Donaldson J. gave judgment on July 24, 1968, in the course of which he said that the plaintiffs had asked for and had been supplied with particulars of the facts and matters and of the statutory provisions on which the defendants relied as authorising the deduction of income tax; the defendants had replied that the interest payments satisfied the description of 'interest of money' and were therefore charged to income tax under Case III of Schedule D by section 123(1) of the Income Tax Act, 1952; that under section 169 (1) (c) of the Act they were empowered to make such deduction and that paragraph (d) of the subsection required the plaintiffs to accept; and that under section 170 the defendants were obliged to make such a deduction.
His Lordship added that the defendants had not committed themselves on whether the section applicable was section 169 or section 170, though that matter might be of importance as between them and the Inland Revenue but not as between them and the plaintiffs. It had been contended for the defendants, he said, that if the payments were not 'interest of money' they were an 'other annual payments' within the meaning of Case III with the like consequence as if they were 'interest of money.' Both parties agreed that if the payments fell within Case III the deduction was rightly made. The judge continued :
'It was common ground that if the obligation evidenced by the coupons had been discharged by the mortgage bank' [the original principal debtors] 'the receipt by the plaintiffs would not have fallen under Case III but under Case IV as income arising from securities out of the United Kingdom since the mortgage bank had no branch in the United Kingdom and the payments were secured on real property in Greece. The defendants, however, submit that the position is quite different in the case of a payment by them, since such a payment is not secured and constitutes income arising in the United Kingdom. In my judgment, both those contentions are correct. The defendants obligation to pay is evidenced by the bond, but there is not right to resort to any specific fund or property to secure the discharge of that obligation. Any income arising from a payment by the defendants is not, therefore, income arising from securities within the meaning of Case IV.... The defendants obligation obligation under the guarantee is a collateral security to the charge on Greek property and both secure the mortgage banks obligations. The obligation under the guarantee itself is, however, unsecured. As to the second point, income arising from payments by the mortgage bank which, if recoverable at all, can only be recovered in Greece, quite clearly arises out of the out of United Kingdom. On the other hand, income arising from payments made voluntarily or compulsorily by the United Kingdom branch of the defendant equally clearly arises within the United Kingdom.'
The judge further held that a payment by the defendants and a receipt by the plaintiffs in discharge of the defendants obligation under the guarantee did not involve the payment of receipt of 'interest of money' within the meaning of section 122(1) (b) or 123(1) Case III of the Act of 1952, and that though any payment by the defendants to the plaintiffs pursuant to the guarantee in respect of the interest coupons would be a pure income profit in the hands of the plaintiffs, the coupons were bearer documents and the necessary element of recurrence which would make them 'annual payments' within Case III was lacking. Accordingly, he held that deduction of the income tax should be made; and he gave judgment for the plaintiffs with costs.
During the hearing the issue was raised that if the defendants failed to deduct income tax they might have to pay income tax in the United Kingdom twice and for that reason the Solicitor to the Inland Revenue instructed counsel [Mr. J. P. Warner] as amicus curiae. The plaintiffs opposed his being heard. The judge in the course of his judgment said :
'This is by no means the first occasion on which the position of the Inland Revenue as a very interest official (but not officious) bystander in a dispute between subjects has created difficulty';
and having reviewed the authorities on the matter he expressed the hope that those who had the power and duty to modernise the law would look into the matter of allowing the revenue to be heard, since in cases where the law required the subject to act as taxgatherer or as part of the machinery for tax collection, the subject ought in justice to be able to obtain a binding decision in one set of proceedings not only between himself and another subject but also between himself and the Crown. He continued :
'If the court requires assistance and asks the commissioners to instruct counsel of attend as amicus curiae in the strict meaning of those words, no doubt the commissioners would comply, as would any other responsible body. The position in wholly different if they seek to use a procedure designed for the assistance of the court for a quite different purpose, namely, the furtherance of their own very proper interests by supporting one party against the other. The result is unfair to the commissioners who would consider themselves bound by a decision against which they could not appeal and who could not recover the costs of their appearance. It is unfair to one of the parties who is faced with an additional antagonist who enjoys a privileged position with regard to costs if the intervention is unsuccessful.
'In the present case I had no doubt that with the appearance of counsel so eminent in the filed of tax law as Mr. Heyworth Talbot and Mr. Desmond Miller, I could have no need of further assistance on the law. I was also unable to detect any special interest of the commissioners which would not be safeguarded by the defendants in their own interests.' He accordingly declined to hear Mr. Warner.
