Aberdeen Construction Group Ltd v Inland Revenue Commissioners

[1978] A.C. 885

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(Decision by: Lord Wilberforce (including background))

Between: Aberdeen Construction Group Ltd - Appellant
And: Inland Revenue Commissioners - Respondents

Court:

Judges:
Lord WilberforceViscount Dilhorne
Lord Fraser of Tullybelton
Lord Russell of Killowen
Lord 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.)

Hearing date: 11-12 January 1978
Judgment date: 15 February 1978

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Decision by:
Lord Wilberforce (including background)

A.C. Ltd., a construction company, purchased the whole share capital of R.F. Ltd., which carried out rock drilling, thereby making it a wholly-owned subsidiary. The amount invested in acquiring the shares (including subscriptions for newly issued shares) was £114,024, and it also made R.F. Ltd. unsecured loans totalling £500,000. The trading position of R.F. Ltd. deteriorated and in 1971 A.C. Ltd. entered into a contract with a purchaser who agreed "to purchase the whole issued share capital ... for £250,000." It was a condition that A.C. Ltd. "waive the loan." A.C. Ltd. was assessed to corporation tax on the basis of a capital gain of £135,976 on the disposal of the shares. The First Division of the Court of Session upheld the assessment.

On appeal:-

Held, allowing the appeal, (1) (Viscount Dilhorne and Lord Russell of Killowen dissenting), that under the contract the purchaser was paying consideration not only for the shares but for the composite obligation of A.C. Ltd. so that there had to be an apportionment between the two obligations, to dispose of the shares and to waive the loan (post, pp. 893G-H, 894D-E, 900C-D, 903G).

(2) That, although the debt was an asset and its release a disposal, that disposal did not give rise to an allowable loss, since paragraph 11 (1) of Schedule 7 to the Finance Act 1965 prevented that arising as between the original creditor and debtor; while the exception to that paragraph "in the case of the debt on a security" expressed to be defined in paragraph 5 did not apply, since this was a debt with no quality or characteristic bringing it within such special category (post, pp. 895G-H, 896E, 900G-H, 903A-D, G).

Decision of the First Division of the Court of Session (1977) T.C. Leaflet No. 2641. reversed.

Appeal from the First Division of the Court of Session.

This was an appeal from an interlocutor of the First Division of the Court of Session in Scotland (Lord President Emslie, and Lords Johnston and Avonside) dated April 1, 1977, pronounced in an appeal brought by way of case stated by the Income Tax Special Purposes Commissioners for the opinion of the Court of Session as the Court of Exchequer in Scotland, under section 56 of the Taxes Management Act 1970. The case was stated by the special commissioners following their dismissal of an appeal to them by the appellants, Aberdeen Construction Group Ltd., against an assessment to corporation tax for their accounting period ended December 31, 1971, made in the amount of £10,000. The stated case was heard before the First Division of the Court of Session on March 8 and 9, 1977 and by the interlocutor of April 1, 1977, the court answered the question of law in the stated case in favour of the respondents, the Commissioners of Inland Revenue, and dismissed the appeal. Opinions were delivered by each of the judges constituting the Division. They were unanimous in the conclusions.

The facts are stated in their Lordships' opinions.

James Mackay Q.C. (Dean of Faculty) and Ronald Mackay (both of the Scottish Bar) for the appellant company. It is submitted:

(1)

The total consideration was not given for the shares only but also for the waiver of the loan.

(2)

By virtue of paragraph 8 of Schedule 6 to the Finance Act 1965, in computing the gain or loss on the disposal of the shares there must be deducted from the £250,000 paid the cost of the shares i.e., £114,024, and the cost of acquiring the loan to the extent that its waiver increased the value of the shares.

(3)

The loan is a debt "on a security" within paragraph 5 (3) (b) of Schedule 7 to the Act so that any gain or loss on its disposal is not excluded from being a chargeable gain or allowable loss by virtue of paragraph 11 (1).

