England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
His Honour Judge Chambers QC
2010 Folio 754

		Royal Courts of Justice Strand, London, WC2A 2LL
		25th April 2012

Lord Justice Patten :

1. This is an appeal by Brightsea UK Limited ("Brightsea") against an order of HH Judge Chambers QC (sitting as a judge of the Commercial Court) dated 1^st July 2011. The principal issue on the appeal is a question of construction relating to a bespoke Tax Deed dated 5^th September 2007 that was entered into between the respondent, Drachs Investments No. 3 Limited ("Drachs No. 3"), and Brightsea as part of the arrangements for the sale to Brightsea of the entire issued share capital of Drachs Investments Limited ("Drachs") and Drachs Investments No. 2 Limited ("Drachs No. 2"). As a result of the sale, Brightsea acquired some 18 subsidiary companies of Drachs and Drachs No. 2, all of which had substantial property holdings. They included Evans of Leeds Limited (which changed its name to Brightsea (EOL) Limited) and Mulgate Investments Limited ("Mulgate").
2. All the sold companies formed part of what was known as the Evans Property Group, of which Drachs No. 3 was the parent company, but the sale did not include all the companies within the group. A number were retained by Drachs No. 3, including Astra House Limited ("Astra").
3. The sold companies were transferred at their net asset value ("NAV") for a consideration of £212,676,207 by reference to a consolidated balance sheet ("the CBS") which included provision for liability to corporation tax in the sum of £632,622. Schedule 10 of the Sale and Purchase Agreement ("SPA") contained detailed provisions governing the preparation of this document including the calculation of corporation tax. Drachs No. 3 (and its co-vendor Equity Trust (Jersey) Limited) also gave warranties in paragraph 9 of Schedule 7 to the SPA about the tax position of the sold companies. These included (in paragraph 9.6) a warranty that the sold companies were under no obligation to make nor had any entitlement to recover any payment for group relief other than as disclosed in the CBS: see paragraph 9.6.
4. It was, however, a term of the SPA (see Schedule 9) that the parties should on completion execute and deliver a Tax Deed and it is this document which has given rise to the current dispute. A sale of only part of the group meant inevitably that some provision had to be made to deal with the outstanding tax affairs of the sold companies for which Drachs No. 3 could in some circumstances be personally liable. Clause 9 of the Tax Deed therefore provided that:

"The provisions of Schedule 2 shall have effect in relation to the conduct after Completion of the tax affairs of the Group Companies."

5. Group Companies in the Tax Deed mean the sold companies but, to avoid confusion, I shall refer to the sold and retained companies in this judgment in those terms.
6. Paragraph 1 of Schedule 2 provides that:

"1.1 The Purchaser shall cause the Group Companies to procure, that:

(a) Deloittes (or such other reputable firm of accountants or tax advisers as the Covenantors may select) shall have the sole conduct of the Covenantors' Conduct Matters;

(b) the Covenantors (or their advisers) shall be provided promptly with any information received by the Purchaser or a Group Company, or of which the Purchaser or any Group Company otherwise becomes aware, which may be relevant to the Covenantors' Conduct Matters, and with such reasonable assistance (including assistance from employees of the Purchaser and the relevant Group Company) and access to such documents and records of, or relating to, the relevant Group Company, as the Covenantors (or their advisers) may reasonably require in connection with the Covenantors' Conduct Matters;

(c) the Group Companies shall, as soon as reasonably practicable and ensuring that they act in time to meet any relevant time limits (statutory or imposed by the provisions of this deed), authorise, sign and submit to the relevant Taxation Authority the finalised returns and other ancillary information, accounts, statements and reports relating to a Relevant Period and make such claims and elections and give such consents and comply with all procedural requirements in respect of the making or giving of such returns, ancillary information, accounts, statements and reports or such claims, elections or consents as the Covenantors, (or their advisors) may, in their absolute discretion, direct in writing.

(d) each Group Company shall appoint Deloittes or such reputable firm of accountants or tax advisers as the Covenantors shall direct from time to time to act as agent for that Group Company to deal with the Covenantors' Conduct Matters and shall notify the relevant Tax Authority of such appointment;

(e) no Group Company shall do any act or thing (including, in particular, the carry back of losses from accounting periods ending after Completion) after Completion which:

(i) might affect a Group Company's ability to make claims for allowances or reliefs, to accept surrenders of Group Relief, or to consent to surrenders of Group Relief in respect of any Relevant Period; or

(ii) would reduce or extinguish any relief or allowance relating to any Relevant Period;

in each case where either the Purchaser or Group Company had been notified in writing by the Covenantors that such claim or surrender was anticipated or where such relief, claim, or allowance was taken into account in the Relevant Accounts; and

(f) no Group Company shall (unless so directed in writing by the Covenantor) amend, disregard, withdraw or disclaim any elections, claims or benefits (including, without limitation, elections or claims under section 402 ICTA 1988 (group relief), or section 171A (notional transfers within a group) or section 179A (reallocation within group of gain or loss accruing under section 179) TCGA 1992) or disclaim any initial or writing down allowances or any other capital allowances in respect of any Relevant Period."

7. "Covenantors' Conduct Matters" means:

"the preparation and submission of all notices, claims, returns and computations, the preparation and submission of all correspondence relating to such notices, claims, returns and computations and the negotiation and agreement of all such notices, claims, returns and computations for a Relevant Period;"

8. "Relevant Period" means:

"any period ended prior to Completion in respect of which a Group Company is required to make a return or a payment to a Taxation Authority;"

9. The Covenantors are the vendors and the exercise by them of the powers to give directions under paragraph 1.1 is subject to paragraph 1.9 which states that:

"(a) Neither the Covenantors nor the Purchaser shall be entitled to take any action under the provisions of this schedule to the extent that it would change the allocation of liability of each party to Taxation or the entitlement of each party to or to use any relief from Taxation as set out in the main body of this deed, including Clause 1 (Interpretation).