The defendant, the National Bank of Greece S. A., appealed on the following grounds : (1) that the issue between the parties being one in which the Inland Revenue Commissioners had a substantial interest, the judge was wrong to refuse counsel instructed on their behalf to address the court; (2) that the judge was wrong in holding that the gross amount of pounds 100 14s. due to the plaintiffs in respect of the coupons satisfied the description neither of 'interest of money' nor of an 'annuity or other annual payment' within the scope of the charge of income tax under Case III of Schedule D. The plaintiff bondholders by a cross-notice sought to have the judgment of Donaldson J. affirmed on the additional grounds (1) that the first ground of the defendants appeal [relating to the admission of counsel for the revenue] did not touch any issue between the parties; (2) that the judge was wrong in holding that the sum payable by the defendants to the plaintiffs in respect of the coupons was in the nature of income; (3) alternatively, that if the sums so payable were in the nature of income (i) the judge was wrong in holding that a reason why the obligation of the principal debtor [the mortgage bank] was a security out of the United Kingdom was the fact that the principal debtor had no branch in the United Kingdom (which reason was not common ground) instead of the fact that the principal debtor was not resident in the United Kingdom; (ii) that he was wrong in holding that the such income arose from payments made by the United Kingdom branch of the defendants and was accordingly income arising from a source in the United Kingdom charged to income tax by section 122 of the Income Tax Act, 1952; (iii) that he was wrong in holding that such income was not income arising from securities out of the Untied Kingdom within Case IV of Schedule D contained in section 123 of the Act of 1952; (iv) that it had been admitted by the defendants without qualification at the trial that the obligation of the principal debtor was a security out of the United Kingdom within Case IV and the judge was wrong in holding that discharge of the defendants obligation to pay to the plaintiff on behalf of the principal debtor that which the principal debtor had failed to pay gave rise to a receipt in the hands of the plaintiffs differing in character or quality in any material respect from the interest arising from such a security which the plaintiffs would have received had the principal debtor paid that interest.
F. Heyworth Talbot Q. C. and John Silberrad for the defendant bank. The defendants accept liability in respect of principal and interest by reason of the House of Lords decisions in Metliss v. National Bank of Greece and Athens S. A. and Adams v. National Bank of Greece S. A. but claim that they are entitled to deduct tax at the standard rate from the payments made on production of the coupons, because the payments are 'interest of money' within Case III of Schedule D to the Income Tax Act, 1952, section 123(1) (a); and if that is correct it is not necessary to show that it is 'annual.' [Reference was made to Riches v. Westminster Bank Ltd.] Donaldson J., basing his view on Romer L. J.s observations in Inland Revenue Commissioners v. Holder, decided that a guarantor does not pay 'interest' : but compare what Lord Atkin said in Holders case in the House of Lords. That is relied on. If the judge was correct, it would mean that whenever there is a guarantee, a claim for tax by the Inland Revenue may be frustrated, and for that reason the revenue is interested in the outcome of the present proceedings and is present as amicus to assist the court if asked to do so. The revenue has given the defendants an undertaking that if they are unsuccessful the tax deducted from the interest will be repaid to them, so there is no danger of the defendants being required to pay tax twice over.
[THE COURT indicated that they would hear counsel for the revenue in due course.]
The defendants also submit that the payments of interest have the character of 'annual payments' within Case III. The judge appeared to base his opinion that they were not on the dissenting opinion of Lord Moncrieff in Moss Empires Ltd. v. Inland Revenue Commissioners; but in the House of Lords in Mosss case their Lordships unanimously disapproved of Lord Moncrieffs view that the payments under the guarantee were not 'annual payments.' That decision is relied on for the submission that in the present case the right to payment is conferred on the bondholder and the obligation to pay interest is laid on the bank as guarantor not by reason of the coupons but by reason of the terms of the bonds themselves, in that the obligations under the bond to pay on the coupons when presented covered the whole period until repayment of principal. That period the necessary element of recurrence to constitute the payments on the coupons 'annual payment' within section 123, even though the coupons can be cut off the bonds and presented separately. The coupons are merely part of the obligations under the bond and not separate contracts. Even if each coupon contained an express promise to pay on presentation, the obligation to pay would still be of a recurring nature and therefore within the statutory concept of 'annual payment.' [Reference was made to U. G. S. Finance Ltd. v. National Mortgage Bank of Greece.]
Desmond Miller Q. C. and John Creese for the plaintiff company. The court, in deciding the main question whether tax is deductible by the deductible by the defendants before payment of interest, must have regard to the whole background history of the bonds from the date of their issue in 1927 by the National Mortgage Bank of Greece as foreign bonds secured on property in Greece up to the House of Lords decisions in the Metliss and the Adams cases.
The plaintiffs claim that as a trustee company incorporated outside the jurisdiction it is a foreign corporation which, having presented coupons on behalf of its clients, is entitled to have the interest paid in full without deduction of tax and that, the primary debtor in Greece having defaulted, the defendant bank, the universal successor of the original guarantor, is not entitled to obtain against a foreign company the benefits of the United Kingdom system of deduction of tax at source on the footing that the payments are made by its branch in the United Kingdom.
