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Hughes v The Revenue Commissioners [2019] IEHC 807 (29 November 2019)
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Page 1 ⇓
[2019] IEHC 807
THE HIGH COURT
REVENUE
IN THE MATTER OF A CASE STATED PURSUANT TO SECTION 941 TAXES
CONSOLIDATION ACT 1997
[2018 No. 290 R]
BETWEEN
RAYMOND HUGHES
APPELLANT
AND
THE REVENUE COMMISSIONERS
RESPONDENT
JUDGMENT of Mr. Justice Allen delivered on the 29th day of November, 2019
Introduction
1. This is an appeal by way of case stated from the determination by his Honour Judge
Francis Comerford of a tax appeal.
2. The issue, as succinctly expressed in the case stated, is whether the appellant, who is
jointly assessed for tax with his wife, is liable for income tax on a benefit which they
obtained when shares which they held in a company, Greenane Developments Limited
(“Greenane Developments”) became more valuable by reason of the actions of another
company, Hughes Chemical Corporation Limited (“Hughes Chemical”), which was also
owned and controlled by Mr. and Mrs. Hughes.
3. The net legal issue is whether the enhancement in the value of the shares in Greenane
Developments was chargeable to income tax as a distribution to them by Hughes
Chemical.
Overview
4. In January, 2006 a scheme was devised to liberate €2 million from Hughes Chemical and
to put the money into the hands of the shareholders, the appellant and his wife.
5. Mr. and Mrs. Hughes bought another company, Greenane Developments, off the shelf.
The plan was first, that the money would be transferred to Greenane Developments, and
then that Hughes Chemical - the person having control of Greenane Developments -
would exercise that control so that the value passed out of the shares owned by Hughes
Chemical and into other shares in or rights over Greenane Developments owned by Mr.
and Mrs. Hughes.
6. The scheme was devised to avoid capital gains tax. By s. 543(2)(a) of the Taxes
Consolidation Act, 1997 the exercise by Hughes Chemical of its control of Greenane
Developments was to have been a disposal of the shares out of which the value passed.
By s. 547(1)(a) of the Act of 1997 the assets of Greenane Developments acquired by Mr.
and Mrs. Hughes by means of a bargain made otherwise than at arm’s length, would be
deemed to be for a consideration equal to the market value of the assets. The hope and
expectation was that the disposal would be chargeable to capital gains tax under s. 543,
but the liability would be nil.
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7. By the means which I will describe in detail, the €2 million which originated in Hughes
Chemical came into the hands of Mr. and Mrs. Hughes.
8. On 6th December, 2011 Mr. Hughes (who is jointly assessed with Mrs. Hughes) was
assessed to income tax on the amount of the distribution on the basis that there had been
- according to the Revenue - a transfer of assets at undervalue, such as came within s.
130(3)(a) of the Taxes Consolidation Act.
The scheme
9. Greenane Developments was incorporated in September 2004. Its sole shareholder
immediately prior to 30th January, 2006 was Hughes Chemical, which held 100 ordinary
shares. Those shares carried the right to receive notice of, to attend, and to vote at
general meetings of the company and to participate in profits and any surplus of capital.
10. On 30th January, 2006 the memorandum and articles of association of Greenane
Developments were amended to increase the nominal share capital from €1 million to €3
million by the creation of 2 million A ordinary shares of €1 each. There were no voting
rights attached to the A ordinary shares. The articles provided that on a winding up the
holders of the A ordinary shares were entitled in priority to the return of capital paid up
on those shares but not to participate in any share premium account or surplus of capital.
11. On the same day, Hughes Chemical subscribed for 100 ordinary shares at €20,000 each
and Mr. & Mrs. Hughes respectively subscribed for 94 and 6 A ordinary shares, at par.
12. On 31st January, 2006 the articles of association of Greenane Developments were again
amended by special resolution so that the voting rights and the right to participate in
surplus capital were vested in the holders of the A ordinary shares, to the exclusion of the
holders of the ordinary shares.
13. On 1st February, 2006 a special resolution was passed for a members’ voluntary winding
up of Greenane Developments. The winding up produced a surplus of €1,981,470, which
was paid to Mr. and Mrs. Hughes as the holders of the A ordinary shares.