Section 22 of the Act relates to disposal of assets and computation of gains. The loan was an asset within the section and the waiver was disposal.

As to (1), when the contract with the purchaser was entered into the appellant company had two distinct assets for capital gains purposes,

(a)

the share capital of Rock Fall and

(b)

by virtue of the loan a debt due to the appellant company by Rock Fall.

The contract the appellant company entered into was one under which it was to receive £250,000 from the purchaser and in return for that two disposals by the appellant company were called for,

(a)

a disposal of the shares by transfer to the purchaser and

(b)

a disposal of the £500,000 debt by extinction.

So part of the £250,000 represents from the appellant company's point of view consideration for the disposal of the loan. Thus an apportionment of the £250,000 is called for. The purchasers imposed conditions one of which was that the loan debt should be extinguished and one must have regard to the condition affecting the value of the shares. The shares and the loan debt were distinct assets for the purposes of capital gains tax. The £250,000 was payable for the transfer of the shares and also for the waiver of the loan. The shares were not the only asset disposed of to the purchaser. The waiver of the loan was part of the same transaction, part of the contract arrangement for the payment of the £250,000. On the appellant company's calculation, the whole amount allowable would be £364,024 - the cost of the Rock Fall shares plus the loan written off, minus the proceeds of disposal.

As to (2), should the first submission not succeed, paragraph 8 of Schedule 6 applies to the asset disposed of. Before the transaction of sale there were two assets, the shares and the loan debt. The view on which this argument proceeds involves the proposition that the first asset, the shares, merged with the second asset, the loan debt, to produce a new asset, viz., the shares freed from the debt. The result of the waiver is that all the rights in respect of Rock Fall would on a liquidation belong to the appellant company. The question whether the loan exists affects the shareholders' rights. The asset which is the shares has gained in value by the extinction of the other asset, the debt. To that extent in the computation of the gain or loss accruing on the disposal of the shares, a deduction must be made of an appropriate proportion of the sum which would be deductible in terms of paragraph 4 (1) (a) and (b) of Schedule 6. Schedule 6 is concerned with the computation of gains or losses and not with the question whether they are chargeable or allowable. The loss on the disposal of the shares was £114,024, the amount invested in acquiring them.

Paragraph 8 of Schedule 6 only comes in if before disposing of the shares to the purchaser the asset consisting of the loan had already been waived. The computation referred to in this paragraph is the computation of a gain in terms of Schedule 6 which is not concerned with the question whether the gains are chargeable or allowable but only with the amount. Nothing in Schedule 7 prevents the making of a calculation of the kind figured in paragraph 8. In so far as paragraph 8 applies, it requires a calculation to be made. Where part of the whole value of a debt passes into another asset on a merger nothing prevents one from making the calculation allowed by paragraph 8.

As to (3), the appellant company disposed of the shares and of the loan, both of which were "assets," for £250,000 and accordingly for the purposes of capital gains tax they made a loss of £364,024.

The loan is a "debt on a security" within paragraph 5 (3) (b) of Schedule 7 so that a gain or loss on its disposal is not excluded from the category of chargeable gain or loss by paragraph 11 (1). In considering whether a debt falls within the terms of paragraph 5 (3) (b) one must look at the substantial nature of the debt and not the form in which it is evidenced. Cleveleys Investment Trust Co. v. Inland Revenue Commissioners, 1971 S.C. 223, 240 (Lord President Clyde), 243 (Lord Migdale), 244 (Lord Cameron) is not conclusive against the appellant company. The definition of "security" in paragraph 5 is not intended to be exhaustive. Lord Cameron's suggestion that securities must be capable of conversion does not follow from the definition, though the concept of securities must be wide enough to embrace those which can be converted. The meaning of the word in paragraph 5 does not rest on the basis of a complete description of what is included. The common qualities in paragraph 5 (3) (b) are that they are in the nature of an investment in loan stock of any government or public or local authority or a company, and what is meant is a debt given on such terms that it is to be regarded as an investment by the creditor. That quality is enjoyed by the debt in the present case. The loan to Rock Fall, which the appellant company controlled, was in the nature of an investment and so was "on a security." It would be possible to think of this debt as being exchanged for other securities of the company.

