Post-liquidation profits
Post-liquidation profits
In January 1998, T plc went into creditors' voluntary liquidation. Its principal asset was a debt owed to it by another company, TEE, in the same group. This whole debt remained outstanding until November 1998, when it was discharged by an agreement between the company and TEE. It was agreed that the amount to be repaid represented the principal only, and no accrued interest. Nevertheless, statutory provisions treated the interest payable after the liquidation as a taxable profit, and imposed on the company, a corporation tax liability in respect of the interest. As such, this tax liability constituted a post-liquidation debt, and was not provable in the winding up. The Revenue, however, said that it was an expense of the winding up within the meaning of section 115, Insolvency Act 1986, and therefore had to be discharged from the company's assets in priority of provable debts.
On an application by the liquidators for directions, the judge held that the corporation tax was not a necessary disbursement within rule 4.218(1)(m) of the Insolvency Rules 1986, and that therefore rule 4.218 applied only to corporation tax arising on the sale of the company's assets. The Court of Appeal reversed the decision, so the liquidators appealed to the House of Lords.
Lord Justice Hoffmann said that it was expressly enacted that a company was chargeable to corporation tax on profits or gains arising in the winding up. Tax was a post-liquidation liability which the liquidators were bound to discharge, and was therefore a necessary disbursement within the meaning of the Insolvency Rules 1986.
Furthermore, it was not at the Court's discretion to judge whether or not a debt should count as expenses of the liquidation, and if a debt did count as such an expense, it did not necessarily mean that the creditor should be allowed to bring proceedings or levy execution immediately. The appeal was dismissed.
(Re Toshuko Finance UK plc, Kahn and another v Commissioners of Inland Revenue, House of Lords, 20 February 2002.)