The Gazette 1980

GAZETTE

JULY-AUGUST

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

and

by the House of Lords

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.

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

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.