The assessment
14. On 6th December, 2011 the Inspector of Taxes raised an assessment for tax on the
distributions amounting in total to €1,999,900. The assessment was not to capital gains
tax on a disposal of the shares, but to income tax said to be chargeable on the value of
the benefit of a transfer of assets by Hughes Chemical to its members by the passing of
the special resolution on 31st January, 2006.
15. Mr. Hughes appealed the assessment to the Tax Appeals Commission but on 21st June,
2016 his appeal was dismissed. Mr. Hughes’ further appeal to the Circuit Court judge was
also dismissed.
16. The appeals to the Tax Appeals Commission and the Circuit Court judge turned, and the
questions posed by the case stated turn, on the correct construction of s. 130(3)(a) of the
Taxes Consolidation Act, 1997.
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Legal principles
17. The case was argued on both sides with great conviction. For all that the court was
presented with two folders of authorities, there was little between the parties as to the
applicable principles of law.
18. As to the correct approach to be taken by the High Court in considering a case stated on a
question of law, the appellant relies on the decision of the High Court (McWilliam J.) in
Mara (Inspector of Taxes) v. Hummingbird [1982] I.L.R.M. 421, which, as counsel for the
respondent point out, was approved by the Supreme Court in Ó Culacháin v. McMullan
Brothers Ltd. [1995] 2 I.R. 217 and Mac Cárthaigh (Inspector of Taxes) v. Cablelink Ltd.
19. In McMullan Brothers Ltd. Blayney J. (O’Flaherty and Denham JJ. concurring) distilled
from Hummingbird and the English authorities five principles of law which were endorsed
in Cablelink Ltd. These were: -
“(1) Findings of primary fact by the judge should not be disturbed unless there is no
evidence to support them.
(2) Inferences from primary facts are mixed questions of fact and law.
(3) If the judge’s conclusions show that he has adopted a wrong view of the law, they
should be set aside.
(4) If his conclusions are not based on a mistaken view of the law, they should not be
set aside unless the inferences which he drew were ones which no reasonable judge
could draw.
(5) Some evidence will point to one conclusion, other evidence to the opposite: these
are essentially matters of degree and the judge’s conclusions should not be
disturbed (even if the court does not agree with them, for we are not retrying the
case) unless they are such that a reasonable judge could not have arrived at them
or they are based on a mistaken view of the law.”
20. In this case there is no dispute as to the primary facts but there is an argument as to the
Circuit Court judge’s “interpretation of the facts”, which I will deal with in due course.
The substance of the appeal is that the Circuit Court judge erred in his construction of the
relevant provisions of the Taxes Consolidation Act.
21. As to the principles of law applicable to construing taxing statutes, there was some
difference of emphasis.
22. Counsel for the appellant submitted, generally, that the determination of the Circuit Court
judge “failed to adhere to the strict construction of taxation statutes” and instead took a
purposive approach. The submission was not really developed or focussed and in one
significant respect the appellant’s complaint is that the Circuit Court judge took a literal
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approach to s. 130(3)(a) rather than a purposive approach to the Act as a whole,
specifically the interaction between s. 130(3)(a) and section 543.
23. In Revenue Commissioners v. O’Flynn Construction Ltd. [2013] 3 I.R. 533, O’Donnell J.,
for the majority of the Supreme Court, undertook a detailed review of the development -
or reappraisal - of the law in Ireland, Northern Ireland and England since the Duke of
Westminster’s case in 1935. At para. 72 O’Donnell J. said:-
“[72] The suggestion that the principles in McGrath v. McDermott [1988] I.R. 258
preclude a ‘purposive approach’ is also perplexing. In the first place the express
words of s. 86 [of the Finance Act, 1989] require the Commissioners to have regard
to the ‘purposes for which it [the relief] was provided’. Furthermore, the decision in
McGrath v. McDermott itself expressly contemplates an approach to the
interpretation of legislation that has always been understood as purposive. In that
decision Finlay C.J. restated at p. 276 the orthodox approach to statutory
interpretation at the time when he adverted to the obligation of the courts in cases
of doubt or ambiguity to resort to a ‘construction of the purpose and intention of
the legislature’. Indeed, if McGrath v. McDermott stands for any principle of
statutory interpretation it impliedly rejects the contention that any different and
more narrow principle of statutory interpretation applies to taxation matters. As
Lord Steyn observed in the Northern Ireland case of I.R.C. v. McGuckian
[1997] N.I. 157, at p. 166, there has been a tendency to treat tax law, almost uniquely in
the civil law as continuing to be the subject of a strict literalist interpretation: -
‘During the last 30 years there has been a shift away from literalist to
purposive methods of construction. Where there is no obvious meaning of a
statutory provision the modern emphasis is on a contextual approach
designed to identify the purpose of a statute and to give effect to it. But
under the influence of the narrow Duke of Westminster doctrine tax law
remained remarkably resistant to the new non-formalist methods of
interpretation. It was said that the taxpayer was entitled to stand on a literal
construction of the words used regardless of the purpose of the statute…[tax]
law was by and large left behind as some island of literal interpretation’.”