Where a parent company lends to a wholly owned subsidiary and that loan is properly treated as capital of the subsidiary and an investment by the parent company, the loan has the character of a debt or loan on a security. In the circumstances of this case the £500,000 is in the nature of a loan or debt on a security. The whole loss of £364,024. is allowable.

W. D. Prosser Q.C. and J. A. D. Hope (both of the Scottish Bar) and P. Gibson (of the English Bar) for the Crown. The House of Lords does not have to concern itself with the meaning of "disposal." The matter really turns on what the parties were doing in ordinary commercial terms. On a correct understanding of the transaction the payment of £250,000 was in consideration of the sale of the shares. The nature of the condition as to the loan is that it is a stipulation by the purchasers that they will purchase the shares if the sellers waive the loan before the sale and independently of it. It is accepted that one can have a contract of purchase in which the money is paid in consideration of the whole transaction being carried out but the mere presence of a condition does not establish that some part of the consideration is attributable to it. Stipulations are designed simply to fix the value of the asset acquired; they have no bearing on the question of what the consideration was for. The consideration was for the sale of the shares.

Condition 1, the waiver of the loan, is different in kind. No one would have touched these shares if the loan was still to be considered as exigible.

There are three possible situations:

(1)

the case of the vendors realising in advance that a purchaser will not be found unless the loan is waived and accordingly waiving it in advance.

(2)

The vendors approaching a potential purchaser, who says that he will not enter into any contract so long as the loan is outstanding; the vendors go away and waive the loan before the contract is entered into.

(3)

The potential purchaser is willing to put into writing his offer to buy the shares if the loan is waived.

In the first two cases it could not be said that any part of the payment was in consideration of the waiver of the loan - an antecedent event not forming part of the contract. The third case is not essentially different.

The shares themselves are the subject-matter of the consideration. If one contracts to sell a factory which is to be improved and altered, the consideration paid is for the factory as improved and altered and not the value of the unimproved factory plus the materials put into improving it.

The mere presence of a condition in a contract of sale does not mean that the price must be apportioned between the subject-matter of the sale and the subject-matter of the condition. One must look at the consideration and distinguish between different kinds of bargain. Is the consideration severable from the primary bargain of sale, i.e., what the purchaser acquires or the seller undertakes? Is there some asset or obligation which itself has monetary value apart from the subjects of sale and independent of them? One must distinguish conditions designed merely to assure the value or the qualities of the subjects of the primary sale at the time of sale. Normally what matters to the parties is the value of the subjects of the sale at the time of the transfer. There are also what could conveniently be called "preconditions" and the condition now in question plainly falls into that category.

What the purchasers were buying here was not the shares subject to the loan and, therefore, they were not the subject-matter of the contract. What they were offering to buy was the shares free of the loan. They paid the £250,000 for the share capital alone. The waiver was an essential fact before the shares were taken under the contract. The purchasers have acquired the shares and nothing else. The whole value of the contract was the acquisition of the shares and there was no extraneous benefit.

There are an infinite number of ways in which one can express the essence of a transaction. One comes back to the terms of the contract and here it is hard to get round the words used. The condition was designed to ensure that the shares were worth what was to be paid for them and to make the purchasers willing to buy them at the price stated. It is wrong to treat the consideration as referable partly to one thing and partly to another.

