Aberdeen Construction Group Ltd v Inland Revenue Commissioners
[1978] A.C. 885(Judgment by: Lord Russell of Killowen)
Between: Aberdeen Construction Group Ltd - Appellant
And: Inland Revenue Commissioners - Respondents
Judges:
Lord Wilberforce
Viscount Dilhorne
Lord Fraser of Tullybelton
Lord Russell of KillowenLord Keith of Kinkel
Subject References:
REVENUE
CAPITAL GAINS TAX
DISPOSAL OF ASSETS
Share capital in wholly-owned subsidiary
Sale by company
Condition that company's loan to subsidiary be waived
Whether consideration to be apportioned between shares and waiver
Whether loan a debt 'on a security'
Whether deduction to be made of amount by which share value derived from waiver
Legislative References:
Finance Act 1965 (c. 25) - s. 19, Sch. 6, para. 8, Sch. 7, paras, 5 (3) (b), 11 (1)
Case References:
Agricultural Mortgage Corporation Ltd. v. Inland Revenue Commissioners - [1978] Ch. 72; [1978] 2 W.L.R. 230; [1978] 1 All E.R. 248, C.A.
Cleveleys Investment Trust Co. v. Inland Revenue Commissioners - 1971 S.C. 233
Kirkwood, In re - [1966] A.C. 520; [1966] 2 W.L.R. 136; [1966] 1 All E.R. 76, H.L.(E.)
Reed International Ltd. v. Inland Revenue Commissioners - [1976] A.C. 336; [1975] 3 W.L.R. 413; [1975] 3 All E.R. 218, H.L.(E.)
Judgment date: 15 February 1978
Judgment by:
Lord Russell of Killowen
My Lords, on the first point taken by the appellants it is in my view necessary to consider the contract between Westminster and the appellants without looking over the shoulder at the statutory provisions relating to capital gains tax. The contract was, it appears to me, a contract by Westminster to buy from the appellants the issued share capital of Rock Fall and to pay as consideration for its transfer £250,000. This is after all what the contract says. The obligation to pay that sum for the shares was conditional upon the shares being shares in a company not burdened with a debt of £500,000 owing to the appellants, and the consideration for the shares was based upon that assumption, but it was and remained consideration only for the shares. Westminster might of course have agreed to pay £250,000 for transfer of the shares and assignment to it of the debt: but that was not the method which the parties chose to adopt for the transaction. (It has before now been said in this House, in the fiscal context of estate duty, "While mere form may not be a deciding factor in the incidence of estate duty, methods adopted may be": In re Kirkwood [1966] A.C. 520, 545, 548, 551.)
There was never a contract to pay £250,000 (a) for shares in a relevantly indebted company and (b) for a waiver of the relevant debt: that concept appears to me artificial: it is to my mind unrealistic to suppose, on the form of the contract, that there was to be any obligation on Westminster to pay anything unless and until Rock Fall no longer owed a debt to the appellants, in which event the payment was to be only for the shares.
It is I believe agreed on all hands that if Westminster had said to the appellants "I am not interested in the Rock Fall shares while your debt remains outstanding: go away and extinguish it and I will then bid you £250,000 for the shares" the appellants' first point could not have succeeded. The distinction between that situation and a contract such as was made, viz: to buy the shares for £250,000 on condition the debt be extinguished, is too fine for me to appreciate. Recognition of the distinction I think, with respect, stems from an understandable reluctance to hold that the ambush of this legislation should catch the appellants with a taxable capital gain when it has lost a substantial sum by its unhappy venture in Rock Fall.
Accordingly I would decide against the appellants on their first contention.