(b) If any action required by the Covenantors would be likely to materially increase any Tax liability of the Purchaser arising after Completion and if the relevant action is not contemplated by clause 7, 8, 9 or 10 of this deed then the Covenantors shall first indemnify the Purchaser in respect of such potential future liability."

10. The Tax Deed also makes provision for indemnifying Brightsea against additional tax liabilities or the loss of reliefs that are taken into account in the CBS. Clause 2.1 provides that:

"The Covenantors covenant with the Purchaser jointly and severally that, subject to the following provisions of this deed, the Covenantors will pay to the Purchaser, to the extent possible by way of repayment of the purchase price for the Shares (but not so as to limit the amount payable where not wholly possible), an amount equal to:

(a) any payment of Taxation made or to be made by a Group Company, the liability for which arises as a result of any Transaction or Transactions (including, for the avoidance of doubt, any steps in the Pre-Sale Restructuring) occurring or profits earned or arising on or before Completion (other than Taxation arising in respect of profits earned or arising after Completion as a result of any such Transaction or Transactions) or in respect of any profits earned or arising on or before Completion or by reason of any Accounts Relief not being available or having been lost, reduced, used or cancelled;

(b) any right to a repayment of Taxation to a Group Company to the extent that the right to the repayment has been taken into account in the Relevant Accounts but is not available or is lost, reduced or cancelled;"

11. "Accounts Relief" means:

"any Relief (other than a right to a repayment of Taxation) which is taken into account in computing, or in obviating the need for, any provision for Taxation or deferred tax in the Relevant Accounts or which is reflected or shown as an asset in the Relevant Accounts;"

12. The "Relevant Accounts" mean the CBS. In relation to "Taxation", clause 1.3 provides that:

"For the purposes of this deed, a Group Company shall be deemed to be liable for a payment of Taxation, and to make that payment of Taxation, if that Group Company would be liable for a payment of Taxation but for the use or setting off against profits or against or in respect of a liability to pay Taxation of a Post Completion Relief or Accounts Relief."

13. The provisions contained in clause 2 are subject, however, to certain exclusions. Clause 4 provides that:

"The covenants contained in clause 2 shall not extend to any liability otherwise falling within this deed to the extent that:

(a) provision or reserve for the liability is made or the liability is otherwise taken into account, or its actual or assumed payment or discharge is taken into account, in the Relevant Accounts; or

…

(d) it would not have arisen (or would have been reduced) but for a voluntary act or omission carried out or effected by the Purchaser or any of the Group Companies after Completion which the Purchaser was or should reasonably have been aware would give rise to the relevant liability other than an act or omission which:

(i) is in the ordinary course of business as carried on by the relevant Group Company at Completion and could not reasonably have been avoided; or

(ii) the relevant Group Company was legally committed to do, or omit to do, under a commitment that existed on or before completion; or

…

(i) it arises as a result of any claim, election, surrender, revocation or disclaimer made or notice or consent given after Completion by a Group Company or any member of the Purchaser's Group under the provisions of any enactment or regulation relating to Taxation other than any claim, election, surrender, revocation, revocation, disclaimer, notice or consent assumed to have been made, given or done in computing the amount of any allowance, provision or reserve in the Relevant Accounts or which is made at the prior request of the Covenantors pursuant to their right under this deed or was referred to in the Disclosure Letter…".

14. Clause 8 also mitigates any liability arising under clause 2 by limiting the vendors' liability to the excess of tax over any other reliefs which were not taken into account in the CBS but which would have been available to the sold companies to mitigate the relevant tax liability. Clause 8 therefore provides that:

"No liability shall arise for the Covenantors under this deed in respect of a liability to Taxation unless, and then only to the extent that, the amount of that liability to Taxation exceeds the Saveable Amount in respect of:

(a) any Covenantors' relief available to mitigate that liability to Taxation (and which has not previously been taken into account in calculating the Covenantors' liability under this deed); or

(b) any Covenantors' Relief which would have been available to mitigate that liability to Taxation had it not been used against one or more Taxation liabilities which do not give rise to a liability for the Covenantors under this deed."

15. "Covenantors' Relief" means:

"a Relief arising to a Group Company as a result of a Transaction or Transactions occurring (or deemed to occur) on or before completion or in respect of a period ended on or before Completion but that is neither:

(a) an Accounts Relief; nor

(b) a repayment of Taxation which is taken into account in the Relevant Accounts as an asset;"

16. "Relief" means:

"any loss, allowance, exemption, credit, relief, deduction or set-off in respect of, or taken into account, or capable of being taken into account, in the calculation of a liability to, Taxation or any right to a repayment of Taxation;"

17. "Saveable Amount" means:

"in respect of a Relief, the amount by which a liability to Taxation could be decreased by the use of that Relief".

18. I need finally to mention clause 6 which deals with overprovisions for tax liabilities in the CBS. This states that:

"6.1 The Covenantors may by notice, on or before the seventh anniversary of Completion, request the Purchaser to procure (at the Covenantors' cost) that the auditors for the time being of a Group Company report whether in their opinion a provision for Taxation in the Relevant Accounts proves to have been, insofar as it relates to the Group Company, too great (an Overprovision) and the Purchaser shall instruct such auditors to deal expeditiously with the production of the report and shall (at the Covenantors' cost) provide, or procure that the relevant Group Company provides, any reasonable information or assistance required for the purpose of enabling the auditors to produce such report.

6.2 Subject to sub clause 6.6, the amount of the Overprovision (less all costs and expenses reasonably incurred by the Purchaser or any Group Company in respect of the operation of this clause 6 in relation to such Overprovision) shall:

(a) first be set against any payment then due from the Covenantors under this deed; and

(b) to the extent that there is an excess, carried forward and set off against any future payment or payments which become due from the Covenantors under this deed.

