Zim Properties Ltd v Proctor
| Jurisdiction | England & Wales |
| Judgment Date | 08 November 1984 |
| Date | 08 November 1984 |
| Court | Chancery Division |
Chancery Division.
Mr. A. Thornhill (instructed by Messrs. Berwin Leighton) for the company.
Mr. R. Carnwath (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Warner J.
Corporation tax - Chargeable gains - Compromise of action for negligence - Payment of agreed sum - Whether right to sue an "asset" - Whether right to sue was asset from which agreed sum was derived - Finance Act 1965, Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) (now Capital Gains Tax Act 1979, Capital Gains Tax Act 1979 section 20 subsec-or-para (1)sec. 20(1)).Corporation tax - Chargeable gains - Computation of gain - Right to sue - Acquired otherwise than by way of bargain at arm's length - Right deemed to have been acquired for market value - Whether right "acquired" - Date when right acquired - Finance Act 1965, Finance Act 1965 section 22 subsec-or-para (4)sec. 22(4) (now Capital Gains Tax Act 1979,Capital Gains Tax Act 1979 section 29A subsec-or-para (1)sec. 29A(1)).
This was an appeal by the taxpayer company against a decision of the Special Commissioners concerning an assessment to corporation tax in respect of a capital gain of £60,000, and a cross-appeal by the Crown.
The taxpayer company entered into a contract for the sale of three properties. The purchaser refused to complete since the taxpayer company had lost the title deeds to one of the properties and so was unable to show good title to it. The company issued a writ against its solicitors claiming damages for negligence and breach of contract. It was agreed that at the time the contract was drafted the solicitors knew that the company had lost the title deeds. After negotiations the parties compromised the action, the solicitors paying to the company £60,000 plus interest of £9,000.
On the principal issue of whether the capital sum of £60,000 was "derived" from any, and if so what, "asset" of the company, it was argued for the Crown that the company's right of action against its solicitors was an asset from which that sum was derived. In the alternative the Crown maintained that the £60,000 was derived from the asset comprising the company's rights under its contract with its solicitors. If either contention were right the entire £60,000 was taxable as a capital gain.
For the company it was submitted that the £60,000 was "derived" from the three properties comprised in the contract of sale. If that were so, the company was entitled to a deduction for its expenditure on acquiring the properties in computing the capital gain, and to an apportionment on one property under Finance Act 1965 schedule 6 subsec-or-para 24para. 24 of Sch. 6 to the Finance Act 1965, tax only being charged on the gain deemed to be attributable to the period after 5 April 1965. Alternatively the company contended that the £60,000 could not be said to have been derived from any asset, on which basis no tax was payable.
On the main subsidiary issue, it was argued for the company that it acquired its right to sue its solicitors otherwise than by way of a bargain made at arm's length, within Finance Act 1965 section 22 subsec-or-para (4)sec. 22(4) of the 1965 Act, so it was deemed to have acquired that right for a consideration equal to its market value. That right was acquired in July 1974 when the purchaser refused to complete the purchase. Accordingly the market value of the right at that time was deductible in computing the chargeable gain.
For the Crown it was contended that the company never "acquired" the right to sue within the meaning of Finance Act 1965 section 22sec. 22. If that were incorrect, then the acquisition occurred in July 1973 when the contract of sale was entered into.
Held, dismissing the appeal and the cross-appeal:
1. The company's right to sue its solicitors was an asset for the purposes of the capital gains tax legislation. The question of whether or not the action would have succeeded had it been tried rather than compromised was irrelevant.
2. To determine the asset from which a capital sum was derived within the meaning of Finance Act 1965 section 22 subsec-or-para (3)sec. 22(3) it was necessary to consider the real rather than the immediate source of the capital sum. In the present case, however, the reality was that the company derived the capital sum from its right to sue its solicitors, not from the properties themselves, which it still owned after the sum was paid.
3. The company acquired the right to sue its solicitors on the date when it entered into the defective contract of sale.
1. At a meeting of the Commissioners for the special purposes of the Income Tax Acts held on 19, 20 and 21 May 1980 Zim Properties Limited (hereinafter called "the Company") appealed against an assessment to corporation tax for its accounting period ended 31 March 1976 in the estimated sum of £15,000 in respect of chargeable gains arising on the alleged disposal by the Company of a chose in action.
