Unilever (UK) Holdings Ltd v Smith (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 19 December 2000 |
| Date | 19 December 2000 |
| Court | Special Commissioners (UK) |
special commissioners decision
Stephen Oliver QC, Malachy Cornwell-Kelly
Capital gains tax - Shares - Reorganisation of share capital - All ordinary stock in subsidiary company acquired by appellant before 6 April 1965 - Scheme or arrangement in relation to subsidiary effected on 29 April 1965 - Calculation of loss - Whether by straight-line apportionment or by reference to value at 29 April 1965 - Preference stock in subsidiary held by public cancelled as part of scheme - Appellant paid holders of preference stock £6.9m as part of scheme - Disposal by appellant of ordinary stock in 1992 at a loss - Whether ordinary stock to be treated as having been acquired at market value on 29 April 1965 on grounds that they had been concerned in a reorganisation on that date and that they became a new holding - No - Whether the £6.9m paid to holders of preference stock as part of scheme was consideration given by appellant for its new holding - No - Appeal dismissed - Taxation of Chargeable Gains Act 1992 section 126 schedule 2 subsec-or-para 19Taxation of Chargeable Gains Act 1992 ss. 126, 127, 128, Sch. 2, para. 19
1. This appeal is, in formal terms, against an assessment dated 14 February 2000 in respect of profits chargeable to corporation tax for the year 1 January to 31 December 1998, for which year the appellant (which we refer to as Unilever) sought to set against its chargeable gains a loss which had been made on the disposal on 22 June 1992 of shares held in a company previously known as The British Oil and Cake Mills Ltd (BOCM) for £67,617,391. (The shares in question have in their history also been held in the form of stock of BOCM and it is common ground that the holding has, throughout, consisted of the same quantity of stock or shares, and that nothing turns on this distinction - since they were at the time we are concerned with held as stock, we will use that term.) We find the following facts - none of which is, indeed, in contention.
2. The stock was at all times held by Unilever in the same amount and had been acquired before 6 April 1965. The point at issue is the base cost of the stock and the reason that question arises is that, on 29 April 1965, the share capital of BOCM was the object of a Scheme of Arrangement ["The Scheme"] approved by the Court on 12 April; The Scheme involved the cancellation of all the company's preference capital, leaving in issue as capital only the ordinary stock the subject of this appeal. So, in essence, the issue is: does the legislation require straight-line apportionment of the value of the stock since actual acquisition, or is the base cost referable to the market value of the shares at the time of the Scheme of Arrangement?
3. The Scheme of Arrangement was dated 22 February 1965 and recited that the Scheme companies (which included another company whose position is not material to these proceedings) were then the only subsidiaries of Unilever in the United Kingdom in which there remained a public holding of preferential capital and that the Sscheme, subject to approval by the Ccourt, sought to redeem that capital with the effect that Unilever would emerge as the sole controlling shareholder of BOCM by reason of its holding of all the ordinary stock of BOCM. It is common ground that the Scheme of Arrangement was implemented for commercial reasons and was not in any sense a tax avoidance scheme.
4. As part of the Scheme, Unilever undertook the following:
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(a) to appear by counsel on the hearing of the petitions to sanction the Scheme;
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(b) to undertake to the court to be bound thereby;
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(c) to do everything needful for giving effect to the Scheme; and
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(d) to make payment to the holders of the preference capital of the value of their holdings as detailed in the Scheme. The Order of the Court was duly made and the effective date of the Scheme was 29 April 1965, when it became operative.
5. The various rights attached to the preference stocks redeemed under the Scheme were cancelled. The principal rights so cancelled were:
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(i) the right to at least a fixed cumulative preferential dividend of either 5.5 per cent or 10 per cent, depending on class;
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(ii) the entitlement to rank first as regards repayment of capital in the event of a winding up;
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(iii) the right to resort to the preferential dividend reserve fund for unpaid cumulative preferential dividends;
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(iv) one vote in general meeting for every one pound nominal capital held;
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(v) the right to object to the issue of shares ranking pari passu with or in priority to the preference stock; and
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(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 the preference stockholders.
6. At the time of the Scheme, and indeed at all other times, the ordinary stock in issue to Unilever was £6m; the preference stock totalled £3,652,124, the whole issued capital being therefore £9,652,124. There was no other issued capital at any material time. 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 per cent of the voting rights in BOCM and was subject to the disadvantage of the other rights and entitlements enjoyed by the preference stockholders.
7. The total authorised share capital of BOCM both before and after the Scheme of Arrangement was £10m,. In the Scheme of Arrangement, the authorised and issued share capital of BOCM was reduced to the extent of the cancellation of all the preference stock, but the authorised capital was increased to the same nominal value by the creation of one pound ordinary shares (though none of those newly authorised shares was in fact ever issued). Tidying up amendments were made to the Memorandum of Association by deleting clauses 6 and 7 dealing with the position of the preference capital. To achieve the overall result, Unilever paid the former holders of the preference capital a total of £6,924,773 in cash.
8. The chronology of the Scheme commences with a public announcement in January 1965 of the proposals to cancel the preference capital. The Scheme was then presented to the court by BOCM on 5 February 1965, when the court ordered the convening of separate meetings of the holders of the two classes of preference stock then in issue. The Scheme of Arrangement itself was made on 22 February 1965 and - though plainly sponsored by Unilever - was in terms made between BOCM and its preference stockholders.
9. The meetings took place on 17 March 1965 when special resolutions of the company were passed under which (a) the Scheme was approved (b) the reductions by cancellation in the preference capital, and the balancing increases in the authorised ordinary share capital mentioned above, were effected. Following that, the definitive hearing of the petition was held on 12 April 1965 and, although Unilever appeared by counsel to give undertakings to the court, BOCM was again formally the petitioner. In accordance with its terms, the Scheme became effective when the Order made by the court sanctioning the Scheme and confirming the reduction of capital resolved on 17 March, was registered with the Registrar of Companies on 29 April 1965.
10. These events necessarily produced an effect on the practical entitlements of the ordinary stockholders: the unlimited borrowing power contained in art. 3(18) of the Articles of Association could now be conferred on the directors by a majority of ordinary stockholders and was no longer dependant upon 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 for 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 meeting exercisable by the ordinary stockholders increased from 62 per cent to 100 per cent.
11 Much of the legislation relevant to this appeal is in its third re-enactment. We will cite it as it appears in the current consolidation, the Taxation of Chargeable Gains Act 1992Taxation of Capital Gains Act 1992, but indicate its earlier provenance.
12. Taxation of Chargeable Gains Act 1992 section 126Section 126 of the 1992 Act, in Taxation of Chargeable Gains Act 1992 part IVCh. II of Pt. IV, provides:
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(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-
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(a) "original shares" means shares held before and concerned in the reorganisation;
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(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).
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(2) The reference in subsection (1) above to the reorganisation of a company's share capital includes-
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(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 as may be in proportion to) their holdings of shares in the company or of any class of shares in the company, and
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(b) any case where there are, (sic) more than one class of share and the rights attached to shares of any class are altered.
(3) The reference in subsection (1) above to a reduction in share capital does not include the paying off of redeemable share capital, and where shares in a company are redeemed by the...
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