6.3 If, at the request and cost of the Covenantors, the auditors for the time being of a Group Company report that a liability to make an actual payment of Taxation of any of the Group Companies has been reduced or extinguished as a result of an adjustment being made to a provision under Schedule 28AA ICTA 1988 in circumstances where a member of the Covenantors' Group suffers (or would, but for the availability of any Relief, suffer) an increased liability to Taxation by reason of such adjustment, then the Covenantors may direct that the Purchaser shall procure that the relevant Group Company shall pay an amount equal to the reduction in the liability to Taxation to the relevant member of the Covenantors' Group by way of a balancing payment pursuant to paragraph 7A Schedule 28AA ICTA 1988 save to the extent that such reduction has been included or reflected in the Relevant Accounts and save to the extent that such balancing payment has previously been made to the Covenators or a member of the Covenantors' Group. If the Covenators make a direction under this sub clause 6.3 in respect of any adjustment then the provisions of sub clause 6.2 shall not apply if and to the extent that it would give rise to an Overprovision."

19. The dispute between the parties relates to the 2006 accounting period. In the year ended 31^st March 2006 Brightsea (EOL) Limited had suffered losses which had already been allocated between various sold and retained companies to obtain group relief against corporation tax. £1,771,595 of the loss was allocated to Mulgate and a further £13,561 to Astra. Deloitte LLP ("Deloittes") who had been appointed by the vendors to conduct the tax affairs of the sold companies in accordance with Schedule 2 of the Tax Deed identified in January 2009 that Mulgate was due to receive a repayment of corporation tax for the period ended 31^st March 2007 of some £1.113m that had not been taken into account in the CBS. The repayment was intended to correct an earlier overpayment of tax by Mulgate that was due to an accounting error. Neither this nor the possible repayment of tax had been taken into account in calculating the NAV of the sold companies in the CBS. Later in 2009 Deloittes also identified a general group-wide overprovision for corporation tax in the CBS amounting to some £474,000.
20. The Tax Deed contains no provision whereby the vendors may recover such an overprovision directly from the purchaser. Instead clause 6.2 limits the vendors to setting off the amount of any such overprovision against any current or future liabilities to the purchaser under clause 2. The vendors (through Deloittes) therefore proceeded to use the powers contained in paragraph 1.1(c) to direct Brightsea to procure the signature on behalf of Brightsea (EOL) Limited and Mulgate of two (CT600C) tax forms electing to adjust the surrenders of group relief previously made in respect of Brightsea (EOL) Limited's losses for the year ended 31^st March 2006. This required an amendment to the original tax returns (see Finance Act 1998, Schedule 18, paragraph 67) and also the consent of the company surrendering the relief: see paragraph 70(c). Where the relevant tax return is amended the original claim for group relief can then be withdrawn and replaced by a new claim: see paragraph 73. The normal time limit for making a claim for group relief is 2 years from the end of the relevant accounting period (see paragraph 74(1)) but this may be extended under paragraph 74(2) at the discretion of HMRC.
21. Accordingly on 14^th January 2010 Deloittes wrote to the directors of Brightsea directing them to procure the signature of the two CT600C forms the effect of which was to move £1,580,000 of group relief out of Mulgate to Astra (a retained company). This had no effect on the tax position of Brightsea (EOL) Limited which would continue to surrender the same amount of group relief but it would obviously increase the corporation tax liability of Mulgate for the 2006 period by 30% of the amount of the transferred relief: i.e. £474,000.
22. Drachs No. 3 accepts that this increase in the tax liability of Mulgate for a pre-completion period gives rise to an obligation to indemnify Brightsea for the amount of the tax under clause 2.1 of the Tax Deed. But it seeks to extinguish that liability by setting off against it the £474,000 overprovision for corporation tax in the CBS in accordance with clause 6.2 of the Tax Deed. If entitled to do this it will thereby achieve the repayment of the overprovision despite the limited nature of its rights under clause 6.2. It also says that it should have been able to rely on the £1.113m tax repayment to Mulgate as Covenantors' Relief under clause 8 of the Tax Deed but there are complications about this which I will come to later.
23. The judge was not asked to consider any issues arising from the tax rebate. Instead he concentrated on the use of the Schedule 2 powers to re-allocate the surrenders of group relief between Mulgate and Astra in order to eliminate the overprovision in the CBS. He seems to have accepted that it was unlikely that those responsible for the Tax Deed envisaged it operating in this way. That much is, I think, self-evident from the fact that clause 6 contained no machinery for the direct reimbursement of any part of the sale price attributable to an overprovision for tax liabilities. But the judge went on to say that this was not conclusive of the matter because the Tax Deed, like a computer program, operates to produce whatever outcome results from how it is populated. He decided that the provisions of paragraph 1 of Schedule 2 did permit the vendors to require a re-adjustment in the surrender of group relief by Brightsea EOL Limited even though the only purpose of it was ultimately to recoup the overprovision for corporation tax in the CBS:

"57. I think that there is a confusion in the Defendant's case between power and motive. If, for a moment, one accepts the Defendant's submission as to the general purpose of the deed, there would seem to be every reason why the Claimant should have the power to require the correction of an unforeseen problem. What the Defendant appears really to object to is not the existence of such a power but the motive in this case for the exercise of that power. However, the Tax Deed says nothing about motive either expressly or by implication.

58. I think it self-evident that the Tax Deed contemplates that the Claimant, by Deloitte, shall have the power so to direct the tax affairs of the sold companies that one or more of them shall be required to surrender tax losses to a retained company or companies. I think it unrealistic to suggest that this must be a 'one shot' right like a wish in a fairy story. Not only do I think that the wording in paragraph 1 of Schedule 2 is ample to permit a revisiting of the situation, I think that to be a necessary element of the commercial sense of the document.

59. I emphasise that this case is not about seeking to shoehorn into the deed some remote aspect of the tax scene. The use of losses in connection with group relief was clearly envisaged by the parties and the deed is directed at such matters. As indicated in paragraph 1.9(b) of Schedule 2 they are "contemplated"."