The question whether such deduction is permissible depends on the construction of the income tax rules. The defendant bank identifies the position of the guarantor with that of the primary debtor and claims that the matter falls under Case III and tax is deductible under section 169 or 170. The plaintiffs while contending that there is still in law a valid distinction between the position of the guarantor and that of the primary debtor, which affects the quality of the payments made, rely principally on the following propositions : (1) the bonds were foreign securities secured on property in Greece; (2) anything emanating from those foreign securities which has an income character is income necessarily arising from foreign securities and so 'income arising from securities out of the United Kingdom' within Case IV of Schedule D, no matter whether that income is paid by the primary debtor or by the guarantor; (3) the machinery of deduction provided in the United Kingdom income tax code is therefore not applicable to such payments; and alternatively (4) the guarantor in fulfilling his contract of guarantee was in law identified with the primary debtor, so that the interest paid to the creditor retained throughout its character as income from a foreign security. That alternative is based on the law as to subrogation : see Singer v. Williams.
There are two views on the questions whether the payments are secured : (1) that of Lord Cave in Singer v. Williams, at page 49, viz., that the personal guarantee of the guarantor may itself be a security; and (2) if subrogation applies and there is no valid distinction between the position of the primary debtor and the guarantor, that there is no change in the quality of the payment when it is made by the guarantor in lieu of the primary debtor. [Reference was made to Anson v. Anson, per Person]., and Chitty on Contracts, 22nd ed., Vol. 2 (1961), para 1049, and 23rd ed., Vol. 2 (1968), para. 1708.] Donaldson J. appears to have been wrong on both approaches, for (a) nothing changed because the surety made the payment; the foreign securities remained foreign securities : and (b) the guarantor by adopting the formula set out in the bonds created a 'security' without the observations of Lord Cave in Singer v. Williams. The situs of the security remained at all times in Greece, which was also the residence of the primary debtor and of the universal successor to the original guarantor. See Helbert Wagg & Co. Ltd., In re Claim by, per Upjohn J., at pages 342, 344, that the locus of a debt is where the debtor resides. It follows from that decision that the situs of the debt in this case is Greece, and the fact that the guarantor has selected a branch in the United Kingdom to pay the debt is quite irrelevant to the question whether this is income arising from a foreign security within Case IV.
Secondly, on the question whether the payments are 'interest of money' or 'annual payment' within Case III, it is accepted that the principles applicable were stated in Inland Revenue Commissioners v. Whitworth Park Coal Co. Ltd. but the present case is distinguishable because the coupons are freely detachable and transferable for money, and, subject to the express requirement printed on them that they must be presented within a given time, they represent a species of independent and separate property just as were the coupons held by Miss Paget in Inland Revenue Commissioners v. Paget, and are incapable by their nature of having the necessary element of recurrence. Moss Empires Ltd. v. Inland Revenue Commissioners is also distinguishable because the payments there were under a covenant and there was no element of guaranteed payment. In U.G.S. Finance Ltd. v. National Mortgage Bank of Greece S. A., there were findings by inference, first, that the coupon could be dealt with without any reference to the bond, and, secondly, that the guarantors liability arose in relation to each individual coupon. See also the further authority on 'annual payment' under rules 19 to 21, Stokes v. Bennett (Inspector of Taxes), where Upjohn J. expressed the view that the rules were simply United Kingdom tax collection machinery. That case by necessary implication supports the submission that though the Case III machinery applies to a person in the United Kingdom who holds a foreign security, it does not apply to a non-resident holder of foreign securities like the plaintiffs.
Thirdly and alternatively, in the present case the guarantor or universal successor to the original guarantor paying the debt was not paying 'interest' due from him but a debt due from the primary debtor; the recipient was paid out of capital; and the questions is whether when it was paid by the guarantor it changed into income when it came into the hands of the coupon-holder. The classic decision on how a payment made out of a fund of capital comes to be income in the hands of the recipient is Cunards Trustees v. Inland Revenue Commissioners; see per Lord Greene M. R., at page 132, that the payments became income of the recipient 'at the moment of payment.' There are many instances under the Income Tax Acts where one looks at the position from the point of view of the recipient, since tax is assessed on 'income' and not on 'outgo'; but in the present case there was no income purpose whatever, but merely a collection of a debt due under a guarantee of separate individual obligations represented by the individual coupons and therefore there could be no element of recurrence, for once a debt had been discharged it has gone for ever.
F. Heyworth Talbot Q. C. in reply and on the cross-appeal. Though it is accepted that the bonds were foreign securities when they were issued in 1927, the events since then, including the war and the effect of the Greek legislatures succession of moratoria up to the date of the bonds maturity, have altered the position, so that though remedies became available in this country against the universal successor to the original guarantor, there are no remedies for enforcing the obligations available under the Greek law, the security has disappeared, and therefore the bonds ceased to be foreign securities in 1941. If that is so, it is contrary to reason to argue that the income arising to bondholders who can enforce a claim against the guarantor in this country is income arising from a foreign security within Case IV.
