Commissioners of Inland Revenue v Blott; Commissioners of Inland Revenue v Greenwood
[1921] 2 A.C. 171(Judgment by: Viscount Haldane (including background))
Between: Commissioners of Inland Revenue - Appellants
And: Blott - Respondent
Between: Commissioners of Inland Revenue - Appellants
And: Greenwood - Respondent
Judges:
Viscount HaldaneViscount Cave
Viscount Finlay
Lord Dunedin
Lord Sumner
Subject References:
REVENUE
Super-tax
Assessment
Shareholder in Company
Distribution of Dividends in the Form of fully paid Shares
Capital or Income
Liability of Shareholder to Super-tax
Legislative References:
Income Tax Act, 1842 (5 & 6 Vict. c. 35) - ss. 40, 54, 163, 164
Finance (1909-10) Act, 1910 (10 Edw. 7, c. 8) - s. 66
Case References:
Bouch v. Sproule applied - (1887) 12 App. Cas. 385
Swan Brewery Co. v. The King distinguished - [1914] A.C. 231
Judgment date: 3 June 1921
Judgment by:
Viscount Haldane (including background)
An assessment to super-tax under the Finance (1909-10) Act, 1910, was made upon the respondent for a certain year in respect of an allotment to him of bonus shares in a limited company. In the previous year the company, in exercise of a power in that behalf conferred by its articles, had passed a resolution declaring that out of its undivided profits a bonus should be paid to its shareholders and authorizing in satisfaction of that bonus a distribution among the shareholders of certain of its unissued shares credited as fully paid up, and the respondent's said shares had been allotted to him pursuant to that resolution:-
Held, by Viscount Haldane, Viscount Finlay and Viscount Cave, Lord Dunedin and Lord Sumner dissenting, that for the purposes of the super-tax the shares so allotted to the respondent could not be treated as part of his "total income from all sources for the previous year" within the meaning of s. 66, sub-s. 2, of the Act, inasmuch as they were not part of his income but were an addition to his capital in that year.
Bouch v. Sproule (1887) 12 App. Cas. 385 applied.
Swan Brewery Co. v. The King [1914] A.C. 231 distinguished.
Decision of the Court of Appeal [1920] 2 K. B. 657 affirmed.
Appeals from a decision of the Court of Appeal [F1] affirming a decision of Rowlatt J. [F2] in both cases.
The question for decision on these appeals was substantially whether a dividend of a limited company declared out of its current annual profits and distributed in the form of shares of the company was income of the recipient for the purposes of super-tax - i.e., whether it was part of the recipient's "total income from all sources" within s. 66 of the Finance (1909-10) Act, 1910, or whether it was exempt from super-tax by reason of its having become capital.
Rowlatt J., affirming a decision of the Commissioners for Special Purposes of the Income Tax Acts, held that for the purposes of the super-tax the bonus shares could not be treated as income, but were an addition to the capital of the shareholder, and his decision was affirmed by the Court of Appeal (Lord Sterndale M.R., Warrington and Scrutton L.JJ.).
There was no material distinction between the facts of the two cases. The facts of both cases are stated in the report before Rowlatt J., and the facts in Blott's Case are also set out in the judgment of Viscount Finlay.
1921. March 10, 11, 14, 15. Sir Gordon Hewart A.-G. and Cunliffe K.C. (with them Reginald Hills) for the appellants.
The question for determination is whether dividends of a limited company paid out of its current profits in the shape of bonus shares form part of the income of the shareholders for the purpose of super-tax. The company was deliberately distributing these profits among the shareholders in a way which would enable them to evade payment of super-tax. The shares were issued as fully paid up and it was out of the power of the company to issue these shares unless they were paid up by some one other than the company. There were therefore really two stages in this transaction: first, a notional payment of dividends to the shareholder, and, secondly, a notional payment back by the shareholder in the purchase of the shares. The primary object of the company in this transaction was the distribution of its current profits amongst the shareholders, and this it effected by the declaration of a further dividend and payment of that dividend in a particular manner; and just as a dividend cannot be limited to a dividend in cash, so payment cannot be limited to parment in cash. The shareholder by this means gets money or money's worth, and if what he receives can be converted into money that is subject to income tax: Tennant v. Smith; [F3] Californian Copper Syndicate v. Harris; [F4] Corke v. Fry. [F5] This is a distribution of current profits, which are liable to income tax, and the particular form of distribution cannot prevent a shareholder from being liable for super-tax, which is a form of income tax.
