The High Court upheld the Special Commissioners' decision in Unilever (UK) Holdings Ltd v Smith.
A scheme of arrangement in April 1965 whereby preference share capital of a company was repaid was held not to amount to a reorganisation as regards the holders of the ordinary stock.
The High Court upheld the Special Commissioners' decision in Unilever (UK) Holdings Ltd v Smith.
A scheme of arrangement in April 1965 whereby preference share capital of a company was repaid was held not to amount to a reorganisation as regards the holders of the ordinary stock.
Background
The relevant facts start back in 1965. Unilever had held shares in British Oil and Cake Mills for many years before 1965. The authorised share capital of British Oil and Cake Mills comprised the following: £9,652,124 was issued and fully paid up, of which £743,103 was 5.5 per cent cumulative preference stock, £2,909,021 was cumulative preferred ordinary stock, and £6 million was ordinary stock. The preference shares were quoted on the London stock exchange, and controlled 37.84 per cent of the votes. Unilever held the ordinary stock, and therefore controlled approximately 62 per cent.
In January 1965, Unilever and British Oil and Cake Mills announced proposals to cancel the preference capital, and a scheme of arrangement was presented to the High Court in February 1965. The Court sanctioned the arrangement, so that the preference capital was cancelled and cash of £6,924,773 was paid to the holders of the issued preference stock. The authorised share capital of British Oil and Cake Mills was reduced by the two classes of preference stock, but increased by an equivalent amount of ordinary shares, although those shares were not issued. Unilever's original holding of £6 million continued to be the only issued and paid up share capital.
In June 1992, Unilever sold all the British Oil and Cake Mills stock for £67,617,391 and, in July 1992, it disposed of another company, PBI Cambridge Ltd, on which it made a chargeable gain. Unilever wanted to offset the loss accruing on the sale of British Oil and Cake Mills against the gain on the disposal of PBI. It wanted to use April 1965 as the base date for valuation, rather than the original date of acquisition which was many years before, believed to be some £40 million, claiming that the scheme of arrangement was a reorganisation within the meaning of section 126, Taxation of Chargeable Gains Act 1992, and that paragraph 19(2) of Schedule 2 to the Act applied to the shares.
Section 126(1) defined reorganisation as a reorganisation or reduction of a company's share capital, and section 126(1)(b) provided that 'new holding' meant, in relation to original shares, the shares in and debentures of the new company which as a result of the reorganisation represented the original shares. Section 126(2)(b) provided that a reorganisation included any case where more than one class of share existed, and the rights attached to shares of any class were altered. Under paragraph 19(2), a person who came to have a new holding after 5 April 1965, was deemed to have disposed of and reacquired the shares at market value at that time. Paragraph 19(3) disapplied paragraph 19(2) where the new holding differed from the original shares by being a greater or lesser number of shares of the same class as the original shares.
The Revenue refused the claim, so the company appealed.
(Robert Venables QC and James Kessler for the taxpayer company; Nicholas Warren QC and David Ewart for the Revenue.)
Decision in the High Court
Mr Justice Burton said that in order for Unilever to take April 1965 as its base cost, it had to establish that its holding of £6 million ordinary stock in British Oil and Cake Mills became a new holding resulting from a reorganisation, being shares which as a result of the reorganisation represented the original shares which were held before and concerned in the reorganisation. If so, then the straight line apportionment is taken from original acquisition up to 29 April 1965, but under paragraph 19, the valuation of the loss made in 1992 would be calculated as from April 1965.
The first question to be answered was whether or not there had been a reorganisation. Counsel for the taxpayer company argued that there was a reorganisation by virtue of the reduction of share capital as a result of the statutory definition in section 126(1), or alternatively by virtue of the reorganisation of the preference shareholding, i.e., on the basis that the reduction amounted to a reorganisation, regardless of statute.
The judge said that there was no alteration of rights attached to the ordinary stock when the prior preference shares were cancelled. He agreed with the Revenue that the alteration of memorandum and articles was a mechanical exercise and, had they not been altered, the position would have been the same. Furthermore, the voting rights were the same.
The judge agreed with the Revenue that a reduction of a company's share capital did not include the cancellation of an entire class of share capital within the context of Chapter II of the Act, because there was no new holding. Section 127 provides that if there is a reorganisation then there is no disposal of the original shares, but that the original shares become part of or are the new holding.
The judge moved on to whether or not the ordinary stock was concerned in the reorganisation. He said that for the shares to become a new holding, they had to have changed in some way. He concluded that they were completely unchanged, and therefore were not concerned in the reorganisation. For this reason also, no new holding had arisen.
The appeal was dismissed.
Decision for the Revenue
(Reported at [2002] STC 113.)