England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		24 March 2009

The Chancellor:

Introduction
1. By an Agreement dated 18th January 1996 ("the Sale Agreement") the appellant, then called Halliburton Holdings Ltd, agreed to sell to Highlands Holdings (UK) Ltd ("HHUKL") for $7.5m the issued share capital in Highlands Insurance Company (UK) Ltd ("HICUK") and Highlands Underwriting Agents Ltd ("HUAL") conditionally on "the Distribution [as defined] being effected" pursuant to a Distribution Agreement dated 10th October 1995 and made between Halliburton Company (1) and Highlands Insurance Group, Inc.("HIG") (2). The distribution referred to was effected at or before 0830 on 23rd January 1996 and the sale of the shares was duly completed later on the same day.
2. In its corporation tax return for the accounting period ended 31st January 2000 the appellant ("HHL") sought to set against its profits a loss of £14,867,445 it claimed to have sustained in consequence of the sale of the shares in HICUK and HUAL. This claim was rejected by HMRC by means of a notice of amendment issued on 14th August 2007 on the ground that HHL and HHUKL were, at the relevant time, connected persons for the purposes of s.18 Taxation of Chargeable Gains Act 1992 ("TCGA") with the consequence, pursuant to s.18(3) TCGA, that the loss was not available to be set against the chargeable gains of HHL arising from transactions with persons other than HHUKL.
3. HHL's appeal against that notice was dismissed by the Special Commissioner (Dr Avery Jones CBE) on 18th June 2008. For the reasons explained in his decision, which I shall consider in detail later, he found that HHL and HHUKL were connected persons at the relevant time as defined by s.286(5)(b) TCGA. HHL now appeals to the High Court. As is well known such an appeal lies under s.56A Taxes Management Act 1970 on a point of law only. Before describing the points of law relied on it is necessary to refer in more detail to the facts, the relevant legislation and the reasoning and conclusions of the Special Commissioner.
The Facts
4. Halliburton Company is a company incorporated under the laws of the State of Delaware. Its shares were and are quoted on the New York Stock Exchange. It was the ultimate holding company of a group comprising subsidiaries incorporated in Delaware and England and engaged in energy or insurance businesses. It wished to regroup its insurance industries under HIG and spin that group off to the shareholders in Halliburton Company. The machinery for achieving that result was set out at length in a Distribution Agreement dated 10th October 1995 and made between Halliburton Company (1) and HIG (2) ("the Distribution Agreement"). The distribution for which it provided was the distribution amongst the members of Halliburton Company on the Distribution Record Date the proportionately equivalent number of shares in HIG which were also to be quoted on the New York Stock Exchange. The distribution was conditional on the matters set out in clause 4.01, but even if they were fulfilled Halliburton Company remained free to abandon the project at any time before the Distribution Date (see clauses 4.02 and 9.01). The Distribution Agreement also provided in clause 3.07 (in both its original and amended form) that "immediately following the Distribution Date" HHUKL, newly incorporated as a wholly owned subsidiary of HIG, should buy the issued share capital of HICUK and HUAL.
5. On 26th December 1995 the directors of Halliburton Company determined, as provided in the Distribution Agreement, that the Distribution Record Date and the Distribution Date should be 4th and 23rd January 1996 respectively. As I have indicated in paragraph 1 above, the agreement for the sale of the shares in HICUK and HUAL by HHL to HHUKL was made on 18th January 1996. The sale was conditional on

"the Distribution (as such term is defined in the Distribution Agreement) being effected pursuant to the Distribution Agreement"

That condition matched the provision in clause 3.07 of the Distribution Agreement that the sale should be "immediately following" the Distribution Date.

6. The conditions precedent to the Distribution were satisfied by close of business on 22nd January 1996 and the Distribution itself was effected by 0830 on 23rd January 1996. The Closing Memorandum records that the shares in HIG were duly issued to the members of Halliburton Company on its register of members on 4th January 1996 and immediately thereafter the sale of the shares in HICUK and HUAL by HHL to HHUKL for $7.5m was duly completed.
7. The Agreed Statement of Facts put before the Special Commissioner included details as to the shareholdings in Halliburton Company as at the Distribution Record Date and in Halliburton and HIG at the Distribution Date. The Special Commissioner concluded in paragraph 18 of his decision:

"On 23 January 1996 the shareholders of Halliburton Company and of HIG (who are the shareholders of Halliburton Company as at 4 January 1996) are not identical since there have been changes of 16% in between the two dates and may be other dealings outside the stock exchange. But I infer, and find as a fact, that one could identify a collection of shareholders who owned the greater part of the share capital of both companies on 23 January 1996."