[They referred to Income Tax Act, 1842, tit., ss. 54, 100, Sch. D, 163, 164; Income Tax Act, 1853, tit., ss. 2, 5; Finance (1909-10) Act, 1910, s. 66.]
Bouch v. Sproule, [F6] by which the Court of Appeal considered itself bound, does not apply. The whole question there was as to the intention of the testator, whose position was similar to that of the respondent in this case, in dividing his property between tenant for life and remainderman, and the decision has no bearing upon the question whether a distribution by a company of annual profits in the shape of shares amongst its shareholders constitutes a taxable profit in their hands under the Income Tax Acts.
If the Crown had been represented in that case it could not have been doubted that profits so distributed would have been held liable to income tax, notwithstanding that as between tenant for life and remainderman they were to be regarded as capital. On the other hand the decision of the Privy Council in Swan Brewery Co. v. The King [F7] applies by analogy. The controversy there was similar to that in the present case. It is true that the decision was upon the terms of a Colonial Act, but the reasoning of Lord Sumner, in delivering the judgment of himself, Lord Moulton and Lord Parker of Waddington, is directly in point. It cannot be said that the taxpayer is not liable in respect of dividends which are paid tax free. The company pays income tax on the profits which are distributed as agent for its shareholders whether the dividend is paid free of income tax or not: Samuel v. Inland Revenue Commissioners. [F8]
[They also referred to Eisner v. Macomber; [F9] Towne v. Eisner.] [F10]
Sir John Simon K.C. appeared with A. M. Latter for the respondent Blott and with Clauson K.C. and A. M. Bremner for the respondent Greenwood.
The case for the several respondents was argued by Sir John Simon K.C. and Clauson K.C. A company pays on its current profits because it is a taxpayer. Assume that a company makes a profit, one of three things may happen. First, it may declare a dividend in the ordinary way, and in that case the company is entitled to subtract a proportionate amount of tax from the dividend, and if the shareholder's income is so large as to attract super-tax he will have to account for that. Secondly, instead of distributing its profits, it may put a certain amount to reserve fund.
That is only a reserve pro tem. available in the company's hands as floating capital. The shareholder has not to account for any portion of that fund. Thirdly, the company may, in the exercise of its powers of domestic management, take that reserve fund and strike it permanently with the character of capital. Can that fact put the shareholder in the position of having in law received additional profit? It is within the constitutional powers of a company either temporarily or permanently to capitalize its undivided profits and it thereby puts it out of its power to distribute the sum so capitalized as profits. Lord Watson in Bouch v. Sproule [F11] states the respondent's case. A company is not bound to divide the whole of its profits amongst the shareholders: Buckley on Companies, 9th ed., p. 648; Burland v. Earle. [F12]
Nor has a shareholder any right to a share of the profits until a dividend is declared; his right to sue commences from the declaration of the dividend: Bond v. Barrow Hoematite Steel Co., [F13] per Farwell J., quoting Lindley on Companies, 5th ed., p. 437; In re Severn and Wye, & c., Ry. Co. [F14] Here it is admitted that the shareholder could not sue for a share of the profits; all he could ask for was his share of the additional statutory capital. The power of a company to issue fully paid shares has varied at different stages in the history of the law of companies. Down to 1867 a company could issue its shares as fully paid within the limits of its authorized capital without any registered contract so long as their face value was represented by money or money's worth, wherever the money came from: In re Barton's Trust. [F15]
Then came the Companies Act of 1867, which, by s. 25, required that a contract in writing should be filed with the Registrar before the issue of such shares. That section was, however, repealed by the Companies Act, 1900, s. 33, and was replaced by s. 7 of that Act, which is now reproduced by s. 88 of the Companies (Consolidation) Act, 1908. The position now is that the company is required within a month of allotment to file with the Registrar a contract in writing or a declaration recording by what means the money is found and if default is made any officer of the company who is knowingly party to the default is liable to a penalty; but default does not render the shareholder liable. The liberty of the company to issue additional shares within its authorized capital out of reserve profits is now unlimited, subject to the imposition of penalties upon the officers of the company where the contract is not registered. Eisner v. Macomber, [F16] a decision of the Supreme Court of the United States, is instructive.
