Overview | [1968] 2 All ER 849, | [1969] 1 WLR 1077, | 45 TC 112, | 47 ATC 49, | [1968]
TR 37, | 112 Sol Jo 275, | L(TC) 2274
WOOD PRESERVATION LTD. v. PRIOR (INSPECTOR OF TAXES) [1969] 1 WLR 1077
[COURT OF APPEAL]
[CHANCERY DIVISION]
Goff J., Lord Donovan and Harman and Widgery L.JJ.
1968 March 5, 6, 7; Nov. 11, 12, 13
Revenue — Income tax — Company — Trading losses — Company selling whole share capital in taxpayers subject to condition — Vendors' business assigned to taxpayers before condition
performed — Condition subsequently waived — Whether binding contract for sale of shares in taxpayers before waiver — Whether vendors beneficial owners of at least three-quarters of share Capital of taxpayers up to time of waiver — “Beneficial ownership” — Whether vendors' trading losses deductible from taxpayers' profits — Finance Act, 1954 (2 & 3 Eliz. 2, c. 44), s. 17.
Until 1960, S. Ltd. were the beneficial owners of the share capital of the taxpayers. In March, 1960, S.
Ltd. entered into an agreement with B.R. Ltd. by which B.R. Ltd. agreed to buy the taxpayers' share capital. The sale was subject to a condition that within one month a letter should be produced from a certain German company giving an assurance that they would continue certain rights in favour of the taxpayers. That condition was eventually waived. Nine days prior to that waiver S. Ltd. assigned their business to the taxpayers. In the years 1960–61 to 1963–64 the taxpayers were assessed to income tax on their profits. They appealed on the grounds that they were entitled by virtue of section 17 of the Finance Act, 1954,
1to [*1078]
deduct trading losses incurred by S. Ltd., that company having, until the date of the waiver, been the beneficial owners of not less than three-quarters of the taxpayers' share capital. The special commissioners dismissed the appeal on the grounds that there was a binding contract between S. Ltd. and B.R. Ltd. in existence before the date of the waiver whereby the whole interest of S. Ltd. in the taxpayers was passed to B.R. Ltd. The taxpayers appealed, and Goff J. dismissed the appeal, holding that the special commissioners' decision was right.
On appeal by the taxpayers:—
Held , dismissing the appeal, that beneficial ownership for the purposes of section 17 of the Act of 1954 meant the right to
deal with property as one's own; that after entering into the contract S. Ltd. had had no power to deal in any way with the
taxpayers' share capital; and that that state could not be called beneficial ownership. Accordingly, section 17 did not apply
and the taxpayers were not entitled to deduct the trading losses of S. Ltd. (post, pp. 1096C, 1097F, G).
The following cases are referred to in the judgment of Goff J.:
Aberfoyle Plantations Ltd. v. Khaw Bian Cheng [1960] A.C. 115; [1959] 3 W.L.R. 1011; [1959] 3 All E.R. 910, P.C.
Curtis & William (Africa) Ltd. v. E. G. Maas [1957] 2 Lloyd's Rep. 223.
Long v. Bowring (1864) 33 Beav. 585.
Barway Estates Ltd. v. Inland Revenue Comrs. Sergeant on Stamp Duties (4th Ed.) (1963); [1958] T.R. 193, C.A.
Sandwell Park Colliery Co., In re [1929] 1 Ch. 277.
Smith v. Butler [1900] 1 Q.B. 694, C.A.
United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd. [1968] 1 W.L.R. 74; [1968] 1 All E.R. 104, C.A.
The following additional cases were cited in argument:
Commissioner of Stamp Duties (Queensland v. Livingstone [1965] A.C. 694; [1964] 3 W.L.R. 963; [1964] 3 All E.R.
692, P.C.
[*1079]
English Sewing Cotton Co. Ltd. v. Inland Revenue Comrs. [1947] 1 All E.R. 679, C.A.
Lysaght v. Edwards (1876) 2 Ch.D. 499.
Marlay, In re. Duke of Rutland v. Bury [1915] 2 Ch. 264, C.A.
Pym v. Campbell (1856) 6 E. & B. 370.
Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. [1952] 2 Q.B. 297; [1952] 1 All E.R. 970, C.A.
No cases are referred to in the judgments of the Court of Appeal.
The following cases were cited in argument:
Birmingham, decd., In re [1959] Ch. 523; [1958] 3 W.L.R. 10; [1958] 2 All E.R. 397.
Dewar v. Inland Revenue Comrs. [1931] A.C. 566; 16 T.C. 84, H.L.(Sc.).
Holmleigh (Holdings) v. Inland Revenue Comrs. [1958] T.R. 403.
Phillipson-Stow's Special Representatives v. Inland Revenue Comrs. (1959) 38 A.T.C. 21; [1959] T.R. 23.
Sudeley v. Attorney-General [1897] A.C. 11, H.L.(E.).
CASE STATED by the special commissioners.
The relevant paragraphs are as follows:
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on February 14, 1966, and thence adjourned to February 15, 23 and 24, 1966, Wood Preservation Ltd. (hereinafter referred to as “the “taxpayers”), appealed against the undermentioned assessments to income tax namely
1960–61 paint dealers £3,806 less £20 capital allowances 1961–62 paint manufacturers £4,000 less £1,500 capital allowances 1962–63 paint manufacturers £4,509 less £1,162 capital allowances 1963–64 paint manufacturers £2,798 less £1,303 capital allowances 1963–64 balancing charge £933.
The grounds of the appeal were that under the provisions of the Income Tax Act, 1952, section 342, and
the Finance Act 1954, section 17, certain losses sustained by Silexine Paints Ltd. (hereinafter referred to
as “Silexine”), a company which at the relevant times owned not less than three-quarters of the share capital of the taxpayers, fell to be deducted from or set off against the amount of the profits or gains so assessed.