There is no challenge to that conclusion.

8. As I have indicated HHL claimed that the sale of the shares in HICUK and HUAL gave rise to a capital loss of some £14m and sought to set it off against chargeable gains arising on transactions with parties other than HHUKL. HMRC contended that as HHL and HHUKL were connected persons such set off was not permissible. That contention was upheld by the Special Commissioner.
The relevant legislation
9. Before I set out the conclusions of the Special Commissioner I should refer to the relevant legislation. I have set it out in its context in the appendix to this judgment. For present purposes it is sufficient to indicate its relevance in broad terms. S.18(3) precludes the set off HHL seeks to make if the sale of the shares in HICUK and HUAL by HHL to HHUKL comes within the section. The section applies

"...where a person acquires an asset and the person making the disposal is connected with him."

10. Who are connected persons is to be determined in accordance with the provisions of s.286. The material provision is subsection (5)(b). This provides that:

"(5) A company is connected with another company-

(a)...

(b) if a group of 2 or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected."

11. By s.288 "control" is to be construed in accordance with section 416 of the Taxes Act 1988. S.416 contains elaborate provisions for determining whether a person has control of a company. HMRC rely on subsections (2), (3) and (6). So far as material they provide:

"(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs,...

(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.

[(4)...

(5)...]

(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection;"

HHL contends that on the facts of this case those provisions do not apply.

12. Given the facts to which I have referred the time at which the question of connection is to be answered is obviously important. In that context it is necessary to have regard to s. 28 TCGA. That section provides:

"28 Time of disposal and acquisition where asset disposed of under contract

(1) Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).

(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied."

The decision of the Special Commissioner
13. After setting out the agreed statement of facts, the terms of the relevant legislation and a summary of the submissions made to him by counsel for the parties the Special Commissioner explained the reasons for his decision. He started by considering three submissions made by counsel for HMRC as to the timing of the sale of the shares by HHL to HHUKL. In each case he rejected them but as they have been raised again before me and as logically they come first I will set out the Special Commissioner's conclusions in respect of them.
14. The first submission was to the effect that s.28 does not affect the application of s.18 so that if the contract was made between parties who were connected then it does not cease to apply if they cease to be connected when the conditions are satisfied. The Special Commissioner said [8]:

"I can see the sense of this, but that is not what s 18 says. Section 18 applies "where a person acquires an asset and the person making the disposal is connected with him." Both disposal and the definition of connected persons must be applied at the same time ("is connected"). Section 28 specifies the time of disposal and it would be odd if the time at which the persons were connected had to be determined at a different time without the section making this clear. Indeed s 18(3) contains an express reference to a gain made on subsequent disposal of an asset at a time when the parties are connected persons:

"...a chargeable gain accruing to him on some other disposal of an asset to the person acquiring the asset mentioned in subsection (1) above, being a disposal made at a time when they are connected persons."

It would be impossible to say there that s 28 did not determine the time of both the disposal and the connection, which helps to show that other timing references in the section are determined by s 28."

15. The Special Commissioner then considered an argument of counsel for HMRC to the effect that the Sale Agreement became unconditional at the time when the conditions in the Distribution Agreement were satisfied so that the question of connection had to be answered at a time before actual completion of either of them. The Special Commissioner rejected this contention on the grounds that it was contrary to the express wording of both the Distribution Agreement and the Sale Agreement. He said [9]:

"The parties have made it clear that they intended the Distribution to take effect before the sale of shares. Reading the reference to the Distribution being effected to mean the Distribution Agreement becoming unconditional would be contrary to the expressed intention of the parties."

In paragraph [10] he rejected for similar reasons an associated submission to the effect that the share sale and distribution were effected simultaneously and should not be dissected. He said:

"I see no reason to say that transactions took effect at the same time when the parties have been careful to specify that they took place in a certain order."