There the question was whether an Act charging income tax on stock dividends - i.e., bonus shares - was authorized by the Constitution - in other words the question was whether this was a genuine income tax. On the only point which is relevant to the present case the judgment was unanimous. It was held that bonus shares were capital as well for the purposes of income tax law as for the adjustment of the rights between tenant for life and remainderman. The point is that the shareholder has now got a capital asset and that the same thing cannot be at the same time capital in the hands of the company and income in the hands of the shareholder.
As regards the structure of the Income Tax Acts and the enactments relating to super-tax in the Finance (1909-10) Act, 1910, it is a fallacy to say that when a company pays income tax it is acting as agent for the shareholder. The Income Tax Acts, so far as Sch. D is concerned, are taxing every description of property or profits in the hands of the taxpayer that makes the profits. That person here is the juristic person, the company, which pays the tax under s. 40 of the Income Tax Act of 1842. There are several respects in which it is inaccurate to say that when the company in distributing dividends makes a deduction in respect of income tax that is the same thing as the income tax which the company has paid. The amount of the income tax payable by the company is paid on the average of the three previous years, whereas the amount distributed is not so ascertained; the company commonly does not distribute the exact amount of its current profits; the profits to be distributed may be accumulated profits which have been made at a period when the income tax was at a different rate; and, lastly, the company will pay income tax on the proper assessed figures at a time when the shareholders are different persons.
These considerations show that the amount deducted does not correspond with the amount of tax paid by the company and that the right to deduct is not based on indemnity on the footing of agency. The deduction is made by virtue of a statutory right conferred by s. 54 of the Act of 1842. This question is really concluded by Scottish Union and National Insurance Co. v. New Zealand Land Co. [F17]
[They also referred on this point to Purdie v. The King; [F18] Johnston v. Chestergate Hat Manufacturing Co.; [F19] Brooke v. Inland Revenue Commissioners; [F20] Ashton Gas Co. v. Attorney-General; [F21] In re Condran; [F22] Patent Castings Syndicate v. Etherington.] [F23]
Applying this to the super-tax provisions of the Finance Act of 1910; for the purposes of the super-tax the total income of the taxpayer is to be taken to be his total income from all sources of the previous year estimated in the same manner as the total income is estimated for exemptions or abatements under the Income Tax Acts. That language clearly does not apply to the allotment of a bonus share. Take the case of exemption - a shareholder having a bonus share and nothing else could not claim exemption in respect of it, because he never paid income tax upon it. Super-tax is assessed on income which the man would receive if there were no income tax.
[They also referred to Williams v. Singer.] [F24]
Reginald Hills, by the indulgence of the House, was permitted to reply in the unavoidable absence of both his learned leaders.
In substance this is a distribution of current annual profits in the form of money's worth, which it is conceded is for the purpose of this appeal equivalent to money, and if there are profits in the hands of the shareholder it is quite irrelevant for income tax purposes how he applies those profits: Port of London Authority v. Orsett Union Assessment Committee. [F25] It is said that what the company has declared to be capital is capital for all purposes, but what a company calls its capital is not necessarily capital in the hands of somebody else. If bonus shares are paid as remuneration for services they would be income in the hands of the recipient: Californian Copper Syndicate v. Harris. [F26] It is not necessary to contend that the company in deducting income tax acts as the agent of the shareholder, if it is understood that the income tax is paid on his behalf. It is the shareholder who pays the tax and who can get it back under the exemption sections: London County Council v. Attorney-General; [F27] Attorney-General v. Ashton Gas Co.; [F28] Patent Castings Syndicate v. Etherington. [F29] It is settled law that a company cannot purchase its own shares, and that there is an obligation on the shareholder to pay for shares issued as fully paid in money or money's worth: Trevor v. Whitworth; [F30] Bellerby v. Rowland and Marwood's Steamship Co.; [F31] In re Wragg; [F32] In re Eddystone Marine Insurance Co.; [F33] General Property Investment Co. v. Matheson's Trustees. [F34]
The House took time for consideration.
1921. June 3. Viscount Haldane -
My Lords, the respondent in the first of these cases was a shareholder in a joint stock company, incorporated in 1895 under the then Companies Acts. Its purpose, as defined by the memorandum of association, was to manufacture and trade in leather goods. Under the articles of association, after providing for the distribution of profits by way of dividend, provision was made by art. 127 enabling a general meeting, among other things, to direct payment of dividend wholly or in part by the distribution of specific assets and, in particular, of paid-up shares in the company.