24. He also rejected the submission made, I think, for the first time at trial that the amendment to the tax return was caught by paragraph 1.9(a):

"62. Nevertheless, the Defendant seeks to trump all these difficulties by interpreting paragraph 1.9(a) disjunctively so as to provide that the schedule cannot be used to "change the allocation of each party to Taxation". To adopt such an interpretation would be to make a mockery of the Tax Deed. What the full provision requires is that the operation of the schedule shall be subordinate to "the main body of the deed".

63. While one may sympathise with the exasperation of the Defendant at being required to revisit a situation in which the overprovision deprives it of a material part of the benefit of clause 2, I think that there can be no doubt that that is what the Tax Deed requires it do."

25. The judge granted a declaration that Drachs No. 3 was entitled to give the direction contained in Deloittes' letter of 14^th January 2010 and that Brightsea and Mulgate were obliged to comply with it. He also ordered Brightsea to deliver the two CT600C tax forms to Drachs No. 3 by 5.00 pm on 4^th July 2011 but stayed his order until 21 days after 20^th June 2011 to allow an application for permission to appeal to be made to this court within that time. In that event the stay was to continue until 15 working days after the application for permission had been dealt with on paper by a single Lord Justice.
26. An application for permission to appeal was made within these time limits and permission was granted by Tomlinson LJ on 2^nd September 2011. But well before then on 13^th July Brightsea in fact delivered the executed tax forms to the respondent's solicitors and on 27^th September paid the sums which the judge had ordered to be paid on account of costs. As a consequence, HMRC have now extended time for the making of a new claim for the surrender of group relief and have assessed Mulgate for additional corporation tax in the sum of £464,813 plus interest of £113,858. The question of whether HMRC will permit a further amendment to Mulgate's tax return for the 2006 period in the event that this appeal succeeds remains uncertain.
27. Brightsea's decision to provide the signed tax forms notwithstanding the stay of the judge's order and the successful application for permission to appeal has given rise to a subsidiary issue about the court's power to grant relief even if it accepts that the judge was wrong on construction. Drachs No. 3 submits that the tax forms were provided voluntarily with the tax consequences I have indicated. The statutory effect of the forms cannot now be undone and it is said that there is no guarantee that HMRC will be prepared to extend time yet again so as to enable the tax position to be reversed. The court should therefore do no more than to make a declaration as to the true construction of the Tax Deed and then leave it to operate according to its terms. In that event Drachs No. 3 will wish (if necessary) to rely upon clause 4(d) of the Tax Deed which excludes any liability under clause 2 for liabilities which would not have arisen but for a voluntary act by the purchaser. Brightsea contend that the forms were submitted in compliance with the judge's order and in the belief that the stay was not likely to have been continued until after the appeal. But it relies in any event on what it says is the court's inherent jurisdiction to make orders for the restoration of benefits transferred between the parties as a result of the judgment which is set aside. If the appeal is successful the court should order Drachs No. 3 to co-operate in obtaining HMRC's consent to a new claim for the surrender of group relief. In the alternative, it should be ordered to pay the monetary equivalent of the tax loss which Mulgate will have suffered.
28. As both parties recognise, the Tax Deed is intended to supplement and give effect to the sale of the Group Companies on an NAV basis. The estimated tax liabilities of the sold companies were therefore an important and necessary factor in the calculation of their worth and any variation in the amount stated in the CBS will materially impact on the consideration paid.
29. The SPA contains no provisions for the adjustment of the consideration (post completion) to take account of subsequent changes in the tax position of the sold companies. Instead it delegates the treatment of these matters to the Tax Deed which was entered into as a condition of the sale. In broad terms, this sets out to deal with three potential problems: (i) unexpected tax liabilities adverse to the sold companies arising in respect of the pre-completion tax periods; (ii) the tax liabilities of the sold companies in what is described as the Straddle Period (i.e. any tax periods which commence before but do not end prior to completion); and (iii) the conduct and completion of the tax affairs of the sold companies for any pre-completion tax periods.
30. This appeal is concerned only with aspects (i) and (iii). The concern of Brightsea as the purchaser of the sold companies was obviously that any increase in the tax liabilities of those companies above the amount allowed for in the CBS would effectively diminish the NAV and thereby render the consideration paid excessive. At the same time Drachs No. 3 was anxious to ensure that the sold companies satisfactorily completed their tax affairs for the pre-completion periods in a way which did not give rise to any additional tax liabilities (for which it would be liable to indemnify the purchaser) and which ensured that Drachs No. 3 would not itself become liable for the tax of its former subsidiaries.
31. What is evident from the provisions of the Tax Deed which deal with the tax liabilities of the sold companies in the pre-completion periods is the extent to which they respect the calculation of those liabilities contained in the CBS. The amount of any unforeseen tax liabilities arising from pre-completion profits or which are due to reliefs taken into account in the CBS not being available must be paid by the vendors to the purchaser under clause 2.1. The CBS calculation of liabilities remains the contractual yardstick by which the additional tax liability falls to be measured. This is re-emphasised by sub-clauses 4(a) and (i) which repeat that the indemnity will not apply to any liability otherwise taken into account in the CBS.
32. Schedule 2, which governs the conduct of the tax affairs of the sold companies post completion, gives to the vendors (through Deloittes) what are, on their face, very wide powers of control in relation to the completion of returns and the making of elections for any of the pre-completion tax periods. Paragraph 1.1(c) requires the sold companies to make such claims and elections and to give such consents as the vendors may in their absolute discretion direct and paragraph 1.1(f) prevents the sold companies from withdrawing any such claims and elections without the vendors' consent. The restrictions placed upon the exercise of those powers are contained in paragraph 1.9. As a matter of general principle, the inclusion of express terms of this kind will exclude any implied terms to the contrary and it is therefore no surprise that Mr Blayney has accepted that paragraph 1.9(a) is central to his client's appeal.
33. It is, I think, common ground that where paragraph 1.9(a) refers to the liability of each party to taxation, that has to be read as including the tax liabilities of the subsidiary companies. The Tax Deed allocates the tax liabilities of the sold companies between the vendors and the purchaser and their entitlement to use any available reliefs by a combination of the CBS and the provisions of clause 2. This indemnity has no application to a post-completion election or surrender by a sold company which is not allowed for in the CBS unless it is made at the prior request of the vendors pursuant to their rights under the Tax Deed: see clause 4(i). The parties divide on whether a post-completion surrender of group relief whose only purpose is to eliminate an overprovision for taxation in the CBS does fall within this exception. This is primarily a question of construction in relation to paragraph 1.9(a) but it falls to be answered by a consideration of what constitutes the allocation of liability to taxation or the entitlement to use any reliefs as set out in the main body of the Tax Deed.