Despite the law on subrogation the position is that once the Greek government decreed that the bonds were not to be serviced, the guarantors could no longer enforce any security against the primary debtor for repayment in sterling. The whole point of the decisions in the Metliss, and the Adams cases, was that though the Greek legislature could exonerate the primary debtor from its liability to the guarantor bank, that would not avail the guarantor in this country as a defence to a claim by a bondholder because the guarantor was bound by an English contract to meet an unsecured liability arising under that English contract. What the bondholders receive when they get interest payments on the coupons from the guarantors is essentially 'interest' or 'annual payment' and is certainly income; but it is not income 'arising from' a foreign security, for the foreign security has ceased to exist. In the context of tax legislation 'security' must be given a realistic meaning and it must be identified and located. Here there is no security. The only source of liability is the guarantors obligation under the English contract by reason of which the bondholders, being unable to get anything from the primary debtor, can sue the guarantor who, though not 'resident' within the technical meaning of 'resident' in legislation, is permanently carrying on business within the jurisdiction. If therefore the income arises here, it is not income from a foreign security.
If the plaintiffs had pursued the argument based on subrogation against the guarantor it might have been more effective.
The plaintiffs have argued throughout that if the interest, though paid by the guarantor, is within the scope of Case IV, the provisions of section 169 and 170, relating to deduction of tax before payment, do not operate. That submissions has hitherto gone unchallenged, but in view of the citation of Stokes v. Bennett (Inspector of Taxes) the question now arises whether anything in those sections operates on income chargeable under Case IV where the income is an 'annual payment' or 'interest'. Section 169 provides that where there is income in this country out of which the interest on the foreign security may be paid, no assessment is made on the person entitled to the interest, but an assessment will be made on the person liable to make the payment. Why does that not apply to the guarantor company which has an office in the United Kingdom If the payer is here, the provisions of the sections apply and there is an obligation to deduct tax in so far as the payments made by the guarantor are not covered by their profits and gains and so brought into tax. The revenue have indicated that they do not acquiesce in that submission on the effect of section 169 and 170. They agree with the plaintiffs that the machinery of those sections does not operate in Case IV or case V matter.
Finally, what the guarantor pays is an obligation inherited from the terms of the bond itself. The guarantor undertook to pay principal and interest; so when a claim is made on the guarantor, what the guarantor disburses is 'interest' and is also 'annual payment', because there is a recurring obligation to pay.
J. P. Warner as amicus curiae. Two points of divergence have emerged as between the Crown and the defendants in the course of the reply of counsel for the defendants : (1) The Crown does not adopt the view that section 169 and 170 apply to Case IV. If the court decides that those sections apply to both Case III and Case IV the guarantors must succeed, irrespective of whether the income is chargeable under Case III or Case IV. But if it is chargeable under Case IV, then, though deductions before payment have been made under section 169 and 170, the Crown would have to return the tax to the plaintiffs because it would be foreign income and they are foreign residents. Therefore the Crown has an interest in the decision whether the sections apply both to Case III and Case IV, whereas that decision does not matter to the guarantor.
(2) The Crown does not concede that when the bonds were issued the obligation of the guarantor was a foreign security. The court must took to see what were the obligations of the primary debtor and of the guarantor at the date of issue; and the position is that while the obligation of the primary debtor, the National Mortgage Bank, was a foreign obligation (for it is common ground that the primary debtor was never resident anywhere but in Greece and its obligations are enforceable only in Greece), that of the guarantor is an English obligation. The Crowns view is that the guarantors obligation is of a different kind from that of the primary debtor, and that it is a purely personal obligation. Subrogation is a right which the National Bank of Greece has against the Mortgage Bank; and once the National Bank of Greece has paid the bondholders, the bondholders rights cease to exist. All that subrogation can do is to put the National Bank of Greece into the shoes of the bondholders.
The rules of equity provide that if the guarantor pays he shall be in the same position in a court of equity as the creditor would have been, with the same rights and remedies against the principal debtor and any security : see Halsburys Laws of England, 3rd e., Vol. 14 (1956), p. 618, paras. 1141-1143; 3rd ed., Vol 18 (1957), pp. 468-469, para. 864; Snells Principles of Equity, 26th ed. (1966), p. 78, on the right of subrogation in law and equity. In the present case, where the defendant bank in is English law the universal successor of the original guarantors, the defendants obligation is personal and the payments fall under Case III which contains no express territorial limitation, though such limitation is implicit : compare Colquhoun v. Brooks.
