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.

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

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

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