England and Wales High Court (Chancery Division) Decisions

Kahn & Vooght v. Commissioners of Inland Revenue [1999] EWHC Ch 205 (30th July, 1999)

Defendants

JUDGMENT

1. The issues raised in this case arise in the winding up of Toshoku Finance Plc ("the Company") a company incorporated in England. The company is a subsidiary of Toshoku Finance Ltd a company incorporated in Japan which is in turn a subsidiary of Toshoku Ltd also incorporated in Japan. A fellow subsidiary of Toshoku Ltd was Toshoku Europa Establishment Ltd ("TEE") a company incorporated in Liechtenstein.
2. It was the business off the Toshoku Group to import and export food to and from Japan. It was the business of the company to raise money in England to be lent to the trading subsidiaries of the Toshoku Group. It did so by borrowing from Japanese banks operating in the London market. In practice substantially the only Borrower from the company was TEE.
3. On the 26th January, 1998 the company was placed in creditors voluntary liquidation and Mr Kahn and Mr Vooght were appointed liquidators. Amongst the documents found by the liquidators was a loan agreement dated the 2nd April, 1990 made between the company and TEE. By this agreement the company gave TEE a borrowing facility with an upper limit of US$ 200 million. It also contained provisions for payment of interest by TEE to the company on the amount outstanding lent by the company to TEE from time to time. It is not clear from the provisions of this agreement whether it applied to all or any part of the amount outstanding from TEE to the company at the date of the company's liquidation.
4. As at the 26th January, 1998 $156 million was outstanding on loan by the company to TEE and represented capital and rolled up interest due at that date. TEE was substantially insolvent. On the 25^th November 1998 agreement was reached between the creditors of TEE as to how TEE’s remaining net assets of approximately $43 million should be divided between them. As result of that agreement the company became entitled to receive slightly more than 54% of TEE’s net assets. TEE’s creditors having been paid the amounts due to them from the assets of TEE pursuant to the agreement, TEE was placed in liquidation in Liechtenstein on of 30th of December 1998. Toshoku Finance Ltd the company's immediate parent had been placed in liquidation in Japan in 19th December 1997. In March of 1998 an administrator for the purposes of a reorganisation plan in respect of Toshoku Limited was appointed in Japan and a reorganisation plan is currently being formulated.
5. The applicants before me are the joint Liquidators and the Respondents are the Commissioners of Inland Revenue. The Applicants seek the directions of the Court in answer to the following question:

"Are the Liquidators required to discharge any liability for Corporation Tax upon any interest payable by Toshoku Europa establishment after 26th January, 1998 upon loans made to it by the Company, pursuant to the provisions of chapter 2 and schedules 8 - 15 of the Finance Act 1996, out of the Company's assets in priority to all other claims as an expense of the winding-up pursuant to section 115 of the Insolvency Act 1986 and rule 4.218 of the Insolvency Rules 1986. "