By art. 128 the directors were empowered, before recommending any dividend, to set aside out of profits a reserve fund, to be applicable for, among other purposes, distribution by way of bonus among the members of the company for the time being, on such terms and in such manner as should be determined in general meeting. At the end of the years 1914 and 1915 there were in hand, after payment of dividends, surplus undivided profits, and on February 8, 1915, the shareholders resolved in general meeting to capitalize over 33,000l., being part of the undivided profits, and that, accordingly,
"a bonus at the rate of 331/2 per cent. per share, free of income tax, on each of the issued ordinary shares of the company be and the same is hereby declared and that the directors be and they are hereby authorized to satisfy such bonus by distribution rateably among the members holding ordinary shares of 33,316 of the unissued second preference shares of 1l. each in the company credited as fully paid in satisfaction of such bonus."
In the following year, on February 7, a similar resolution was passed by which 50,000l., part of the undivided profits for the preceding year, was capitalized, and a bonus of 50 per cent. was in like manner declared on each of the issued ordinary shares, and the directors were in like manner authorized to satisfy the bonus by the distribution of 50,000 second preference unissued shares of 1l. each, credited as fully paid up. Among the shareholders who received some of these bonus shares was the respondent. He neither paid nor received any cash in respect of them, but simply became an allottee of part of the unissued shares. Agreements between the company and persons acting on behalf of the holders of ordinary shares in the company for an allotment of these shares in pursuance of the resolutions I have quoted, were executed and filed to satisfy the requirements of the Companies Act as to shares issued otherwise than for cash.
The question which arises for decision in this appeal is whether the respondent is liable for super-tax on his share in the benefits I have referred to. Super-tax arose under the Finance (1910-10) Act, 1910, which provided that, in addition to the income tax to be charged under that Act, there should be charged in respect of the income of any individual the total of which exceeded a prescribed limit an additional duty of income tax, called a super-tax, leviable on the total income for the preceding year.
The income assessable for super-tax is to be estimated in the same manner as the total income from all sources is estimated for the purposes of exemptions or abatements under the Income Tax Acts, subject to variations which are not material for the purposes of the question before us. What we have to decide is whether the allotment of bonus shares to the respondent was capital, or was in reality an allotment of annual profits which conferred a benefit chargeable in his hands with income tax, for if so it is not in controversy that the super-tax provisions will apply. The Special Commissioners for Income Tax have stated a case. They decided that the respondent was not liable to super-tax, because of the concurrence of previous decisions by the Commissioners that the judgment of this House in Bouch v. Sproule [F35] governed this case. They intimated, however, that, had they felt themselves free, they would have come to a different conclusion. Rowlatt J. also took the view, but on more general grounds, that the respondent was not liable, and the Court of Appeal have unanimously affirmed his decision.
My Lords, the contention of the Crown is briefly this. It is said first that the respondent's original shares in the company were a source of profits, and that the further benefits in question arose out of these profits and really formed part of them. It is said further that in the reports of the directors which the resolution of the general meeting carried out, it was proposed to declare a dividend out of profits in the hands of the company to the ordinary shareholders to be satisfied by an allotment of shares. But the report did not, any more than the resolutions, recommend that this dividend, whatever the expression signified, should be paid in cash, and the resolutions, which are the operative factors in determining the titles conferred, give no right to shareholders to receive anything more than shares.
Even if the expression "dividend" used in the directors' reports had been repeated in the resolutions, which it was not, I do not think that in its context it could be taken as meaning more than that something should be divided, either as capital or as income. The Crown further says that the so-called dividends, in whatever form distributed, imported a distribution of the annual profits of the company to its shareholders as income, and that it was not open to the company, under the Companies Acts, to retain the amount in satisfaction of liability on the shares issued.
My Lords, there is no doubt that the money in question formed originally part of profits made by the company on which it was liable to pay income tax. It is quite another question whether these profits as such ever reached the respondent and the other shareholders as income so as to make them liable for income tax and entitled to a deduction on the score that the tax had already been paid by the company. It is further contended that the decision of this House in Bouch v. Sproule, [F36] to the effect that a distribution of new shares to shareholders in a certain company was a distribution of capital and not of income, is relevant only in such cases as that which it decided, where the question is one between tenant for life and remainderman, depending on the construction of a testator's intention, and that the decision has no application to the question whether a distribution by a company of annual profits, applied to paying up the liability on further shares issued to a shareholder who is an absolute owner, gives rise to a taxable profit in the nature of income in his hands.