3. The following facts were admitted or proved.
(1) In the year 1957 Silexine was carrying on business as a manufacturer and dealer in paint and as a dealer in products for the preservation, cleansing and maintenance of wood and other floorings: inter alia products known by the names of Xylamon, Bourne Seal, Bourne Gleem and Glint were dealt in. Silexine handled all the retail sales of Bourne Seal and Bourne Gleem in the United Kingdom pursuant to an agreement entered into in 1956 with the manufacturers thereof, Floor Treatments Ltd., for a period of seven years. (2) In October, 1957, Silexine agreed to sell its factory and office premises for £27,500. In April, 1958, Silexine entered into an agreement with Denton Edwards & Co. Ltd., for the manufacture of Silexine's products and for the supply of paints and granted a licence to Denton Edwards & Co. Ltd., to use Silexine's formulae relating to stone paints and to deal in such paints. By June, 1958, the sale of Silexine's factory and other assets used in the former conduct of manufacture had been completed. Thence forward Silexine was engaged in dealing only in paint and associated products and not in manufacturing.
[*1080]
(3) By an agreement dated June 30, 1959, made between Silexine of the first part, the directors of Silexine of the second part, and Denton Edwards Paints Ltd., of the third part, Silexine agreed to sell to Denton Edwards Paints Ltd.: (A) the goodwill of Silexine's business so far as it related to the business of manufacturers and dealers in paint; (B) the exclusive right to use the name “Silexine,” the trade mark
“Silexine” and certain trade names; (C) all formulae and processes known to Silexine and relating to the said business for the sum of £5,000.
(4) By an agreement dated June 30, 1959, and made between Floor Treatments Ltd., of the one part and Silexine of the other part it was agreed that the marketing agreement, referred to in subparagraph (1) above, should be brought to an end. It was agreed that the marketing agreement should cease to have effect from September 1, 1959, and the obligations of the parties were mutually released. As consideration of the release by Silexine of their rights, Silexine was to be paid £11,676 18s. 6d. by instalments of
£3,300 a year from September 1, 1959, to March 14, 1963. (5) On June 30, 1959, Mr. Allbeury's service agreement [as managing director] with Silexine was terminated and on the same day he entered into a new service agreement with the taxpayers as managing director for a period of five years at a salary of not less than £750 per annum and commission. Mr. Allbeury agreed that he would not during his term of office without the written consent of the taxpayers' board of directors be directly or indirectly interested in any business similar wholly or in part to the business from time to time carried on by the taxpayers or calculated to compete therewith.
(6) By the Desowag agreement, dated July 1, 1959, and made between Desowag-Chemie G.m.b.H.,
Silexine and the taxpayers, expressed to be entered into for a period of five years, the taxpayers were to be
substituted for Silexine in respect of an agreement made in 1955, which was based on yearly periods, and
all Silexine's rights and duties were expressed to pass to the taxpayers. Desowag granted the taxpayers the
right of exclusive import and distribution of their wood preservation preparations manufactured at that
time and distributed under the marks Xylamon, Fluralsil. Pyromors and Xylacolor for the area of the
United Kingdom to be sold by the taxpayers in their own name and for their own account. It was a term of
this agreement (contained in article 6 (2) to which reference is made in the letter set out in paragraph 3 (9)
below) that the agreement might be dissolved by either contracting party for important reasons without
any preliminary notice. It was provided, further, that an important reason should mean any circumstance
which made it unreasonable to expect a party to continue the agreement until terminated by notice in the
ordinary way. A number of instances of “important reasons” were given in the agreement (the original of which had been in German), which included if the management of the taxpayers was not, or ceased to be, conducted by persons ensuring the requirements for the distribution of the products, the subject of the agreement.
(7) At all material times up to and including March 25, Silexine owned not less than three-quarters of the share capital of the taxpayers.
(8) In accounting periods up to and including May 9, 1960, Silexine incurred losses in carrying on its trade, in respect of which relief had not been obtained under the provisions of the Income Tax Act, 1952, section 342. On or about May 9, 1960, Silexine and the taxpayers executed the assignment which provided, inter alia, as follows:
“Whereas: [*1081]
(a) Since June 30, 1959, the company [the taxpayers] has carried on as agents for Silexine the exclusive import from Desowag-Chemie G.m.b.H. of Dusseldorf and the distribution in the United Kingdom of wood preservation preparations manufactured and distributed under the names of Xylamon, Fluralsil, Pyromors and Xylacolor (hereinafter called “the said preparations”).
(b) Silexine beneficially owns 6,999 of the ordinary shares of £1 each in the company [the taxpayers] out of a total issued share capital of 8,875 said shares.
(c) Silexine desires that the company [the taxpayers] should no longer carry on the trade of marketing the said preparations (hereinafter called “the said trade”), in the United Kingdom under the said agreement as agents for Silexine but shall hereafter be entitled to carry on the said trade for their own account.
Now therefore this deed made in consideration of the premises witnesseth as follows: Silexine hereby assigns: (a) All that the right title and benefit of Silexine of and in the goodwill of the said business. (b) The beneficial interest in the said trade. To hold the same unto the company [the taxpayers] absolutely.”
(9) On March 25, 1960, P. L. Burgin (hereinafter referred to as “Mr. Burgin”) the chairman of the British Ratin Co. Ltd. (hereinafter referred to as “British Ratin”) wrote to the directors of the taxpayers in the following terms, inter alia:
“We hereby offer to purchase the whole of the issued share capital of Wood Preservation Ltd., consisting of 8,875 fully paid ordinary shares of £1 each for the sum of 27s. per share.
“This offer is made on the following terms and subject to the following conditions: 1. That satisfactory evidence is produced to us to show that prior to completion Wood Preservation Ltd. is or has become the only person entitled to or interested in the rights granted by the German manufacturers of the wood preservative Xylamon for the sale of Xylamon in Great Britain and the Commonwealth. 2. That within one month from the date of the acceptance of this offer a letter is produced to us signed on behalf of Desowag-Chemie G.m.b.H.
confirming that they would not consider the purchase of the whole of the issued share capital of Wood Preservation Ltd. by the British Ratin Co. Ltd. as an ‘important reason’ entitling them to terminate the agreement made between themselves Silexine Paints Ltd. and Wood Preservation Ltd. and expressed to come into force as from July 1, 1959, pursuant to article 6 (2) thereof. 3. That Wood Preservation Ltd. has not entered into any undisclosed long term or abnormal contracts or undertaken any obligations whatsoever except such as are usual and necessary in the ordinary and proper course of its business and that until completion the said company will carry on business in the same manner as heretofore and will not otherwise than in the ordinary course of business enter into any contract or increase its unsecured liabilities or dispose of any of its assets or increase its secured liabilities or create any mortgage or charges or issue any shares or declare or pay any bonus or dividend. 4. That on completion all of the existing directors of the company other than Mr. T. E. Allbeury shall resign from their offices as such directors. 5. That completion shall take place within seven days from the production of the letter referred to in condition 2. 6. That this [*1082]
offer is accepted within seven days of today's date by one hundred per cent. of the registered proprietors of the issued share capital of the company.