6. By section 8 (2) of ICTA 1988 "…A company shall be chargeable to corporation tax on profits arising in the winding-up of the company. . ."
7. By section 6(4) of ICTA 1988 "profits" means income and chargeable gains.
8. By section 80(1) of the Finance Act 1996 "for the purposes of corporation tax all profits and gains arising in a company from its loan relationships shall be chargeable to tax as income. . . "
9. Section 84(1) of the Finance Act 1996 provides that "the credits and debits to be brought into account in the case of any company in respect of its loan relationships shall be the sums which, in accordance with an authorised accounting method, and when taken together, fairly represent, for the accounting period in question:
10. (a ) All profits, gains and losses of the company, including those of a capital nature, which (disregarding interest and any charges or expenses) arise to the company from its loan relationships and related transactions;
11. (b) All interest under the company's loan relationships and all charges and expenses incurred by the company under or for the purposes of its loan relationships and related transactions."
12. "Authorised accounting method" (a) was referred to as the "accruals basis of accounting".
13. Section 87 (1) and (2) of the Finance Act 1996 provide that where two parties to a loan relationship are connected, the only accounting method authorised for the purpose of the Finance Act 1996 for use by the company shall be an authorised accruals basis of accounting under Section 84 (1)(a).
14. By section 87(3) of the Finance Act 1996 there is a connection between a company and another company for an accounting period if there is a time in that period, or in the two years before the beginning of that period, when both Companies have been under the control of the same person.
15. Under paragraph 5(1) of schedule 9 to the Finance Act 1996 it is provided that, "in determining the credits and debits to be brought into account in accordance with an accruals basis of accounting, a departure from the assumption that every amount payable will be paid in full as it becomes due shall be allowed to the extent only that
16. a debt is a bad debt;
17. a doubtful debt is estimated to be bad … ."
18. It was the contention of the Inland Revenue that by reason of these provisions the company was assessable under section 8(2) of ICTA 1988 to corporation tax on an amount representing interest charged at the contractual rate for the period from the commencement of the liquidation down to the 25th November, 1998 when the loan relationship between the company and TEE was terminated by the agreement between the company and TEE settling the amount payable from the assets of TEE to the company in discharge of the amount outstanding. It was further contended by the Inland Revenue that the resulting corporation tax was payable as an expense of the liquidation in priority to all other claims pursuant to section 115 of the Insolvency Act 1986. It is the joint Liquidator’s contention that that such corporation tax was not an expense of the liquidation entitled to such priority.
19. For purposes of the hearing before me I am asked to assume that the amount outstanding from TEE to the company at the commencement of the liquidation of the company carried contractual interest. I am further asked to assume that the company and TEE are connected companies for the purposes of section 87(3) of the Finance Act 1996 and that in consequence the incidence of corporation tax on the company after the commencement of the liquidation pursuant to section 8(2) of ICTA 1988 is to be calculated on an accruals basis in accordance with section 84(1) sub-section (a) of the Finance Act 1996 with no bad debt relief that would otherwise have been available under paragraph 5(1) of Schedule 9 to that Act. Thus corporation tax on the "notional" interest contractually due on the amount outstanding from TEE was payable notwithstanding that no interest was actually paid by TEE and that the Joint Liquidators stance has throughout been that no such interest was in fact contractually due or, if due, the Joint Liquidators had taken no steps to recover it.
20. Section 115 of the Insolvency Act 1986 provides: -

"All expenses properly incurred in the winding up, including the remuneration of the liquidator, are payable out of the company's assets in priority to all other claims."

21. Section 156 provides:-

"The Court may, in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the expenses incurred in the winding up in such order of priority as the Court thinks just."

22. Rule 12.2. of the Insolvency Rules 1986 provides:-

"All fees, costs, charges and other expenses incurred in the course of winding up or bankruptcy proceedings are to be regarded as expenses of the winding up or, as the case may be, of the bankruptcy. "