The basic test for determining whether the payments are income arising in the United Kingdom is to be found in Dicey and Morris on The Conflict of Laws, 8th ed. (1967), p. 508, rule 79, on the determination of the situs of things. Applying that rule here, the debt is enforceable only in England where it is situate and this is the place where the income arises. The test generally applied in the case of a personal obligation is the residence of the debtor. But that test cannot be a rule of thumb (a) because it affords no solution in a case where the debtor has more than one residence and (b) because if, in the present case, it had been found that the defendants were resident only in Greece, the absurd consequence would arise that the source of this income was in the one country which denies its existence. Residence is important because in most cases it is where the debtor is resident that the debt can be enforced. But the true test is : in what country is the obligation primarily enforceable The answer to the question : How can an obligation to pay Pound 100 be discharged by paying Pounds 61 odd is to be found in Lord Dennings speech in the Adams case viz., that this was an English contract governed by English law; and under English law and Income Tax Act, 1952, requires tax to be deducted before payment. New York Life Insurance Co. v. Public Trustee shows that if the test of residence leaves one with a choice between an English and a Greek situs, the English situs must be preferred because the proper law of the contract is English. It would be patently absurd to attribute a Greek situs to the obligation when Greece is the one country where it has been abolished.
[SACHS L. J. asked about the Mercantile Law Amendment Act, 1856, s. 5]
That Act was passed before the Judicature Acts at a time when the common law courts would not have given effect to the equitable right of the subrogated surety : see Chitty on Contracts, 23rd ed., Vol. 2, para. 1709. The right of subrogation in the present case is valueless or at least speculative because of the moratorium in Greece.
[SACHS L. J. But the question is whether in law there is such a right of subrogation and whether it can be said that the guarantors right qua guarantor are less because he happens to have acted as guarantor.]
The right of subrogation may well exist as a matter of English law, assuming that under the 1927 arrangements the rights of guarantor and primary debtor as between themselves were also governed by English law and equity; but that does not arise here nor has it arisen in the other Greek bond cases which have all been actions by bondholders against the universal successor of the original guarantor. What is under consideration in the instant case is the item of income in the hands of the recipient. What is its source The Crown says it is a chose in actions which is a right enforceable in English and the whole machinery of the English court can be invoked to enforce it. That brings in the machinery of sections 169 and 170 in relation to the deduction of tax before payment. Herbert Waggs & Co. Ltd., In re Claim by, is distinguishable for there the German company had only one residence, Germany, where alone the debt could be enforced. Here what the plaintiffs have is an English right, primarily enforceable in England, and certainly nor enforceable in Greece : Adams v. National Bank of Greece. [Reference was also made to Chamney v. Lewis and Inland Revenue Commissioners v. Brommes (Viscount) Executors].
On the question under Case III of 'interest' or 'annual payment', the Crown adopts the argument for the defendants.
Miller Q. C. in reply. Two new points have been raised at a late stage in the appeal. On the first, viz., the submission that Stokes v. Bennett supports the view that the machinery of deduction under section 169 and 170 applies to payments from foreign securities, it is submitted that nothing in that case supports that proposition. The subject matter in Stokes v. Bennett was an annual payment arising under the order of an English court. It has no application to the present case.
Secondly, the Crowns interest in a decision whether the machinery of section 169 and 170 applies both to Case III and Case IV is irrelevant as between the parties to the appeal in which the Crown appears merely as amicus. That point need not therefore be pursued in the reply.
Cur. adv. vult.
LORD DENNING M. R. - I do not propose in this case to go through the history of the litigation between the bondholders and the National Bank of Greece. Those who are interested can read it all in the judgments in Metliss v. National Bank of Greece and Athens S. A., Adams v. National Bank of Greece S. A., U. G. S. Finance Ltd. v. National Mortgage Bank of Greece and National Bank of Greece S. A.
The only facts needed for this case are these : in 1927 the National Mortgage Bank of Greece (a company incorporated under Greek law) issued Pounds 2m. sterling mortgage bonds, interest payable half-yearly. The indebtedness was secured on properties in Greece. Payment who to be made in sterling.
'at the offices of Hambros Bank Ltd., of Erlangers in London, England or at the option of the holder at the National Bank of Greece in Athens, Greece, by cheque on London.'
Each bond contained this guarantee by the guarantor - the National Bank of Greece - which was a Greek company :
'The National Bank of Greece hereby unconditionally guarantees the due payment of the principal moneys and interest and the due performance of all the conditions of this bond.'
Each bond had coupons attached to it for interest every half-year. Each coupon said :
'This coupon is payable in sterling in London at the officers of Hambros Bank Ltd., or Erlangers Ltd., or in Athens at the offices of the National Bank of Greece by cheque on London. This coupon will be forfeited if not presented within the six years from due date.'