As to the argument based on paragraph 5 (3) (b) of Schedule 7, the definition is of "security," not of "debt on a security." The word "security" is limited to the things there listed. The definition appears in the context of conversion and this makes sense in relation to the kind of debts it describes. In "similar security" the similarity must be relevant to the context of conversion. One can convert any debt, but by the terms of the definition the debts on security are distinguished from other debts: compare paragraphs 4 and 11. From paragraph 5 (3) (b) it appears that one does not call an ordinary debt (i.e., a debt without any special characteristics) a "debt on a security." Such a debt imports rights and obligations in money terms constituted on a security. The natural meaning of "security" does not extend to this debt, nor does it fall within the words of paragraph 5 (3) (b).

On the argument for the appellant company, which controlled Rock Fall, if it had assigned this debt to a stranger, a secured debt would become a non-secured debt simply by the assignment because the control, it is said, constitutes the security. So too if the controlling company allowed its shareholding to drop below the level of control the debt would thereby cease to be a debt on a security. But this is not a debt on anything which can be called a security.

As to the argument under paragraph 8 of Schedule 6, a right in an asset is different from an asset. If the debt is extinguished and as a result the value of the shares is increased, there is no reason to marry the two events. The extinction of an asset is dealt with by section 23 (3) of the Act and there is no need to invoke paragraph 8 of the Schedule, which does not apply unless the asset continues in existence. Here an asset, the loan, was extinguished. Where there is a merger there is a continuing asset which survives in a new form.

Mackay Q.C. in reply. On the first argument it must be remembered that this case is concerned with chargeable gains on the disposal of assets. One must look to Schedule 6 to the Act for the calculation to be made: see paragraph 3 for the exclusion of short-term gains and paragraph 4 for the deductions allowed. One is concerned with a case where there is more than one asset; on any view there were two distinct assets at some stage. What is sought is the consideration for the disposal of assets by the appellant company. There is a question of the construction of the contract.

The subject matter of this contract is the loan to Rock Fall as well as the disposal of the shares. No obligation of the purchasers or of the appellant company was superseded. The obligation on the purchasers is to pay the price and on the appellant company to transfer the shares and waive the loan. The transfer could take place before the loan was waived. The two operations are distinguishable. The purchasers got the right to the transfer of the shares plus a right against the appellant company that it should waive the loan. The purchasers could have obliged the appellant company to waive the loan. Against the background of the companies' structure the reality of the situation was that the share capital and the loan were distinct assets. The positive step required of the appellant company was to waive the loan as part of the consideration it had to give for the £250,000. The two assets had to be disposed of by the appellant company in order to get the £250,000.

If a contract required a vendor to acquire and dispose of an asset other than the one in his possession that would be a relevant factor in determining what consideration he had received for his other asset.

If one must distinguish between the points of view of the purchaser and that of the appellant company, it is the point of view of the appellant company which is decisive.

As to the point under paragraph 5 (3) (b) of Schedule 7, a debt on a security is the kind of right against a company which a layman would regard as an investment and the company would regard as capital. The security is the arrangement under which the debt is held. The terms of the contract relating to the debt must be such that the debt can properly be regarded as being on a security. An ordinary bank overdraft would not be an investment by the bank in the company, though it would be secured in a sense on the assets of the company. The word "investment" has a reasonably precise meaning. In the present case the idea behind the loan was that the appellant company should get a reasonable return on the investment.

The point under paragraph 8 of Schedule 7 need only arise if the House of Lords holds that there were not two assets at the time of the transfer but that a merger had taken place before.

Take a case where all one has is the debt plus the rights of the existing shareholders, two assets, i.e., rights as shareholders and rights as creditors which between them exhaust all the rights. When the loan is extinguished the shareholders become entitled on a liquidation to all the assets of the company. One finishes with a single asset resulting from the merger of all the rights. Paragraph 8 would apply and produces the same result here whether the contract was in its actual form or in one of the forms suggested by the Crown.

Their Lordships took time for consideration.

February 15. Lord Wilberforce.

My Lords, this appeal concerns the application of certain provisions of the Finance Act 1965 relating to capital gains tax. The actual tax assessment which is in issue is for corporation tax for the appellants' accounting period ended December 31, 1971, but this depends on whether the appellants in that period incurred a chargeable gain.