24. O’Donnell J. at para. 73 noted that in Barclays Finance Ltd. v. Mawson [2005] 1 AC 684
the House of Lords had reaffirmed that in England the same principles of statutory
construction applied to taxation statutes as to other non-criminal statutes. He went on
to say that:-
“In Ireland, however, this was something that was acknowledged at least implicitly
in McGrath v. McDermott [1988] I.R. 258, and explicitly in the provisions of the
Interpretation Act 2005 which embodies a purposive approach to the interpretation
of statutes other than criminal legislation and made no concession to a more
narrow or literalist interpretation of taxation statutes. Accordingly, the Appeal
Commissioners’ conclusion that the principles set out in McGrath v. McDermott
prohibited the adoption of a purposive approach is incorrect on a number of levels.”
Page 5 ⇓
25. This disposes of any criticism of the Circuit Court judge for having failed to adhere to the
strict construction of taxation statutes.
Relevant statutory provisions
26. Section 130(3)(a) of the Taxes Consolidation Act 1997 provides:-
“(3)(a) Where on a transfer of assets or liabilities by a company to its members or
to a company by its members the amount or value of the benefit received by a
member (taken according to its market value) exceeds the amount or value (so
taken) of any new consideration given by the member, the company shall be
treated as making a distribution to the member of an amount equal to the
difference (in paragraph (b) referred to as ‘the relevant amount’).”
27. Section 543, sub-ss. (1) and (2) of the Taxes Consolidation Act provide:-
“(1) Without prejudice to the generality of the provisions of the Capital Gains Tax Acts
as to the transactions which are disposals of assets, any transaction which under
this section is to be treated as a disposal of an asset —
(a) shall be so treated (with a corresponding acquisition of an interest in the
asset) notwithstanding that there is no consideration, and
(b) in so far as, on the assumption that the parties to the transaction were at
arm’s length, the party making the disposal could have obtained
consideration or additional consideration for the disposal, shall be treated as
not being at arm’s length, and the consideration so obtainable, added to the
consideration actually passing, shall be treated as the market value of what is
acquired.
(2) (a)
Where a person having control of a company exercises that control so
that value passes out of shares in the company owned by such person or a
person with whom such person is connected, or out of rights over the
company exercisable by such person or by a person with whom such person
is connected, and passes into other shares in or rights over the company,
that exercise of such person’s control shall be a disposal of the shares or
rights out of which the value passes by the person by whom they were
owned or exercisable. …”
28. Section 547 provides insofar as is material:-
“(1) Subject to the Capital Gains Tax Acts, a person’s acquisition of an asset shall for
the purposes of those Acts be deemed to be for a consideration equal to the market
value of the asset where -
(a) the person acquires the asset otherwise than by means of a bargain made at
arm’s length (including in particular where the person acquires the asset by
means of a gift),
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(b) the person acquires the asset by means of a distribution from a company in
respect of shares in the company …”.
The correct approach to the issue
29. The assessment to income tax, as I have said, was raised under s. 130(3)(a) of the Act of
1997. At the hearing before the Circuit Court judge, and on this appeal, the Revenue
Commissioners argued that the correct approach was simply and solely to examine
whether that provision applied the transactions. The only issue before the Circuit Court
judge, it was submitted, was whether the assessment to income tax had been correctly
raised and the Circuit Court judge was not, and this court should not be, concerned with
and should not entertain any argument as to whether, the transaction might also have
fallen within section 543.
30. The scheme devised for the appellant was focussed on section 543. The appellant
argued that the correct approach to be taken was to look at both s. 543 and s. 130 and to
decide which of those provisions better caught the transactions, or, as it was put in
argument on the appeal, which of the provisions was the better fit.