23. So far as material to this judgment rule 4. 218 of the Insolvency rules provides: -
24. 4.218 (1) the expenses of the liquidation are payable out of the assets in the following order or priority –
25. expenses properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or getting in any of the assets of the company;…
26. (m) Any necessary disbursements by the liquidator in the course of his administration (including any expenses incurred by members of the liquidation committee or their representatives and allowed by the liquidator under Rule 4.169, but not including any payment of corporation tax in circumstances referred to in sub-paragraph ( p) below) ;…
27. The amount of any corporation tax on chargeable gains accruing on the realisation of any asset of the company (without regard to whether the realisation is affected by the liquidator, a secured creditor, or a receiver or manager appointed to deal with the security );. . ."
28. It was Mr Phillips’ submissions on behalf of the Joint Liquidators that not every liability which falls due from a company after the commencement of it’s liquidation is payable as an expense of the winding up within section 115 of the Insolvency Act. Only those liabilities which are incurred by the liquidator for the purposes of the liquidation are so payable. This "rule" he described as the "the liquidation expenses principle" and arose as a result of the proper construction of the sections of the Insolvency Act and the Insolvency Rules which I have set out above.
29. For the construction of those sections and rules I was taken to a number of authorities. The leading authority on this area of the law is the decision of the Court of Appeal in re Oak Pits Colliery Company 1882 21. CD page 322. The issue in that case arose in the liquidation of a colliery company. The material facts were that initially the liquidator did not take possession either of the colliery or of 163 acres of land appurtenant to it which were the subject of a lease to the company. However the liquidator did not either take any steps to surrender the colliery and the land to the landlord under that lease. Later the liquidator had the whole of the plant and machinery of the colliery valued for the purposes of a sale to mortgagees which did not proceed. The liquidator then advertised the plant and machinery for sale to the public and it was sold. The landlord sought payment in full of the rent in respect of the premises let and leave to distrain on the company's goods for the purposes of enforcement of that claim. The Judge at first instance ordered the liquidator to pay to the Landlord's rent from the commencement of the liquidation.
30. The Court of Appeal allowed an appeal by the liquidator. The judgment of the Court was delivered by Lord Justice Lindley the material part of which starts at page 330 of the report: -
31. "If the liquidator has retained possession for the purposes of the winding up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it or to do the best he can with it, the landlord will be allowed to distrain for rent which has become due since the winding up:… when the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company, and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose, and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full without reference to the amount which could be realised by a distress. … But no authority has yet gone the length of deciding that a Landlord is entitled to distrain for, or be paid in full, rent accruing since the commencement of the winding up, when the liquidator has done nothing except abstain from trying to get rid of the property which the company holds as lessee."
32. In his judgment in re Downer Enterprises 1974 1 WLR page 1460 at page 1466 the Vice Chancellor Sir John Pennycuick having cited a passage from the judgment of Plowman J in re ABC Coupler and Engineering Company limited (No. 3)(1970)1WLR p702 at page709 then continued: -
33. "I confess that I'm not entirely happy at the expression "motivation". That seems to make the right of the landlord dependent on the subjective processes in the mind of the liquidator. However, the difficulty is perhaps not a real one in most ordinary cases and there is nothing extraordinary about the case before me. The Landlord's motivation will be found or will be inferred from what he in fact did.
34. What happened, as appears from the evidence, … was that for a short time, certainly a matter of weeks but probably a matter of a few months after the commencement of the winding up on 8th November, 1971, the liquidator cast about by way of taking legal advice and so forth, to ascertain what he should do with this property and, in particular, whether he should disclaim it. However having for one reason or another, decided on advice not to disclaim it, he then gave instructions to agents to find a purchaser. … Given those facts it seems to me that from the date when he gave instructions to find a purchaser - that is some date in the early spring of 1972 - the liquidator must be treated as having remained in possession of this property with a view to the realisation of the property to the best available advantage, or, in other words, he must be treated as having kept the property in order to sell it or do the best he could with it."
35. In re Mesco Properties Limited 1979 1 WLR p558 Mr Justice Brightman was considering a case where a liquidator in the process of realising the assets of a company in liquidation had sold properties at a profit over their purchase price thereby giving rise to the incidence of corporation tax on the resulting capital gain. However because the amounts due to secured creditors had to be discharged the net proceeds of sale of the properties was sufficient to pay both the tax and the liquidators fees. On the Liquidator’s summons to determine (1) whether the corporation tax was part of "the fees and expenses properly incurred in preserving, realising or getting in the assets" within the meaning of the opening words of rule 195(1) of the Company's (Winding-up) rules 1949 or was part of "the necessary disbursements of any liquidator appointed in the winding up by the Court other than expenses properly incurred in preserving, realising or getting in the assets heretofore provided" within the 5th paragraph of the Sub-rule and (2) whether the corporation tax came within the expression "the costs charges and expenses incurred in the winding up" within section 267 of the Companies Act 1948, Mr Justice Brightman held that the corporation tax fell within rule 195(1) and so fell to be paid in priority to the remuneration of the liquidator as well as the ordinary creditors. On the second question the Judge held the tax was a charge or expense incurred by the liquidator in the winding-up and that he thus had power under section 267 to order payments from the available surplus as seemed just to him.
36. The decision of Brightman J was upheld in The Court of Appeal – 1980 1 WLR p 96.
37. Since re Mesco is an authority upon which the Inland Revenue place much reliance the relevant statutory provisions under which that case was decided should be set out. The equivalent of section 115 of the Insolvency Act in force in 1979 was section 309 of the Companies Act 1948. The two sections are in substantially the same terms.
38. Section 267 of the Companies Act 1948 was the equivalent of the present section 156 and provided:-
39. "The Court may, in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the costs, charges and expenses incurred in the winding up in such order of priority as the Court thinks just. "
40. Rule 195 of the Companies (Winding-up) Rules 1949 provided:-
41. The assets of a company in a winding up by the Court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets including where the company has previously commenced to be wound up voluntary such remuneration, costs and expenses as the Court may allow to a liquidator appointed in such voluntary winding up, shall, … be liable to the following payments, which shall be made in the following order of priority namely:

 

42. First…
43. Next …
44. Next…
45. Next…
46. Next - the necessary Disbursements of any liquidator appointed in the winding-up by the Court, other than expenses properly incurred in preserving realising or getting in the assets heretofore provided for. …"
47. Next…
48. Next The remuneration of any such liquidator
49. In dealing with the first question Mr Justice Brightman said this at page 561:-
50. "As I have already said, section 243(2) of the Income And Corporation Tax Act 1970 [the then equivalent of section 8(2) of ICTA 1988] expressly enacts that a company is chargeable to corporation tax on a capital gain arising in the winding-up. It follows that the tax is a charge which the liquidator is bound to discharge by payment, to the extent that assets are available. It is, therefore, to my mind beyond argument that the payment of tax is a "necessary disbursement" of the liquidator and must come within the fifth paragraph of rule 195(1)… unless it is "an expense properly incurred in preserving, realising or getting in the assets, in which case it is excepted from the fifth paragraph because it falls within the opening words of the sub-rule."
51. At the bottom of page 562 the Judge having quoted an extract from the judgment of Mr Justice Maugham in the re Beni-Felkai Mining Co 1934 CH p 406, continues:-
52. "I respectfully agree with his conclusion, given obiter, that in the case of a compulsory liquidation income tax incurred by the liquidator under schedule D in carrying on the business of the company after the date of the order is not an expense incurred in realising or getting in the assets notwithstanding he is carrying on the business in the course of the performance of his duty to realise and get in the assets: nor do I think that corporation tax on a capital gain made by the liquidator when he sells an asset is "an expense incurred in realising" that asset. It is not like the fees payable to a solicitor or to an estate agent in connection with a sale, or the advertising costs of a sale which are clearly part of the expenses of the sale. The tax does not assist the liquidator to sell. Nor is it a necessary result of the sale. It is merely a possible consequence of a sale at a profit. Even when a sale has been made at a profit the liquidator may not know whether any tax will ultimately be payable. This will depend on what, if any, profits including both income and chargeable gains or losses arise in that financial year and whether any losses can be carried forward from a previous year. The tax is merely a possible consequence of the realisation of an asset at a profit; it is not an expense which the liquidator incurs for the purposes of, or as a direct result of realising that asset, and therefore it is not, in my view, an expense incurred in realising it. However it seems to me equally clear as I have already indicated that the tax is a necessary disbursement of the liquidator and therefore falls within the fifth paragraph of rule 195(1).
53. I turn now to the second question. The Beni-Felkai case is a direct authority that schedule D income tax is a charge or expense "incurred in the winding-up" within the meaning of what is now section 267 of the Act. It seems to me equally clear that corporation tax is also such a charge or expense. This follows from the decision which I have already made that the tax is a necessary disbursement of the liquidator."
54. The Court of Appeal 1980 1 WLR p 96 agreed with Mr Justice Brightman. At page 99 Lord Justice Buckley giving the lead judgment said:-
55. "The first question for consideration is, I think, whether Brightman J was right in holding that the tax constitutes a necessary disbursement within the meaning of the rule. It would, in my view, be a very remarkable thing if the proper priority of a liability under rule 195 were to depend upon whether the liquidator decides to pay or not, which seems to be the effect of Mr Dillon’s argument, for he says that if the liquidator had paid the tax it could properly be described as a disbursement but that until he pays it cannot so be described. …
56. The company is liable for the tax which is due. The tax ought to be paid. The liquidator is the proper officer to pay it. When he pays it he will clearly make a disbursement. In my judgment it will be a necessary disbursement within the meaning of the rule. Moreover common sense and justice seem to me to require that it should be discharged in full in priority to the unsecured creditors, and to any expenses which rank lower in priority under rule 195. The tax is a consequence of the realisation of the assets in the course of the winding-up of the company. That realisation is a necessary step in the liquidation; that is to say, in the administration of the insolvent estate. The fact that in the event there may be nothing available for the unsecured creditors does not, in my view, mean that the realisation was not a step taken in the interests of all who have claims against the company. Those claims must necessarily be met out of the available assets in due order of priority. Superior claims may baulk inferior ones, but the liquidator’s duty is to realise the assets for the benefit of all in accordance with their rights. If in consequence of the realisation, the company incurs a liability, the discharge of such liability must, in my judgment, constitute a charge or expense incurred in the winding-up within section 267 of the Companies Act 1948 and must also, in my view, fall within rule 195."