16. In paragraphs [11] to [19] the Special Commissioner considered the submission of counsel for HMRC that the circumstances fell within s.286(5)(b) TCGA and s.416(6) ICTA. Given his finding of fact I have quoted in paragraph 7 above he concluded that they did. His reasons appear in paragraphs [15] to [17] as follows:

"15. The issue is whether the shareholders in Halliburton Company and HIG are "a group of 2 or more persons [which] has control of each company" for s 286 and "two or more persons [who] together satisfy any of the conditions of subsection (2) above" for s 416. The opening part of s 416 is oddly worded: "a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs." Shareholders in a UK company (and in the absence of evidence I have to assume that it is the same for a Delaware company) can never excise control over the company's affairs in the sense of the business of the company; the most they can do is to remove the directors. The affairs of the company cannot therefore refer to the business of the company, as Morritt LJ said in Steele v EVC International NV [1996] STC 785 at 794, and must mean control at general meetings of the company. In any case s 416(2) goes on to say that, without prejudice to the generality of those preceding words, a person shall be taken to have control of a company "if he possesses or is entitled to acquire-(a) the greater part of the share capital...". Therefore one person having the greater part of the share capital of a company has control over the company.

16. By s 416(3) "Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company." I do not read "together" as imposing any additional requirement that there is an agreement between them so that they can collectively exercise control before one can aggregate their votes; it is the natural word to use to total their rights, here their shareholdings. That seems to have been accepted in Steele v EVC International NV at 795b; the point that was common ground, that coincidence of voting the same way at general meetings was insufficient, relates to whether they were acting together to exercise or secure control within s 286(7), which is not in issue here. Therefore two or more persons together (ie in total) having the greater part of the share capital of a company have control over the company. It is not necessary to ask whether they exercise, or are able to exercise, control over the company's affairs. And by s 416(6) one can attribute to those two or more persons (I cannot see how the reference to person can be restricted to the singular person when applying subs (6) to subs (3)) all the rights and powers of any company of which they have control. That means that one can attribute to them the parent company's right to control its subsidiaries. Therefore the shareholders holding the greater part of the share capital of Halliburton Company control the Appellant, its 100% sub-subsidiary; and the shareholders holding the greater part of the share capital of HIG control HHUKL, its 100% subsidiary.

17. By s 286(5) "A company is connected with another company-(b) if a group of 2 or more persons has control of each company, and the groups...consist of the same persons..." Again I do not read the reference to group as importing any additional requirement of commonality of purpose. It is the natural word to denote a collection of people who here have a common relation, rather than purpose, of being shareholders in a company in accordance with the dictionary definition. [Counsel for HHL] makes the powerful point that many large public companies might be connected on this basis on account of large shareholdings by pension funds and institutional investors, which Parliament cannot have intended. While I see the force of this, large shareholders have to identify themselves so that one should be able to determine whether this is the case, and I suspect that it is unlikely that one would find a common collection of shareholders holding the greater part of the share capital of two otherwise unrelated companies. Here there is no problem in applying the rule because on the Distribution the shareholders are identical except for changes in the shareholders between 4 and 23 January 1996."