“We should be obliged if you would communicate the terms of this offer to all the shareholders who are, we believe, the following persons in respect of the number of shares set opposite their names:
“For the sake of simplicity we enclose herewith three spare copies of this offer which can be accepted by completion of the certificate set out at the foot hereof.
“In conclusion we should inform you that if this deal goes through it is our intention that Wood Preservation Ltd. should offer to Mr.
Allbeury a service contract for a period of five years at £1,000 a year.”
The figure of 27s. per share in the first unnumbered paragraph and the words “Great Britain and the Commonwealth” in the first condition stated in the second paragraph of the letter, were subsequently altered to “28s. per share” and “the United Kingdom” respectively and the alterations initialled by Mr.
Burgin. At the foot of this letter was written the following statement:
“We Silexine Paints Ltd. hereby accept the above written offer dated March 25, 1960 made by the British Ratin Co. Ltd. to purchase from us our fully paid ordinary shares of £1 each in Wood Preservation Ltd. on the terms and subject to the conditions therein set out.”
This statement was signed over a sixpenny stamp by Mr. Allbeury, a director, for and on behalf of Silexine. Similar letters were extant in respect of the shares owned by Mr. Allbeury and Silexine Colours and Chemicals Ltd., bearing acceptances signed by or on their behalf respectively.
(10) On March 31, 1960, S. P. Pyke (hereinafter referred to as “Mr. Pyke”), one of the partners of Staddon, Pyke and Barnes of 58 Finsbury Pavement, London, E.C.2, the solicitors acting for Silexine, wrote to Mr. Burgin in the following terms, inter alia:
“Wood Preservation Ltd.
“As arranged on the telephone yesterday I enclose herewith qualified acceptances of British Ratin's offer, signed by the three shareholders of Wood Preservation Ltd.
“The qualified acceptance is of course the deletion of the words ‘and commonwealth’ from your offer, and the substitution of the words
‘United Kingdom’ for the words ‘Great Britain’ as the actual territory; this conforms with the wording of the agreement with Desowag- Chemie G.m.b.H.
“I confirm however your having stated that in fact such amendment is accepted, and that you will let me have a formal confirmation thereof from British Ratin Ltd.
“No doubt you will let me know in due course how you wish to deal in the accounts of the two companies with the Silexine stock which we discussed on the telephone as also as to the form of determination of the Wood Preservation company Ltd.'s agency.”
[*1083]
(11) On April 1, 1960, Mr. Burgin wrote to Mr. Pyke in the following terms, inter alia:
“Wood Preservation Ltd.
“Thank you for your letter of March 31. I confirm your understanding therein contained and enclose herewith a formal letter from me as chairman of the British Ratin Co. Ltd. addressed to the three acceptors of British Ratin's offer confirming the alteration in paragraph 1 of that offer. For your information I have in fact also initialled the alteration in the documents returned to me.
“As to the last paragraph of your letter I have already asked Mr. Carr of Sturges, Fraser, Cave & Co. to get in touch with Mr. Snelling and discuss these matters.”
(12) On April 1, 1960, Mr. Burgin wrote to Silexine, Mr. Allbeury and Silexine Colours and Chemicals Ltd., in the following terms, inter alia:
“I write to acknowledge receipt of your acceptance of the offer contained in my letter of March 25, addressed to the directors of Wood Preservation Ltd. and to confirm that I agree and accept your deletion of the words contained in paragraph 1, namely ‘Great Britain and Commonwealth’ and the substitution therefor of the words ‘the United Kingdom’.”
(13) On April 27, 1960, Mr. Burgin wrote to W. H. Westphal of British Ratin in the following terms, inter alia:
“Wood Preservation Ltd.
“I had a long talk with Pyke again today. He is seeing Wood Preservation's accountants on Friday and will at that time discuss the question of the formal assignment of the Xylamon business from Silexine Paints to Wood Preservation.
“As I told you over the telephone the other day, it is quite vital to the case for taking advantage of the tax losses that that assignment is made before the letter from Desowag for which I have asked is produced. Pyke understands the position quite clearly and hopes to have the assignment completed by Tueday of next week.
“I just felt you should have a note of the position for the record.”
(14) On May 10, 1960, Mr. Pyke wrote to Mr. Burgin in the following terms, inter alia:
“I am pleased to tell you that Silexine Paints Ltd. held its board meeting yesterday, at which the assignment of Wood Preservation Ltd.
was executed in the form which we have discussed and agreed on the telephone.
“I accordingly now return your draft amended and completed in the form in which it has finally been executed. It has also been stamped today.
“I also enclose a draft of the minutes of the board meeting, dealing with the various other matters including the sale of Silexine Paints Ltd.'s stocks of Xylamon advertising material and packing material.
“I understand from Mr. Allbeury that he is experiencing a certain amount of difficulty inducing Messrs. Desowag to give the letter, which Silexine Paints will require to obtain under the terms of the agreement for the sale of the shares, and which is a condition precedent [*1084]
to such contract becoming binding. However, I will communicate with you further about this matter in the course of a few days.”
(15) On May 18, 1960, Mr. Burgin wrote to Mr. Pyke in the following terms, inter alia:
“I now learn that it will be possible for British Ratin to make satisfactory arrangements direct with Messrs. Desowag. I am, therefore, instructed by British Ratin that they can now withdraw condition 2 set out in their letter of offer of March 25. In these circumstances the contract between the two companies has now become unconditional. No doubt you will let me know on what date it would be convenient for you for completion to take place.”