34. Mr Blayney submits that the purpose of the Tax Deed was that the CBS should determine the allocation of all foreseen tax assets and liabilities on the part of the sold companies. As described above, the provision for tax liabilities in the CBS is to be maintained by the clause 2 indemnity which protects Brightsea against the financial consequences of liabilities not provided for in the CBS but protects the vendors against the consequences of other unauthorised acts or omissions of Brightsea and the sold companies post completion; see clause 4(d). In this way the integrity of the allocation of assets and liabilities in the CBS is preserved.
35. The calculation of the tax liabilities of the sold companies in the CBS assumes, of course, the use of group reliefs in the way in which they were allocated prior to completion and up to the direction of 14^th January 2010. But Mr Blayney also emphasises and relies on what the Tax Deed does not provide for. In particular, he says it contains no equivalent provisions to clause 2 in respect of unforeseen tax developments which are favourable to the purchaser but not to the vendors. So, in relation to the unexpected repayment of tax to Mulgate, there is no corresponding liability on the part of the purchaser to increase the consideration to the extent that the tax credit is not accounted for in the CBS. Instead, the vendors are given only the limited rights under clause 8 to a credit against any liabilities of their own under the clause 2 indemnity. Similarly an overprovision in the CBS is recoverable only to the extent of any available set-off under clause 6.2. In the absence of those, the sold companies are entitled to retain the tax credits without increasing the liabilities of the purchaser to the vendors.
36. Brightsea's essential case is that paragraph 1.9(a) has to be given a meaning and effect which is consistent with the allocation of benefits and liabilities provided for in the provisions I have described. Central in that is the CBS. If paragraph 1.9(a) is to operate (as it was clearly intended to do) as a restriction or limitation on the scope of the paragraph 1.1 powers then it has to do so by reference to a state of affairs other than one which is the consequence of the exercise of those very powers. Otherwise one is in a circular situation in which paragraph 1.9 is robbed of any effect. The draftsman must therefore have fixed as a reference point what he describes as the allocation of liability of each party to Taxation and their entitlement to use any relief from Taxation which is ("as") set out in the main body of the Tax Deed including clause 1. This can only sensibly refer to the position disclosed in the CBS as qualified by clauses 2, 4 and, where applicable, 6 and 8. It is inherent in this analysis that the reference in clause 4(i) to a request made under the powers contained in paragraph 1.1 of Schedule 2 has to be treated as providing for a legitimate request under those powers determined in accordance with those principles and not (as the judge seems to have held) as a term of the Tax Deed indicating that any request made to the sold companies for the surrender of group relief will automatically fall within clause 2.
37. As of 14^th January 2010 some £1,771,595 of group relief had been surrendered by Brightsea (EOL) Limited in favour of Mulgate and the provision for the tax liabilities of the sold companies in the CBS had been calculated accordingly. This allocation of liability between the sold and retained companies and its use of Accounts Relief is preserved by paragraph 1.9(a) and cannot therefore be displaced in order to correct the existence of an overprovision in the amount specified for taxation in the CBS. The vendors were not therefore entitled to make the direction contained in Deloittes' letter and clause 2 of the Tax Deed never became engaged.
38. Much of the written argument submitted by Drachs No. 3 concentrates on the scope of the paragraph 1.1 powers. As already indicated, they are widely drawn and, literally construed, they are, in my view, sufficient in terms to extend to the direction which was made. That point is, I think, now conceded. The only issue is whether their exercise in the particular circumstances of this case is prohibited by the restrictions contained in paragraph 1.9.
39. Mr Wolfson's initial response to Brightsea's reliance on paragraph 1.9(a) was to suggest that it only prevented an exercise of the clause 1.1 powers if the consequences could not be accommodated by the clause 2 indemnity. In practice this would exclude the exercise of those powers outside the seven year limitation period on the vendors' liabilities contained in clause 5 of the Tax Deed. The effect of the indemnity would be to maintain the purchaser's immunity from the liabilities in excess of those provided for in the CBS notwithstanding that the actual allocation of group relief underlying those calculations would have been altered.
40. This argument has now been developed into a more general one based upon the economic effect of the various provisions in the Tax Deed. This approach is said to be consistent with the treatment of the tax liabilities of the parties being represented through the allocation of reliefs between the subsidiary companies and the indemnity mechanism in clause 2 in respect of their unforeseen liabilities. What is said is that the 14^th January direction did not "change" the allocation of tax liabilities or their entitlement to use the reliefs "as set out in the main body" of the Tax Deed. The direction resulted in less group relief being surrendered to Mulgate by Brightsea (EOL) Limited than was previously the case but it did not change the entitlement to Mulgate to Accounts Relief in respect of the reduced amount.
41. Mr Wolfson submits that the economic effect of the CBS was preserved by the judge's construction of the Tax Deed. Although the direction, once acted upon, had the effect of creating an additional tax liability on the part of Mulgate, that was relieved by the operation of the clause 2 indemnity. He makes the point that, in the particular circumstances of this case, Mulgate is seeking to profit from the repayment of tax which it has received in a way that was not contemplated by the Tax Deed. Had Brightsea complied with the direction when made and had the surrenders of group relief then been adjusted in the way that subsequently occurred, its additional tax liability of £474,000 would have been set-off against the repayment leaving it with a net repayment of some £626,000 but with no liability for interest. In the event, it claimed and received the full £1.1m tax repayment before the trial of the claim and before the additional tax liability arose. One consequence of this may be that Drachs No. 3 has been deprived of the opportunity to rely upon the mitigation provisions contained in clause 8 of the Tax Deed which limit the vendors' liability under clause 2 to the excess of the new charge to tax over any Covenantors' Relief that could have been "available" to mitigate that liability. Mr Wolfson says that the £1.1m repayment was Covenantors' Relief and would therefore have been available to meet the additional £474,000 tax liability but for the way in which Brightsea chose to respond to the 14^th January direction.
42. I do not propose to become side-tracked by this particular controversy. It is not an issue in these proceedings and we have heard no direct argument about it. If the tax rebate is a Covenantors' Relief it may well be arguable that Brightsea's refusal to comply with the 14^th January direction (if unlawful) sounds in damages which would include any loss of the clause 8 relief. But none of this is central to what we have to decide. The provisions of paragraph 1.9 do not depend for their operation on extrinsic circumstances of this kind. If the tax repayment is a Covenantors' Relief it may limit any liability of the vendor under the clause 2 indemnity. But it does not assist in determining whether clause 2 is in fact engaged.