In 1941, the Germans captured Athens and occupied Greece, and in the result the principal debtors - the National Mortgage Bank of Greece - were left with nothing with which to pay the bonds. The properties on which the bonds were secured were taken over or in some way disappeared so as to be no longer available. In 1949, the Government of Greece passed a law suspending all obligations on the bonds. It imposed a moratorium. It has continued ever since. It was, and is, illegal by Greek law for the principal debtors or the guarantors to pay either principal or interest. For all practical purposes, the liability of the principal debtors and guarantors has become extinguished in Greece and the securities have gone with it. In 1953, the guarantors, the National Bank of Greece, were amalgamated with the National Bank of Athens so as to become one new company, the National Bank of Greece and Athens S. A. This new company was the universal successor of the original guarantors. It is a Greek company and carries on business in Greece. But it also has an office in England and carries on business here.
In 1955, an English bondholders sued the universal successor of the guarantors in England on the bonds, and succeeded : because its obligations were governed by English law. Four days later the Greek Government tried to save the universal successor from liability in England by passing a decree so as to exempt this guarantee from the succession. But this device did not succeed either. Another English bondholder sued the universal successor in England and succeeded, despite the new decree.
So it is now clearly established by decisions of the House of Lords that the National Bank of Greece S. A. (as the universal successor of the original guarantors) is liable to pay the principal and interest on the bonds, such liability being enforceable by action in the English courts and recoverable by execution against its assets in England.
Now we have a bondholders ho is resident in the Channel Island and seeks to recover interest in full from the universal successor of the guarantors. The bondholder has duty presented the coupons for payment of interest due between December, 1957, and June, 1960. The total was Pounds 100 14s. The defandants admitted their liability but claimed to deduct income tax at the standard rate. It came to Pounds 39 0s. 5d., and they sent to the bondholder a certificate of deduction. The bondholder refused to allow the deduction and has sued for the full amount. The revenue authorities are much interested in the outcome. They applied to the trial judge for their counsel to address the court as amicus curiae. The trial judge declined, but we allowed it. Since that time in In revandervells Trusts we have, I think, set a precedent for joining the revenue whenever the justice of the case so requires.
It was common ground before us that if the income comes within Case III of Schedule D, it is the duty of the defendants to deduct the tax under sections 169 or 170 of the Income Tax Act, 1952. But if it comes within Case IV, the plaintiffs as foreign residents are entitled to the income clear of tax : and if tax is deducted, to recover it back. So the root question is whether the income comes within Case III or Case IV of Schedule D. These cases are delimited in section 123 of the Income Tax Act, 1952, in these words :
'Tax under Schedule D shall be charged under the following Cases respectively, that is to say.... Case III - tax in respect of - (a) any interest of money, whether yearly or otherwise, or any annuity, or other annual payment, whether such payment is payable within or out of the United Kingdom......Case IV - tax in respect of income arising from securities out of the United Kingdom......'
I. Do the payments come within case III ?
The first question argued before us was whether the sums payable by the universal successor come within the description (in Case III) of 'any interest of money, whether yearly or otherwise, or any annuity, or other annual payment.' I must say that when the guarantors pay under the guarantee, I think they pay 'interest'. They pay the interest due under the bonds which they have guaranteed. But the bondholder says that they do not. He says that when the guarantors pay under their guarantee, the indebtedness changes its character. He agrees that when the principal debtors pay the interest, it is truly interest of money : but he says that when the guarantors pay under their guarantee, they pay the like amount, but it is not then a payment of interest. It is a payment of a debt due under the guarantee. The bondholder relies for this proposition on Inland Revenue Commissioners v. Holder and particularly on the observation of Romer L. J. in the Court of Appeal, at page 101 :
'I must how consider..... whether...... the respondents can truly be said to have paid interest to the bank. In my opinion they cannot. What they paid to the bank was the debt due from them under the guarantees. The debt became due, no doubt, because the company had failed to discharge its own indebtedness to the bank, and part of that indebtedness consisted of interest. But the respondents owned no interest to the bank.'
I do not accept the bondholders contention. Holders case was a decision on the words in section 36(1) of the Income Tax Act, 1918 : '.... the person by whom the interest is paid.' It is not an authority on the words 'interest of money' in section 123, 169, 170 of the Act of 1952. Rather than follow Romer L. J., I would follow Lord Atkin, in Holders case in the House of Lords who said, at pages 628-629 :
'..... there can be no doubt, I think, that, as the result of the sum of money paid by the guarantor, the interest due from the principal debtor was in fact paid, and that if the principal debtor were sued he could support a plea of payment'.
So here the guarantors unconditionally guaranteed the due payment of the principal moneys and interest. When they pay under the guarantee, they pay the interest which the principal debtor should have paid. The indebtedness for interest is then discharged. So the payment is truly payments of 'interest'.