The appellants at the relevant time were a holding company with interests in a number of other companies. One such company was Rock Fall Ltd. Rock Fall was formed in 1957 to carry on specialist work involving drilling and blasting of rock. It was successful, but was short of the capital needed to acquire expensive equipment. The appellants were customers of Rock Fall. In June 1960 they decided to take an interest in that company; they subscribed for 4,600 shares at par and made a loan to it. In February 1961 the appellants acquired its remaining issued share capital - 35,400 shares - so that Rock Fall became a wholly owned subsidiary Later the issued capital of Rock Fall was increased to 125,000 shares, the appellants subscribing the newly issued shares at par. In all, the appellants spent £114,024 for the shares in Rock Fall purchased and subscribed for.

Rock Fall's business expanded in the 1960s and needed more money for plant and working capital. Its requirements were met through unsecured loans from the appellants. At December 31, 1970, these loans totalled £500,000 and were shown at this figure in the appellants' balance sheet under the heading "Capital Employed - Loan." Thus the appellants' total investment in Rock Fall amounted to £614,024. With the prospect of having to provide further capital if the interest in Rock Fall were to be retained, the appellants decided to seek a purchaser for Rock Fall and in 1971 entered into negotiations and ultimately an agreement with Bos Kalis Westminster Dredging Group N.V. ("Westminster"). The agreement was recorded in a letter dated March 10, 1971, from Westminster to the appellants, the terms of which the appellants accepted. It is necessary to reproduce this in full:

"Dear Sirs,

We hereby offer on behalf of Westminster Dredging Group Ltd., subject to the under noted conditions to purchase the whole issued share capital of Rock Fall Co. Ltd. of Barrhead, Scotland, for the sum of £250,000.

The conditions are:

1.

Aberdeen Construction Group Ltd. waive the loan to Rock Fall Co. Ltd. which presently stands at £500,000.

2.

Taxation losses accumulated as at this date remain for the benefit of the purchaser.

3.

Net current assets of £58,732 as shown in the draft balance sheet as at December 31, 1970, which is attached and initialled by representatives of both companies are guaranteed by the vendors. Any variation in the said sum shall be made good by the vendors or paid over by the purchaser as at December 31, 1971, without any adjustment for interest.

The said sum of £250,000 is due and payable as at April 10, 1971.

Notwithstanding the date hereof the effective date of transfer of the shares is to be at December 31, 1970, and the vendors will procure that the transfer of the shares will be properly effected into such names as will be notified."

In accordance with this the appellants wrote off the loan of £500,000 in their balance sheet as at December 31, 1970. Thus, in financial or economic terms, the result of the appellants' "investment" in Rock Fall turned out as follows:

The appellants debited this amount to capital reserve in their balance sheet at December 31, 1970.

In this situation it may seem surprising that any question should arise of the appellants having to pay tax on the basis of a capital gain. They had made an unfortunate investment. They had lost £364,024. But the Commissioners of Inland Revenue contend that the appellants made a chargeable gain on the disposal of the shares in Rock Fall of £135,976, representing the difference between £250,000 received under the agreement of March 10, 1971, and £114,024, the cost of the shares. Again it seems surprising that the shares in Rock Fall should have appreciated to such an extent after their acquisition by the appellants, and in the light of Rock Fall's balance sheet as at December 31, 1970, which showed net current assets of only £58,732.

The capital gains tax is of comparatively recent origin. The legislation imposing it, mainly the Finance Act 1965, is necessarily complicated, and the detailed provisions, as they affect this or any other case, must of course be looked at with care. But a guiding principle must underlie any interpretation of the Act, namely, that its purpose is to tax capital gains and to make allowance for capital losses, each of which ought to be arrived at upon normal business principles. No doubt anomalies may occur, but in straight-forward situations, such as this, the courts should hesitate before accepting results which are paradoxical and contrary to business sense. To paraphrase a famous cliche, the capital gains tax is a tax upon gains: it is not a tax upon arithmetical differences.

