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Barclays Bank Ltd. Vs. Inland Revenue Commissioners. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1960]38ITR88(Cal)
AppellantBarclays Bank Ltd.
Respondentinland Revenue Commissioners.
Cases ReferredInland Revenue Commissioners v. Silverts Ltd. In
- xfcg july 21. the following judgments were read.lord evershed m. r. the plaintiffs in this action are the personal representatives of one, tom shipside, who died on december 15, 1955. the assets of the deceaseds estate included 1,100 fully paid shares of pound 1 each in the capital of a company, t. shipside ltd., formed in the year 1917 to acquire the motor business formerly carried on by the deceased. the share capital of the company was and is pounds 10,000, divided into 10,000 shares of pound 1 each, carrying the right, upon a poll, of one vote per share at general meetings of the company. the issued share capital was at all material times, and is, pounds 8,350. the companys regulations include clause 61 of table 'a' in the companies (consolidation) act, 1908, whereby, in the case of.....

XFCG July 21. The following judgments were read.

LORD EVERSHED M. R. The plaintiffs in this action are the personal representatives of one, Tom Shipside, who died on December 15, 1955. The assets of the deceaseds estate included 1,100 fully paid shares of pound 1 each in the capital of a company, T. Shipside Ltd., formed in the year 1917 to acquire the motor business formerly carried on by the deceased. The share capital of the company was and is pounds 10,000, divided into 10,000 shares of pound 1 each, carrying the right, upon a poll, of one vote per share at general meetings of the company. The issued share capital was at all material times, and is, pounds 8,350. The companys regulations include clause 61 of Table 'A' in the companies (Consolidation) Act, 1908, whereby, in the case of joint holders of shares 'the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders; and for his purpose seniority shall be determined by the order in which the names stand in the register of members'. The deceased was a director of this company from the date of its incorporation until the date of his death.

In addition to the 1,100 shares registered in his sole name, of which he was, admittedly, the beneficial owner, his name also appeared first on the register as joint holder with (since 1948) the names of three other persons of a further 3,650 of the companys shares. These 3,650 shares are the subject of a settlement made by the deceased on December 1, 1936, in favour of his wife and three children (to the exclusion of any beneficial interest in himself). By the settlement he had the power during his life of appointing new trustees - a power which he exercised in 1948.

It will be noted that the 3,650 shares, plus the deceaseds own 1,100, together amount to a majority of the issued shares of the company; so that if he exercised his voting rights, under the companys regulations, as 'senior' registered holder of the 3,650 shares and as sole proprietor of his own 1,100 shares, he would command a majority of all the votes at general meetings of the company. In these circumstances, the question has arisen whether it should now be held that at and time during the last five years of the deceaseds life he was 'in control' of the company within the meaning of section 55 of the Finance Act, 1940 : for, if so, it must follow that his own 1,100 shares in the company must be valued for estate duty purpose, not according to their value in the market pursuant to section 7 of the Finance Act, 1894, but according to the value of the companys assets as provided by the Act of 1940. It is this question of the proper basis of valuation which is posed for the court by the originating summons, and which Danckwerts J. answered in a sense favourable to the plaintiff executors. It is to be noted, as Mr. Bathurst for the plaintiffs observed, that an answer favourable to the Crown may have the added effect of so increasing the value of the estate as to raise also the general rate of estate duty payable in respect of it.

The problem turns entirely upon the true interpretation of the relevant provisions of the Finance Act, 1940.

