England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		23 March 2004

The Hon Mr Justice Langley:

1. There are two applications before the court. The defendant applies to strike out the claim and/or for summary judgment dismissing the claim. The Claimant seeks permission to amend the claim in accordance with a draft which was supplied to the defendant on 8 March.
2. The defendant has sensibly agreed that its application should be addressed to the proposed amended claim. The question is whether, in the light of the proposed amendments, the claim stands any real prospect of success.

The Facts.

3. The relevant factual background assumed for the purposes of the applications can be summarised as follows:

i) By an agreement dated 3 November 1997 the claimant and a company shortly described as AMEC entered into a joint venture for the construction and operation of a hospital in Cumbria.

ii) The corporate vehicle established for the purposes of the joint venture was Health Management (Carlisle) plc to which I shall refer as HMC.

iii) At this time the defendant company was a wholly-owned subsidiary of the claimant.

iv) The joint venture agreement provided for the division of any tax losses suffered by HMC equally between the claimant and Amec. The claimant was entitled to use the tax losses itself or to make them available to other members of its group.

v) The joint venture agreement also provided that in the event (which has not occurred to date) that HMC itself became liable to pay any corporation tax in circumstances where it would not have been so liable had the surrender of tax losses not occurred, each joint venture partner would make payments to HMC or procure that the relevant group company would make payments to HMC sufficient to offset that additional tax.

vi) During the 61 day accounting period to 31 December 1997 HMC made a loss in excess of £4m. The losses were made available to the claimant and Amec equally under the joint venture agreement and the consortium tax relief provisions of the Income and Corporation Taxes Act 1988.

vii) The claimant company had no profits itself and therefore the tax losses were of no value to it. Two of its subsidiaries, including the defendant, did have profits and the claimant, in accordance with the provisions of the 1988 Act therefore procured that HMC surrender the losses to the subsidiaries.

viii) The defendant utilised the tax losses to obtain relief and realised a tax saving of £368,164.

ix) In its audited accounts for the period ending 31 December 1998 the defendant, under the heading "Creditors: Amounts falling due within one year" showed an item "Consortium relief" in an amount of £368,000. Under the same heading figures were also given for "amounts owed to fellow subsidiary undertakings", "amounts owed to immediate parent company" (the claimant) and "amounts owed to ultimate parent company".

x) By an Agreement (the SPA) dated 6 August 1999 the claimant sold the entire issued share capital of the defendant to a company shortly described as "SGI". The completion accounts prepared on behalf of the defendant for the seven months ended 31 July 1999 repeated the reference to the sum of £368,000 shown in the December 1998 accounts. There were no figures for other group companies because inter-company debts had been settled in the sale (see xi) below)except for a trading sum of £9000 said to be due to "seller undertakings" which included the claimant.

xi) Clause 3.3 of the SPA provided that at completion SGI and the claimant would "procure the repayment of all inter-company debt" adding in terms that the consequence was a net payment to the claimant of £3.1m. That payment was in fact made. It did not include the sum of £368,000. The claimant's reply in these proceedings, verified by a statement of truth signed by Mr Spencer, the Claimant's Company Secretary, pleads that the sum was not included in the repayment because "there was a collateral agreement between the parties" to exclude it. That agreement is said to have been "concluded by conduct" because the item still appeared in the draft completion accounts.

The Claims.

4. Two claims are advanced in the Amended claim: a claim in contract and a restitutionary Claim. They are pleaded as follows:

"Agreement between the Claimant and Defendant

12. It was agreed between the Claimant and the Defendant that upon the Transfer, the Defendant would be indebted to the Claimant for a sum equal to the tax saving (if any) made by the Defendant as a result of the receipt of the Transfer alternatively would make a payment to the Claimant in that sum. In the absence of agreement as to the date of the payment, payment is to be implied to be on demand as from the date of any tax saving made by the Defendant. The said agreement can be implied from the conduct of the Claimant and the Defendant.

13. Pending disclosure and/or the service of witness statements herein, the best particulars of the conduct which gave rise to the agreement are as follows:

(a) the Claimant procured the transfer of the Tax Losses to the Defendant;

(b) the Defendant accepted and used the Tax Losses to make a financial gain and/or benefit of £368,164;

(c) the Defendant represented in its accounts that it was indebted in the sum of £368,000 under the heading "Consortium Relief", which, as aforesaid, on the only true construction of its accounts represented a debt due to the Claimant.