For the respondent it is argued that the distribution was one of capital and not of income, and was made such for all purposes by the decision of the company itself to that effect. Bouch v. Sproule [F37] is relied on as decisive of the principle to be applied, as being that the company itself can decide conclusively whether what is given is given as capital or income. It is further said that the increase in the number of shares entitled to participate did not increase the quantum of the total interest of the respondent in the capital of the company, and that at no time did the respondent acquire a right to demand any part of the profits, added by it to capital, from the company.
My Lords, the questions so raised are of much importance. Speaking for myself, I think that they can only be answered if the relation of a shareholder to a company incorporated under the relevant Companies Acts, as they stood both before and after their consolidation in 1908, has been determined. It must be borne in mind that the provisions of the Companies (Consolidation Act) of 1908, with the powers it confers, apply, where the context does not exclude this, to existing companies incorporated under the Act of 1862 as well as to new companies. My Lords, as I understand the law relating to companies to which the Act of 1908 applies, as it does in the present case, the position of such a company is this. It can do nothing which is not authorized by its memorandum of association, excepting so far as the Act expressly enables it to do so.
But one of the powers which the Act expressly gives to it is that of increasing its capital as named in the memorandum. Such a company is a corporate entity separate from its shareholders, but the latter can control its action by passing resolutions in general meeting. If these resolutions are directed to what falls within the capacity of the company as the Act of Parliament defines it, they are treated as concerned with internal management, and if they have been passed in accordance with the statute and the articles of association no Court has jurisdiction to interfere in a question which is for the proper majority of the shareholders alone. The company, acting with the assent so given of the shareholders, can decide conclusively what is to be done with accumulated profits. It need not pay these over to the shareholders. It can convert them into capital as against the whole world, including, as I think the principle plainly implies, the Crown claiming for taxing or for any other purposes. The only question open is, therefore, whether the company has really done so.
If there were any doubt as to the power of the company, in point of principle, to convert such accumulated profits into capital, it seems to me that the principle is recognized by s. 40 of the Act of 1908, which expressly enables a company to return accumulated profits in reduction of the paid-up capital of the company. Clearly on such a return the profits cease to be income and become capital. But the general principle does not rest merely on this section. It appears to follow from reasons of a wider kind. A shareholder is not entitled to claim that the company should apply its undivided profits in payment to him of dividend. Whether it must do so or not is matter of internal management to be decided by the majority of the shareholders. He cannot sue for such a dividend until he has been given a special title by its declaration. Until then, no doubt, the profits are profits in the hands of the company until it has properly disposed of them, and it is assessable for income tax in respect of these profits.
But if, acting within its powers, it disposes of these profits by converting them into capital instead of paying them over to the shareholders, that, as I conceive it, is conclusive as against all the outside world, including the Crown, and the form of the benefit which the shareholder receives from the money in the hands of the company is one which is for determination by the company alone. Subject to anything to the contrary provided in the articles, the directors where, as is usually the case, there are directors, exercise the powers of the company as its agents. On their powers to deal with share capital, and on the power in this regard of the company itself, there are well known restrictions. These appear in the group of sections in the Act of 1908, which commences with s. 40. That section expressly enables the company, when it has accumulated undivided profits, instead of dividing them as dividend or bonus, to return them, on complying with certain formalities, to the shareholders in reduction of capital actually paid up on their shares, the liability for what will thus remain unpaid being increased proportionally. This section is concerned with shares that have been issued and paid up in part or entirely. The next section, among other things, enables the company to cancel unissued shares without the diminution of nominal capital thereby occasioned becoming a reduction of share capital within the meaning of the Act. Sect. 46 confers a general power, subject to confirmation by the Court, to reduce share capital by extinguishing unpaid liability, or by cancelling lost, paid-up capital, or by paying back paid-up share capital, which is in excess of the wants of the company.
My Lords, none of the provisions which I have just referred to affect the question before us excepting on one point. They do show that when a company has share capital which has remained unissued, it is free to cancel it as the alternative to issuing it. Nowhere in either the Act of 1908 or in the earlier Acts is there any provision restricting its capacity, if the memorandum of association permits of it, to apply funds, which form no part of its share capital, but are surplus profits at its disposal, in providing for the benefit of shareholders who desire to take up unissued capital the funds requisite for so doing, and to apply such funds directly to the purpose.