(16) On June 9, 1960, Mr. Burgin wrote to Mr. Pyke in the following terms, inter alia:
“I am enclosing herewith the relevant share transfers in the form that we would like. If you would be kind enough to have them executed by your clients and returned to me as quickly as possible I will undertake to hold them in escrow pending completion. The reason for my request is so that they can be executed by the transferees and stamped before completion takes place on Tuesday next so that the retiring directors can approve and pass these transfers before they in fact retire.”
The share transfers referred to in the said letter were duly executed on June 14, 1960.
4. It was contended on behalf of the taxpayers: (i) that the offer by British Ratin to purchase the shares of the taxpayers, beneficially owned by Silexine, contained in the letter of March 25, 1960, hereinbefore referred to, was a conditional offer subject to the express conditions therein stated and in particular to condition 2, and that such offer did not become unconditional until the withdrawal of the said condition 2 by British Ratin on May 18, 1960; (ii) that at the date of the assignment, May 9, 1960, not less than three- quarters of the shares of the taxpayers remained in the beneficial ownership of Silexine; (iii) that losses incurred by Silexine prior to the date of the assignment fell to be deducted from or set off against the profits or gains of the taxpayer as successor to the trade or business formerly carried on by Silexine under the provisions of Income Tax Act, 1952, section 342, and Finance Act, 1954, section 17; (iv) that the appeal should be allowed and the assessments adjusted accordingly.
5. It was contended on behalf of the Crown: (i) that on or about April 1, 1960, Silexine entered into a binding contract to sell to British Ratin the shares of the taxpayers beneficially owned by it; (ii) that at the date of the assignment, none of the shares of the taxpayers remained in the beneficial ownership of Silexine; (iii) that losses incurred by Silexine, prior to the assignment of its trade or business, did not fall to be deducted from or set off against the profits or gains of the taxpayers under the provisions of the Income Tax Act, 1952, section 342, and the Finance Act, 1954, section 17; (iv) that the appeal should be dismissed.
6. The commissioners who heard the appeal, gave their decision in principle on June 14, 1966, in the following terms:
“This is an appeal by Wood Preservation Ltd. (hereinafter referred to as ‘the taxpayers’) against the under-mentioned assessments:
[*1085]
1960–61 paint dealer £3,806 less £20 capital allowances 1961–62 paint manufacturer £4,000 less £1,500 capital allowances 1962–63 paint manufacturer £4,509 less £1,162 capital allowances 1963–64 paint manufacturer £2,798 less £1,303 capital allowances 1963–64 balancing charge £933.
The grounds of the appeal are that under the provisions of the Income Tax Act, 1952, section 342, and Finance Act, 1954, section 17 certain losses sustained by the Silexine Paints Ltd. (hereinafter referred to as ‘Silexine’) a company which at the relevant times owned not less than three-quarters of the share capital of the taxpayers, fell to be deducted from or set off against the amount of profits or gains so assessed.
[2. Paragraph 2 is not relevant to this report.]
3. The second question which arises is whether or not Silexine retained its interest amounting to not less than three-quarters of the equity of the taxpayers until May 9, 1960, or whether the beneficial interest had passed to the British Ratin Co. Ltd. (hereinafter referred to as ‘British Ratin’) by virtue of a contract made on or about April 1, 1960, for the sale by Silexine to British Ratin of the whole of its interest. The said contract is said to be contained in letters dated March 25, 1960, March 31, 1960, and April 1, 1960, which passed between Silexine and British Ratin and the question is whether there was a binding contract under which the shares owned by Silexine were transferred to British Ratin or whether the letters merely set out certain proposals which remained executory until at any rate May 9, 1960. In our opinion upon consideration of the evidence adduced and the arguments addressed to us on behalf of the parties and the cases cited to us namely: Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. [1952] 2 Q.B. 297; Pym v. Campbell, 6 E. & B. 370;
Parway Estates Ltd. v. Inland Revenue Commissioners, Sergeant on Stamp Duties (1963) 4th ed., p. 428 and In re Marlay, Duke of Rutland v. Bury [1915] 2 Ch. 264, there was a binding contract between Silexene and British Ratin entered into on or about April 1, 1960, whereby the whole of the interest of Silexine in the taxpayers was transferred to British Ratin. The appeal therefore fails.
4. [The commissioners then adjourned the appeal for the agreement of figures].”
7. On October 20, 1966, the amounts of the assessments having been agreed between the parties on the
basis of our decision in principle set forth above, the commissioners determined the appeal as follows:
The taxpayers appealed.
[*1086]
H. H. Monroe Q.C. and Maurice Drake for the taxpayers.
E. I. Goulding Q.C., J. Raymond Phillips and J. P. Warner for the Crown.
GOFF J. This case arises under section 17 of the Finance Act, 1954, but here there is no dispute what the parties agreed, but only as to its effect in law.
Silexine Paints Ltd. were United Kingdom distributing agents of a German company called Desowag, who manufacture wood preservation products, and by an agreement dated July 1, 1959, their subsidiary, the taxpayers were substituted for them by article 6 (2). That agreement, which was to be governed by German law, was made terminable by Desowag without notice in certain events. That article reads as follows:
“The agreement may furthermore be dissolved by either contracting party for important reason without any preliminary notice (extraordinary termination). An important reason shall mean any circumstance which makes it unreasonable to expect a party to continue the agreement until it is terminated by notice in the ordinary way. Important reasons for extraordinary notice of termination of the agreement by Desowag shall be, for instance: (e) If the management of the contractual dealers is not or ceases to be conducted by persons ensuring the requirements for the distribution of the contract products.”