43. Mr Wolfson's principal submission is that "liability" in paragraph 1.9(a) has to be read and understood in an economic sense. Clauses 1 to 8 of the Tax Deed can fairly be said to govern the "use" of the reliefs referred to in the body of the deed. The purchaser has paid for the sold companies on the basis of the existing deployment of Accounts Relief hence the indemnity in clause 2. But the vendors are entitled to a credit in respect of any other reliefs that could have been used by the sold companies to reduce the relevant tax liability and can set off against any clause 2 liability the amount of any overprovision in the CBS (clause 6). Clause 7 also gives the vendors a limited right to repayment in respect of corresponding benefits subsequently received by the sold companies. Mr Wolfson says that in economic terms Drachs No. 3 has come up with a way in effect of exercising its contractual entitlement to use some Covenantors' Relief which it ought to be entitled to do under clause 8.
44. Paragraph 1.9(a) is concerned, he says, to prevent action which would "change" what would otherwise be the position resulting from the main body of the Tax Deed. The sort of change which the provision contemplates would be one which prevents a Covenantors' Relief being used by the vendors or a delay which results in the tax liability not arising until after the time limit (in clause 5) for claiming under the indemnity has expired. In such a case the "allocation of liability" would have changed. But here there has been no change of that kind. The vendors will, as a result of the direction, be able (in effect) to use the Covenantors' Relief provided by the tax repayment regardless of whether they could still also rely on clause 8 itself. The transfer of group relief from Mulgate to the retained companies will have the same economic effect. Moreover, even if there is a re-allocation of liability within the meaning of paragraph 1.9(a), that is not a change in liability in any economic sense because the indemnity continues to operate if the tax liability arises as a result of a direction given under paragraphs 1.1: see clause 4(i).
45. I am not able to accept these submissions. Although the wording of paragraph 1.9 is not straightforward, it is clear that it was intended to prevent the Schedule 2 powers being used to change the allocation of liabilities and the use of reliefs as set out in the main body of the deed. Because this is the only restriction on the otherwise extensive powers of the vendors to re-arrange (for example) the allocation of group relief which underpins the provision for taxation in the CBS, paragraph 1.9(a) was intended to have and must be given a meaning which best accords with the ascertainable objectives of the deed. As explained earlier in this judgment, those provisions largely respect the calculation of NAV contained in the CBS. The indemnity contained in clause 2 therefore operates to protect the purchaser from additional tax liabilities imposed on the sold companies by the non-availability of reliefs that were factored into the CBS calculations. But the liability of the vendors is mitigated by any failure on the part of the sold companies to use other available reliefs.
46. It is important to bear in mind that the Schedule 2 powers are primarily concerned with the completion of the tax affairs of the sold companies for the pre-completion periods at a time when they have ceased to be under the vendors' control. One would therefore expect those provisions to protect the vendors against any re-organisation of or failure to complete its tax affairs for those years which might create additional liabilities for them. It would be unusual for those powers to be intended to re-balance the interests of the parties or, for that matter, the economic effect of the SPA by re-allocating liabilities and reliefs used to calculate the NAV.
47. Consistently with this hypothesis, paragraph 1(c) requires the sold companies to meet relevant time limits and submit finalised returns and other information to the tax authority. Paragraph 1(e) prevents a sold company from acting so as to affect the ability of the sold companies to make claims for reliefs or accept surrenders of group relief and paragraph 1(f) prohibits the sold companies from withdrawing or disclaiming any elections, claims or benefits.
48. None of these provisions suggests (when read in context) that the parties intended them to be used to effect a significant change in the financial consequences of the transaction for either party. And, in my view, paragraph 1.9(a) puts the matter beyond doubt. The references to the allocation of liability of each party to taxation and to the entitlement of each party to or to use any relief from Taxation as set out in the main body of the deed have, I think, to be read as referring to the allocation of group reliefs which at the date of the deed formed the basis of the contents of the CBS. I do not accept that the "entitlement" of the sold companies to those reliefs remained unchanged by the transfer of group relief from Mulgate to Astra simply because Mulgate retained some of the relief which it previously enjoyed. The definition of "Accounts Relief" indicates in express terms that the existing reliefs have been purchased by Brightsea for the consideration it has paid. They are in a real sense assets of the sold companies. Paragraph 1.9(a) operates to prevent their re-distribution by the vendors.
49. The economic burden argument deployed by Drachs No. 3 depends upon the availability of the clause 2 indemnity to meet the new tax liability and with it the right of the vendors to rely on the availability of Covenantors' Relief (in the form of the £1.1m tax repayment) as a mitigating factor. But in my view one does not get to clause 2. If the intention of the parties had been to give the vendors a free hand to re-arrange the existing CBS allocation of reliefs then paragraph 1.9(a) might as well have been deleted which was the effect of the judge's own construction of the Tax Deed. As it is, it gives the purchaser a protection consistent not only with the allocation of reliefs under the CBS but also with the purchaser's right to retain the benefit of any tax credits not taken into account in the CBS save to the extent that they can be used under clause 8 to reduce a concurrent clause 2 liability. As part of this analysis (as I explain below), I do not therefore accept that the Schedule 2 powers can be used to re-allocate reliefs simply in order to correct any overprovision in the CBS.
50. I need to make clear at this stage that I regard the reliance which has been placed on the £1.13m tax credit as fortuitous and it is, in my view, largely irrelevant to the solution of the issues of construction which underlie this appeal. The 14^th January 2010 direction was not given in order to obtain relief under clause 8. It was given in order to eliminate the overprovision in the CBS of £474,000 which had nothing to do with the £1.1m repayment. The existence of the repayment gave the vendors the additional advantage of being able to set it against any liability that might arise under clause 2 but that was unnecessary if the scheme worked because clause 6.2 gave them a set-off in the form of the overprovision. What the purchasers, on the other hand, have lost is the group relief enjoyed by Mulgate which has been transferred to Astra and, if Mr Wolfson is right, is irrecoverable because of the operation of either clause 6.2 or clause 8.