31. The Circuit Court judge acknowledged that the appellant had an argument that s.
543(2)(a) represented a clear manner in which through the use of the ordinary and
natural meaning of words, a dealing such as that the subject of this appeal could be
identified. He rejected however, the argument that since that “happier formulation” had
not been used in s. 130(3)(a), or elsewhere in s. 130, that it was not the intent of the
legislature to catch the activities so described. He did not think that was a useful
approach. Rather, he said, the focus should be on s. 130(3)(a) and the issue was
whether the transaction was caught by the words used there and not whether other
words might have done this better.
32. The first question posed by the case stated is whether the Circuit Court judge was correct
in law in determining that he should not conduct an enquiry to see which provisions of the
Taxes Acts better caught the actions of 31st January, 2006, but rather should consider
whether s. 130(3)(a) applied, even if some other provision might apply.
33. As I have said, the scheme which was implemented on 30th and 31st January, 2006 was
devised to make the transactions chargeable to capital gains tax, for which there would
be a nil liability, but the assessment is to income tax.
34. The appellant would make the case that the transaction was a capital transaction
involving a disposal, which by the application of s. 547 was deemed to have been a
disposal at market value. The fact that the case clearly falls within s. 543 – so the
argument goes – goes to show that it does not fall within section 130(3)(a).
35. In support of the argument that the Circuit Court judge ought to have examined which of
the provisions was the better fit, counsel for the appellant referred to the decision of the
High Court in Menolly Homes Ltd. v. Appeal Commissioners [2010] IEHC 49, (Unreported,
Page 7 ⇓
High Court, Charleton J., 26th February, 2010) in which Charleton J. adopted from an
English case a convenient statement of the function of the Appeal Commissioners:-
“[I] may note here at once, that in making the assessment and in dealing with the
appeals, the Commissioners are exercising statutory authority and a statutory duty
which they are bound to carry out. They are not in the position of judges deciding
an issue between two particular parties. Their obligation is wider than that. It is
to exercise their judgment on such material as comes before them and to obtain
any material which they think is necessary and which they ought to have, and on
that material to make the assessment or the estimate which the law requires them
to make. They are not deciding a case inter partes; they are assessing or
estimating the amount on which, in the interests of the country at large, the
taxpayer ought to be taxed.”
36. The passage referred to by Charleton J. does not, as the transcript of the judgment
suggests, come from Sneath’s case 17 T.C. 149 but from a slightly later case of Rex. v.
Income Tax Special Commissioners, ex parte Elmhirst [1936] 1 K.B. 487 in which
Sneath’s case was considered, first by a divisional court of King’s Bench where the
judgment was delivered by Lord Hewart C.J., and then by the Court of Appeal, where the
principal judgment was given by Lord Wright M.R. The passage cited by Charleton J.
comes from the judgment of Lord Wright M.R. in ex parte Elmhirst at page 493 of the
report.
37. The effect of this statement of the role of the Appeal Commissioners, it is said, is that the
role of the Circuit Court judge was to properly determine what legal treatment should be
applied to the transaction, specifically which particular provision of the Taxes
Consolidation Act applied to the transaction, and not merely whether s. 130(3)(a) applied.
38. In my opinion the appellant’s reliance on Menolly Homes Ltd. is misplaced. That was an
application by way of judicial review for an order quashing a decision of the Appeal
Commissioner refusing to allow the taxpayer to cross-examine the Inspector of Taxes who
had raised an assessment to value added tax. The object of the proposed cross-
examination was to examine the inspector as to his state of mind when he made the
assessment, specifically to try to show that the demand had been unlawful because he
had not had “reason to believe” that the tax was due and payable. Charleton J. found
that any issue as to the validity of the assessment was outside the scope of the appeal:
which was limited to determining the amount, if any, of the tax due. The Appeal
Commissioner’s jurisdiction was confined to deciding whether the amount of the liability
should be abated in its entirety, reduced, left stand, or increased.
39. The issue in ex parte Elmhirst was whether a taxpayer who had appealed an assessment
to income tax to the Special Commissioners of Income Tax could withdraw his appeal
without the consent of the Special Commissioners. The divisional court of King’s Bench
and the Court of Appeal in England held that he could not, because when the notice of
appeal was given it became the duty of the Special Commissioners to arrive at a true
assessment.