[His Lordship read section 55(1), (3) and (5) and section 58(4) and (5) and continued :] It is easy, and perhaps not profitable, to criticise the draftsmanship of an Act of Parliament; but the intelegance and obscurity of some, at any rate, of the relevant provisions of the Act of 1941 is certainly remarkable and in this respect section 58(4) undoubtedly takes pride of place. Nevertheless, it is a mistake to suppose that, to the draftsman of this Act, the; phrases 'control of the company' or 'controlling interest in the company' had acquired the precise significance which later judicial pronouncements in Inland Revenue Commissioners v. J. Bibby & Sons Ltd., and other cases have given them. In 1940. Only Rowlatt J., in B.W. Noble Ltd. v. Inland revenue Commissioners, had anticipated the law, as later laid down, when he said that the phrase 'controlling interest' in regard to a company was a reference to the situation of one 'whose shareholding in the company is such that he is the shareholder who is more powerful than all the other shareholders put together in general meeting'; for on this point I do not think the decision of this court in Himley Estates Ltd. and Humble Investments Ltd. v. Inland Revenue Commissioners is relevant. In that case the question for the determination of the court was whether the company then under consideration was to be treated as being under the control of not more than five persons within the meaning of subsection 6(d) of section 21 of the Finance Act, 1922. The voting scars were held by 14 persons, all of whom were admittedly beneficial owners of their shares. But it was said on behalf of the crown that they were nonetheless friends (though not relatives or nominees) and supports of the tenant for life, Lord Ednam, and that the case fell, therefore, somehow within the language (the 'ridiculous' language, according to one member of this court) of the definition at the end of the subsection, 'a company shall be deemed to be under the control of any persons where the majority of the voting power or shares is in the hands of those persons or relatives or nominees of those persons, or where the control is by any other means whatever in the hands of those persons.' The debate before Rowlatt J. and this court was substantially directed to the interpretation of that special formula, quite different from anything found in the Act of 1940.

It follows then, if I am right so far, that the draftsman, in using the phrase in section 55(1)(a), 'control of the company,' would not, or at least may well not, have intended by it what a draftsman in 1959 would intend. In the absence of judicial interpretation 'control of the company' is a somewhat wide phrase. This consideration leads me, therefore, to the view that subsection (3) was intended as a definition or exposition; and this view seems to be supported by the return, in subsection (5), to the phrase 'control of a company' - for I feel it difficult to suppose that subsection (5) was only intend to apply to subsection (1) case and not to subsection (3) cases. My view is also, I think, supported-as Mr. Pennycuick conceded - by the reference to subsection (3) in section 58(4). If 'control of a company' in subsection (1) was thought to have a precise but limited meaning, which subsection (3) was intended to expand, I should have expected subsection (3) to say 'In the section the phrase control of a company shall be deemed to include...' etc., or words to that effect.

But in the end, it may not very much matter. Mr. Bathurst conceded that the phrase in subsection (3)(a) 'control of powers of voting,' etc., would cover the ordinary case of a majority shareholder entered in the register. As Lord Radcliffe indicated in St. Aubyn v. Attorney-General (No. 2), the effect of a 'deeming' clause may be to cover both the obvious and the not-so-obvious.

In my view, the difficulty in subsection (3)(a) is caused by the words 'powers of.' What is really meant by the phrase 'control of the powers of voting' is surely no more than 'the control of voting' : perhaps 'rights' would have been a better word than 'powers.' What, however, I think the words were intended and are apt to cover is the person who can, either by the direct exercise of the voting power or rights that he has, or indirectly by requiring such power of rights to be exercised as he wants by others, command, or produce the result, that the majority of the votes will be given as he whishes. It covers the absolute owner of 51 per cent. of the (voting) shares : it covers also, to my mind, the beneficial owner of 51 per cent. registered in the name of a nominee.

One result of this view may be that, in the contemplation of the section, more than one person may have 'control of a company' within the section at the same time. This indeed is made clear by subsection (3) itself, for example where A owns beneficially 51 per cent. of the shares, but B is the governing director (see paragraphs (a) and (b) of the subsection) - for the argument is not affected by the later repeal of paragraph (b). Similarly, a custodian trustee and managing trustee might both have 'control.' The latter point is, however, not likely to be of much practical significance having regard to subsection (5). The relevance for present purposes is that, in construing the section, the fact that 'control' is, within the meaning of the section, found to be in one person, does not impliedly negative 'control' also in someone else, after all, the section is not concerned to regulate companies, but to tax the estates of people whose interests in a company have a certain proprietary quality.