57. Lord Justice Buckley then expressly agreed with the passage from Mr Justice Brightman’s judgment, set out above, in which he concluded that the tax was a "necessary disbursement" within section 195(1) because in was tax which the liquidator was bound to discharge under section 243(2) of the 1970 Act. He then continues:-
58. "Brightman J expressed the opinion that corporation tax on a capital gain, made when a liquidator sells an asset, is not an "expense incurred in realising that asset". I agree with this. The liability to tax is a consequence of, amongst other things, the realisation, but it is not a direct consequence of the realisation. It depends upon the amount of the company’s "profits" as defined in section 238 [of the 1970 Act] (if any) for the entire relevant accounting period. It is, as the Judge said, merely a possible consequence of a sale at a profit. He consequently reached the conclusion that the tax did not fall within the expression "fees and expenses…incurred in… realising… the assets" in the opening words in rule 195, but did fall within the words "the necessary disbursements of any liquidator appointed in the winding-up by the Court… in the fifth paragraph of paragraph 1 of the rule.
59. On the question raised by paragraph (2) of the summons, he held that the corporation tax was a charge or expense incurred in the winding-up within section 267. In my judgment the Judges conclusions were correct…".
60. In re Atlantic Computer Systems Plc 1992 CH p 505 the Court of Appeal were considering claims by the lessors for rentals becoming due on chattels leased to the company which, after an administration order remained in the possession of the company and were used by the administrators. At page 522 of the report Lord Justice Nicholls having referred to the example of the case where a person seeks leave to seize the property of a company in liquidation which would if allowed by the Court, be inconsistent with the purpose for which Parliament imposed a prohibition on proceedings against the company continued:-
61. "However, the matter stands differently if the debt, in respect of which the creditor seeking to exercise a remedy against the company’s property was a new debt incurred by the liquidator for the purposes of the liquidation. In such a case the grant of leave would not be inconsistent with the purpose of the legislation. In such a case it is just and equitable that the burden of the debt should be borne by those for whose benefit the insolvent estate is being administered. The Court should exercise its discretion accordingly. The creditor should be at liberty to enforce his rights against the company’s property if his debt is not paid in full. Further, and by way of corollary, since the debt was incurred for the purpose of the liquidation, it is properly to be regarded as an expense of the liquidation and it ought to be paid as such. The Court will direct the liquidator accordingly."
62. In re Kentish Homes Ltd 1993 BCC p212 Lord Nicholls by this time Vice Chancellor was considering a claim by a local authority to be paid standard community charge as an expense in the liquidation of a property development company which was not due at the commencement of the liquidation but had accrued due thereafter by reason of the company being the freeholder of empty but completed flats. He held that whereas the company was liable for the community charge, that charge was not to be treated as an expense of the winding-up nor was it provable in the winding-up pari passu with the ordinary creditors. At page 217 the Vice Chancellor says this:-
63. "It is against this background that the Court is being asked to direct that the amounts due from the company to Tower Hamlets should be paid by the liquidators as expenses in the winding-up of the company. The obligation to make these payments is an obligation of the company and it arose while the company was being wound up. If the court directs the liquidators to discharge this obligation of the company out of the assets in their hands, the payment will constitute an expense properly incurred in the winding-up. It will rank for payment as a "necessary disbursement" by the liquidators in the course of their administration section 115 and rule 4.218(m)).