Page 8 ⇓
40. Both cases are authority for the proposition that the jurisdiction and duty of the Appeal
Commissioners is to determine the amount, if any, of the tax assessed properly due and
owing on the assessment. In Menolly Homes Ltd. it was value added tax; in ex parte
Elmhirst it was income tax. Neither is authority for the proposition underlying the
appellant’s submission which effectively is that the Tax Appeals Commission or the Circuit
Court judge should have substituted a liability to capital gains tax (albeit a nil liability) for
the assessment to income tax.
41. The legislation expressly contemplates that the disposal of assets may attract income tax.
Sections 544(7) and 551(2) of the Taxes Consolidation Act, 1997 provide that if a receipt
is chargeable to income tax, then it will not also be chargeable to capital gains tax.
42. The object of statutory interpretation is to discern the intention of the Oireachtas. That
intention is to be ascertained by construing the words used. If the legislative intention is
discernible from the words used, I can see no basis in law or in logic upon which the court
might embark on an enquiry as to whether the intention might have been better
expressed by the use of other words.
43. Moreover, the premise of the proposition that s. 543 is a better fit, or a happier
formulation, or better or more clearly catches the transactions of 31st December, 2006 is
that s. 130(3)(a) is a fit – albeit not as good a fit – or catches the transactions – albeit
perhaps not as clearly as section 543 – while the appellant’s real argument is that they
are not caught by s. 130(3)(a) at all.
44. I fully agree with the Circuit Court judge that the approach urged on behalf of the
appellant is not helpful and that the correct approach is to consider whether s. 130(3)(a)
applied, even if another provision might apply, and that it is not necessary or appropriate
to decide whether another provision did in fact apply.
The arguments as to the meaning of s. 130(3)(a)
45. The appellant submits that the transaction was not caught by s. 130(3)(a) of the Act of
1997. Three separate and distinct arguments are advanced as to why this is said to be
so: any of which, individually, would entitle the appellant to succeed.
46. The appellant’s case is that: -
(a) The rights attached to the ordinary shares and A ordinary shares were not “assets”;
(b) There was no “transfer of assets” from one party to another; and
(c) Insofar as there was (if there was) any transfer of rights, those rights moved from
Greenane Developments to its shareholders rather than from Hughes Chemical to
its shareholders.
47. The appellant argues that the share rights the subject of the transactions were not assets
because, it is said, they are not legally separate from the shares to which they attached
and may not be assigned separately from the shares.
Page 9 ⇓
48. In support of this argument the appellant refers to the definition of “asset” in Black’s Law
Dictionary (10th Edition) and Jowitt’s Dictionary of English Law (4th Edition).
49. The first of three meanings suggested by Black’s is that an asset is “an item that is owned
and has value”. Jowitt’s suggests that an asset is “property available for satisfaction of
debts or, in the case of deceased persons, bequests”, which matches Black’s third
suggestion. Combining these two definitions, it is submitted that an asset is something of
value which is capable of being realised for value.
50. Seizing on the word “property” in the second definition, it is submitted that an asset must
be capable of having an independent existence and be legally capable of being assigned
or sold. Reference was made to a dictum of Baroness Hale in OBG v. Allan [2008] 1 A.C.
“The essential feature of property is that it should have an existence independent of
a particular person: It can be bought and sold, given and received, bequeathed
and inherited, pledged or seized to secure debts, acquired (in the olden days) by a
husband on marrying its owner.”
Reference was also made to the well-known definition of a share in Borland’s Trustee v.
“[T]he interest of a shareholder in the company measured by a sum of money, for
the purpose of a liability in the first place, and of interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders inter
se in accordance with s. 16 of the Companies Act, 1862.”
51. Citing Attorney General v. Jameson [1904] 2 I.R. 644 and Arthur D. Little Ltd. v. Ableco
Finance LLC [2003] Ch. 217, counsel submitted that the rights which together make up
the bundle of rights which constitute a share are not legally separable from the share in
that they do not have an existence independent of the share.
52. It seems to me that the proposition that share rights are not legally separable from the
shares to which they attach is shown to be wrong by the transactions in this case. The
Circuit Court judge said that he was tempted to say so. In my view there was no reason
why he could not have said so. The resolution of 31st January, 2006 stripped the
participation and voting rights from the ordinary shares and vested them in the holders of
the A ordinary shares. The fact that the rights had to be attached to one or other class of
shares does not mean that they are not valuable or capable of being moved (to use an
entirely neutral term) from one class to the other.
