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TMI Blog1963 (6) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... by virtue of its membership of the North Staffordshire Collieries Mutual Indemnity Ltd. (the "mutual company"), upon the liquidation of the mutual company, were properly to be treated as forming part of the trading receipts of the appellant company in computing its taxable profits. The appellant company had for many years prior to the nationalisation of the coal-mining industry on January 1, 1947, carried on a mixed trade, including the operation of several collieries and of a brickworks situated on the site of one of the collieries. Since the nationalisation of the collieries it had continued to operate the brickworks, and had done so on property the freehold of which was acquired by the National Coal Board but which had been leased to the company. It was agreed that for taxation purposes the various activities of the appellant company together constituted one indivisible trade the identity of which was not destroyed by the nationalisation of the collieries. In common with a number of other colliery proprietors in the North Staffordshire area, the appellant company was a subscriber to the memorandum of the mutual company. The mutual company, a company limited by guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant company, amounted to approximately £ 44,000. Following the nationalisation of the collieries, the activities of the mutual company were transferred to the National Coal Board, and negotiations took place between the mutual company and the National Coal Board for the ascertainment of the liabilities which had vested in the board under the Coal Industry Nationalisation Act, 1946. These negotiations were completed in 1953, and the mutual company was then put into voluntary liquidation. The funds available in the liquidation enabled a first distribution of £ 700,000 to be made in December, 1953, to the contributories of the mutual company, the amount received by the appellant company being £ 52,059. In 1954, a further and final distribution to contributories was made by the liquidator of the mutual company of ú82,180, of which the appellant company's share was ú6,049. The sums of ú52,059 and ú6,049 were not included as revenue receipts in the appellant company's profit and loss accounts for 1953 and 1954. These sums, less provision for possible taxation, were put to capital reserve in the balance-sheets as at December 31, 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of the continuing business. This case is concerned with sums amounting to some ? 58,000 received by the appellants on the liquidation of the North Staffordshire collieries Mutual Indemnity Ltd. This was a company, limited by guarantee, of which a number of colliery companies were members, and with which those companies insured against accident claims. The mutual company ceased to carry on business after nationalisation of the collieries. It had a large reserve fund so that, after the National Coal Board had taken over all its liabilities at an agreed valuation, it had surplus assets, when put into voluntary liquidation in 1953, of over ? 700,000. The mutual company only insured its own members and its only source of income was premiums paid by the members. So this surplus arose entirely from the fact that, as it turned out, members had been paying more in premiums than was required to meet claims. By reason of the decision of the Court of Appeal in Thomas v. Richard Evans & Co. Ltd.* the members, including the appellants, were entitled to and did bring in all these premiums to their profit and loss accounts as trading expenses in each year for income tax purposes. So the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property of a company...shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company." In the present case the articles do "otherwise provide." Article 130 provides for distribution in proportion to the amounts of premiums paid during the five years before the company ceased to carry on business. But the articles of any kind of a company can "otherwise provide." And section 20 of the Companies Act makes the articles of every company a contract between it and its members. So if the argument for the respondents is sound it must I think lead to the conclusion that wherever the articles "otherwise provide" the distribution of the company's assets in liquidation is in fulfilment of the contract contained in the articles and is not subject to the ordinary rule that the assets when distributed are capital. There is certainly no authority for drawing such a distinction between cases where the articles expressly provide how the assets are to be distributed and cases where they do not, and I do not think that it would be right to introduce any such distinction. In my view the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the general purposes of the company. Under the mutual company's articles of association its affairs were managed by a board of directors with a managing director appointed by themselves. The original directors were appointed in writing by a majority of the subscribers to the memorandum of association, being thereafter subject to retirement by rotation and directors were afterwards elected by general meetings of the company. It was the duty of the directors from time to time to fix the amounts of the premiums payable by its members, the amount of such premiums being in each case related to the total of the member's wage bill. Membership was confined to companies or persons carrying on the business of coal mining. By article 38 a member was entitled to withdraw from membership provided that all premiums due from such member up to