Scottish Court of Session Decisions

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Cite as: [1923] ScotLR 220, [1923] SLR 220

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SCOTTISH_SLR_Court_of_Session

Page: 220↓

Court of Session Inner House First Division.

[Exchequer Cause.

Tuesday, January 23. 1923.

60 SLR 220

Glasgow Expanded Metal Company, Limited

v.

Inland Revenue.

Subject_1Revenue
Subject_2Excess Profits Duty
Subject_3Company
Subject_4Directors'Fees — Directors Holding a “Controlling Interest” — Company Assessed as a Partnership — Finance Act 1916 (6 and 7 Geo. V, cap. 24), sec. 49 (1).
Facts:

The Finance Act 1916, section 49, empowers the Commissioners, in assessing a company, whose directors have a “controlling interest” therein, to excess profits duty, to treat the company as if it were an ordinary partnership, the result being that the sums paid as fees to its directors become part of the profits of the company. Out of a total number of 7600 shares in a company the directors held 4300 among them.

Held that the fact that the company allowed the directors’ remuneration to be fixed by the managing director did not so restrict or impair the powers of the company, and the controlling interest of the directors in regulating these powers, as to elide the effect of section 49, and that the Commissioners were therefore entitled to treat the company as if it were a firm.

Headnote:

The Finance Act 1916 (6 and 7 Geo. V, cap. 24) enacts—Section 49 (1)—“Where the prewar standard of profits is taken to be the percentage standard, or is calculated by reference to the statutory percentage, in the case of any trade or business owned or carried on by a company or other body corporate whose directors have a controlling interest, the Commissioners of Inland Revenue may, if they think fit, as respects any accounting period, including a past accounting period, for the purpose of the provisions relating to the statutory percentage, and for the purpose of the determination and computation of profits under Part I of the Fourth Schedule to the principal Act, treat the company or body corporate as if it were a firm and not a company or body corporate, and the directors or any of them as if they were partners in the firm.”

The Glasgow Expanded Metal Company, Limited, appellants, being dissatisfied with a decision of the Commissioners for the General Purposes of the Income Tax Acts, and for executing the Acts relating to inhabited house duties for the Lower Ward of Lanarkshire at Glasgow, sustaining an assessment to excess profits duty, appealed by way of Stated Case, in which J. Anderson, Inspector of Taxes, Glasgow, was respondent.

The assessment appealed against, which was made under the Finance (No. 2) Act 1915 (5 and 6 Geo. V, cap. 89), was in respect of the accounting period ending 31st December 1918 on the sum of £2419, the duty on which at the rate of 80 per cent. being £1935.

The Case stated, inter alia—“The following facts were admitted or proved:—1. The company was incorporated on the 30th day of December 1914, and by its articles of association the regulations in Table A of the First Schedule of the Companies (Consolidation) Act 1908 were made applicable to the company so far as not excluded, altered, or modified by the said articles. … 2. The company's capital consists of 6000 preference shares of £1 each and 4000 ordinary shares of 2s. 6d. each, of which 3600 preference shares and 4000 ordinary shares have been issued and subscribed. The company is a private one consisting of twenty-three shareholders, seven of whom are directors who hold the following shares:—

The directors thus hold 4300 shares out of a total number of 7600 shares. 3. Mr W. S. Gallie is managing director, and Messrs Watt, M'Cubbin, Fergusson, Graham, Cairns, and Hindson are also directors. Mr Graham is secretary, and Messrs Cairns and Hindson are representatives of the company in London and Manchester respectively, and as such these three gentlemen receive salaries. 4. Remuneration has been paid to the directors as follows:—1915, £255; 1916, £265; 1917, £265; 1918, £1975. At the fourth ordinary general meeting of the shareholders held on 21st February 1919 an honorarium of £600 was voted for allocation amongst the directors as they might determine. By mutual agreement this was divided as follows:—