The business reality of the present case is that the appellants made an investment in Rock Fall - the word "investment" is not mine but is that used by the special commissioners: "Aberdeen's investment in Rock Fall amounted to £614,024." This took the form partly of subscription of share capital (plus a small amount for purchase of shares), partly of a loan. Whichever it was represented capital made available to Rock Fall: in Rock Fall's draft balance sheet as at December 31, 1970, there was shown under a heading "Capital Employed" first the share capital (£125,000), secondly the loan (£500,000). Those managing the affairs of the appellants would undoubtedly consider any proposition to "get out" of Rock Fall in the light of this total investment: when they had done so - and obtained £250,000 from Westminster - they so recorded the result in their balance sheet. It is clear however that the capital gains tax legislation prevents the matter being looked at in so simple a manner as this because it imposes the tax on disposals of "assets" (Finance Act 1965, section 19). So it is necessary to consider separately each asset disposed of, in the light of rules which apply to that asset.

The asset on which, on the revenue's claim, the chargeable gain was made was the shares in Rock Fall owned by the appellants. There is no doubt that these shares were acquired for £114,024 but for what were they disposed of? The answer to this question must be found in the contract of March 10, 1971, interpreted, as any contract must be, against its background.

At March 10, 1971, on the basis of Rock Fall's draft balance sheet at December 31, 1970, the Rock Fall shares had little or no value: certainly they could not be worth par; still more certainly they could not be worth £2 each, a value they would have to possess if a price of £250,000 was to be justified. On the other hand, if the debt of £500,000 were to be removed the position would be very different: there would be tangible assets and tax losses which might well be of considerable value to a purchaser. The agreement of March 10, 1971, is drafted so as to deal with this situation; it does so by paragraph 1, "Aberdeen waive the loan." I can only read this as a contractual provision to be performed by the sellers of the shares: in other words, leaving aside the subsidiary matters dealt with in the other clauses, the contract is that

(1)

the appellants shall transfer the shares and waive the loan,

(2)

Westminster will pay £250,000.

The effect of this is that Westminster was paying £250,000 not only for the shares, but for the composite obligation undertaken by the appellants. If this is right, in order to ascertain what Westminster was paying and the appellants receiving for their shares, an apportionment would have to be made of the sum of £250,000 between these two obligations.

The argument for the revenue that £250,000 was paid for the shares alone was based, in the end, as I understand it, on the use of the word "conditions." The contract was, so they contend, for the shares, but the agreement to buy at the stated price was conditional upon the waiver of the loan. The waiver was something which was to be carried out before the sale and independently of it, in order to clear the way for a sale at £250,000. I cannot accept this. An obligation may be, or be called, a condition and still be a contractual term. Calling a term a condition, so far from making it non-contractual, normally makes it a contractual term of particular importance - such that if it is not carried out the other party may rescind the contract. It is clear that the loan had not been waived at the date of the contract - paragraph I states that it "presently stands at £500,000."

It is equally clear that in order to bring into force Westminster's obligation to pay £250,000, the appellants would have, not only to transfer the shares, but to waive the loan: from this it must follow that the £250,000 was paid in consideration of both obligations. On this I must respectfully differ from the learned judges of the Court of Session. The Lord President held that there were two separate disposals by the appellants but only one of them a disposal to Westminster. Westminster contracted to acquire the rights of the appellants as shareholder and that is what they paid for.

"So far as the loans are concerned the appellants waived them in a question with Rock Fall in order to be able to sell the shares to Westminster."

But the question, as I see it, is not whether there was a "disposal" to Westminster of the debt, but - a pure matter of contract - what the £250,000 was paid for. In this context the fact is that the appellants agreed with Westminster to waive the loan to Rock Fall. A may quite well agree with B to release C from an obligation, thus giving rise to a contract between A and B: this is what the appellants did. If the appellants failed to waive the loan, Westminster would be entitled to force them to do so, or at least to recover damages. I would therefore so far allow the appeal and remit the matter to the special commissioners to make an apportionment as suggested above and to adjust the assessment accordingly.