On a liquidation, these funds would have belonged to the existing shareholders as surplus assets. While the company is a going concern, clauses Y. and Z. of the memorandum of association expressly enable the company to distribute among the members in specie any property or proceeds of property of the company, so long as this does not amount to a reduction of capital requiring sanction by law, and to do anything conducive to such an object. There was, therefore, power conferred on the company to do what was done in the case before us. It was, doubtless, an act for which it was expedient, lf not necessary, to have the direction of the shareholders in general meeting, and by the 127th and 128th articles of association, which I have already quoted, express provision on the point is made. It is by no means certain that the majority in such a general meeting would consist of persons liable to super-tax and assembling to devise a method of escaping it.
Why, as matter of law, if they were such, they should not attempt to escape it by any means that is not made unlawful I do not see. But even this question does not necessarily arise. The majority may on any occasion consist of persons who escape from super-tax, because their incomes, even with the additions to be derived from the distribution by the company, are below the level required for the tax. My Lords, for the reasons I have given I think that it is, as matter of principle, within the power of an ordinary joint stock company with articles such as those in the case before us to determine conclusively against the whole world whether it will withhold profits it has accumulated from distribution to its shareholders as income, and as an alternative not distribute them at all, but apply them in paying up the capital sums which shareholders electing to take up unissued shares would otherwise have to contribute. If this is done the money so applied is capital and never becomes profits in the hands of the shareholder at all. What the latter gets is no doubt a valuable thing. But it is a thing in the nature of an extra share certificate in the company. His new shares do not give him an immediate right to a larger amount of the existing assets.
These remain where they were. The new shares simply confer a title to a larger proportion of the surplus assets, if and when a general distribution takes place as in a winding up. In these assets the undistributed profits now allocated to capital will be included, profits which will be used by the company for its business but henceforth as part of its issued share capital. Such a transaction appears to me to be one purely of internal management, with which, for the reasons explained by Lord Davey in Burland v. Earle, [F38] no Court can interfere.
But, my Lords, I do not think that the matter is one which rests merely on principle. It appears to me that the Court of Appeal have rightly held that the question is concluded adversely to the contention of the Crown by the decision of this House in Bouch v. Sproule. [F39] In that case a testator had bequeathed his residuary estate in trust for his wife for life and after her death to somebody else absolutely. Part of the residue consisted of shares in a company whose directors had power, before recommending a dividend, to set apart out of the profits such sum as they thought proper as a reserve fund for certain purposes.
On the recommendation of the directors the company by special resolution passed a new article empowering the directors with the sanction of the company (afterwards given) to declare a bonus to be paid to the shareholders out of the reserve fund with its purposes so enlarged, or out of any other accumulated profits, in proportion to their shares. The directors then issued a letter giving effect to this in a fashion which they had recommended in a report approved by the shareholders. They allotted to each shareholder new shares in proportion to his existing holding, crediting the amount taken from the reserve fund as paid up on the new shares.
There was an ambiguity in the terms on which the directors made their communication to the shareholders which was thought by the Court of Appeal to have left open the view that the allocation was one substantially of dividend out of profits, claimable as such. On that point this House differed from the Court of Appeal, holding that the allocation by the company must be taken as having in substance been one to be treated as of capital. In connection with this question old authorities in analogous cases were discussed, but in reality only on the point of construction of the intention shown. On the main question, which is the question really relevant to what we have to determine in the present appeal, this House laid down distinctly what it held to be the law. Lord Herschell says: [F40]
"I quite agree with the Court below that, apart from the authorities to which I have alluded, the general principle for the determination of such a question as that before us, and in my opinion the only sound principle, is that which is well expressed in the judgment of Lord Justice Fry:'When a testator or settlor directs or permits the subject of his disposition to remain as shares or stocks in a company which has the power either of distributing its profits as dividend or of converting them into capital, and the company validly exercises this power, such exercise of its power is binding on all persons interested under the testator or settlor in the shares, and consequently what is paid by the company as dividend goes to the tenant for life, and what is paid by the company to the shareholder as capital, or appropriated as an increase of the capital stock in the concern, enures to the benefit of all who are interested in the capital.'"