Restitutionary Claim

14. Alternatively, if and to the extent that no agreement existed in the terms set out above, the Claimant transferred the tax losses to the Defendant under a mistake of fact. The aforesaid mistake of fact was that the Claimant transferred the benefit of the Tax Losses to the Defendant on the understanding that the Defendant was agreeing that it would thereby become indebted to the Claimant in the terms set out in paragraph 12 above alternatively that the result of the transfer of the Tax Losses was that the Defendant would be liable to pay the Claimant for the Tax Losses on demand in the amount of the sum equal to the benefit received by the Defendant from its utilisation of the Tax Losses."

The Accounts.

5. The basis for the allegation that "the only true construction" of the accounts is that the consortium relief represented a debt due to the claimant is that the debt was expressed as an actual rather than a contingent debt payable within a year and the £368,000 "was incapable of creating an actual liability in favour of any party other than the claimant". That is true in the sense that any obligation to reimburse HMC would depend on HMC itself becoming liable to pay tax which it would not have had to pay but for surrendering the losses. But the "only true construction" of the accounts on which the claimant relies is in my judgment misconceived. The audited accounts expressly distinguished between the item for "consortium relief" and amounts owed to the claimant: see paragraph 3 ix). The plain inference is therefore to the contrary namely that insofar as consortium relief was owed it was not owed to the claimant. That is no surprise because to be effective in tax terms should payments have had to be made to HMC in the future they would have had to be made to HMC by the defendant not the claimant. The "consortium" was also an appropriate description of the joint venture.
6. The same applies to the Completion Accounts: paragraphs 3x) and xi). They assumed settlement of all but £9000 of inter-company debts and thus the items remaining including "Consortium relief" were not such debts. The matter is, I think, put beyond argument by the fact that inter-company debts were, as one would expect, expressly dealt with and discharged under the SPA in an amount which excluded the sum of £368,000. Moreover, in commercial terms it is astonishing that if the agreement for which the claimant contends truly existed, a demand was not made for payment and the amount included in the sale. Again, in my judgment, the plain inference is in fact to precisely the opposite effect to that for which the claimant contends.

The Contract Claim.

7. Mr Thornton, who appeared for the claimant, described this as the principal basis on which the claim was founded. There is no doubt that an agreement can be implied from conduct. The agreement alleged is one which arose (if it did) at the time the losses of the joint venture were transferred to the defendant albeit to be payable if and when a tax saving by the defendant was achieved. Thus the accounts, as Mr Colton for the defendant submitted, could in any event do no more than evidence an earlier agreement; they could not create it.
8. In my judgment this claim has no real prospect of success. I think it faces insuperable difficulties. If an agreement is to be implied from conduct it must I think be an obvious or necessary implication. But the simple fact is that at the time the losses were surrendered to the defendant not only was the claimant itself not able to use them but the group of which the claimant was the holding company benefitted from them to the full extent as, no doubt, the claimant intended. I see no reason at all in those circumstances to imply an obligation on the defendant to pay the benefit to the claimant let alone the necessity of such an implication. Indeed Mr Thornton accepted (rightly) that the facts of procuring the surrender of the losses to the defendant and the defendant's use of them to obtain relief could not alone give rise to the contract on which the claimant relies. His submissions rested on the terms of the audited and completion accounts as evidencing the contract. But for the reasons I have expressed, in my judgment the accounts evidence the contrary as do the undoubted facts that neither when the defendant obtained the tax relief nor when the claimant sold the defendant did the claimant demand payment.

The Claim in Restitution.

9. The claim alleges that the tax losses were transferred to the defendant "under a mistake of fact". The mistake alleged is, in effect, that the claimant mistakenly thought the defendant was agreeing to pay it the benefit derived from the losses. In my judgment this claim also has no real prospect of success. It is an attempt to create a contract where the claim predicates that none exists. The tax benefit was never available to the claimant as such but only via the group. That benefit the claimant received. The defendant was not enriched at the claimant's expense unjustly or at all. The transfer would in all probability have been made whether or not there had been an agreement to pay the benefit to the claimant: that was the only way in which the group could achieve an immediate benefit from the tax losses of HMC.

Conclusion.

10. As I informed the parties at the end of the argument in my judgment the proposed amended claim stands no real prospect of success. The consequence is that permission to amend is refused and the defendant is entitled to summary judgment. I will hear the parties at a time to be arranged on any ancillary issues if they cannot be agreed.