2. Shortly stated the question for our decision was whether a sum of money received by the Company from the compromise of its High Court action against a firm of solicitors for damages for the firm's negligence while acting as the Company's solicitors in connection with the proposed sale by the Company of properties (which negligence caused the sale to be called off) was consideration for the disposal or part disposal of an asset of the Company thus giving rise to a chargeable gain and, if so, how the gain should be computed.
3. The following authorities were cited to us:
Lysaght v. Edwards |
[1876] 2 Ch. 499 |
Glegg v. Bromley |
|
I.R. Commrs v. Montgomery |
|
Raja's Commercial College v. Gian Singh & Co. Ltd. |
[1976] STC282 |
[1977] A.C. 312 |
|
O'Brien v. Benson's Hosiery (Holdings) Ltd. |
[1977] Ch. 348 (High Ct.) and [1979] 3 All E.R. 652; [1980] A.C. 562 (House of Lords) |
Davis v. Powell |
|
Aberdeen Construction Group Ltd. v. I.R. Commrs. |
|
Marren v. Ingles |
T.L. 2703 (High Court) and [1979] 1 W.L.R. 1131 (Court of Appeal) |
Midland Bank Trust Co. Ltd. & Anor. v. Hett, Stubbs & Kemp |
|
Stoke-on-Trent City Council v. Wood Mitchell & Co. Ltd. |
|
Halsbury's Laws of England, 4th Ed. |
Vol. 6, para. 86-87 |
4. We the Commissioners who heard the appeal took time to consider our decision and gave it in writing on 23 December 1980.
5. A copy of our decision is appended to this Case and forms part of it. In our decision we have set out:
(a) a list of the documents which were proved or admitted before us (para. 4): copies of these are available for inspection by the court if required;
(b) the facts as agreed between the parties (para. 3);
(c) the contentions of the Company (para. 6);
(d) the contentions of the inspector of taxes (para. 7 and 8);
(e) our conclusions (para. 9).
6. On 5 August 1981 both parties made a joint application to us for a Case to be stated on the points of principle for the opinion of the High Court. A copy of this application is appended hereto as a Schedule. Since the decision of Browne-Wilkinson J. in Hallamshire Industrial Finance Trust Ltd. v. I.R. Commrs. WLR[1979] 1 W.L.R. 620 we believe ourselves to be justified, having determined issues raised in the Company's appeal, in acceding to the request of the parties, and we have stated and do sign this Case accordingly.
7. The question of law for the opinion of the court is whether our decision on how the sum received by the Company from the compromise of its action for damages should be treated for corporation tax purposes was correct.
1. We have before us an appeal by Zim Properties Ltd. ("the Company") against an assessment to corporation tax for its accounting period ended 31 March 1976 in the estimated sum of £15,000 in respect of chargeable gains arising on the alleged disposal by the Company of a chose in action.
2. Put shortly, the question for our decision is whether a sum of money received by the Company from the compromise of its High Court action against a firm of solicitors ("the Firm") for damages for the Firm's negligence while acting as the Company's solicitors in connection with the proposed sale by the Company of properties (which negligence caused the sale to be called off) was consideration for the disposal or part disposal of an asset of the Company thus giving rise to a chargeable gain and, if so, how the gain should be computed.
3. The following facts are agreed between the parties:
(2) The Company is incorporated in England with limited liability, having as its main object the holding of property by way of investments. Its accounting period in all relevant years ended on 31 March.
(3) By a Contract dated 1 September 1960 the Company acquired the properties known as 49 and 49a Faulkner Street, Manchester. Such properties were acquired by the Company and held by it at all times as an investment.
(4) In 1973, the properties were damaged as a result of fire and the Company decided that it should sell the property 49 Faulkner Street. A prospective purchaser was found for the property together with two other properties held by the Company, 51 Faulkner Street and 17 Nicholas Street, Manchester, at an aggregate price, subject to contract, of £175,000. The 3 properties are hereinafter called "the Properties".
(5) The same solicitors ("the Firm") who acted for the purchase of 49 and 49a Faulkner Street, were instructed to act for the Company in connection with the proposed sale. Contracts ("the Contract") were exchanged on 12 July 1973. Completion was due to take place on 12 July 1974, time to be of the essence. The date was not inserted in the Contract, but is established by correspondence passing between the solicitors for the vendor and purchaser.
(6) Completion did not take place on the said date. The Company...
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