The issues and my conclusions
17. The issues fall into two categories namely (1) when the question of connection must be determined and (2) as at that time were HHL and HHUKL connected persons. Logically the first category should be considered and decided before the second. The issues in the first category are those raised by the respondent's notice issued by HMRC. They are (a) whether s.28 TCGA is relevant in the determination of whether the sale of the shares by HHL to HHUKL was a connected party transaction and, if so (b) whether the condition of the sale of the shares was satisfied at the same time as the distribution was effected.
18. Both ss. 18 and 28 fall within Part II TCGA which is entitled "General Provisions relating to computation of gains and acquisitions and disposals of assets". S.18 is in Chapter I described as "Introductory". S.28 is in Chapter II headed "Assets and disposals of assets". For the reasons set out in paragraph 15 above the Special Commissioner concluded that s.28 applied to determine the time at which the question of connection for the purpose of s.18 should be determined.
19. Counsel for HMRC submits that the Special Commissioner was wrong. He contends that the policy evidently behind s.18 applies to the contract when made not when completed. The possible consequences of a contract made between connected parties are that the price may be artificially determined or the terms artificially constructed. The first is nullified by s.18(2) applying s.17(1) and the second by s.18(3) restricting the uses to which a loss arising from a transaction between connected parties may be put. He submits that it would be contrary to such policy that s.18 should only apply to a conditional contract when the condition is satisfied and not when the conditional contract is made. He contends that the two sections deal with different subject matters. S.18 deals with connection between the parties to a disposal and s.28 to the timing of that disposal. He submits that the Special Commissioner adopted an unduly restricted interpretation of s.18 and implied into s.18 a requirement of connection at the time the conditions are satisfied which the wording does not justify. He contends that the Special Commissioner placed weight on the terms of s.18(3) which it will not bear.
20. This is disputed by counsel for HHL. He submits that the Special Commissioner was right for the reasons he gave. He points to the use of the present tense in s.18 as necessitating a connection at the time of the acquisition/disposal. He contends by reference both to its place in the Act and its terms that s.28 is and is intended to be of general application and dictates that in this case the acquisition/disposal occurred when the condition was satisfied.
21. There is considerable force in the policy arguments advanced by counsel for HMRC. But they presuppose that s.18 does not require the connection to exist both at the time the contract was concluded and at the time the condition was satisfied. As there is no doubt that the connection existed on 18th January 1996 it is not necessary to decide that point in this case. The question is whether the connection must (also) exist at the time the condition is satisfied. On that narrow issue, in my judgment, the express terms of ss.18 and 28 are clear. It is undeniable that the Sale Contract was a conditional contract within s.28(2). It follows that the acquisition/disposal was made at (or at least was not completed until) the time when the condition was satisfied, namely when the Distribution was effected. There is no suggestion that s.28 prescribes the time of the disposal for a particular limited purpose. It is true that s.18(1) deals with the situation "where" rather than "when" a person acquires an asset etc. It is also the case that the acquisition, whenever made, was by HHUKL from HHL. Nevertheless I am unable to read the word "is" in subsection (1) as including "was". As the Special Commissioner pointed out, if there were any doubt on this score it would be resolved by the express terms of subsection (3) requiring the second disposal to be made "at a time when they are connected persons".
22. I turn then to the second issue in relation to timing. This was dealt with by the Special Commissioner as indicated in paragraph 15 above. Counsel for HMRC contends that the Special Commissioner was wrong. He submits that the only realistic conclusion from the facts as found is that the Distribution and the Share sale took effect at the same time on 23rd January 1996. He contends that at that time both HHL and HHUKL were subsidiaries or sub-subsidiaries of Halliburton Company. Accordingly they were at that time connected parties within s.286(5)(a). If the premise is correct the conclusion follows.
23. In my judgment the premise is not correct. The agreements were quite specific on the matter. It was provided in both clause 3.07 of the Distribution Agreement and clause 2.2(a) of the Sale Agreement that the sale should follow the distribution. It would be inconsistent with both agreements for the two transactions to be implemented simultaneously. Moreover the Closing Memorandum is quite specific in showing that the Distribution was in Phase I, the completion of the Sale Agreement in Phase II and that Phase II followed on the completion of Phase I. There was no suggestion at the hearing before the Special Commissioner that the Closing Memorandum was inaccurate in any respect. In my judgment it is the best evidence of what actually happened on 23rd January 1996. For these reasons I agree with the Special Commissioner on this point too.
24. It follows from my conclusions so far that the question of connection must be determined as of the time after the Distribution had been effected on 23rd January 1996 when the Sale Agreement became unconditional. At that time, as the Special Commissioner found as a fact in paragraph [19] there was a

"collection (or "group") of shareholders holding the greater part of the share capital of Halliburton Company and of HIG...consisting of the same persons having control of each company..."

That conclusion is not challenged. The questions are whether such collections were (1) 'a group' for the purposes of s.286(5)(b), (2) 'two or more persons together' satisfying the conditions of s.416(2) ICTA for the purposes of s.416(3) and/or (3) there is to be attributed to them collectively the rights and powers of respectively Halliburton Company and HIG. For the reasons quoted in paragraph 16 above the Special Commissioner answered each of those questions in the affirmative.