51. It seems to me that the real objection to the economic burden argument is that it fails to respect the way in which the Reliefs as defined are allocated under the terms of the Tax Deed. Mr Wolfson's argument that the exercise of the paragraph 1.1 powers in the way that has been done can be characterised as the obtaining of clause 8 relief ignores the fact that both clause 6 and clause 8 give the vendors limited rights of set-off which depend upon the existence of a clause 2 liability at the relevant time. As at 14^th January 2010 Brightsea had purchased the sold companies for a price which reflected the NAV as calculated in the CBS. Insofar as that contained an overprovision for taxation, that benefited the purchaser. The same went for the tax rebate. Brightsea had acquired a subsidiary with an asset which had not been included in the calculation of its value.
52. Clause 2 is in terms an affirmation of the CBS in that it is designed to operate when Accounts Relief is not available or has been lost, reduced, used or cancelled. But for the provisions of Schedule 2, there could, I think, be no argument that those words were intended to apply to anything but a loss or lack of availability of the relief that was not foreseen when the CBS was drawn up. This view is supported by the provisions of clause 3.1 of the Tax Deed which made payment under clause 2 conditional on a notice served in accordance with sub-paragraph 2.1 of Schedule 2. All the events specified in paragraph 2.1 involve unexpected adverse tax movements. Not tax movements whose only purpose or necessity is the deliberate re-allocation of existing tax reliefs in order to re-order the financial consequences of the transaction. I am not therefore persuaded that clause 2 can be construed so as to include a subsequent state of affairs brought about by the exercise of the scheduled powers but, even if it is wide enough to bear that meaning, Mr Blayney is right in my view in his submission that the availability of the clause 6 and clause 8 reliefs depends in these circumstances on the exercise of a Schedule 2 power rather than on the operation of anything in the body of the deed. Absent the exercise of that power, the sold companies would retain their existing allocation of group relief; the vendors would not be exposed to a clause 2 liability; and the provisions of clauses 6 and 8 could not come into play.
53. If Mr Wolfson is right then the exercise of the paragraph 1.1 powers have, it seems to me, changed the entitlement of Brightsea (through Mulgate) to use the relief allocated to it under the CBS and has also altered the economic effect of the transaction as completed. As already explained, the variation in the surrender of group relief to Mulgate will transfer an economic benefit of some £474,000 to the vendors which would otherwise have remained an asset of the purchaser.
54. My views about the construction of paragraph 1.9(a) are also re-inforced by what is perhaps a more simple approach to this problem. It seems to me very odd to attribute to the parties through the language of the contract an intention to allow the vendors to recoup the economic effect of an overprovision for liabilities in the CBS when clause 6 of the deed already contains express provisions which give only limited relief in the form of a set-off against any existing or future clause 2 liability. If the intention was to permit the vendors to correct the error by making an unrestricted re-allocation of group relief between sold and retained companies one would have thought that a direct right of recovery of the overprovisions would have been the more obvious way of achieving this.
55. As mentioned earlier, some reliance is also placed by Mr Wolfson on the reference in clause 4(i) to a prior request made by the vendors in exercise of their rights under the deed. But consistently with the structure of the deed, it is not correct to read this as giving the vendors carte blanche to make any post-completion adjustment they think fit merely in order to create a clause 2 liability. It depends for its application on the Schedule 2 powers being validly exercised and I have already explained the reasons why I consider that this did not occur.
56. For these reasons, I consider that the judge was wrong in his construction of the Tax Deed and I would therefore allow the appeal and set aside his order.
57. That leaves the question of relief. If the vendors are not entitled to give the directions contained in the 14^th January letter it must follow that it had no contractual effect and that Brightsea was not obliged to comply with it. It must also follow that the provisions of clause 4(i) do not come into play and that no liability arose under clause 2 of the Tax Deed
58. Had Brightsea chosen to take advantage of the stay granted by the judge of his order and had not complied with the direction then the appeal could be disposed of by this court making a declaration to the effect that the vendors were not entitled to exercise the Schedule 2 powers as they did and Mr Wolfson has submitted that this would be the proper way of disposing of the appeal in the appellant's favour. But it is now said that even if the judge was wrong on construction, the appeal is of no practical effect because Brightsea has voluntarily provided the CT600C tax forms duly executed and Mulgate has, as a consequence, been assessed to tax in accordance with the amended returns. Mr Wolfson submits that, in these circumstances, the tax liability was not incurred as a result of compliance with the judge's order and the court cannot make any order which has the effect of undoing the consequences of the transfer of group relief to the retained companies.
59. There are therefore two issues to be considered. First whether the court either can or should make an order in Brightsea's favour which does any more than to decide what the true construction of the Tax Deed is; and second what kind of relief that should be.
60. I can deal with the second issue quite shortly. As things stand, it is uncertain whether HMRC would consent yet again to a further re-allocation of group relief between the retained and sold companies. The matter would be entirely at their discretion. Various points have been raised by Brightsea as to whether the tax forms were correctly submitted but it is not open to this court to investigate and determine those matters in the context of this appeal. If any relief is to be granted beyond a declaration then it must obviously be effective to deal with the financial consequences of Brightsea's compliance with the direction. The most obvious step would be to order the vendors to reverse the 2010 surrender of group relief because this would presumably erase both the consequential tax liability and any liability on Mulgate for interest, although it would, by the same token, expose Astra to a corresponding liability in respect of its own unpaid tax. But if HMRC is not willing to permit a re-allocation of group relief to take place out of time then Drachs No. 3 can be ordered to pay to Brightsea the amount of the tax liability which has arisen.
61. Mr Wolfson submitted that this could give rise to the possibility of double recovery if Brightsea also has a right to an indemnity under the clause 2 indemnity. I cannot see how that could arise. The indemnity is not engaged by a direction which was not authorised under the contract and, in any event, no claim for an indemnity could be pursued if the tax loss was compensated for by a payment made under the order of the court.
62. The real issue of principle is whether the court should make an order of this kind in this case. Merely to set aside the judge's order and to grant a declaration about the true construction of Schedule 2 will not, of itself, restore Brightsea to the position it enjoyed on my view of the contract before the 14^th January direction was made and subsequently complied with. Subject to Mr Wolfson's argument that Brightsea's submission of the tax forms was voluntary and not a consequence of the judge's order, this raises a preliminary question of whether this court can make more far reaching orders so as to restore to Brightsea the benefits it has lost.
63. Mr Blayney has referred us to the decision of the House of Lords in Nykredit Mortgage Bank Plc v Edward Erdman Group Limited (No. 2) [1997] 1 WLR 1627 where this issue was considered in relation to an award of interest on damages and costs paid pursuant to the earlier judgment which was reversed on appeal. Lord Nicholls (at page 1626H) said that:

