The Gazette 1980

JULY-AUGUST

19

GAZETTE

or Fork) having by the lease dated 8th December 1958 "previously conveyed or transferred" the premises to Littlewoods. Somewhat surprisingly, Danckwerts J.'s decision was upheld both by the Court of Appeal 4 and by the House of Lords 5 and must now be accepted as settled law. The shortcomings of (a), on the other hand, became apparent in Shop and Store Developments Ltd. vs. IRC (1967) 1 A.C. 472, the facts of which, so far as material, were as follows. As part of an admitted "arrangement" Greenwoods (Hosiers and Outfitters) Ltd. ("the clothing company") which was the beneficial owner of not less than 90 per cent of the issued share capital of the appellant company ("the property company") had transferred certain freehold and leasehold property to the appellant company for £984,541, paid and satisfied by the allot- ment to the clothing company, credited as fully paid up, of 2,920,000 shares of 5s.0d. each in the capital of the property company, valued at 6s.9d. each, of which the clothing company subsequently sold 1,200,000 shares to an issuing house at 6s.5d. per share (i.e. for £385,000). The Revenue contended that under the arrangement part of the "consideration" had been provided indirectly by a person (the issuing house) which was associated neither with the property company nor with the clothing company, and that the transfer of the freehold and leasehold property consequently failed to satisfy (a) above. The Revenue's argument, on this occasion, failed to convince the House of Lords, which by a majority of three to two held that the appellant company was entitled to the relief it sought. "The clothing company sold their properties to the property company. If it is asked what did the clothing company get in return the answer, and, as it seems to me, the complete answer, must be that they got 2,920,000 shares in the property company". "In agree- ment with Pennycuick J. 6 I recognise that the words 'directly or indirectly' cast a wide net, but I also agree with him that if company A sells property to company B in consideration of fully-paid shares in company B and if company A, even pursuant to a pre-arranged plan, then sells some of the shares to C, it cannot be said that C has provided directly or indirectly the consideration for the sale of the property by company A to company B": 494, 496 per Lord Morris of Borth-y-Gest. The United Kingdom Legislature's reaction was swift. It replaced S.50 Finance Act 1938 by a new enactment, S.27(3) Finance Act 1967, which, while preserving both (a) and (b) above, shored up the tottering edifice by the addition of a third paragraph, and a statutory gloss expanding the meaning of (a). Both amendments are to be found in S. 19(3) in the new legislation. The first, which is designated (c), precludes relief if the "arrangement" envisages that the transferor and the transferee will at some future date cease to be associated to the required extent. This, in itself, would have been sufficient to close the loophole exposed by the decision in Shop and Store Developments Ltd. vs. 7RC(1967) 1 A.C. 472. Suppose, for example, that a holding company (H) is the beneficial owner of the entire issued share capital (£100, represented by 100 Ords. of £1) in a subsidiary (S). H wishes to sell its premises to a third party (P) for £100,000. Under the former legislation this could have been done without P paying ad valorem stamp duty by simply arranging for S to take a transfer of the premises 98

from H for a consideration of £100,000 paid by S to H with moneys raised by S on overdraft, P subsequently subscribing for 100,000 Ords. of £1 in the capital of S, and S applying the proceeds of the issue of the 100,000 Ords. of £1 in discharge of its overdraft. At the time of the execution of the transfer H and S would have been associated to the required extent, S being a wholly owned subsidiary of H, and the "consideration" (£100,000) for the transfer would have been paid by S to H, so that (a) above would have been in no way contravened. P would thus become the owner of the premises through its wholly owned subsidiary S at the cost of, at most, £1,000 in capital duty. Under the new legislation, however, such a scheme would not qualify for relief, since an essential ingredient of the "arrangement" would be that H and S would cease to be associated to the required extent on P subscribing for 100,000 Ords. of £1 in the capital of S. As an additional preventative to any attempted repetition of the scheme which was successful in Shop and Store Developments Ltd. vs. IRC (1967) 1 A.C. 472 the Legislature added a gloss to (a), providing that the consideration for the conveyance or transfer is to be treated as having been provided by a person not associated to the required extent with either the transferor or the transferee if, as part of the "arrangement", such a person makes a "payment or other disposition" which "enables" the transferee to "provide" the "consideration" payable. The precise set of circumstances to which the statutory gloss is intended to have reference is not clear. Suppose, as before, that a holding company (H) wishes to convey its premises to its wholly owned subsidiary (S) for £100,000. S raises the requisite sum by way of mortgage, and on closing, the mortgagee's solicitors hand over a draft for £100,000 made out to S, which S endorses over to H. There is no question of any third party, P, subscribing for or purchasing shares in S. The matter is purely an internal one, involving only H and S. Is the endorsement by S of its draft over to H a "payment or other disposition" by an out- side person (the mortgagee) "enabling" S to pay the required "consideration" to H? If so, does the statutory gloss treat the consideration for the conveyance as having been provided not by S but by the mortgagee, thus precluding relief under the new legislation? It is difficult to imagine that the statutory gloss could have been intended to have such an unreasonable effect. It is submitted that the statutory gloss, like the rest of the new legislation, must be construed in the manner laid down by Lord Denning in Escoigne Properties Ltd. vs. IRC (1958) A.C. 549, 566: "When the draftsman is drawing the Act, he has in mind particular instances which he wishes to cover. He frames a formula which he hopes will embrace them all with precision. But the formula is as un intelligible as a mathematical formula to anyone except the experts: and even they have to know what the symbols mean. To make it intelligible, you must know the sort of thing Parliament had in mind. So you have to resort to particular instances to gather the meaning." It is probable that the draftsman of S. 19(3) in the new legislation (or rather his United Kingdom colleague before him) had in mind a set of circumstances similar to those in Curzon Offices Lis. vs. IRC( 1944) 1 All E. R. 163, 606, the facts of which were as follows.