John Fergusson

£50

W. S. Gallie

50

Hugh Watt

150

Thos. M'Cubbin

150

John B. Graham

50

John Cairns

25

J. J. Hindson

25

£600

included in above £1975. 5. Article 9 of the company's articles of association gives the managing director power to fix the remuneration payable to the managers, agents, and servants of the company. Article 11 provides that a director shall not vacate office by reason of holding any other appointment under the company although he receives remuneration therefor. Article 12 provides that the remuneration of the directors as such (including the managing director) shall be payable only out of surplus profits remaining in each year after payment to preference and ordinary shareholders of dividend and share of profits specified in paragraphs ( a) and ( b) of clause 2 of the articles. 6. By section 69 of Table A, First Schedule, to the Companies (Consolidation) Act 1908 (8 Edw. VII, cap, 69) it is provided that the remuneration of the directors shall from time to time be determined by the company in general meeting. 7. The company having been incorporated in December 1914 had no pre-war standard for the purposes of excess profits duty, and consequently its pre-war standard must be taken to be the statutory percentage on the average amount of capital employed in its business during the accounting period as provided by the Finance (No. 2) Act 1915, Fourth Schedule, Part II, Rule 4. 8. By the
Page: 221↓
Finance Act 1916, sec. 49 (1), the Commissioners of Inland Revenue may, where the pre-war standard of profits is calculated by reference to the statutory percentage, in the case of any business carried on by a company whose directors have a controlling interest, if they think fit, treat the company as if it were a firm, and the directors or any of them as if they were partners in a firm. Proceeding upon this section the Commissioners of Inland Revenue have treated the company as if it were a firm, and written back to profits the whole of the directors’ remuneration in the accounting period to 31st December 1918. 9. There is no dispute in regard to the figures involved in this case, and the only point at issue is the question whether the directors have a controlling interest in the company, and if so, whether the Commissioners of Inland Revenue were right in treating it as if it were a firm, and the directors as if they were partners in such firm.

The Commissioners having considered the points raised, found as a fact that the directors of the company possessed a controlling interest, and that consequently the Commissioners of Inland Revenue could treat the company as a firm and its directors as partners of such firm. The Commissioners accordingly dismissed the appeal and confirmed the assessment.”

Argued for the appellants—The expression “directors” referred to in the Act meant effective directors. In this company the directors, acting rather in the capacity of employees as they did, had no real “controlling interest.” They exercised no control over the company's internal policy, nor over the remuneration payable to the directors. The following authorities were referred to:— Dillworth v. Commissioners of Stamps, (1899) AC 99, per Lord Watson at p. 105; Buckley on the Companies and Limited Partnership Acts (9th ed.), pp. 619, 622.

Counsel for the respondent was not called upon.

Judgment:

Lord President—This appeal arises out of an assessment to excess profits duty for the accounting period which ended on 31st December 1918. In making that assessment the Commissioners resorted to the provisions of section 49 of the Finance Act 1916. According to that enactment, in the case of a company whose directors have what the section calls a “controlling interest,” the Commissioners are entitled to treat the company as if it was an ordinary partnership, and the result of that is that sums which have been paid by the company as fees to its directors become a part of the profits of the company itself. Now the question which the appellants have raised is whether the condition for the application of that section is established—whether, that is to say, in the case of the present company the directors had or had not a “controlling interest.” It seems to me that the only interpretation which can be given to that expression is by reference to the power which the number of shares held by the directors give them to control the disposal of the company's assets and the administration of its affairs at a general meeting of the company. If that be the true interpretation of those words, then there is no doubt that in the case of the present company the seven directors did have a controlling interest within the meaning of the section, because they held among them shares enough to enable them (if they were minded to act together) to turn the decision of any general meeting of the company. It is nothing to the point that three of the directors were also employees. The appellants founded on certain of the articles of association, and in particular upon article 9, which gives the managing director power for the first three years of the company's existence to fix the remuneration of “managers, agents, and servants of the company.” The argument was that “managers” includes directors, and that as the company had acquiesced in the managing director's appointment of the directors’ fees, not only in the first three years of the company's existence but also in the fourth, the question of directors’ remuneration was not a matter upon which the controlling interest of the directors in the capital of the company could be of any importance. I am unwilling to say anything with regard to the construction of this company's constitution, or with regard to the mode in which it may have been interpreted or acted on by the managing director, which is not necessary for the determination of the present case. I confine myself therefore to saying that I do not see that there is anything stated in the Case upon which the Commissioners would have been entitled to find that, even as regards the appointment of directors’ fees, the powers of the company (and the controlling interest of the directors in regulating the use of those powers) were so impaired or restricted as to elide the effect of section 49.

Lord Sherrington—The facts which are set forth in the Case as having been admitted or proved do not, in my judgment, demonstrate or even suggest that the General Commissioners committed any error of law when they found as a fact that the directors of the company had what section 49 (1) of the Finance Act 1916, describes as “a controlling interest.” That being so, it was within the discretion of the Commissioners of Inland Revenue to treat the company as if it were a firm, and the directors or any of them as partners of such firm. It was not argued that this discretionary power, assuming the Commissioners to possess it, had not been legally exercised. The determination of the Commissioners ought therefore to be affirmed.

Lord Cullen—I am of the same opinion. The share holdings of the directors are such as to give them a preponderating vote on any question which comes before the shareholders in general meeting. Prima facie that means that they possess a controlling interest in the company, in whatever way they or some of them may choose to exercise it, and I do not think we have heard anything to displace that view.

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Lord Sands was absent.

The Court affirmed the determination of the Commissioners.

Counsel:

Counsel for the Appellants— Mackay K. C.— M. J. King. Agents— Dove, Lockhart, & Smart, S.S.C.

Counsel for the Respondent—The Lord Advocate ( Hon. W. Watson, K. C.)— Skelton. Agent— Stair A. Gillon, Solicitor of Inland Revenue.
1923