The Gazette 1980

GAZETTE

JUNE 1980

A holding company, Humphreys Ltd. ("Humphreys") was the owner of the entire issued share capital (£100, represented by 100 Ords. of £1) of a wholly owned subsidiary Curzon Offices Ltd. ("Curzon"). Humphreys owned a block of London flats (Ghelsea Cloisters) and Curzon an office block (Curzon Street House). Humphreys had in fact built Curzon Street House for Curzon and Curzon was in consequence indebted to Humphreys for the building costs of £286,596. Humphreys, having agreed to sell both Chelsea Cloisters and Curzon Street House to a purchaser, Regis Properties Co. Ltd. ("Regis"), took the following steps:— (1) Humphreys conveyed Chelsea Cloisters to Curzon for £568,078, of which £238,404 was to be pay- able in cash and the balance (£392,672) left owing on the security of the Cloisters. (2) The National Provincial Bank then lent Curzon £525,000, which Curzon paid to Humphreys. Of this, £286,596 was paid in discharge of Curzon's indebtedness to Humphreys in respect of the build- ing of Curzon Street House, and the balance (£238,404) in part payment of the purchase price of Chelsea Cloisters. The National Provincial Bank's loan of £525,000 was secured, inter alia, by a bank guarantee from Regis. (3) Regis acquired the issued share capital (100 Ords. of £1) of Curzon from Humphreys at par (i.e. for £100). Macnaghten J. (165) held that Curzon was not entitled to relief in respect of the conveyance to it by Humphreys of Chelsea Cloisters on the ground that the consideration for the conveyance had been provided in part by Regis' guarantee of the National Provincial Bank's loan, and that Regis not being associated with either Curzon or Humphreys to the required extent at the date of the conveyance, Curzon's claim for relief failed to satisfy (a). The Court of Appeal (606) took the same view. 7 Strangely enough, no mention appears to have been made of Curzon Offices Ltd. vs. 77?C(1944) 1 All E.R. 163, 606, in Shop and Store Developments Ltd. vs. IRC (1967) 1 A.C. 472, either in the Law Lords' speeches or in argument. It is submitted that the draftsman of S. 19(3), apprehensive that the decision had been impliedly over- ruled by the simplistic view taken by the majority of the House in Shop and Store Development Ltd. vs. IRC (1967) 1 A.C. 472, inserted the statutory gloss referred to above to ensure the survival of the principle established in Curzon Offices Ltd. vs. 77?C(1944) 1 All E.R. 163, 606. If so, the purpose of the statutory gloss at once becomes clear. It is intended to apply where the conveyance or transfer in question is merely a step in an overall arrange- ment whereby either the subject matter of the conveyance or transfer, or the share capital of a company owning it, is to be transferred by one party to another party, neither of which is associated with the other to the extent provided in S.19(2). In such a case the consideration for the conveyance or transfer in question is treated as having been provided by the purchasing party, even though immediately payable by a company associated with the

transferor to the required extent. Construing the statutory gloss in accordance with the principles laid down by Lord Denning, therefore, it is clear that it is not intended to apply to an internal conveyance or transfer by a parent to its subsidiary, or vice versa, even if the finance for the consideration payable is raised from an outside source. In such a case " . . . there is no real change in the beneficial interest at all: there is, of course, a change in form and change in law, but the beneficial interest really remains where it was": Curzon Offices Ltd. vs. IRC (1944) 1 All E.R. 606, 607 per Goddard L. J. In closing, it should be pointed out that in many instances avoidance schemes based on the former legislation came to grief because the transferor was not the "beneficial owner" of the requisite proportion of the issued share capital of the transferee. In Holmleigh (Holdings) Ltd. vs. CIR 45 T.C. 435, for example, Great Universal Stores Ltd. ("GUS") had agreed to acquire the issued share capital of a manufacturing company, A. W. Flateau & Co. Ltd. ("Flateau") for £1,835,000. Flateau, however, owned certain assets, valued at £870,000, which GUS had no interest in acquiring, and it was there- fore agreed that these assets would be transferred to the appellant company (of which Flateau held the entire issued share capital of £2, represented by two ordinary shares of £ 1 held by the subscribers in trust for Flateau). The original members of Flateau subsequently acquired these shares for £870,000. Harman J. (455), upheld the Revenue's decision of Leigh Spinners Ltd. vs. CIR 45 T.C. 425, upheld the Revenue's contention that the appellant company was not entitled to relief under the United Kingdom equivalent to the former legislation, on the ground that the two shares were "subject to equitable obligations in favour of others" (i.e. the former members of Flateau) which prevented Flateau from being the "beneficial owner" thereof at the date of the transfer of the assets. Any kind of legally enforceable arrangement, there- fore, whereby the shares in the transferee constituting the required degree of association between the transferor and the transferee are to be sold subsequently is sufficient to subject the shares in question to equitable obligations in favour of the intended purchaser thereof, and thus prevent the transferor from being the "beneficial owner" thereof. Decisions to the same effect abound 8 and it is strange that the point has been so frequently overlooked. And worse news The requirements of S. 19(3), stringent though they are, will not be contravened unless it is envisaged at the outset that the transferor and the transferee will eventually part company. Under the United Kingdom equivalent to the new legislation a subsequent reorganisation of the share capital of the transferor or the transferee having this effect will not prejudice the relief unless it can be shown by the Revenue to have been a necessary ingredient of the original arrangement, in the contemplation of the parties from the outset. Not so in Ireland. In an excess of zeal, the Irish Parliamentary draftsman, determined to outdo his United Kingdom colleague, had added an additional S. 19(6) providing for the withdrawal of the relief in the event of 99