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TMI Blog1942 (2) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... the investments held by the company by acquiring certain large holdings of shares in other companies (which have been called "the operative companies" to distinguish them from the investment company), but the appellant company had no sufficient resources of its own by means of which to make the purchase. Accordingly, it approached Martins Bank, Ltd., and on September 22, 1936, an agreement was made under which the bank undertook to advance a sum not exceeding £ 108,000 at a stipulated rate of interest. With this advance, supplemented by its own cash, the company acquired the shares of the operative companies at a price of £ 121,221. The bank's loan was secured by a deposit of all the shares, including the investments already owned by the company, and the company bound itself to pay to the bank, until the loan was completely discharged, all dividends which it received in respect of any of its investments. These dividends were the company's sole source of income. The investments in the operative companies' shares brought in an excellent return; in the financial year 1936-37 the income from all investments was £ 6,540; and in the financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Greenwood [1921] 2 A.C. 171; 8 Tax Cas. 101) or otherwise. Accordingly, by Section 21 of the Finance Act, 1922, it was enacted: " With a view to preventing the avoidance of the payment of super-tax through the withholding from distribution of income of a company which would otherwise be distributed, it is hereby enacted as follows : " (I) Where it appears to the Special Commissioners that any company to which this section applies has not, within a reasonable time after the end of any year or other period ending on any date subsequent to the fifth day of April, nineteen hundred and twenty-two, for which accounts have been made up, distributed to its members in such manner as to render the amount distributed liable to be included in the statements to be made by the members of the company of their total income for the purposes of super-tax, a reasonable part of its actual income from all sources for the said year or other period, the Commissioners may, by notice in writing to the company, direct that for purposes of assessment to super-tax, the said income of the company shall for the year or other period specified in the notice, be deemed to be the income of the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een restrained by injunction; and there appeared to be no argument that the contract was not a reasonable contract 24. We considered that as the company was an investment company, which after August 24, 1936, held investments producing revenue for which the company had paid £ 18,000, there was prima facie case that the reasonable course was that the company should so manage its affairs as to provide for distribution of dividend; and that the company had not displaced such prima facie case by evidence that this could not have been done without jeopardising the interests of the company or without making it impossible to acquire the shares which it desired to buy. 25. We found as a fact that the company had not within a reasonable time distributed in the manner referred to in Section 21 of the Finance Act, 1922, a reasonable part of its income for either of the periods in question." And the questions for the opinion of the Court are thus stated: " (1) Whether our conclusions of law as set worth in paragraph 23 were correct. (2) Whether there was evidence to support our finding of fact as set forth in paragraph 25. (3) Whether the matters set forth in paragraph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uite distinct question of the use of a credit balance on the profit and loss account to justify the distribution of a dividend. As for paragraph 24 of the special case, the Commissioner had contended before the Board of Referees that as the company was purely an investment company, its profits should have been distributed to its shareholders. I do not think that this general proposition can be sustained; as already pointed out, the additional investments were highly profitable. There was no evidence that the company could have financed its purchase on less onerous terms, and the Solicitor-General rightly admitted that it was not part of the case for the Revenue before this House that the company should not have entered into this bargain with the bank. As Scott, L.J., observed, a finding that it was "not reasonable to make such a contract" is irrelevant. There remains paragraph 25, which contains a finding of fact in the exact terms which would justify the Commissioners' direction under Section 21. The question to be decided is whether there was evidence to support this finding of fact, and the answer to that question must be found by examining the contents of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of law raised in this case. The appellant company was incorporated in 1919 with a nominal capital of £ 25,000 dividend into 15,000 ordinary and 10,000 preference shares of £ 1 each, of which 15,000 ordinary and 1,765 preference shares have been issued as fully paid up. The company was formed to acquire a retail jewellery and mail order business carried on at Bolton by Thomas Fattorini, and in June, 1919, it duly acquired the business for £ 14,724 paid as to £ 12,000 in fully paid shares and the balance in cash. There were at this time three other companies in existence in each of which Thomas Fattorini was the principal shareholder: (1) Thomas Fattorini (Skipton), Ltd., incorporated in 1919 with an issued capital at the material date of 47,980 ordinary and 4,200 preference shares of £ 1 each. (2) Thomas Fattorini (Birmingham), Ltd., afterwards named Thomas Fattorini, Ltd., with an issued capital of 13,480 ordinary shares of £ 1 each. (3) H. Pearson, Ltd., with an issued capital of 24,980 shares of £ 1 each. Company No. 1 carried on a jewellery and mail order business at Skipton. Company No. 2 carried on the business of manufacturing meda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loan was repaid to pay to the bank all the dividends it received from the shares in reduction of the amount due to the bank from time to time for payment of capital and interest. There was a stipulation that the companies should not during the period of the loan pay directors' fees in excess of £ 6,000 a year, a provision which suggests that Wilfred was not left without resources. But, as far as the company was concerned, for the time being it placed all its resources of every kind at the disposal of the bank, and was left without any income of any kind which it could, without the consent of the bank, devote to any purpose. There is no finding that this agreement was made in bad faith, or to avoid super-tax, and the Crown expressly disclaimed any attack upon it as being unreasonable. Indeed, it is easy to see that Wilfred and his wife, as the directors and sole shareholders of the company, might congratulate themselves upon getting an advance from a bank on this class of security of so large an amount with the result that they secured in the near future a very valuable asset at the cost of foregoing for a few years' dividends which so far had amounted to £ 500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to, and that if they had produced the evidence they might have displaced the prima facie case; or means that there was evidence of the nature referred to, but it did not displace the prima facie case. I think it probably means the former. In paragraph 25 they say [his Lordship read the paragraph]. The two questions now relevant posed by the Board are: "(2) Whether there was evidence to support our finding of fact as set forth in paragraph 25. (3) Whether the matters set forth in paragraph 24 are such as to show that we misdirected ourselves as to the onus of proof in a case where it is admitted that an investment company with a