefore specified) to receive dividends on the capital for the time being paid up or credited as paid up thereon …"
The effect of this was summarised in the Decision of the Special Commissioners as follows:
"5. The various rights attached to the preference stocks redeemed under the scheme were cancelled. The principal rights so cancelled were: (i) the right to at least a fixed cumulative preferential dividend of either 5.5% or 10% depending on class; (ii) the entitlement to rank first as regard repayment of capital in the event of a winding up; (iii) the right to resort to the preferential dividend reserve fund for unpaid cumulative preferential dividends; (iv) one vote in general meeting for every £1 nominal capital held; (v) the right to object to the issue of shares ranking pari passu with or in priority to preference stock; (vi) the right to prevent borrowing by the directors in excess of the company's issued and paid up capital without the separate approval of an extraordinary resolution of preference stockholders.
6 … The result of the scheme of arrangement therefore was, as has been indicated, to leave Unilever in sole and unqualified control of BOCM, whereas it had before no more than 62% of the voting rights of BOCM and was subject to the disadvantage of the other rights and entitlements enjoyed by the preference stockholders.
10. These events necessarily produced an effect on the practical entitlements of the ordinary stockholders: the unlimited borrowing power contained in Article 3(18) of the articles of association could now be conferred on the directors by a majority of ordinary stockholders and was no longer dependent on the separate consent of the preference stockholders; the right to share in the dividends of the company was no longer subject to the prior rights of the preference stockholders; the preferential dividend reserve fund could now be distributed, or otherwise applied to the advantage of the ordinary stockholders; the repayment of capital on liquidation was no longer subordinated to the entitlements of the preference stockholders; and the proportion of voting rights in general meetings exercisable by the ordinary stockholders increased from 62% to 100%'.
Some twenty seven years later, on 22 June 1992, Unilever sold all the stock in BOCM for £67,617,391. In July 1998 Unilever disposed of PBI Cambridge Ltd, on which it realised a chargeable gain. Unilever seeks to set off the loss that accrued on disposal of BOCM against that gain: this appeal concerns the year 1998, when for the first time chargeable gains accrued against which any possible capital loss on the disposal could be set.
The decision to be made is one of principle, and does not involve the assessment of any particular figures, but the difference to Unilever if it can establish April 1965 as the base date for valuation, rather than the original date of acquisition of the stock many years before 1965, may be, I am informed, as much as some £40,000,000.
The material legislation relevant to this case is now all contained in the Taxation of Chargeable Gains Act 1992 ("the Act"), although I include reference below to the provenance of the relevant sections.
(I) CHAPTER II OF PART IV
Section 126 of the Act ("s126') provides:
"(1) For the purposes of this section and sections 127 to 131 "reorganisation" means a reorganisation or reduction of a company's share capital, and in relation to the reorganisation -
(a) "original shares" means shares held before and concerned in the reorganisation,
(b) "new holding" means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain).
(2) The reference in subsection (1) above to the reorganisation of the company's share capital includes –
(a) any case where persons are, whether for payment or not, allotted shares in or debentures of the company in respect of and in proportion to (or as nearly a may be in proportion to) their holdings of shares in the company or of any class of shares...
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