UKPC 9
Privy Council Appeal No 0028 of 2011
Commissioner of Taxpayer Audit and Assessment (Appellant) v Cigarette Company of Jamaica Limited (in Voluntary Liquidation) (Respondent)
From the Court of Appeal of Jamaica
Sir Patrick Coghlin
JUDGMENT DELIVERED BY
13 March 2012
Heard on 15 February 2012
Christopher McCall QC
(Instructed by Charles Russell LLP)
David Milne QC
Vincent Nelson QC
(Instructed by Myers, Fletcher & Gordon)
7,020,000 (90.0% approx) Carreras;
500,000 (6.4% approx) BAT;
280,000 (3.6% approx) other shareholders.
The preference shares (with a nominal value of $236,000) are of little importance as the 8% nominal yield was well below the rate of inflation in Jamaica throughout the period. It appears that Carreras owned them all by 1979 [Record p1012].
"That [Carreras] may at its sole discretion (but with the approval of [CCJ]) borrow from [CCJ] such amounts as it may from time to time require free of interest, provided however that [Carreras] guarantees to [CCJ] the repayment of such borrowings at such times and in such manner as [Carreras and CCJ] may mutually determine, and provided also that [Carreras] shall not borrow any amounts under this clause until Barclay's Bank of Jamaica Ltd has released BAT from the guarantee referred to in clause 19."
That was part of a clause which was expressed, no doubt advisedly, as a mutual covenant between Carreras (the majority shareholder) and BAT (the largest minority shareholder). It did not and could not bind the other, smaller minority shareholders, who were not parties to the 1977 agreement.
"In practice, however, it may be possible for the directors of a subsidiary to take into account the interests of the group more than the Charterbridge case suggests. Certainly, if the intended measure is likely to promote the success of the company for the benefit of its members as a whole, it is not a breach of duty for the director to take into account the benefit to the group as a whole. Moreover, in the case of a solvent company the interests of the subsidiary are likely to include the interests of its shareholders generally. In the case of a wholly-owned subsidiary, the interests of the subsidiary will therefore include its holding company."
As this passage indicates, in practice problems are most likely to arise if the subsidiary is at risk of insolvency, or is only a partly-owned subsidiary. In those cases the directors of the subsidiary will be under a duty to consider the interests of creditors or of minority shareholders.
"The evidence established, without contradiction, that the group structure, whereby [Carreras] as the parent company provided management and other support services, such as a centralised treasury function, for its subsidiaries, including CCJ, had been in place for over 30 years. As Lord Hoffmann NPG observed in [Commissioner of Inland Revenue v HIT Finance Ltd (FACV Nos 8 and 16 of 2007)] there is 'nothing odd' about this. In my view, this longstanding relationship between [Carreras], the parent, and CCJ, its virtually wholly-owned subsidiary, renders of far less significance than would ordinarily be the case the absence of documentary evidence of the terms of the loans, an agreed repayment schedule or the agreement that the extending of the loans free of interest would be in exchange for the use by CCJ of [Carrerras's] trademarks without payment of royalties.
The reality was that the Group Finance Director, as Mrs Sutherland's evidence indicated, was responsible for the accounting function of [Carreras] as well as overseeing that of the subsidiaries. As a result of this functional connection between the companies, the annual budgeting process of [Carreras] and the subsidiaries was centrally coordinated, with the further result that by the time the process was completed, the management of each subsidiary and of [Carreras], to quote Mrs Sutherland, 'had effectively approved the projected inter-company movements for the ensuing financial year.'"
Morrison JA may also have overlooked the changes, during the period, in the size of Carreras's holding in CCJ.
The statutory provisions
"Where the Commissioner is of opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious, or that full effect has not in fact been given to any disposition, the Commissioner may disregard any such transaction or disposition, and the persons concerned shall be assessable accordingly."
"34. (1) Any act by a body corporate subject to income tax which falls within any paragraph of the following Table but not within any exception to that paragraph shall be treated for the purposes of this Act as a distribution by the body corporate, but, . . . no other act shall be so treated.
Table of Company Distributions
. . .
Distributions to shareholders
1. Any dividend.
. . .
2. Any payment, other than a dividend, made (whether in cash, goods or otherwise) in respect of shares in the body corporate out of assets of the body corporate or so that the cost of it falls on the body corporate, excluding such payments made in the winding-up of a body corporate.
Exceptions: (a) so much of any payment as represents a repayment of capital on the shares (including repayment of any premium at which the shares were issued);
(b) so much of any payment as is proved by the body corporate to have been made out of capital assets.
. . .