The special commissioners found, at paragraph 3 (7), that:
“At all material times up to and including March 25, 1960, Silexine owned not less than three-quarters of the share capital of the taxpayers,”
and in paragraph 3 (8) that:
“In accounting periods up to and including May 9, 1960, Silexine incurred losses in carrying on its trade, in respect of which relief had not been obtained under the provisions of the Income Tax Act, 1952, section 342. On or about May 9, 1960, Silexine and the taxpayers executed the assignment which provided, inter alia as follows,”
and then they set out all or most of the assignment whereby the parent company, Silexine assigned to the taxpayers:
“(a) All that the right title and benefit of Silexine of and in the goodwill of the said business. (b) The beneficial interest in the said trade.
To hold the same unto the company absolutely.”
The question is whether the taxpayers are entitled to set off the losses incurred by Silexine against future profits, and it arises because Silexine also parted with its shares in the following circumstances. Paragraph 3 (9) of the case:
“On March 25, 1960, P. L. Burgin (hereinafter referred to as ‘Mr. Burgin’), the chairman of the British Ratin Co. Ltd. (hereinafter referred to as ‘British Ratin’), wrote to the directors of the taxpayers in the following terms, inter alia: ‘We hereby offer to purchase the whole of the issued share capital of Wood Preservation Ltd., consisting of 8,875 fully paid ordinary shares of £1 each, for the sum of 27s. per share. [*1087]
“‘This offer is made on the following terms and subject to the following conditions:
1. That satisfactory evidence is produced to us to show that prior to completion Wood Preservation Ltd. is or has become the only
person entitled to or interested in the rights granted by the German manufacturers of the wood preservative Xylamon for the sale of Xylamon in Great Britain and the Commonwealth.
2. That within one month from the date of the acceptance of this offer a letter is produced to us signed on behalf of Desowag-Chemie G.m.b.H. confirming that they would not consider the purchase of the whole of the issued share capital of Wood Preservation Ltd. by the British Ratin Co. Ltd. as an “important reason” entitling them to terminate the agreement made between themselves Silexine Paints Ltd. and Wood Preservation Ltd. and expressed to come into force as from July 1, 1959, pursuant to article 6 (2) thereof.’”
Paragraph 3 dealt with the usual type of warranty as to long-term commitments and so forth, and provided further that:
“Until completion the said company,” that is, Wood Preservation Ltd., “will carry on business in the same manner as heretofore and will not otherwise than in the ordinary course of business enter into any contract,”
and other matters. Paragraph 4 dealt with the resignation of the directors on completion. Paragraph 5 stated that completion shall take place within seven days from the production of the letter referred to in condition 2. Paragraph 6 stated a further condition:
“That this offer is accepted within seven days of today's date by 100 per cent. of the registered proprietors of the issued share capital of the company.”
The letter continued:
“We should be obliged if you would communicate the terms of this offer to all the shareholders who are, we believe, the following persons in respect of the number of shares set opposite their names: T. E. L. Allbeury — 1,876; Silexine Paints Ltd. — 6,998; Silexine Colours and Chemicals Ltd. — 1.
“For the sake of simplicity we enclose herewith three spare copies of this offer which can be accepted by completion of the certificate set out at the foot hereof.”
By agreement between the parties the figure of 27s. per share was subsequently altered to 28s. , and the area was confined to the United Kingdom, but nothing turns on that. At the foot of the letter which I have read was the following statement:
“We Silexine Paints Ltd. hereby accept the above written offer dated March 25, 1960, made by the British Ratin Co. Ltd. to purchase from us our fully paid ordinary shares of £1 each in Wood Preservation Ltd. on the terms and subject to the conditions therein set out.”
The special commissioners' finding was that:
“This statement was signed over a sixpenny stamp by Mr. Allbeury, a director, for and on behalf of Silexine. [*1088]
“Similar letters were extant in respect of the shares owned by Mr. Allbeury and Silexine Colours and Chemicals Ltd. bearing acceptances signed by or on their behalf respectively.”
Paragraph 3 (10) of the case states:
“On March 31, 1960, S. P. Pyke (hereinafter referred to as ‘Mr. Pyke’), one of the partners of Staddon, Pyke and Barnes of 58 Finsbury Pavement, London, E.C.2, the solicitors acting for Silexine, wrote to Mr.
Burgin in the following terms, inter alia:
“‘As arranged on the telephone yesterday I enclose herewith qualified acceptances of British Ratin's offer, signed by the three shareholders of Wood Preservation Ltd.’”
They were qualified only in respect of the area and that qualification was accepted by British Ratin and is irrelevant for present purposes.
Paragraph 3 (13):
“On April 27, 1960, Mr. Burgin wrote to W. H. Westphal of British Ratin in the following terms, inter alia: ‘I had a long talk with Pyke again today. He is seeing Wood Preservation's accountants on Friday and will at that time discuss the question of the formal assignment of the Xylamon business from Silexine Paints to Wood Preservation.’”
That, of course, is an internal memorandum, but it does refer to talks with Mr. Pyke. The significance of it is that it is within the month allowed for obtaining the letter from Desowag and shows that the parties still contemplated proceeding with their contract. The second paragraph of that letter states:
“As I told you over the telephone the other day, it is quite vital to the case for taking advantage of the tax losses that that assignment is made before the letter from Desowag for which I have asked is produced.”
On May 10, 1960, Mr. Pyke wrote to Mr. Burgin telling him that Silexine Paints Ltd. had executed the assignment to Wood Preservation Ltd., and said:
“I understand from Mr. Allbeury that he is experiencing a certain amount of difficulty inducing Messrs. Desowag to give the letter which Silexine Paints will require to obtain under the terms of the agreement for the sale of the shares, and which is a condition precedent to such contract becoming binding. However, I will communicate with you further about this matter in the course of a few days.”
In fact no such letter was forthcoming and on May 18, 1960, Mr. Burgin wrote to Mr. Pyke in the following terms, inter alia:
“I now learn that it will be possible for British Ratin to make satisfactory arrangements direct with Messrs. Desowag. I am, therefore, instructed by British Ratin that they can now withdraw condition 2 set out in their letter of offer of March 25. In these circumstances the contract between the two companies has now become unconditional. No doubt you will let me know on what date it would be convenient for you for completion to take place.”