64. An interesting illustration of the Court giving such a direction is to be found in re Mesco Properties … there several properties were sold after a company had gone into liquidation some of the sales were by the liquidator, others by a receiver appointed under legal charges, and one of the sales was by the mortgagee bank itself. In consequence a liability to corporation tax in respect of chargeable gains arose. In each case the tax liability was that of the company, even though some of the sales had been made by a receiver or the mortgagee. The liquidator was under no personal liability. Brightman J held that payment of the tax was a necessary disbursement which the liquidator was bound to make."
65. The Vice Chancellor then sets out part of the passage from the judgment of Lord Justice Buckley which I have cited and continues:-
66. "In that case the Court held that justice required that the post liquidation tax liability should be paid as a liquidation expense. In re Atlantic Computer Systems … this Court noted that in determining whether an obligation of the company arising after the commencement of the winding-up should be discharged as a liquidation expense, the Court is exercising a discretion, albeit the discretion is exercised in accordance with established principles. One of the circumstances in which the Court will normally direct payment of such an obligation as a liquidation expense is when the debtor’s obligation arises from property retained by a liquidator for the purposes of the liquidation…."
67. It was Mr Jones’ first submission on behalf of the Commissioner’s that where it is established that a company in liquidation has made a payment or incurred a liability which constitutes an expense "incurred in the winding-up" the Court has no discretion but to award it the priority over the company’s ordinary creditors conferred by section 115. (see per Phillips LJ in re Exchange Travel 1997 2 BCLC 579 at 587h) . I accept that submission. It does not seem to me that the extract from the judgment of the Vice Chancellor in the Kentish Homes case, when properly analysed, is to a contrary effect. Those expenses are payable in the priority provided for in rule 4.218. if the assets are insufficient to pay the expenses the Court has a discretion under section 156 to vary that order of priority.
68. Mr Jones second submission is that the decision of the Court of Appeal in re Mesco Properties is direct binding authority for the proposition that corporation tax on post liquidation profits is a necessary disbursement which the liquidator is bound to pay in full at the conclusion of the liquidation out of the assets of the company and in priority to any claim of the unsecured pre-liquidation creditors. I am not able to accept that submission.
69. The Mesco case was decided under rule 195 of the Companies (Winding-up) Rules 1949. It decided that corporation tax arising as a result of the sale of the company’s assets in the course of its liquidation fell within the fifth paragraph of rule 195 being a "necessary disbursement of any liquidator". Although Lord Justice Buckley speaks of the tax as "a consequence of the realisation of the assets in the course of the winding-up of the company… a necessary step in the liquidation …" it is clearly arguable that because the Court of Appeal approved the judgment of Mr Justice Brightman including the passages which I have quoted from his judgment and because of the second passage from Lord Justice Buckley’s judgment which I have quoted, corporation tax from whatever source constitutes a disbursement within rule 195.
70. However the Mesco Properties case was decided under rule 195 of the Companies (Winding-up) Rules 1949. Since then those rules have been replaced. The current equivalent of the fifth paragraph of rule 195 is rule 4.218(1)(m) of the Insolvency Rules 1986. It is clear that corporation tax resulting from gains on the sales of company assets such as was being dealt with in the Mesco Properties case will not fit into sub-rule (m) by reason of the last three lines of that sub-rule which expressly exclude "any payment of corporation tax in circumstances referred to in sub-paragraph (p) below", namely, "tax on chargeable gain accruing on the realisation of any asset of the company…". The tax with which the Court was concerned in the Mesco Properties case would today be treated as an expense of the winding-up taking priority as being included in sub-rule (p).
71. The present case does not concern corporation tax arising on the sale of assets. The Commissioners contend that corporation tax from what ever source derived is a disbursement by the liquidator within sub-rule (m) although the actual dispute has arisen because a substantial part, if not the whole, of the corporation tax chargeable to the company under section 8(2) ICTA 1988 arises from "notional" interest which the company has not actually received. There is no other sub-rule to rule 4.218(1) into which corporation tax can fall. Sub-rule (a) is clearly excluded.