9. The grant of a loan falling within section 35."
"35 (1) A body corporate subject to income tax shall be treated as making a distribution where it grants a loan, otherwise than in the course of a bona fide business of lending money –
(a) to a principal member of the body corporate or of any other body corporate connected with it; or
(b) to a relative of any such principal member; or
(c) to any other person on terms such that any such principal member or relative indirectly receives the equivalent of the loan or part of it:
Provided that this subsection shall not apply –
(i) if the principal member is a body corporate resident in the Island; or
(ii) if the principal member is a body corporate resident out of the Island and the Minister has approved the loan as being beneficial to the economy of Jamaica; or
(iii) if the loan is granted by a company to a person employed by it where loans on the like terms are made available by the company to all its staff in similar employment."
" 'Artificial' is an adjective which is in general use in the English language. It is not a term of legal art; it is capable of bearing a variety of meanings according to the context in which it is used. In common with all three members of the Court of Appeal their Lordships reject the trustees' first contention that its use by the draftsmen of the subsection is pleonastic, that is, a mere synonym for 'fictitious'. A fictitious transaction is one which those who are ostensibly the parties to it never intended should be carried out. 'Artificial' as descriptive of a transaction is, in their Lordships' view a word of wider import. Where in a provision of a statute an ordinary English word is used, it is neither necessary nor wise for a court of construction to attempt to lay down in substitution for it, some paraphrase which would be of general application to all cases arising under the provision to be construed. Judicial exegesis should be confined to what is necessary for the decision of the particular case. Their Lordships will accordingly limit themselves to an examination of the shares agreement and the circumstances in which it was made and carried out, in order to see whether that particular transaction is properly described as 'artificial' within the ordinary meaning of that word."
Were the loans "artificial"?
(1) The judge was influenced by the absence (as he saw it) of documentary evidence of management policy, decisions, and implementation of decisions.
(2) No interest was paid on the loans, and there was no reliable evidence that this was a quid pro quid for use of Carreras's trademarks, or that these reciprocal benefits were quantified.
(3) No actual repayment of the loans was made until the decision in 2003 that there should be a major reorganisation.
(4) There was no evidence that external group borrowing was reduced as a result of the loans.
(5) "[Carreras], as a 99.8% shareholder had virtually unlimited power as a matter of fact and law, to determine what was to be done with surplus cash held by [CCJ]. There is no evidence that any explanation was every given to [CCJ] as to how [Carreras] proposed to use the funds in question."
(1) Experience in company law cases suggests that board minutes often reflect immediate preoccupations rather than long-term policy, and are sometimes uninformative. An example is in the minutes of the Carreras board meeting on 6 February 1997 [Record p1825] which may be the only documentary reference to consideration of the minority shareholders. Under the heading "Any Other Business: minority interests in Cigarette Company of Jamaica" it reads, not very helpfully, "All correspondence submitted to the Board was taken as read. Management is awaiting a response as is evident from the correspondence dated January 10, 1997". In fact the financial statements and other documentary evidence in the Record contain a good deal of information, some of which is summarised above. But it seems that counsel did not take the judge to much of it in the course of the hearing.
(2) It may well have been a mistake for CCJ's advisers to rely on the trademarks point. There may have been a "swings and roundabouts" attitude at first, but the sums loaned during the 1990s were out of all proportion to any plausible bargain. The only possible justification for the loans was the group structure.
(3) It is now accepted that the loans were real loans, which were as a matter of law repayable on demand (even if the auditors considered that a true and fair view was to classify them as non-current). Their existence was acknowledged regularly by directors of Carreras signing the balance sheet. Carreras was at all times in a position to repay the whole of the loans out of cash or readily realisable investments.
(4) The judge misunderstood the arrangement with Bank of Nova Scotia, which provided various banking facilities, including a standby loan facility which was not in fact used. Morrison JA drew attention to this point in para 94 of his judgment in the Court of Appeal. Carreras itself had massive reserves of cash ($146m in 1990 rising to $2.262bn in 2001) [Record pp1267, 1569] and relatively negligible external borrowing.
(5) The group structure was not, as the judge seems to have been suggesting, a reason for treating the loans as artificial. It was, on the contrary, the commercial context in which there was nothing abnormal or artificial in the loans being unsecured, interest-free, and documented only by normal accounting and auditing processes. Had the CCJ been a wholly-owned subsidiary of Carreras throughout the relevant period the conclusion that the loans were not artificial would have been clear and irresistible. It would have been a paradigm case of a loan which, although not on commercial terms if looked at in isolation, falls squarely within proviso (i) to section 35(1) of the Income Tax Act. Any element of bounty in the transaction would have remained within the reach of Jamaican corporate taxation.
"But there is no reason to make a mystery about the subjects that commissioners deal with or to invite the courts to impose any exceptional restraints upon themselves because they are dealing with cases that arise out of facts found by commissioners. Their duty is no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado."
Second, the Board does not agree with Morrison JA's view, at para 99, that an artificial transaction would invariably (or even usually) involve dishonesty. In general it would do so only if it involved active deception, or non-disclosure which was in the circumstances tantamount to active deception.