I therefore conclude that the section applies prima facie, and subject to exclusion under subsection (5), to a person who was, during the relevant period, in a position, by virtue of the voting rights vested in him, to secure the; passing of any ordinary resolution at a general meeting. The next question then arises, is the prima facie result altered if it is shown that a relevant number of the shares, whose votes he was able and entitled to cast, were registered in him jointly with others as a trustee or otherwise I assume in posing the question that subsection (5) has no application, and since, for the purposes of this case, it is conceded that subsection (5) cannot help the plaintiffs, having regard to the fact that Mr. Shipside himself made the trust disposition (see section 58(5)), I shall disregard the possible application of the former subsection to this case.

Danckwerts J. thought that the question posed should be answered affirmatively. His grounds, briefly, were (and they are those submitted by the plaintiffs) : (1) it is clear, for example, from subsection (5) of section 55, that you must go beyond the companys constitution and inquire of the capacity on which the registered shareholder in fact held his shares; and (2), when you find that the person entitled or primarily entitled to vote is one of four trustees, then it follows that he is speaking not with his own voice but with the united voices of all four trustees; it therefore follows that Mr. Shipside, though first on the register, was not voting the trust shares for himself and for his own purposes (as he was in respect of his own 1,100 shares) : he was voting those shares on behalf and in the interests, to the exclusion of his personal interest, of the four trustees as a body. It was therefore said (and held by Danckwerts J.) that the present case was outside the scope of the relevant authorities, particularly Inland Revenue Commissioners v. J. Bibby & Sons Ltd. in the House of Lords; the two cases in this court, Inland Revenue Commissioners v. Silverts Ltd. and S. Berendsen Ltd. v. Inland Revenue Commissioners; and the case before the First Division of the Court of Session in Scotland in 1950 (which was expressly approved by this court in the Silverts case) namely, John Shields & Co. (Perth) Ltd. v. Inland Revenue Commissioners.

I have, for my part, reached a different conclusion from Danckwerts J. and I can state as follows the grounds for my conclusion :

(1) Although the Bibby and other cases (above referred to) were decisions on somewhat different contexts and related to the tax liability of companies and not of individuals, nevertheless, the speeches and judgments in those cases seem to me to have laid it down as a clear general proposition of law that control of a limited liability company depends upon, and is to be judged by reference to, the companys own constitution. I do not repeat the citations which Danckwerts J. made in his judgment, but, in my view, the general proposition has been affirmed with increasing emphasis as one case has succeeded another. What the company, being a 'persona ficta,' does or does not do is determined by the resolutions of its corporations, or their votes n general meeting, control the company, the validity of the transactions of which cannot be questioned so long as the resolutions have been duty passed in accordance with the companys regulations -however much those who voted may have regarded or disregarded other (outside) obligations resting upon them. 'A clean cut' (said Viscount Simonds in the Bibby case) 'there must be.' It is nihil ad rem that the control of the company may be in the hands of persons who are themselves controlled. The company is in this respect like a motorcar the speed and direction of which is controlled by the driver notwithstanding any influence or encouragement to which the driver is subject from other passengers.

(2) In the absence, therefore, of some compelling context to the contrary, the court must respect the general rule binding upon it; and it should avoid making fine distinctions. In my judgment there is no such compelling context in section 55 of the Act of 1940. For reasons which I have earlier attempted to state, other persons than the majority shareholder may well also, under the section, be deemed at the same time to control the company : and in this connection I refer to the last three lines of subsection (3) of the section. But these other 'controllers' (if such there be) do not displace the control of the man who, according to the companys regulations, secures by his votes the passing of the resolutions - any more than the 'control' of a motor-car by the driver is displaced by the fact that he may be acting under the influence and orders of a passenger who might therefore also be sensibly alleged to be in 'control.'

(3) It is true that, as Danckwerts J. pointed out, you are required by section 55(5) to look into the character of the shareholder to see whether he is a trustee. But I observe that that subsection in terms affirms, rather than negatives, the trustees 'control.' The subsection does not say that a majority shareholder, who is a trustee, shall not be deemed to control the company; it says rather that the control which the trustee has is to be disregarded. Further, if Mr. Bathursts argument were accepted, the subsection can, as he concedes, only apply to a sole trustee - a result which seems to me, to say the least, to be an unlikely intention.