53. The dictum of Lady Hale in OBG Limited v. Allan which is relied upon is a single sentence
from one of five separate opinions of the appellate committee on three appeals which
raised a variety of issues of law in relation to economic torts. Lady Hale devoted a good
part of her opinion to the development, and possible further development, of the law in
relation to the tort of conversion. The sentence relied on is taken from a paragraph in
Page 10 ⇓
which she recalls the reluctance of the common law to recognise a right of action as
property, and the legal fiction employed to extend the tort of conversion from tangible
property to choses in action - which was to pretend that the document had the same
value as the obligation it evidenced. I understand the list of the essential features of
property to be a list of indicia rather than of requirements or prerequisites. For example,
it can hardly be doubted that a right to an annuity for life is property, even though it
cannot be bequeathed or inherited. In any event, the issue in this case is whether the
relevant rights are assets, not whether they are property.
54. In Attorney General v. Jameson the issue was the correct basis of valuation for estate
duty purposes of 750 shares of £100 each in a joint stock company which had been
paying dividends for years of 20% per annum but were subject to pre-emption rights in
the event that any member wished to dispose of his shares in favour of all the other
members at a “fair price” of £100 each. The testator’s executors had paid estate duty on
the basis that the shares were worth £100. The Attorney General contended that the
value of the shares was what they would fetch if sold in the open market. The decision of
the Court of Appeal in Ireland was simply that the valuation of the shares at the date of
the deceased’s death had to take account of the restriction on alienation and transfer in
the articles of association. Fitzgibbon L.J. said that:-
“In my opinion each of these shares with all rights and liabilities and all advantages
and disadvantages, incident to ownership, passed on Henry Jameson’s death to his
executors as one indivisible piece of property”.
55. Attorney General v. Jameson decided that any estimate or valuation of the open market
value of shares transmitted on death could not disregard the pre-emption rights to which
they were subject. It is not authority for the proposition that the bundle of rights
making up a share is indivisible.
56. In Arthur D. Little the issue was whether a charge over the entire shareholding in a
company, together with the distribution rights from time to time accruing thereto, was a
fixed or floating charge. The High Court in England found that the fact that the charge
covered the distribution rights did not alter the nature of the charge over the shares. The
court found that the receipt of dividends and other rights arising by virtue of the shares
were examples of the principal subject matter of the charge, i.e. the shares.
57. Far from supporting the appellant’s argument as to the indivisibility of the rights attaching
to shares, it seems to me that Arthur D. Little is clear authority against that proposition.
The charge in that case (by contrast to the precedent in the standard books)
contemplated that until an event of default, the chargor would continue to receive and
retain dividends and other distributions and to exercise all rights attaching to the shares,
including the right to vote them. Mr. Roger Kaye Q.C., sitting as a Deputy High Court
judge, referred at p. 237C to a dictum of Nicholls L.J. in In Re Atlantic Computer Systems
Page 11 ⇓
“A mortgage of land does not become a floating charge by reason of the mortgagor
being permitted to remain in possession and enjoy the fruits of the property
charged for the time being.”
58. Arthur D. Little, then, is clear authority for the proposition that the right of disposal of
shares in severable from the rights to vote and to receive and retain dividends and
distributions. It seems to me that there is no reason in principle why the charge might
not have extended to the right to receive and retain dividends and distributions, while
leaving in the hands of chargor the right to vote.
59. In this case the effect of the special resolution was that Mr. and Mrs. Hughes became
entitled to both the right to vote and the right to participate in the surplus, but it is useful
to contemplate that the rights might have been split. Theoretically, if the right to trigger
a winding up was divorced from the distribution right, Mr. and Mrs. Hughes’ prospects of
obtaining the money might have depended on Hughes Chemical voting for a members’
voluntary winding up.
60. I am satisfied that the rights attached to the shares in Greenane Developments to attend
and vote at general meetings and to participate in a surplus on winding up were valuable
rights which were divisible from the shares to which they were attached and were assets.
61. The appellant’s second argument is that the Circuit Court judge erred in his finding that
the action of Hughes Chemical in voting for the special resolution of 31st January, 2006
was a transfer of assets.
62. The Circuit Court judge found that the extinguishment of a right and creation of a new
right could be a mechanism to effect a transfer but that whether or not it did so was a
matter of fact depending on the circumstances. He treated the issue as to the effect of
the special resolution as an issue of fact.