25. Counsel for HHL submits that in each case the Special Commissioner was wrong. He takes the points in the reverse order. He submits that s.416(6) is the key provision because it is the only one which attributes to any person the rights and powers of a company which he controls. For this reason it is the only provision which enables the control of a subsidiary to be attributed to the controller of the parent company. He contends that it operates by attributing to the person identified under subsection (2) or each of the two or more persons identified under (3) the rights and powers of a company which that person controls either alone or in conjunction with his associates (as defined in s.417(3)). Put negatively he submits that s.416(6) does not authorise the attribution to two or more persons identified under (3), who are not associates of each other under s.417(3), the rights and powers of a company they jointly control.
26. In support of this submission counsel for HHL points out that ss.416 and 417 in their original context deal with close companies under the control of five or fewer people. Accordingly the focus is on individual shareholders notwithstanding that, as he accepted, those sections must for present purposes be construed in the context in which they are used, namely ascertaining control for the purpose of establishing a connection for capital gains tax purposes.
27. He traced this process through the earlier subsections. Thus subsection (2) looks to a single person, subsection (3) aggregates two or more persons and subsection (5) attributes to each of them the rights of a nominee for him or her. He contends that subsection (6) has exactly the same effect in its application to subsections (2) and (3). The emphasis is on the single person embraced by the pronoun "he". He submits that if the pronoun "he" is to be read as "he or they" in the application of subsection (6) to subsection (3) it would introduce a different meaning depending on whether subsection (6) was being applied to subsections (2) or (3). Further it would render redundant and be inconsistent with the subsequent references to associates.
28. Counsel for HHL draws particular attention to the passage in paragraph 16 of the Special Commissioner's decision where he said

"(I cannot see how the reference to person can be restricted to the singular person when applying subs (6) to subs (3))"

He submits that that conclusion is wrong in law and led the Special Commissioner into misapplying the subsection.

29. In relation to the second issue the Special Commissioner said

"...I do not read the reference to group as importing any additional requirement of commonality of purpose. It is the natural word to denote a collection of people who here have a common relation, rather than purpose, of being shareholders in a company in accordance with the dictionary definition." [17]

In relation to the first he considered

"I do not read "together" as imposing any additional requirement that there is an agreement between them so that they can collectively exercise control before one can aggregate their votes; it is the natural word to use to total their rights, here their shareholdings." [16]

30. Counsel for HHL submitted that each of those statements was wrong in law. In each case he suggested that the "two or more persons [who] together satisfy" any of the conditions for control set out in subsection (2) of s.416 or the "group of 2 or more persons [having] control" required by s.286(5) must have some common factor or connecting link in addition to the fact that they all hold shares in the same company. The common factor or connecting link he submits is required is a "commonality of wish or purpose". He submits that this additional requirement is warranted by both the requirement that the two or more persons should "together satisfy" the requisite conditions and that they should constitute a "group" within the normal meaning of the word. He points out that if all that is required is the ability to identify members of company A who are also members of Company B and hold 50% or more of the issued share capital of each company it will in practice give rise to much doubt and difficulty.
31. Counsel for HMRC dealt with these issues in the order in which I have set them out in paragraph 24 above. He too relied on the ordinary dictionary meaning of the word 'group' given in the Shorter Oxford English Dictionary, namely

"A number of people or things regarded as forming a unity or whole on the grounds of some mutual or common relation or purpose, or classed together because of a degree of similarity."

He contended that membership of the same company was a sufficient common relation. Accordingly s.286(5)(b) was satisfied. Consequently the Special Commissioner was right on the first issue.