Lord Watson says: [F41]
"In these circumstances it was undoubtedly within the power of the company, by raising new capital to the required amount, to set free the sums thus spent out of the reserve fund and undivided profits for distribution among the shareholders. It was equally within the power of the company to capitalise these sums by issuing new shares against them to its members in proportion to their several interests."
My Lords, it is contended for the Crown that in using this language Lord Herschell and Lord Watson were doing no more than stating a principle which was to apply merely to the respective rights of a tenant for life and a remainderman, and were merely guarding against the application of the well known rule laid down by Lord Eldon in Howe v. Lord Dartmouth, [F42] that where there is a residuary bequest to persons in succession, and no trust for conversion, and such property is not invested in securities which would be approved by the Court, then, unless there is an express or implied statement of the testator's intention that such property is to be enjoyed in specie, the general rule is that the property is to be converted and properly invested.
Now I think that it is evident that the noble and learned Lords would not have used the sweeping language they did had they not intended it to be taken as expressing a principle of much wider application. Bouch v. Sproule [F43] was argued in April, 1886. Judgment was not given until June, 1887. In between, in March, 1887, the well known case of Trevor v. Whitworth, [F44] reported in the same volume, was heard. The question there was one very different from that now before us. It was whether a company incorporated under the Act of 1862 could purchase its own shares under a power purporting to be conferred by the articles, and it was held, reversing the opinion of the Court of Appeal, that it could not do so consistently with the provisions of the Companies Acts.
What is important is that Lord Herschell, and Lord Watson also, sat to hear Trevor v. Whitworth, [F44] and that, in the course of the discussion, a minute examination was made of the principles and structure of the Acts as regards the power of a company to deal with its own capital. Judgment was given in July, 1887, very shortly after that in Bouch v. Sproule. [F43] My Lords, it is hardly conceivable for those who remember the habitual accuracy in the use of language of these two noble and learned Lords that they should have said what they did unless they had in mind what came before them in the argument in Trevor v. Whitworth, [F44] and what was the subject of the subsequent judgment in that case. I think it is clear that they must have intended to lay down that none of the restrictions on a company transacting with regard to its own share capital applied to the case of a company using a reserve over which it had full power of disposition, in order to make payments out of it for the benefit of the existing shareholders of capital sums which they would otherwise have had to contribute for the purchase of new shares.
I am, therefore, of opinion, both on principle and on authority, that the transaction in the present case was one in which the company was in law dominant on the question whether the money in question was to be capital or income for all purposes, and I do not think that, in the circumstances of this case, the respondent received any income or profits at all. I think that Rowlatt J. and the Court of Appeal were right in the conclusion they came to, and that the Appeal of the Crown to your Lordships' House ought to fail.
My Lords, it is said that the point was decided otherwise by the Judicial Committee of the Privy Council in Swan Brewery Company v. The King. [F45] There the transaction was in many respects analogous to that here. But the taxing statute was couched in very different language. The Dividend Duties Act, 1902, of Western Australia had imposed a duty on the amount or value of every dividend declared by companies there. Dividend was defined to include "every profit, advantage or gain intended to be paid or credited to or distributed among the members of the company."
It was held that new shares which were issued to the shareholders and paid for out of accumulated reserve were "advantages," and so taxable. There were expressions in the judgment which may be construed as having gone rather further, and treated the payment made by the company as equivalent in substance to a payment by the company to the shareholders, and by them back to the company. It may have been so, and without a fuller knowledge of the facts in the case and of the local law than the report discloses, it is difficult to be quite sure about the point, but what is clear is that the wide character of the word "advantages" was a primary consideration in what was said by their Lordships who took part in advising His Majesty. I therefore do not feel embarrassed by the decision in that case.
On the other hand I have not allowed myself to treat the decision of the Supreme Court of the United States in the case of On the other hand I have not allowed myself to treat the decision of the Supreme Court of the United States in the case of Eisner v. Macomber [F46] as a reason for the conclusions at which I have arrived. For the taxing statute then in question was of a different order and the jurisprudence invoked was also on certain points different, but none the less I have read with great pleasure and instruction the judicial discussion in which the varying opinions of the eminent judges who decided the case occur.
If I am right in the conclusion at which I have arrived it is agreed that this conclusion disposes also of the appeal which immediately follows in your Lordships' list.