substantial income has not distributed any part of it". I do not know whether there is any meaning in the inversion of order of the paragraphs in the questions as put. In any case I should conclude that if the Board adopted a view as to the prima facie value of certain facts, and the failure of the company to displace those facts, their final decision that the company had not distributed a reasonable part of its income was necessarily based upon their expressed view of the prima facie case made and not displaced. On what other footing could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are equally entitled if they choose to forego their income for a time to develop and improve the company's undertaking. I think, therefore, that the answer to question three is that the matters referred to do show that the Board misdirected themselves as to the onus of proof. But I also think that the facts stated by the Board disclose no evidence on which it could be found that the company failed to distribute a reasonable part of its income in the years in question. We may eliminate the question which interested the Court of Appeal whether it was legal for the company, having disposed legally of all its income for the year, to distribute a dividend at all. It was pointed out in the Court of Appeal if the company had made profits it would be perfectly legal to distribute them if it could secure the means to do so out of its other free assets or by borrowing. The point was not argued before us by appellants' counsel in his cogent and convincing address. Whether it would be reasonable to exercise the legal right is another and the only relevant question. It will be convenient here to deal with the argument which was pressed upon us by counsel that in the present case the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to me that it was for the Inland Revenue authorities to give evidence indicating not only that it was possible for the company to borrow (the Court of Appeal say that it would have been easy to borrow), but that in the circumstances it was the reasonable thing to do. In the result, therefore, I come to the clear conclusion that there was no evidence that the company failed to distribute a reasonable part of its income. I regard the case as turning on the bank agreement. As long as that remains unassailed it must necessarily have controlled the actions of the company and their reasonable decisions. The Court of Appeal spoke of "the whole plan in the present case for protecting its two shareholders from surtax." I cannot reconcile this phrase with their attitude towards the bank agreement; nor do I find it supported by any finding of the Board of Referees. If the arrangement with the bank was in fact made as part of a plan for avoiding surtax there might very well be evidence of a failure to distribute a reasonable part of the income. But in the absence of any evidence or finding to that effect and in view of the respondents' disclaimer of any attack on that agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refrain from distributing dividends which could have been provided only out of borrowed money. No indication is given of any grounds on which it would have been reasonable for the company to borrow money to enable it to pay a dividend. If a dividend had been paid it would not in fact have been paid out of profits, but out of borrowed money. It would not have been a distribution of profits but a distribution of borrowed money which it was legitimate to distribute because a corresponding amount of profits had been earned. What, then, is the finding in fact by the Board which your Lordships are asked to hold as justifying the Board's conclusion that the appellant company had not distributed in dividends a reasonable part of its income£ It is to be found in paragraph 24 of the stated case, which expresses the opinion of the Board [his Lordships read paragraph 24.] The reference to the figure of £ 18,000 relates to the purchase price of the shares which the appellant company purchased from its own resources as distinct from the money borrowed from the bank. It will be observed that the paragraph I have quoted puts the matter as one of onus. It may well be that when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts found in the special case. But I think it cannot properly be disposed of without considering the other question which is logically prior-though postponed in the order in which the case is stated. That latter is in truth a question as to the onus of proof, and can only be understood by referring to paragraph 24 of the case. I understand that paragraph to mean that the Board are treating the onus as of an ambulatory or shifting character, so that at a certain stage of the inquiry it finally shifts from the respondent to the appellant. I think that is wrong in law. The Crown set out to prove that the direction of the Board is justified because the appellant company has not distributed a reasonable part of its income within the meaning of Section 21 of the Finance Act, 1927. It is obvious that the section is penal in character, and in my opinion the onus is finally on the Crown to prove its right to impose what is a very severe penalty. At the end of the day it is for the Crown to establish the facts necessary to show want of reasonableness on the part of the appellant. I cannot discover in the case as stated that there are facts found sufficient to justify the conclusion. Nor do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot rule out the possibility that it may be seen in a particular instance that no genuine transaction has taken place and that the bargain made, actual or purported, is really a subterfuge merely adopted to avoid the payment of tax. I am not saying that such a state of affairs should not be taken into consideration in determining whether a reasonable part of a company's income has or has not been distributed. Moreover, I agree with the noble Viscount and with the Board that the decision in the Glazed Kid Case** is open to the objection that it appears to assume that a dividend, at any rate in the case of a holding company, can only be paid out of income receivable as cash. The fact that the income had been invested or hypothecated for some purpose elsewhere would not of itself necessarily prevent the distribution of a dividend. Subject to the qualification that the opinion of the Board of Referees as to the reasonableness of the contract entered into is in this case an immaterial consideration, I should answer the first question asked by the case in the affirmative. There is, however, as I think, more difficulty in answering the second question. As I understand the framework o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an earlier date than that finally stipulated. If, then, positive evidence is required to support the finding in paragraph 25 of the special case that the company had not distributed a reasonable portion of its income, I can find none. So far as the bank is concerned it is negatived, and so far as any other source is concerned it is merely conjecture. Indeed, as I think, paragraph 24 depends, and having regard to the form of the case stated depends solely, upon the assumption that the onus of proof is on the company to show not that it could have raised money to pay a dividend after making the bargain into which it had entered, but that it could have made a better bargain. If the finding in the case had been that the appellants could and should reasonably have raised money or credit upon the equity of redemption of the assets pledged to the bank, and so could have provided funds sufficient to declare a dividend, or even that it would have been reasonable to raise the money in this way and the appellants had not shown they could not do so, I should have hesitated in differing from the Court of Appeal. But that is not how I understand the Board to have reached the result arrived at. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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