It will be seen that the offer to purchase was accepted on March 31, or possibly April 1, when Mr. Burgin accepted the qualifications, but it was [*1089]
conditional in some sense under paragraph 2 of the terms and conditions. The “month” described in that paragraph expired before the transfer of the business and Mr. Burgin's letter waiving, or purporting to waive, the condition was after the transfer of the business, as, indeed, was the actual transfer of the shares.
It has been suggested that whatever view one takes of the position during the month, as the letter was not obtained within the specified period, nor was the requirement waived in that time, the whole agreement came to an end at the expiration of a month, in which case clearly at the date of the transfer on May 9, the beneficial ownership of the shares could not have passed from Wood Preservation Ltd. to the purchasers, or if it had, it would have been revested in it.
There is some authority for that view in In re Sandwell Park Colliery Co. [1929] 1 Ch. 277and also
Aberfoyle Plantations Ltd. v. Khaw Bian Cheng [1960] A.C. 115, though the actual point there was not
precisely whether the contract automatically came to an end, but whether the condition not having been
fulfilled in due time, the vendors could enforce the contract against a purchaser who had refuted it. I do
not think, however, it is necessary for me to resolve that point because I am satisfied that the proper
inference from Mr. Burgin's letter to Mr. Westphal and the subsequent conduct of the parties was that they
agreed during the month to extend the time or that they made a new agreement to continue the conditional
arrangements between them and even if that be not the true view that they made such new agreement
before May 9, so that the conditional arrangements were subsisting at the material date. It is necessary to consider, however, whether those conditional arrangements were such as to cause Silexine forthwith to cease to be the beneficial owner of the shares in Wood Preservation Ltd. or whether they continued as the owners down to and after the transfer of the business, and that depends upon the true construction and legal effect of the offer and acceptance.
The commissioner' gave their decision in principle in the following terms:
“3. The second question which arises is whether or not Silexine retained its interest amounting to not less than three-quarters of the equity of the taxpayers until May 9, 1960, or whether the beneficial interest had passed to the British Ratin Co. Ltd. (hereinafter referred to as ‘British Ratin’) by virtue of a contract made on or about April 1, 1960, for the sale by Silexine to British Ratin of the whole of its interest. The said contract is said to be contained in letters dated March 25, 1960, March 31, 1960, and April 1, 1960, which passed between Silexine and British Ratin and the question is whether there was a binding contract under which the shares owned by Silexine were transferred to British Ratin or whether the letters merely set out certain proposals which remained executory until at any rate May 9, 1960. In our opinion upon consideration of the evidence adduced and the arguments addressed to us on behalf of the parties and the cases cited,”
and they then set out the cases,
“there was a binding contract between Silexine and British Ratin entered into on or about April 1, 1960, whereby the whole of the interest of Silexine in the taxpayers was transferred to British Ratin. The appeal therefore fails.”
[*1090]
Wood Preservation Ltd., now appeal from that decision, and Mr. Monroe on their behalf says that the sale under the agreement was subject to a condition precedent and therefore the beneficial ownership did not pass out of the taxpayers' hand until the condition was waived. He has classified the possible situations under four heads. The first is where the arrangement between the parties, which would otherwise be a contract, is subject to a condition precedent to the making of any agreement at all. I do not think he suggests that the present case falls within that category, but in any case, in my judgment, it clearly could not be so construed, as the terms of the offer imposed obligations upon Wood Preservation Ltd., which would be operative as from the making of the conditional agreement and not merely from the performance of the condition.
I refer to the express contract in clause 3 that they will carry on business in the same manner as heretofore and not enter into particular contracts and so forth, and also what I think is necessarily implied in this contract, an obligation on their part to use their best endeavours to obtain the desired letter from Desowag.
The second class of case is where there is a contract under which one party assumes a unilateral obligation to purchase from another in a certain event, and there is no obligation on the other to bring that event about. In that class of case there is a contract from the start imposing a unilateral obligation, but no bilateral obligation arises and no contract of sale until the condition has been discharged. That type of case covers options and analogous agreements.
His third class is where you have a bilateral contract of sale subject to a condition precedent with an immediate obligation on one of the parties to perform the condition or to use his best endeavours to perform it. There he says there is an immediate obligation, but the bilateral obligations of the contract of sale are nonetheless subject to a condition precedent, and there is no sale until the condition is performed.
His fourth class is where you have an immediate contract of sale but on the basis or term that one of the parties, say the vendors, would obtain some particular information or assurance or something of that sort.
In such a case the contract of sale is immediate — it is not subject to a condition precedent — but if the
vendor fails to discharge his obligation he will not be liable in damages for the breach, and if the breach
goes to the root of the contract, then the purchaser may be discharged from further performance, but the contract of sale is nonetheless immediate and not subject to any condition precedent.
I think that classification is justified by the most careful and detailed analysis which was undertaken by Diplock L.J. in United Dominions Trust (Commercial) Ltd. v. Eagle Aircraft Services Ltd. [1968] 1 W.L.R. 74, 82. Mr. Monroe concedes that if the case falls within his fourth class, then the decision of the special commissioners was right. He submits, however, that the present case falls within the second class, and even if it be a class three case the sale was conditional, therefore, the property could not pass at the earliest until Mr. Burgin, on behalf of British Ratin, waived the condition on May 18, 1960.
Mr. Goulding, I think, really denied the existence of any distinction between the third and fourth classes which, in my judgment, I cannot accept, as I think there is, a distinction, but he submitted that the true test is: has the vendor been deprived of the right to dispose of his shares for his own benefit and has that right passed to the purchaser? He says that in the present case the answer to both questions is in the affirmative.
I [*1091]
am satisfied that this is not a mere option case, but I do not think that that test is the right one, because in the case of an option or a right of pre-emption the vendor does deprive himself of the right to deal with the property for his own benefit. It is true that he can assign the property subject to the option or right of pre- emption, but he cannot ignore it and take a better offer. Alternatively, Mr. Goulding says that the answer to the question whether the vendor has ceased to be the beneficial owner depends on the right of the purchaser to specific performance. He says in this case the purchaser could claim specific performance notwithstanding the condition. He relies in support of that argument upon Long v. Bowring (1864) 33 Beav. 585, where there was an agreement to grant an underlease subject to the lessor's consent, with the provision that if the landlord should refuse to grant a licence, or in case a licence should not be obtained on or before a certain date, then the grantor would pay to the grantee the sum of £1,000, a sum which was thereby mutually agreed should be the damages assigned and fixed by them for not obtaining such licence.