(4) If I am right so far, then the only remaining question is whether the facts that the deceased as the 'senior' of the four trustees, had, by virtue of clause of 61 of Table 'A,' only a prior right of voting quoad the other trustees, and that, when he voted, he must be taken to have the other trustees, and that, when he voted, he must be taken to have spoken with the voices, in union, so all four trustees, make any difference. It is true that these facts did not precisely arise in any of the divided cases; but in my opinion we should not on that ground distinguish this case from the Scottish case of Shields, which has been expressly approved in this court. It is true that under the relevant article in the Shields case Mrs. Bell had more than mere priority - she was to be treated as the sole proprietor of the trust shares. But, like the deceased, she had still to attend and vote; and like him, if (as we must assume) she performed her trust duties properly, she spoke with the voice of all the trustees.

In my judgment, therefore, we ought, in conformity with the principles of law binding upon us, to hold that the Crown has in this case discharged the opus which rests upon it of showing that the deceased, during the relevant period. Was (by virtue of the 3,650 shares registered in the names of himself and his three co-trustees - his own name being first on the register - and of the 1,100 shares of which he was the registered proprietor and beneficial owner) 'in control of the company' within the meaning of section 55(1) and (3) of the Act.

Mr. Bathurst argued that on this view anomalies would arise, of which he gave examples. It may be that some anomalies do arise, upon my view of the construction - and on sections worded as are these, it would be perhaps surprising if it were not so. But I do not think that my construction involves anomalies so striking as to require that construction to be rejected.

Finally, I am also not satisfied that acceptance of the Crowns argument involves a manifestly unjust result or one which is contrary to the apparent intention of Parliament. The deceased was without doubt closely connected with the business of the company which bears his name. Immediately before the making of the settlement he appears to have held in his own right, 4,750 shares out of an issued total of 8,350 or approximately 57 per cent. at that time he undoubtedly 'controlled the company.' He appears also to have been at all times a director. I have also referred to the fact that by the terms of the settlement he gave himself the power (which he exercised eight years after the passing of the Act of 1940, retaining his own place as first on the register) to appoint new trustees. It is no doubt a misfortune for his estate that the deceased on making the settlement, or thereafter, in more from putting the name of one of the trustees other than himself first on the register. But he did not do so. It appears to me at least highly likely that the conduct and management of the companys affairs remained (and may even have been intended to remain) after the settlement exactly the same as it had been before.

I add that I am glad to be able to reach the conclusion that I do without recourse to the almost offending language of section 58(4). As regards that subsection, I content myself by saying that, as at present advised, I am inclined to agree with Mr. Bathurst that its terms are not apt to apply to the circumstances of the present case. I have also not found it necessary to do more than refer to section 58(5) since it was (as I have earlier stated) conceded before us that so far as the deceased was concerned, the subsection effectively disqualified the plaintiffs from invoking subsection (5) of section 55.

For the reasons which I have stated, I would allow the appeal and answer the question raised by the originating summons in the sense of paragraph 1(a).

Peace L.J., who is unable to be present today but who had seen the draft of the judgment which I have delivered has authorised me to say that he agrees with it.

ROMER L.J. I agree with the Master of the Rolls and Peace L.J. in thinking that this appeal should be allowed but as I have reached that conclusion by a somewhat different road, and as we are differing from the judge, I will add a few words of my own.

For myself I incline to the view that if a case be found to come within subsection (1) of section 55 of the Finance Act, 1940, it is unnecessary to look further and, in particular, it is irrelevant to inquire whether the case falls within the terms of subsection (3) of the same section. In other words, it seems tome that the 'deeming' provisions of subsection (3) are supplementary to, or expansive of, subsection (1), and are not merely expository thereof. I think that subsection (1) is dealing with direct control of a company, whilst subsection (3) is concerned with indirect control. If subsection (3) were merely expository of subsection (1), it must at least be assumed to cover the case of a registered beneficial owner, but much an owner does not easily fit into the words 'the control of powers of voting on all questions.' These words in their natural sense would seem to indicate control of powers vested in some third person, as distinct from the exercise of powers which are vested in a registered owner himself-a distinction which is recognized in terms in subsection (3)(b). I feel that if subsection (3) had been intended to be an exhaustive definition of what constituted 'control of a company' for the purposes of section 55 the draftsman would have used wider language in subsection (3)(a), such as 'the powers of voting or the control of powers of voting,' etc. It is true that section 58(4) tends to the opposite view to that which I have expressed, but that subsection is drawn in such a bewildering manner as to be an unsure guide to the inter-relation of subsections (1 and (3) of section 55. I find some support for the construction of these subsections which appeals to me from the approach of Lord Greens M. R. to a somewhat similar question to In re Parsons. On the footing, then, which I have indicated, the first question to consider is whether the Crown have succeeded in establishing that the deceased had the control (within the meaning of section 55(1)) of T. Shipside Ltd., at any time during the relevant period before his death.