32. In relation to the second issue he points out that the definition of control in s.416(2) is satisfied "if he...is able...to exercise...indirect control over the company's affairs". Accordingly when considering the application of s.416(3) it is necessary to ask the question whether "two or more persons...are able...to exercise...indirect control over the company's affairs". To satisfy that condition an ability to control is enough without any commonality of wish or purpose.
33. Counsel for HMRC also submits and submitted to the Special Commissioner that on the findings of the Special Commissioner and on a straightforward application of s.416(3) the respective groups of shareholders in Halliburton Company and HIG did indirectly control HHL and HHUKL immediately after the distribution had been effected. On this basis it is not necessary to resort to the provisions of subsection (6). The Special Commissioner did not deal with this submission but it is not disputed that it is open to counsel for HMRC to rely on it in this court.
34. In relation to s.416(6) counsel for HMRC points out that s.416 as a whole is applicable to an enormous diversity of situations. The fact that the application of a part of it to one situation renders other parts redundant should not be a cause for surprise or a reason for giving a strained construction to either part. He suggests that to limit the application of subsection (6) to subsection (3) in the manner in the way counsel for HHL suggests would be both unreasonable and contrary to the decision of Lightman J in Gascoines Group Ltd v HMIT [2004] EWHC 640(Ch) para 12. In that paragraph, he submits, Lightman J regarded control of a subsidiary as giving rise to either indirect control by the controller of the parent under s.416(2) or the attribution of control of the subsidiary to the controller of the parent under s.416(6). Counsel for HMRC suggested that in s.416(6) "he" must be read as "he or they" in its application to subsection (3). Thus where two or more persons together control the parent the rights and powers of the parent over the subsidiary are to be attributed to them together.
35. In his reply counsel for HHL submitted that HMRC had provided no answer to his objections to their reading of s.416(6). He suggested that if "indirect" control included the control of a wholly owned subsidiary by the controller of the parent then most of subsection (6) is redundant. He submitted that in paragraph 12 of his judgment in Gascoines Group Ltd v HMIT [2004] EWHC 640(Ch) Lightman J evidently regarded the satisfaction of subsections (2) and (6) as cumulative not alternative requirements for they were separated by a conjunctive "and".
36. I propose to deal with these issues in the order in which I set them out in paragraph 24 above. Thus the first issue is whether the collections of shareholders identified by the Special Commissioner in paragraph 18 of his decision were 'groups' within the meaning of that word in the context of s.286(5)(b). The ordinary meaning of the word is satisfied by a common relation without any requirement for a common purpose. Their individual membership of the relevant companies is a relation common to all of them. Moreover the purpose of s.286(5)(b) is to identify whether that collection or group has control of the relevant companies. Such control is to be construed in accordance with s.416 ICTA. That definition requires the group to be "able to exercise...control". It would be inconsistent with that provision to construe the word 'group' as impliedly requiring a commonality of view or purpose in addition to a common relation. For these reasons I consider that the collections of members identified by the Special Commissioner in paragraph 18 of his judgment were 'groups' within the meaning of that word in the context of s.286(5)(b).
37. The second issue is similar. As no single member of those groups enjoyed control it would be necessary to aggregate them. This depends on satisfying the condition of s.416(3) that they are properly to be regarded as "two or more persons together satisfying any of the conditions of subsection (2)". Given that the normal meaning of the word 'together' relates to "conjunction, association or contact" and given that the purpose of the conjunction is to determine whether the aggregate is "able to exercise...control" I see no scope for implying any additional requirement of commonality of view or purpose. Accordingly I conclude that the collection of shareholders identified by the Special Commissioner in paragraph 18 of his decision are also properly to be considered as "two or more persons [acting] together" for the purposes of s.416(3).
38. I turn then to the issues arising on the application of s.416(3) and (6). I do so by reference to a simple, and common, corporate structure. Assume three individuals A, B and C each holding one third of the issued capital of company X. Company X holds all the issued capital of company Y and company Y holds all the issued capital of company Z. In that structure it is plain that A, B and C together control company X within subsection (3). But if the argument of counsel for HHL is well founded they do not control companies Y or Z. This would be because, in his submission, the word "indirect" in subsection (2) does not comprehend the control of a controller of a parent company over its wholly owned subsidiary. Further, on his submission, subsection (6) would not apply so as to attribute to A, B and C jointly the rights and powers enjoyed by company X over company Y because such attribution can only be made to each of them singly and none of them singly controls company X.
39. The starting point is the meaning of "control over the company's affairs" in s.416(2). In Steele v EVC International NV [1996] STC 785 the Court of Appeal had to consider the same definition used in the different context of double taxation relief. At page 794j I expressed the view, with which the other members of the Court of Appeal agreed, that

"..control of the affairs of the company in s.416 means control at the level of general meetings of the company in the sense explained in the cases to which I have referred. Those cases recognise that control at that level carries with it the power to make the ultimate decisions as to the business of the company and in that sense control its affairs."