The grantor tried to avail himself of that clause to get out of the contract and he refused to seek the consent of the landlord. Thereupon the grantee brought an action for specific performance and succeeded.
It may be that in such a case, that is, a contract for sale of a leasehold property, or the granting of a lease, subject to the landlord's consent, the property does pass in equity immediately on the making of the contract. But I am not satisfied that that is so, and in any case in Long v. Bowring the object of the order for specific performance was to compel the grantor to take the necessary steps to obtain the licence, and if he could do so, then there would be an order directing a conveyance and that was, as I understand it, included in the order from the outset, but if he could not get it, then, of course, the order would have to be discharged or varied. The order could not give the plaintiff an unqualified right to a conveyance.
Mr. Goulding also says that this was a condition exclusively for the benefit of the purchasers which they
could waive. Mr. Monroe counters that by saying that his clients might also want protection from it,
because Desowag might say, “If you assign your shares you will be liable to us in damages,” and it has to
be remembered that the agreement was governed by German law. I think, however, that answer is really a
fanciful one, since it is quite clear that by the agreement of July 1, 1959, Wood Preservation Ltd. were
substituted for Silexine Paints Ltd., who, apart from remaining liable for certain debts until they were paid
off, fell out of the matter, and I cannot see how Silexine could possibly be exposed to any liability in
damages for assigning their shares. Desowag might quite possibly say that that was an important reason
within article 6 (2) of the agreement, and of course British Ratin wanted to be sure that they would not,
but I cannot see that Silexine would require any protection in the matter at all. I think, however, that that
is closely bound up with the remedy of specific performance. The real test where the vendor has entered
into a contract for the sale of his shares, which is not absolute and immediate, is whether the property in
the shares has passed at any rate in equity to the purchaser.
In the present case, as I construe the agreement, although the whole contract was not subject to a condition precedent, the obligation to buy and sell the shares was. Therefore, as it seems to me, prima facie, the property in the shares would not pass to the purchasers until the condition was performed. The two cases as to the effect of non-performance of the condition, to which I have already referred, clearly emphasise the difference [*1092]
between an immediate agreement for sale and an agreement for sale subject to a condition precedent. Thus in In re Sandwell Park Colliery Co. [1929] 1 Ch. 277, at p. 282, Maugham J. said:
“Courts of equity, in dealing with actions for specific performance relating to land, have been accustomed to give effect to the real intention rather than to the precise words fixing the date for completion. The effect is that a clause fixing the date for completion is equivalent to a clause stating that completion shall be on that date or within a reasonable time thereafter. But there is no ground for a similar construction in the case of a condition upon which the validity of the contract as one sale depends. The distinction is obvious.”
Again, in the Aberfoyle case [1960] A.C. 115Lord Jenkins said, after citing In re Sandwell Park Colliery Co. and Smith v. Butler, at p. 126:
“Before parting with these two authorities their Lordships would observe that the reason for taking the date fixed for completion by a conditional contract of sale as the date by which the condition is to be fulfilled appears to their Lordships to be that until the condition is fulfilled there is no contract of sale to be completed, and accordingly, that by fixing a date for completion the parties must by implication be regarded as having agreed that the contract must have become absolute through performance of the condition by that date at latest.”
I think assistance is also derived from Curtis and William (Africa) Ltd. v. E. G. Maas [1957] 2 Lloyd's Rep. 223, which is a case of a series of purchasers in which one of them required satisfactory evidence of the existence of the steel, not only to satisfy himself but also to satisfy the buyer from him, and the proviso was, at p. 225: “provided you give us proof of existence which is satisfactory to our buyers.”
Pearson J. said on that, at p. 227:
“I think the effect of those words in this, that if there had been an immediate unqualified acceptance on the other side, those words would have formed a condition precedent to the other obligations under the contract. I think the effect of those words would have been, taking it in order, first that there would be an obligation on the plaintiff company to provide proof of existence, and then there would be an implied obligation on the defendant to take the steps for submitting it to his buyers and obtaining their expression of satisfaction. But, unless and until the expression of satisfaction was obtained from the defendant's buyers, then the rest of the contract would not have to be carried out. It would be a condition precedent to the need for fulfilling the rest of the contract.”
I would refer finally to Parway Estates Ltd. v. Inland Revenue Commissioners, which is fully reported in Sergeant on Stamp Duties, 4th ed. (1963), p. 428. That case was a class four case because though the vendor was subject to certain obligations there was no condition affecting the sale. Jenkins L.J., giving the decision of the Court of Appeal alluded clearly to the distinction where he said, at p. 435:
“But, says Mr. Pennycuick, this is not an unconditional contract for sale: before the obligations of the parties, on the one hand to sell and on the other hand to buy, becomes effective, there are in the provisions of this agreement certain obligations imposed on the vendors which they must first perform; and it is said that those obligations [*1093]
are imposed by paragraphs 4 and 5. Mr. Pennycuick puts these obligations as conditions which have to be fulfilled before there is a contract for sale and purchase which can have the effect of transferring the beneficial interest.
“I must refer again to those two paragraphs. The first of them reads:
‘The vendors will on or before the date hereinbefore fixed for completion procure the purchase from the company at the vendors expense of all the assets of the company as detailed in the Schedule hereto at a price to be calculated in accordance with the principle as to calculation set out in the said Schedule and to be paid by means of an equivalent reduction in the amount of the indebtedness shown to be due from the company to the vendor.’
The other reads:
‘5. The vendors will on or before the date hereinbefore fixed for completion procure the discharge by the company of all liabilities due by the company whatsoever’
- and that is developed in detail by referring to mortgages, debentures and so forth. Mr. Pennycuick says that these are in the nature of conditions with the result I have mentioned. Of course I think it is really reasonably plain that, if one has a contract of sale and purchase which is expressed to be conditional on the happening of some event, the procuring of some consent or something of that sort, the contract for sale and purchase is in abeyance until such time as the condition is fulfilled, though it may well be that there might be a repudiation even before the condition was fulfilled if one of the parties announced they were never going to perform the contract whether the condition was fulfilled or not. But that is not, as I understand it, this case. I cannot see that either of these paragraphs are conditions precedent.