Even if I am wrong about this, I think that payment by the universal successor was an 'annual payment'. It fulfilled all the requisite laid down by Jenkins L. J. giving the judgment of the court in Inland Revenue Commissioners v. Whitworth Park Coal Co. Ltd. (In liquidation). But the defendants denied this. They said that it lacked the quality of 'recurrence' because the guarantors did not have to make their payments annually. They had only to pay in case the principal debtors defaulted : and then only to the amount left unpaid. But this argument cannot stand in the face of Moss Empires Ltd. v. Inland Revenue Commissioners. Lord Macmillan said, at pages 793-794 :
'It was argued for the appellants that the payments were not annual payments inasmuch as they were casual, independent, not necessarily recurrent, and throughout subject to a contingency. This argument commended itself to Lord Moncrieff, but I am unable to accept it.... The fact that the payments were contingent and variable in amount does not affect the character of the payments as annual payments.'
So here, although the payments by the guarantors were contingent and variable, nevertheless, they were annual payments.
In my opinion, therefore, the payments by the universal successor come within the description 'interest of money..... or other annual payments.' But it does not follow that they have to be dealt with under Case III because we have yet to see if the case comes under Case IV.
II. Do the payments come within Case IV
The second question argued before us was whether the sums payable by the universal successor come within Case IV as being 'income arising from securities out of the United Kingdom'. The word 'securities' in this context was defined by Lord Cave in Singer v. Williams'
'The word denotes a debt or claim the payment of which is in some way secured. The security would generally consist of a right to resort to some fund or property for payment; but I am not prepared to say that other forms of security (such as personal guarantee) are excluded. In each case, however, where the word is used in its normal sense, some form of secured liability is postulated.'
Applying that definition, it is quite plain that until 1941 the income payable to the bondholders did arise from securities out of the United Kingdom. It arose from securities in Greece, where the principal debtors were resident, and where there were properties which were security for the indebtedness and where the guarantors were resident. But it is said that after 1941, or, at any rate, after the Greek legislation of 1949 to 1956, the income did not arise from any securities in Greece at all. There were no properties in Greece available to meet it. The courts of Greece would not allow any bondholder to sue for the principal or interest. There was no possibility of getting anything out of Greece to meet the bonds. It was only recoverable in England by action against the universal successor of the guarantor. Accordingly, it is said that the indebtedness is now here, and here only : see New York Life Insurance Co. v. Public Trustee. So the income now arises here and here only.
I can see the force of this argument, but I cannot accept it. These are bearer bonds which are international in character. They may pass from hand to hand in the countries of the world. Their character - and the character of the income from them - does not change with wars or rumours of wars, or with the imposition of a moratorium, or the lifting of it. If the bonds start as foreign securities, they go on as foreign securities. At any rate, the bearers are entitled so to regard them. When a bearer presents a coupon for payment, it may be honoured by the principal debtor or by the guarantor - he need not inquire which it is - suffice it that it is paid. His security for payment has always been property in Greece and the personal guarantee of a Greek company, which will have the right of subrogation given to guarantors. That makes it income arising from securities out of the United Kingdom.
In my opinion, therefore, the income in this case does come within Case IV.
This finding that the income comes within Case IV means that it does not come within Case III. It does not have to be deducted under sections 169 and 170 of the Income Tax Act, 1952. It is income which arises from securities outside the United Kingdom, and it was, I think, conceded that a person resident outside the United Kingdom is entitled to receive such income free of English income tax. The plaintiffs are a company resident outside the United Kingdom, and hold the income, I understand, for beneficiaries outside the United Kingdom. So they are entitled to receive it without deduction of the tax.
I come, therefore, to a similar conclusion as the judge, but on different grounds. I would dismiss the appeal.
SACHS L. J. - On the face of these much litigated bonds appear the following terms of cardinal importance :
'The mortgage bank......hereby unconditionally promises to pay in sterling to the bearer of this bond on December 1, 1957.... the principal sum of Pounds 20 and also in the meantime until such principal moneys shall be fully paid off to pay in sterling interest on the said principal moneys at the rate of 7 per cent. per annum half-yearly.....upon presentation and surrender of the coupons attached hereto as they severally become due.
'Payment of principal and interest will be made in sterling... at the offices of Hambros Bank Ltd. or Erlangers Ltd. (hereinafter collectively called the bankers) in London, England, or at the option of the holder at the National Bank of Greece in Athens, Greece, by cheque on London.
'The National Bank of Greece hereby unconditionally guarantees the due payment of the principal moneys and interest...'
The principal debtor having defaulted and the guarantor having in July 1963, been called upon to pay and having made payments in respect of a number of half-yearly coupons representing interest at 7 per cent., did those payments fall for income tax purposes within Case IV of Schedule D (Income Tax Act, 1962, s. 123), as the creditors asserts, or Case III, as the guarantors contend That is the first and to my mind crucial question in this appeal. Amidst the ever-widening range of conflicting submissions - some of them raised for the first time at very late stages in this appeal - two factors remained constant. The first is that at all stage of this case the guarantors pinned their defence to establishing that the payments fell within Case III and it was common ground that they must fail in these proceedings unless they succeed on that point. Secondly, it has been common ground, both in this court and at first instance, that if the payments of the coupons had been made by the principal debtors (the mortgage bank) they would have fallen within Case IV as being in respect of foreign securities.