Neither party sought to challenge that view.

40. S.416(2) includes in the concept of control but without prejudice to the generality of the preceding words of the subsection, three specific examples of control, direct or indirect. They are the possession or entitlement to acquire (a) the greater part of the capital or voting rights of the company, (b) such part of the capital as would be entitled to the greater part of the company's income if it were distributed or (c) the right to the greater part of the assets as would be distributable in a winding up to participators. In this context the concept of indirect control of a company's affairs is wide.
41. In Gascoines Group Ltd v HMIT [2004] EWHC 640(Ch) Lightman J was concerned with the availability of small company relief. The relevant legislation applied the definitions of control contained in s.416. The facts and conclusions of Lightman J sufficiently appear from paragraph 12 of his judgment:

"On these facts: (1) Mr D W H Gascoine had control of Gascoines, because he owned the greater part of the share capital: section 416(2)(a); (2) Mr D W H Gascoine also had control of Newark, because (a) (since he owned the greater part of the share capital in Gascoines, its parent) he was able to exercise direct or indirect control over the affairs of Newark: section 416(2); and (b) Gascoines had control of Newark and all the rights and powers of Gascoines may be attributed to Mr Gascoine under section 416(6); (3) Mr D W H Gascoine also had control of Saracens because: (a) the Trustees of the 1987 Trust owned 99% of Saracens. The Trustees therefore together had control of Saracens because they owned the greater part of the share capital: section 416(2) and section 416(3); (b) the Trustees are associates of Mr D W H Gascoine, because he is a settlor of the 1987 Trust: section 417(3)(b); and (c) therefore, the rights of the Trustees are to be attributed to Mr D W H Gascoine who is to be taken to have control of Saracens: section 416(6)."

42. The significance of that judgment for present purposes is that Lightman J regarded Mr DWH Gascoine as having indirect control of Newark, the subsidiary of Gascoines, both under s.416(2) and by attribution of the rights of Gascoines under s.416(6). He plainly regarded them as alternatives and not cumulative requirements for the existence of control. I should follow his judgment unless I am convinced that he was wrong. In my judgment Lightman J was plainly right. The concept of indirect control of a company's affairs is imprecise, but once it is accepted that control can be indirect, if the controller of a parent company does not have indirect control of its wholly owned subsidiary I am unable to give any sensible meaning to the concept of indirect control. Accordingly in the example I have postulated in paragraph 37 above A, B and C have direct control of company X under s.416(3) and indirect control of companies Y and Z.
43. A conclusion that s.416(3) applies does not of itself exclude the possible application of s.416(6). I agree with counsel for HMRC that s.416 is cast in wide terms so as to be applicable in all the possible variations of corporate structures. The fact that one application may be thought to duplicate another or indicate that other provisions may be redundant is not enough to exclude it. This was evidently the view of Lightman J in Gascoines. Accordingly it is appropriate to consider the application of s.416(6) as well as that of s.416(3).
44. There is no doubt that that subsection applies so as to attribute to company Y its rights and powers in respect of company Z and to company X its rights and powers in respect of company Y which would include those over company Z. The contention of counsel for HHL is that the process of attribution cannot be carried further up the chain so as to attribute to A, B and C together the rights and powers of company X. He accepts that such an exercise could be carried out under subsection (2) if control of company X was vested in A alone but not under subsection (3) when it is divided between A, B and C.
45. The opening words of subsection (6) clearly contemplate that that subsection should be equally applicable to subsection (3) as it is to subsection (2). That purpose is defeated if it is read in the literal way for which counsel for HHL contends. It is intended to apply in circumstances where two or more persons together have control of company X. That is not achieved if the concept of such joint control is not carried down to subsection (6) as necessarily implicit in the opening words "for the purpose of subsection..(3) above". Thus where two or more persons together (A, B and C) have control of company X there is to be attributed to them together the aggregate of their rights and powers over company X. Accordingly I reject the submission of Counsel for HHL that subsection (6) can only be applied to a person in the singular because the opening words to which I have referred clearly contemplate application to two or more persons together.
46. I also reject the argument of counsel for HHL that the construction I favour extends the concept of control of Company X envisaged by subsection (6) from that of the person and his associates to that of the members of company X who may or may not be associates. In my view this is irrelevant. An associate is relevant to the question of control only as an associate of a participator, see s.417(3). But, in the example I have given, A, B and C are themselves participators, see s.417(1). It follows that there is no extension of the concept of control as suggested because the control of the participators is assumed in the application of subsection (3). There is no need to bring in by extension any of A, B or C as associates of each other.
47. I have considered the submissions on the application of subsections (3) and (6) in the context of the example I have given in paragraph 37 above. In this case the equivalent of A, B and C are the collections of shareholders to which the Special Commissioner referred in paragraph 18 of his decision. In their capacity as members of Halliburton Company Halliburton Holdings Inc is company X and HHL is company Y. In their capacity as members of HIG HHUKL is company X. The sale is from company Y in the first chain to company X in the second. In my judgment those companies were connected because each was controlled by the members so identified by the Special Commissioner under both subsections (3) and (6) of section 416 ICTA. Consequently the terms of s.286(5)(b) TCGA are satisfied and s.18 of that Act applies.
48. In my judgment HMRC were right to refuse the set off sought by HHL and the Special Commissioner was right to dismiss the appeal of HHL from the decision of HMRC. I dismiss this appeal.
Appendix Relevant Legislation Taxation of Chargeable Gains Act 1992