“Mr. Pennycuick referred us to a passage cited in the judgment of the learned judge from the speech of Lord Atkinson in De Beers Consolidated Mines Ltd. v. British South Africa Co. [1912] A.C. 52, 65–66:
‘Much reliance was placed by counsel for the company in argument on the application to the agreement of December 7, 1892, and especially to its first paragraph, of the well-known doctrine of courts of equity, that in equity everything should be taken to be done which ought to be done. That doctrine cannot, in its application to contracts, however, be permitted to turn the conditional into the absolute, the optional into the obligatory, or to make for the parties contracts different from those they have made for themselves. What a party to a contract ought to do, within the true meaning of this doctrine, is what he has contracted to do, and nothing more and nothing less is to be taken, in equity, to be done.’
“Mr. Pennycuick says that there is no room here for the application of the doctrine of conversion or, in other words, the maxim that equity looks on that as done which ought to be done so long as the vendors' obligations set out in paragraphs 4 and 5 of the agreement remained unperformed. As I understood it, he admitted that the purchaser might, if so minded, enforce the contract while the vendors [*1094]
were still in default under paragraphs 4 and 5, but said that the vendors on their side could not enforce it until they performed their part of the bargain, and adduced from the vendors' inability to enforce it until then that the doctrine of conversion could not apply. I do not altogether follow that argument. It appears to me that for the present purpose the material matter is the position of the purchaser. If the purchaser has a contract for the purchase by himself of shares which he can enforce against the legal owner of those shares I should have thought one is coming near to saying that the vendors have become trustees of the shares for the purchaser on the strength of the purchaser's right to call for specific performance.”
Later at the conclusion of his judgment Jenkins L.J. said, at p. 437:
“For my part, I prefer to found myself on the ground that there is nothing in this agreement to take the case out of the general rule under which there is no doubt that the equitable interest in the shares became vested in the purchaser when the agreement of January 12, 1956, was signed.”
It appears to me to follow quite clearly from that authority that ordinarily where the mutual obligation of
sale and purchase is subject to a condition precedent the property does not pass so long as the condition
remains unperformed, but in the present case I have to consider whether it makes any difference that this
was a condition, as I find, solely for the benefit of the purchaser and which he could, therefore, waive. In a
sense, therefore, he had a contract of which he could obtain specific performance by, at any time, waiving
the condition, but on the other hand he had expressly provided that he would buy the shares subject to the
condition of the letter which he needed being produced to him. Mr. Monroe says, “Well, he could have
waived, and if he did waive it the property would then pass to him,” but unless and until he waived it, it
would not. That, I think is not an entirely easy matter to decide, but on the whole I have come to the
conclusion that as the matter of waiving the condition rested entirely with the purchaser, he could at any
time require specific performance of the contract, and therefore to use the words of Jenkins L.J. in the
Parway case
“one is coming near to saying that the vendors have become trustees of the shares for the purchaser on the strength of the purchaser's right to call for specific performance.”
On the whole, therefore, I have come to the conclusion that under this contract the beneficial interest had sufficiently passed to the purchaser and that the conclusion of the special commissioners was right.
Appeal dismissed with costs.
The taxpayers appealed.
Solicitors: Denton, Hall & Burgin; Solicitor of Inland Revenue.
[Reported by ANGUS NICOL ESQ., Barrister-at-Law.]
1 Finance Act, 1954, s. 17: “(1) A trade carried on by a company … shall not be treated for any of the purposes of the Income Tax Acts as permanently discontinued, nor a new trade as set up and commenced, by reason of a change in the year 1954–55 or any subsequent year of assessment in the persons engaged in carrying on the trade, if the company is the person or one of the persons so engaged immediately before the change and on or at any time within two years after the change the trade or an interest amounting to not less than a three-fourths share in it belongs to the same persons as the trade or such an interest belonged to at some time within a year before the change …. (3) If a trade is permanently discontinued, but on the discontinuance the activities of the trade or part of them are carried on by some person as his trade or as part of his trade, — (a ) the foregoing subsections shall apply in relation to any change in the persons engaged in carrying on the first- mentioned trade as if the two trades were the same trade, and (b ) the two trades shall be treated for all the purposes of the Income Tax Acts as if they were the same trade and as if, instead of the discontinuance, there had been a change in the persons engaged in carrying on that trade, where the effect of so treating them is that either of the foregoing subsections applies to prevent the change being treated as a discontinuance: … (4) For the purposes of this section — … (c ) a trade or interest therein belonging to a company shall, where the result of so doing is that the conditions for subsection (1) or subsection (2) of this section to apply to a change are satisfied, be treated in any of the ways permitted by the next following subsection. (5) For the purposes of this section, a trade or interest therein which belongs to a company engaged in carrying it on may be regarded — (a ) as belonging to the persons owning the ordinary share capital of the company and as belonging to them in proportion to the amount of their holdings of that capital, or (b ) in the case of a company which is a subsidiary company, as belonging to a company which is its parent company, or as belonging to the persons owning the ordinary share capital of that parent company, and as belonging to them in proportion to the amount of their holdings of that capital, and any ordinary share capital owned by a company may, if any person or body of persons has the power to secure by means of the holding of shares or the possession of voting power in or in relation to any company, or by virtue of any power conferred by the articles of association or other document regulating any company, that the affairs of the company owning the share capital are conducted in accordance with his or their wishes, be regarded as owned by the person or body of persons having that power. (6) For the purposes of the last foregoing subsection — (a) references to ownership shall be construed as references to beneficial ownership, and the expression “ordinary share capital” in relation to a company means all the issued share capital (by whatever name called) of the company, other than capital the holders whereof have a right to a dividend at a fixed rate or at a rate fluctuating in accordance with the standard rate of income tax, but have no other right to share in the profits of the company; …”