There are, as between taxable receipts falling within Case III and Case IV respectively, differences in the machinery for collecting tax, but with these I do not propose to concern myself. More important, there are differences between the rights of non-resident holders of coupons to reclaim tax paid according to whether Case III or Case IV applies. It would be strange if the coupon-holders tax recovery rights changed because it was the guarantors who provided the money : but this is the contention of the guarantors - who seek in effect to say the quality of their payment differs from that of the principal debtor.
It is suggested that because the terms of the guarantee read in isolation prima facie produce an English debt paid in England, the result is a Case III payment even if the guarantor is (as was common ground) non-resident qua the income tax law. Even if that were so (despite Stokes v. Bennett per Upjohn J.), I am not prepared to look at this guarantee in such isolation. Taking the terms of the bond as a whole the guarantor for the purposes of Cases III and IV (with which alone this case is concerned) simply steps into the paying shoes of the principal debtor, and having made the payment comes away by virtue of subrogation with the bondholders clothes vis-a-vis that debtor. At every stage it is a foreign security transaction - and none the less so because a moratorium (which may or may not be now continuing) at one time suspended or may still suspend the bondholders right to sue and to enforce his rights of security, or even if the Greek Government has now fully barred legal action in Greek - matters left in the air on the evidence. A foreign security does not in income tax law cease to be a foreign security because a foreign government by legislation impairs the collateral or underlying security, any more than it would merely because some third party physically destroyed it.
It is not unknown for government which have suspended or cancelled obligations on securities by subsequent administrative action or legislation to revive those defaulting obligations in whole or at any rate in part. The securities do not, to my mind, change their nature according to variations in the financial policy of foreign governments, and indeed so to hold would hardly seem consistent with the common ground mentioned earlier in this judgment, viz., that if the payment had been made by the principal debtors Case IV would have applied.
It is, moreover, perhaps permissible to note that this case is concerned with internationally marketable bearer bonds of Pounds 20 denominations. It would seem wrong if those who owned or acquired such bonds have to look beyond what appears on the face of them to ascertain their position. Nor would it redound to the credit of London as a financial centre if the contrary view prevailed.
In reaching the above conclusions my view has not depended on the principle that where, as here, the proper law of the bondholders contract is English law, the courts of this country do not necessarily, having regard to private international law, recognise the fiscal measures of another government or those discharging or altering the contractual rights of a bondholder - but none the less, the creditors might well, if necessary, be able to rely on that principle : see the discussion in Adams v. National Bank of Greece, for instance in the speeches of Viscount Simonds at pages 274 to 275 and Lord Reid at pages 279 to 280.
I would accordingly dismiss this appeal on the ground that the payment falls within Case IV even though, as appears to me, it is an annual payment. On this further issue I am in agreement with Lord Denning M. R. for the reasons which he has given and would respectfully differ from Donaldson J. It is perhaps useful also in this behalf to refer to the judgment of McNair J. in U. G. S. Finance Ltd. v. National Mortgage Bank of Greece and the National Bank of Greece S. A. on July 25, 1962 (unreported). There, in relation to the submission that the coupons of the bonds formed a separate obligation, he said :
'The form of the coupons and the bonds I have set out earlier in this judgment. As it seems to me, the coupon standing by itself contains no promise by anyone to pay anyone. It clearly contains no express promise to pay the holder. It is a mere voucher - a piece of machinery for implementing the promise contained in the bond. The promise in the bond is expressed to be a promise to pay in sterling to the bearer of the bond... the principal moneys hereby secured.... and to pay in sterling interest on the said principal moneys..... in every year upon presentation and surrender of the coupons attached thereto as they severally become due';
and he then proceeded to reject the above submission. With those views I agree : they underline the element of recurrence that constitutes an annual payment.
KARMINSKI L. J. - I agree. The vital question in this case is whether payments by the guarantor are made under Case III or Case IV of Schedule D. I agree with Lord Denning M. R. and Sachs L. J. that at every stage they have retained their quality as a foreign security transaction. Both the original borrowers and the guarantors are Greek Corporations. It is true that the loan was raised in London in sterling, and interest is payable in London in sterling as well as in Athens. I can see no difference because the guarantor has stepped into the shoes of the principal debtor, and by subrogation has acquired the latters rights.
Whether or not the payments by the guarantors constitute annual payments is a matter on which I have formed to clear view. But as it is not necessary for the purpose of this appeal to express any opinion on this point, I prefer to leave the question unanswered. In my view this appeal should be dismissed.
Appeal dismissed with costs.
No order as to costs of Inland Revenue.
Leave to appeal to House of Lords.
Solicitors : Stibbard, Gibson & Co., Herbert Smith & Co.; Solicitor, Inland Revenue.