"18 Transactions between connected persons

(1) This section shall apply where a person acquires an asset and the person making the disposal is connected with him.

(2) Without prejudice to the generality of section 17(1) the person acquiring the asset and the person making the disposal shall be treated as parties to a transaction otherwise than by way of a bargain made at arm's length.

(3) Subject to subsection (4) below, if on the disposal a loss accrues to the person making the disposal, it shall not be deductible except from a chargeable gain accruing to him on some other disposal of an asset to the person acquiring the asset mentioned in subsection (1) above, being a disposal made at a time when they are connected persons.

28 Time of disposal and acquisition where asset disposed of under contract

(1) Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).

(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.

286 Connected persons: interpretation

(1) Any question whether a person is connected with another shall for the purposes of this Act be determined in accordance with the following subsections of this section (any provision that one person is connected with another being taken to mean that they are connected with one another).

....

(5) A company is connected with another company-

(a) if the same person has control of both, or a person has control of one and persons connected with him, or he and persons connected with him, have control of the other, or

(b) if a group of 2 or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected.

(6) A company is connected with another person, if that person has control of it or if that person and persons connected with him together have control of it.

(7) Any two or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.

(8) In this section "relative" means brother, sister, ancestor or lineal descendant.

288 Interpretation

(1) In this Act, unless the context otherwise requires-

"control" shall be construed in accordance with section 416 of the Taxes Act;…".

Income and Corporation Taxes Act 1988

"416 Meaning of "associated company" and "control"

(1) ...

(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company's affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire -

(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or

(b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or

(c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.

(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.

(4) For the purposes of subsection (2) above a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire.

(5) For the purposes of subsections (2) and (3) above, there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.

(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection;"

417. Meaning of "participator", "associate", "director" and "loan creditor".

(1)...a "participator is, in relation to any company, a person having a share or interest in the capital...

(2)....

(3) For the purposes of this Part "associate" means, in relation to a participator—

(a) any relative or partner of the participator;

(b) the trustee or trustees of any settlement in relation to which the participator is, or any relative of his (living or dead) is or was, a settlor ("settlement" and "settlor" having here the same meaning as in Chapter IA of Part XV (see section 660G(1) and (2))); and

(c) where the participator is interested in any shares or obligations of the company which are subject to any trust, or are part of the estate of a deceased person—

(i) the trustee or trustees of the settlement concerned or, as the case may be, the personal representatives of the deceased; and

(ii) if the participator is a company, any other company interested in those shares or obligations;

and has a corresponding meaning in relation to a person other than a participator.

(4) In subsection (3) above "relative" means husband or wife, parent or remoter forebear, child or remoter issue, or brother or sister."