63. It is submitted on behalf of the appellant that the resolution of 31st January, 2006 which
extinguished the rights of the ordinary shareholders to vote and participate in any surplus
and created new rights in the A ordinary shares was “an action of Greenane
Developments as orchestrated by its members”. The effect of the resolution, it is said,
was to extinguish the existing rights and to create new rights and not to transfer them
from one class of shareholder to the other.
64. The appellant relies on the definition of “transfer” in Murdoch and Hunt’s Dictionary of
Irish Law (6th Edition) as “the passage of a right from one person to another either (a) by
the act of the parties e.g. in a conveyance of land or (b) by operation of law e.g.
forfeiture, bankruptcy, succession.” What happened in this case, it is said, was not a
transfer but an alteration of share rights.
65. The appellant accepts (as Keane J. said in Re Sugar Distributors Limited [1995] 2 I.R.
194, 207) that a share in a company is a bundle of proprietary rights which can be sold or
exchanged for money or other valuable consideration. The appellant accepts that the
Page 12 ⇓
rights may be sold or exchanged by way of a shareholders’ agreement and that “the said
rights constitute assets for the purpose of the Capital Gains Tax Acts”. It seems to me
that the acceptance that the rights attached to shares can be bought and sold by a
shareholders’ agreement is an acknowledgment that the bundle of rights is divisible. It is
not suggested that there is any special definition of assets for the purposes of the Capital
Gains Tax Acts: so if the rights are assets for the purposes of the Capital Gains Tax Acts,
they must equally be assets for the purpose of the Income Tax Acts.
66. The appellant submits that there is no authority for the proposition that a sale or
exchange of rights attaching to shares may be effected by resolution and that there is no
basis in company law for the proposition that the bundle of rights which constitute a share
can be broken up and reallocated by the company which issued them to different
members of the company.
67. It seems to me that the fundamental flaw in this argument is that it fails to recognise the
basic principle of company law spelled out in Borland’s Trustee that the articles of
association are a contract between the members and the company, and between the
members inter se. The resolutions, which are passed by the members and not by the
company, create a contract between the members and the company, and the members
inter se, as to how the assets of the company are to be distributed in the event of a
winding up. While it is perfectly correct to describe the resolutions as resolutions of the
company, it does not follow that they are not also resolutions of the members.
68. It is accepted by the appellant that the resolution of 31st January, 2006 effected a
“movement of share rights as between different classes of shares”. The rights moved
from the ordinary shares, held by Hughes Chemical, to the A ordinary shares, held by Mr.
and Mrs. Hughes. That movement occurred because Hughes Chemical, as the only
shareholder in Greenane Developments entitled to vote, voted for the extinguishment of
the rights attaching to its shares and the creation of the same rights in the shares owned
by Mr. and Mrs. Hughes. As a result of the action of Hughes Chemical, the rights in
Greenane Developments theretofore held by it were thereafter held by Mr. and Mrs.
Hughes.
69. The appellant, by reference to the definition of a transfer offered by Murdoch and Hunt,
argues that the rights acquired by Mr. and Mrs. Hughes did not come “from” Hughes
Chemical but were new rights created on the extinguishment of the rights of Hughes
Chemical. That may be so, but as counsel for the Revenue point out, what s. 130(3)(a)
captures is a transfer “by” rather than a transfer “from” a company.
70. On the same day and by the same resolution, by the vote of Hughes Chemical, the rights
to vote and to participate in a surplus of assets in Greenane Developments ceased to
belong to Hughes Chemical and came to belong to Mr. and Mrs. Hughes. The resolution
and the amended articles of association amounted to an agreement between Hughes
Chemical and Mr. and Mrs. Hughes that the rights in Greenane Developments formerly
enjoyed by Hughes Chemical would thenceforth be enjoyed by Mr. and Mrs. Hughes. I
cannot see how this was anything other than a transfer.
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71. In my view the Circuit Court judge was correct in his determination that the
extinguishment of a right and creation of a new right could be a mechanism to effect a
transfer and that there was abundant justification for his conclusion that the resolution
effected a transfer.
72. The appellant’s third argument is that any transfer (if there was one) of any assets (if
any) was not made to them in their capacity as members.
73. It is submitted on behalf of the Revenue that this contention would add to s. 130(3)(a) a
requirement which is simply not in the wording. The paragraph, it is said, simply
identifies the recipient of the assets, and no more. I agree.