The Master of the Rolls has stated the material facts of the case and I do not repeat them. The answer to the question which I have posed depends upon whether the shares comprised in the settlement which this gentleman made in 1935, and in respect of which he and his co-trustees were at all material times on the companys register. Are relevant to the issue. His name appeared first on the register in respect of the joint holding of these shares, and it is the Crowns contention that this fact, combined with his own beneficial holding, gave him control of the company at and prior to his death. The contrary view, accepted by Danckwerts J. and advanced before us by Mr. Bathurst and Mr. Buckley, is based upon the contention that no regard should be had to the settled shares in considering whether the decease had control of the company.

Now the precise words 'the control of the company' which appear in section 55(1) have not been judicially interpreted in any decision binding upon this court. The words 'controlling interest,' however, have been considered in more than one case, including Inland Revenue Commissioners v. J. Bibby & Sons Ltd., which was a decision of the House of Lords. The cases in question were concerned with other statutes and dealing with other issues than those which arise under the Finance Act, 1940, section 55; but it appears to me that the result of the decisions is that where Parliament speaks in a taxing statute of a 'controlling interest' in a company, that expression is referable to voting control and to nothing else. If so, I am unable to attribute a different meaning of the words 'control of a company'; and, accordingly, the control of a company is in the hands of the person (if any) whose holding carries a majority of votes. 'The control of a company,' said Lord MacMillan in Bibbys case 'resides in the voting power of its shareholders.' Nor does it matter that the shares, which confer the voting power, are held by a trustee. 'The trustee, like the beneficial owner, controls' : per Lord Porter. Nor, as was pointed out by Lord Simonds in some case, is it material that th trust ee has to pay regard to the wishes of others. 'Those' (he said) 'who by their votes can control the company do not the less control it because they may themselves be amenable to some external control.'

Prima facie, then, if the deceased had been the sole trustee of the settlement and the shares comprised therein had been registered in his name alone, it could, I think, hardly by contended that the voting power so vested in him should be disregarded in an inquiry whether or not he had control of company. And. Indeed, as the Master of the Rolls has pointed out in his judgment, section 55(5) inferentially recognizes that control of a company may be in the hands of a person who holds shares as trustees for third parties, but the plaintiffs argument in the present case is based upon the fact that the deceased was only one of four trustees; that any decision of two or more trustees must by unanimous; and that, accordingly, the vote and voice of the deceased at a meeting of the company were those of the trustees as a body and not the personal vote and voice of him as an individual. True it is said Mr. Bathurst and Mr. Buckely, that by reason of article 61 of Table 'A' of the Companies Act, 1908, the vote of Mr. Shipside, as the first of the joint holders on the register, was accepted to the exclusion of the votes of the other trustees; but the fact remains. And should be recognized by the court, that Mr. Shipsides vote was the vote of the trustees as a whole and that each trustee had an equal say as to the manner in which that vote should be cast. It seems to me that this argument seeks to apply by analogy the decision of this court in S. Berendsen Ltd. v. Inland Revenue Commissioners, in which it was held that, where a registered shareholder was a body corporate, it was necessary to look beyond the share register to ascertain who by their votes controlled that body corporate. In the course of his judgment in that case, my Lord, the Master of the Rolls, said : 'Where the registered shareholder is a body corporate, you nevertheless may. And indeed must, for certain purposes, look beyond the register; for since the company cannot itself speak you must find out with whose voice it must do so, you may therefore ask, who does control the body corporate by the necessary shareholding interest in it ?'