"The court has no general, inherent power to order the payment of interest. But the situation now under consideration is not directed at requiring a defendant against whom the plaintiff has a cause of action to pay interest on money to which the plaintiff's cause of action entitles him. Nor is it directed at requiring him to pay interest on unpaid costs. Rather, when ordering repayment the House is unravelling the practical consequences of orders made by the courts below and duly carried out by the unsuccessful party. The result of the appeal to this House was that, to the extent indicated, orders made in the courts below should not have been made. This result could, in some cases, be an idle exercise unless the House were able to make consequential orders which achieve, as nearly as is reasonably practicable, the restitution which this result requires. This requires that the House should have power to order repayment of money paid over pursuant to an order which is subsequently set aside. It also requires that in suitable cases the House should have power to award interest on amounts ordered to be repaid. Otherwise the unravelling would be partial only.

This power seems to me to fall squarely within that range of powers which are necessarily implicit if a court of law possessed of appellate functions is to carry out its prescribed functions properly. It is, as such, a power derived from what is usually referred to as the inherent jurisdiction of the court. It is a power equally possessed by the Court of Appeal consequential upon orders made by it."

64. In considering the extent of the court's powers in these circumstances it is, I think, important to bear in mind that, as a general rule, a party who acts in pursuance of a court order will not become liable in damages for those acts even if it subsequently transpires on appeal that the original order should never have been made: see Hillgate House Ltd v Expert Clothing Services & Sales Ltd [1987] 1 EGLR 65. There will therefore be obvious difficulties in the way of any action by Brightsea to recover the lost relief insofar as its cause of action is based on compliance with the judge's order. It might have to base any claim in restitution on its compliance with the direction itself which will raise the issue of causation in relation to the reason for compliance.
65. If the compliance was the result of the court order for specific performance then I cannot see why Brightsea should be denied the benefit of an order of this court exercising its powers to reverse the effect of the order of the lower court. There is no reason in principle why this should not (if necessary) extend to requiring the unsuccessful respondent to disgorge the financial benefits directly obtained as a result of the original order. Although the judge's order required Brightsea to set in train a new application to HMRC for the surrender of group relief, the practical effect of this was to allow Drachs No. 3 to effect a re-allocation of that relief from Mulgate to Astra. The financial consequences are direct, readily identified and easily calculable. And the court has jurisdiction to make an order for repayment if the process cannot be unwound just as much as it would be able to order the re-conveyance of property in the event of the reversal on appeal of an order for specific performance of a contract of sale.
66. What remains is the question whether Brightsea's loss is in truth the consequence of the judge's order. As to this, there is a witness statement from Mr Nicholas Jordan, a partner in Clifford Chance, the solicitors acting for Brightsea, which was made in support of his client's application for permission to amend the notice of appeal in order to claim the relief under consideration. He says that despite the stay, his client completed and submitted the tax forms in conformity with the judge's findings and order and would not have done so but for the judgment against it.
67. There has been no application to cross-examine Mr Jordan on those matters or any evidence in answer to his witness statement. In my view, we should accept that, on the evidence, the appellant's compliance with the direction was the result of the judge's ruling and order even though that order was stayed at the time. It seems to me unrealistic to conclude on the available material that Brightsea's conduct was so independent of the order in the proceedings as to make it causally unconnected. I would therefore allow the appeal and make the orders which I have indicated.

Lord Justice Kitchin :

68. I agree.

Lord Justice Pitchford :

69. I also agree.