74. The appellant acknowledges that the finding of the Circuit Court judge that s. 130(3)(a)
does not require the transfer of assets to the member to be in his capacity as a member
“may be correct as an abstract construction but … it does not elucidate the matter in the
instant case”. The argument then goes back to the proposition that there was no
transfer.
75. I take the acknowledgement that the finding of the Circuit Court judge may have been
correct, absent any argument as to why it was not or might not have been correct, as an
acknowledgement that the finding was correct: which it was.
76. The appellant submits that this is a liquidation case to which s. 130 does not apply. While
it is true that Greenane Development went into liquidation and the proceeds of the share
premium account were distributed by the liquidator, the taxable event was not the
distribution made in the winding up but the transfer of assets which occurred on 31st
January, 2006.
77. In the course of his determination, the Circuit Court judge suggested that the only legal
relevance of the €1,981,470 – which was the amount paid out by the liquidator – was
that it was a reliable measure of what the value of the benefit was on 31st January, 2006.
While it is a very small point, I think that the Circuit Court judge was not strictly correct.
The assessment to income tax was not for the amount of the distribution following the
liquidation but for the amount of the share premium account of Greenane Developments,
which was €1,999,900: the difference between the €2 million subscribed by Hughes
Chemical and the right to the return of the nominal value of the shares, which it retained.
78. I offer one final observation. The Circuit Court judge noted there that was not a complete
identity between the rights attaching to the ordinary shares held by Hughes Chemical on
29th January, 2006 and the A ordinary shares held by the appellant and his wife on the
morning of 1st February, 2006 because, he said, the surplus was subject to the payment
of an additional €200. He thought, however, that because the additional obligation was
so small, the rights were essentially the same rights.
79. I quite agree that there was not an identity of rights but, respectfully, not that the rights
were essentially the same rights. Nor do I agree that on the morning of 1st February,
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2006 the surplus was subject to payment of €200.00 more. Nor, if I may say so, do I
agree that it would be appropriate to attempt to equate the rights attached to the two
classes of shares by disregarding on a de minimis basis a difference (if there was one) in
those rights.
80. On the transfer to Hughes Chemical of the original shares in Greenane Developments,
Hughes Chemical became entitled to the return of capital on those shares. On their
subscription on 30th January, 2006 for the new ordinary and A ordinary shares, each of
Hughes Chemical and Mr. and Mrs. Hughes became entitled to the return of capital on
those shares, with the A ordinary shares entitled to priority over the ordinary shares. As
of 30th January, 2006 the total amount that had been subscribed was €2,000,200: €100
for the first 100 ordinary shares at par; €2 million for the second 100 ordinary shares at a
premium of €19,999; and €100 for the A ordinary shares at par. The share premium
account was €1,999,900. Ignoring the inevitable costs of winding up, the surplus on the
morning of 1st February, 2006 was €1,999,900.
81. After the passing of the special resolution on 1st February, 2006 Hughes Chemical was
entitled to the return of the nominal value of its shares - €200 - and Mr. and Mrs. Hughes
to the return of the nominal value of their shares - €100. The right to take the surplus
had been transferred to Mr. and Mrs. Hughes: but the amount of the surplus – again
ignoring the costs of winding up – was the same. The rights to priority, to vote, and to
participate in the surplus had been switched. The ordinary shares no longer carried the
right to vote and participate but they now carried the right to priority. Since Greenane
Developments had €2 million or so in the bank, the order of priority for distribution was of
no practical significance, but legally there was no identity of rights. It seems to me that
the fact that the rights were not the same goes to show that the rights attaching to each
class of share were divisible and transferrable.
Conclusions
82. The case stated asks for the opinion of the High Court as to whether the Circuit Court
judge was correct in law in his determination:-
(a) That the court should not conduct an enquiry to see which provisions of the Taxes
Acts better catches the actions on 31st January, 2006; that the correct approach
being to consider whether section 130(3)(a) applied even if another provision might
apply?
(b) That the share rights in issue were “assets” within the meaning of section
130(3)(a)?
(c) That the actions of Hughes Chemical through voting through the special resolution
of 31st January, 2006 was a transfer of rights which were assets for the purposes
of section 130(3)(a)?
(d) That the transfer was a distribution and chargeable to income tax as at the time the
appellant and his wife were members of Hughes Chemical?
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(e) That section 130(3)(a) does not require the transfer of assets to the appellant to be
in his capacity as member?
83. For the reasons given, the answer in each case is Yes.
Result: The answer is Yes in each case