The second contention of the appellants is based upon paragraph 8 of Schedule 6 to the Finance Act 1965, which contention if correct would lead to some apportionment, as under the first contention. That paragraph is cross-headed "Assets derived from other assets." If broad terms were legitimate in connection with any part of this complicated legislation one would say that in broad terms the paragraph is designed to provide for computation of capital gains where one asset has gained in value at the expense of another asset in the same ownership. Had it been expressed in such broad terms it would be clear that in the circumstances the Rock Fall shares asset had gained in value by the extinction of the appellants' other asset - the debt. But the paragraph has limiting factors or qualifying conditions for its operation. So far as presently relevant it was necessary for the appellants to contend that the debt and the shares had been "merged" or (perhaps) that the shares had "changed their nature."
I find these contentions wholly unacceptable. Release of a company from its debt does not achieve anything that can be described as merger of the debt with the shares in the company: nor does it change the nature of those shares. If the contrary were true it would equally be appropriate to say that (within the paragraph) the debt was a right or interest over the shares which had been extinguished: but of course it was not such. At one time I speculated whether it could be said that the waiver of the debt was a case of extinction of "rights or interests in or over" the asset consisting of the debt - a suggestion quite rightly not advanced by counsel for the appellants. The speculation was soon terminated by counsel for the respondents who pointed out that total extinction of the asset cannot come within the language: the part is not the whole.
Accordingly I would reject the second contention.
I turn to the appellants' third contention. This depends upon the application to the facts of this case of the language of paragraphs 11 (1) and 5 (3) (b) of Schedule 7 to the statute.
Paragraph 11 (1) is in the following terms:
"Where a person incurs a debt to another, whether in sterling or in some other currency, no chargeable gain shall accrue to that (that is the original) creditor or his legatee on a disposal of the debt, except in the case of the debt on a security (as defined in paragraph 5 of this Schedule)."
Paragraph 5 (3) (b) is in the following terms:
"'security' includes any loan stock or similar security whether of the Government of the United Kingdom or of any other government, or of any public or local authority in the United Kingdom or elsewhere, or of any company, and whether secured or unsecured."
I find these provisions particularly obscure and on any construction cannot find a rational explanation. There may be a temptation to take advantage of that very obscurity so as to reach a construction favourable to the stricken appellants: but it must be borne in mind that the provision works both ways, and to find in this case an allowable loss is to find in another case a chargeable gain, though not perhaps of such hardship.
Paragraph 11 (1) deals with the disposal of a debt asset, but only where such disposal is made by the original creditor (or his legatee): such disposal might - for example in the case of a debt expressed in a foreign currency - result, on disposal by the original creditor (or his legatee), in a capital gain, but that gain is not to be a chargeable gain: and a parallel loss is not an allowable loss. But those provisions do not cover all debts for there is excepted "the case of the debt on a security (as defined in paragraph 5 of this Schedule)." (I do not know why "the debt": I take the phrase simply to mean "a debt," the language used in subparagraph (2).) If the appellants are to succeed on the third contention they must bring the £500,000 debt into the exception, the appellants being the original creditor.
In the ordinary sense of the phrase this cannot be said to be a debt on a security: it was not secured on any property or in any way. Can it be said to be a debt "on a security" in the extended meaning given to the word "security" by paragraph 5 (3) (b)? That word embraces "any loan stock or similar security ... of any company ... whether secured or unsecured." Can it fairly be said that we have a case of "loan stock" or of a security "similar to loan stock"? The debt was of course a loan, or series of loans, to Rock Fall, and figured in Rock Fall's balance sheet as such as one item under the head of "capital employed": this was a suitable accountancy niche having regard to the purposes for which the loans were made and to which they were put. But in my opinion this was not a case of loan stock, which suggests to my mind an obligation created by a company of an amount for issue to subscribers for the stock, having ordinarily terms for repayment with or without premium and for interest. The series of loans by the appellants to Rock Fall ultimately in total outstanding amounting to £500,000 are not within that concept: nor can they fairly be described as "similar security." They were simply loans by Aberdeen, initially when Rock Fall was not a subsidiary and for the greater part when it was.
Accordingly for my part I reject the contentions of the appellants under all three heads, and would dismiss the appeal. On a broader view of the circumstances of the case I am happy to find myself in a minority on the first point.