72. The question therefore is whether corporation tax generally fits into sub-rule (m). in my judgment it does not and the decision of the Court of Appeal in Mesco Properties does not bind me to find that it does. It seems to me that rule 4.218(1) is to be construed as only including so much of any charge to corporation tax payable by a company after its liquidation as is referable to sales of the company’s assets. Consistently with this construction provision made in sub-rule (p) for the priority of such corporation tax. There seems no logic in a scheme which gives different priority to corporation tax depending on the source from which it arises. In particular there seems no logic in giving corporation tax from income arising from a source other than the gains realised on a sale of the company’s assets, priority over remuneration of a liquidator while corporation tax arising from the sale of assets takes a lower priority. If it is right that the legislature did not intend to differentiate between sources of corporation tax and such tax is to be treated as a disbursement within sub-rule (m) there would be no need for sub-rule (p) at all.
73. It was then contended on behalf of the Commissioners that corporation tax arising from sources other than gains on sales of assets by the liquidator falls within rule 12.2 of the Insolvency Rules being a charge "incurred in the course of winding-up … proceedings… ." It was argued that because in Mesco Properties Mr Justice Brightman and the Court of Appeal held that the corporation tax in that case fell within the words "costs charges and expenses incurred in the winding-up" within section 267 of the 1948 Act it must be taken to fall within "all fees, costs, charges and other expenses incurred in the winding-up…" for the purposes of rule 12.2. I have come to the conclusion that rule 12.2 is not to be construed in that way. Section 267 and its modern equivalent section 156 of the Insolvency Act are not concerned to define what "charges" constitute expenses in the winding-up having priority but are concerned to deal with the particular case where there are insufficient assets in the liquidation to meet all the charges which constitute expenses (see Insolvency Rules 4.220). By contrast rule 12.2 is a rule plainly intended to define the meaning of "expenses properly incurred in the winding-up" when used in section 115 of the Insolvency Act. Section 156 only speaks of "the expenses incurred in the winding-up". Applying the ejusdem generis rule of construction to "fees, costs, charges and other expenses" does not, in my view, lead to a construction which makes corporation tax a "charge". Tax of any kind and, in particular, tax on notional income which the company has never actually received, cannot, it seems to me, be treated as an "other expense" of winding-up proceedings.
74. Further as I have concluded that corporation tax generally does not fit into Insolvency rule 4.218(1). That sub-rule was plainly intended to contain an exhaustive list of all "expenses" having priority subject to the provisions of sub-rules (2) and (3) which do not affect this case. (see per Phillips LJ in re Exchange Travel at p 587 and per Chadwick LJ in re RS & M Engineering Co Ltd unreported 15^th Jan 1999).
75. For these reasons I reject the argument put forward on behalf of the Commissioners. It seems to me that the present state of the law is summarised in the passages which I have quoted from the judgments of Lord Nicholls in the Atlantic Computer and Kentish Homes cases. There is little to distinguish the facts in the Kentish Homes case from those of the present case. In the present case the company has not received nor sought to obtain any interest on its outstanding loans to TEE. The tax liability on the notional interest arising is not a consequence of any realisation of or use of property of the company by the liquidators. The compromise of the company’s claim against TEE in exchange for a percentage of the net proceeds of sale of TEE’s assets did not in any sense give rise to the tax charge. In that sense the facts in the present case are afortiori the decision in Kentish Homes where the claim for community charge resulted from the liquidators completing the unfinished flats. Payment of the tax would not be a "disbursement" rendered necessary by the proper performance of the liquidator’s duties (per Phillips LJ ibid. at p588).
76. For these reasons I would answer the question posed by paragraph 1 of the Joint Liquidator’s originating application in the negative and direct the liquidators to administer the assets of the company in their hands accordingly.