The appellants then raised a further contention - which in fact appears first in their submissions before the special commissioners - that is that the appellants disposed both of the shares and of the loan, each of which were "assets," for an aggregate sum of £250,000, and that for corporation tax capital gains tax purposes the appellants made a loss of £364,024.

That the shares and the loan were "assets" is not disputed, but it is said that any loss on the loan cannot be treated as a loss for capital gains tax purposes because of certain special provisions in the Finance Act 1965. This raises a difficult question.

That a debt is an "asset" is expressly stated in section 22 (1) (a) and that a release or extinction of a debt is a disposal of an asset appears from section 22 (3) (c) and section 23 (3). However, whether such a disposal gives rise to a chargeable gain or an allowable loss (these are governed by the same rules, see section 23 (1)) depends upon provisions in Schedules 6 and 7. The revenue claims that the disposal of this debt is prevented from giving rise to a gain (or a loss) by Schedule 7, paragraph 11(1) which, as between the original debtor and creditor, does so prevent "except in the case of the [sic] debt on a security (as defined in paragraph 5 of this Schedule)."Reference to paragraph 5 plunges us at once into a thicket. The relevant sub-paragraph is (3) (b) which reads:

"'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."

This raises several difficulties. First, the sub-paragraph does not provide a definition except by inclusion, so the question must arise whether the reference in paragraph 11 is limited to what is specifically mentioned as included, or to some wider class. Second, if it defines anything, it defines "security" not "debt on a security," and in view of the words "whether secured or unsecured" the latter must include some unsecured debts. As Lord Cameron said in Cleveleys Investment Trust Co. v. Inland Revenue, 1971 S.C. 233, 244, "whatever else it may mean, the phrase 'the debt on a security' is not a synonym for a secured debt." But which unsecured debts come within the exclusion in paragraph 11 and which do not is not stated and I find it impossible to discover any principle on which to state a discrimen.

The general subject of company indebtedness, or of loans to companies seems to be one as to which the legislative mind is clouded. The courts have had difficulties over the subject of "funded debt" as to which this House felt obliged to differ from the Court of Appeal (Reed International Ltd. v. Inland Revenue Commissioners [1976] A.C. 336). They have had difficulties over "loan capital" and "issue of loan capital" (Agricultural Mortgage Corporation Ltd. v. Inland Revenue Commissioners [1978] 2 W.L.R. 230). In that case money was borrowed by the company for capital purposes, the purpose being to enable it to make loans to other persons. The members of the court thought that the money borrowed had the character of loan capital. "The money was required for capital purposes: and it was borrowed money": per Scarman L.J. at p. 247. But they did not consider that there had been an "issue."

The decisions were on different statutes inter se and from the Finance Act 1965 and it is difficult to find any clear common principle underlying them, but taking such guidance as they do provide leads me to think that the only basis on which a distinction can be drawn is between a pure unsecured debt as between the original borrower and lender on the one hand and a debt (which may be unsecured) which has, if not a marketable character at least such characteristics as enable it to be dealt in and if necessary converted into shares or other securities. This is indeed lacking in precision but no more can be drawn from the statutory provisions than the draftsmen have put in - and that is both meagre and confusing. In agreement with the Court of Session I can find nothing here except an unsecured loan subsisting as between the original debtor and creditor, given the description of loan capital, whether correctly or not but with no quality or characteristic which brings it within whatever special category is meant by a debt on a security. I cannot therefore accept this argument.

A final contention of the appellants was based upon Schedule 6, paragraph 8 of the Finance Act 1965, an obscure provision dealing with merger of assets and similar situations. I agree with the Court of Session that this contention is a hopeless one and need add nothing to their reasons.

To the extent indicated I would allow the appeal.