The plaintiffs say that it is not even necessary to look beyond the share register of T. Shipside Ltd., for the names of all the trustees appeared upon it; but that it is clear that the voice of the deceased was that of the body of the trustees, which (by reason of article 61 of Table 'A') could no more speak as such than could an incorporated body. In my opinion this contention must be rejected for three reasons : In the first place it necessarily involves the view that section 55(5) - as qualified by section 58(5) - was directed only to cases in which the majority voting power in a company is in the hands of a sole trustee of a settlement to the exclusion of the far more common case of settled shares being held by two or more trustees. I find it difficult in the extreme to suppose the this can have been the intention of the legislature. Secondly, there is no true analogy, in my judgment, between the position of the deceased and his co-trustees on the one hand and a corporation on the other, it was of the essence of the decision in Berendsens case that a corporation is unable itself to speak, which cannot be said of a body of individuals, and I do not think that the limiting provisions of article 61 are sufficient to constitute an analogy. Thirdly (and possible of most importance). The plaintiffs contention is, in my judgment, inconsistent with the decision of the court of Session in John Shields & Co. (Perth) Ltd. v. Inland Revenue Commissioners, which was approved by this court in Inland Revenue Commissioners v. Silverts Ltd. In that case the majority of shares in a company consisted of a trust shareholding of which there were four trustee. One of the articles of association of the company provided, so far as relevant, that 'if two or more persons are registered as joint owners of any shares any one of them nominated in writing by them all from time to time, or in default of such nomination the person first named on the register in respect of such shares, shall, as regards voting.... be deemed the sole owner.' No such nomination as that mentioned in the article was made. There were four trustees on the companys register in respect of the trust holding, and, of these, a Mrs. Bell was named first in the register. Other points arose in the case to which it is not, for present purposes, necessary to refer, k but the court held that the controlling interest in the company resided in Mrs. Bell. The plaintiffs submission in the present case, as applied to Shields case, would have resulted in a decision that the controlling interest in the company was vested in all four trustees and not in Mrs. Bell alone. It is true that in Shields case, having regard to the article which I have quoted, unless Mrs. Bell attended a meeting of the company and voted. The voting power conferred by the trust holding could not be exercised at all and that that would not be the position under article 61 of Table 'A,' but in my opinion that is a distinction without a difference. The essential fact is that the voting control was held to reside in Mrs. Bell, notwithstanding that as a trustee she could only properly record a vote with the unanimous concurrence of her co-trustees and that in that sense her own voice was the voice of them all. Mr. Bathurst suggested that if the deceased had started away from a meeting of the company, or had attended but refrained from voting, the trustee whose name next appeared on the register could exercise the voting power conferred by the settled shares and that such power was accordingly not vested in the deceased exclusively. I think that the answer to that is that control of a company may well exist in a person even though he may, on occasion, choose not to exercise it; and, in any case, so far as I am aware, there is no suggestion made that the deceased did not at any time during the five years which preceded his death exercise the voting power himself.

Accordingly, I am of opinion, for the reason above stated, that on the facts of this case it falls within section 55(1), and regard need not be had to the provisions of section 55(3). If, however, I am wrong in thinking that subsection (3) of section 55 is not merely expository of subsection (1), I would agree that in the end the same result follows, for the reasons which the Master of the Rolls has stated in his judgment.

In conclusion I would only add that, except to the extent that section 55 does or may operate harshly (a question with which we are not concerned), I cannot regard the present case as one of any special hardship. For the deceased, in settling the shares in question, took good care to see that, during the lifetime of his wife, the voting powers attaching to such shares remained in his own control, so that he could continue to exercise the same influence over the conduct and management of the companys affairs as he had done previously. Moreover, by clause 8 of the settlement of 1936 he expressly reserved to himself during his life the power to appoint new trustees, a power which he in fact exercised when one of the original trustees retired in 1948.

I agree that the appeal must be allowed.

Appeal allowed. Respondents to pay party and party costs here and below. Leave to appeal to House of Lords.

Solicitors : solicitor of Inland Revenue; Gibson & Weldon for J & A. Bright, Nottingham.

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