the date of his withdrawal had been paid. By article 42 a member might transfer his interest in the mutual company on such terms as the directors might determine to some other company or person or persons who might acquire the transferor's coal-mining business and become a member of the mutual company. The only other article to which I need re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o January, 1947, carried on both coal-mining activities and also a brickworks and its activities as regards the brickworks have continued since the beginning of 1947 until the present time. It has for the purposes of this case been conceded on the appellant company's behalf that its activities prior to January 1, 1947, constituted a single business and that business has since January 1, 1947, continued up till the present time. In the circumstances which I have stated the question involved in the present proceedings is whether the sum of ? 58,108 which I have mentioned was a trading receipt in the appellant company's hands and accordingly should be taken into account for income tax purposes; or whether, on the other hand, it was a capital sum and as such not liable to be reckoned for tax purposes. Before the Special Commissioners and in the court of first instance the question was decided in the appellant company's favour, but the Court of Appeal by a majority (Lord Denning M.R. and Donovan L.J., Pearson L.J. dissenting) reversed Plowman J.'s decision and concluded that the sum of ? 58,108 must in the appellant company's hands be treated as a trading receipts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the premiums paid; so that when upon a liquidation such surplus assets came to be distributed the sums received by the appellant company represented and were in truth (notwithstanding any effect of any investment by the mutual company) nothing other than a return of what had proved in the event to be an over-payment of premiums. It is not in doubt for the purposes of the present case that the premiums in fact paid from time to time by the appellant company were properly allowed as trade expenses for income tax purposes, and also it was not in doubt, following certain cases (including cases before your Lordships' House) the latest of which is that of Faulconbridge v. National Employers' Mutual General Insurance Association Ltd.*, that the nature of the mutual company's business was such that the excess in any year of the premiums received over any expenditure in meeting claims could not be regarded as trading profits liable to income tax. It was therefore said (and this point appealed particularly to the majority of the Court of Appeal) that as a matter of fairness and common sense the share of the surplus assets received by the appellant company (being in truth as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the steps so taken by the appellant company (in the present case the relationship of the appellant company with the mutual company) as sensibly a special or distinguishing characteristic of its business or as part of its "fixed capital framework" as I understand that phrase in light of the Van den Berghs case* and I therefore reject this part of Mr. Bucher's argument. On the other hand I have with all respect to the majority of the Court of Appeal felt compelled to the conclusion that the ? 58,108 received by the appellant company from the liquidator of the mutual company did not lose its capital character when received by the appellant company and cannot properly be regarded as a trading receipt. It cannot now be in doubt that surplus assets in the hands of the liquidator of a limited liability company--whether limited by share capital or by guarantee--are in his hands capital. Such a conclusion was laid down by the Court of Appeal in Inland Revenue Commissioners v. Burrell** (see especially per Atkin L.J.) and it has never since been questioned. The terms of section 302 of the Companies Act, 1948, are entirely consistent with this view for they speak of the " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do so on such terms as the directors decide. It is of course possible that the directors might decide in favour of the consideration being paid by annual sums: but prima facie what is being done upon a member's exercising his rights under article 42 is to dispose of his interest qua member, that is to say, to dispose of his proprietary interest in the mutual company. It so happened that on January 1, 1947, the assets of the mutual company exceeded considerably its liabilities. At other points of time the excess might have been very different and there might have been times on which the assets would have shown upon a proper accounting a deficiency. Indeed it is the fact that in the year 1944 reports made by actuaries employed for the purpose by the mutual company showed that on December 31, 1943, the assets in that company's hands fell short by over ? 500,000 of the amount regarded as requisite and appropriate to cover probable or estimated liabilities: and, as a result, all the members were called upon to pay and paid during 1944 additional premiums. As Pearson L.J. pointed out in his judgment, had it not been for the nationalisation of the coal mines the mutual company mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolution. The truth is, in my opinion, that the assets from time to time in the possession of the mutual company represented (subject to its liabilities) the property of that company as a persona ficta wholly distinct from its members and that article 130 provided for the distribution among the members of the surplus (capital) assets of the mutual company upon its liquidation. It was the view of the learned Master of the Rolls that if the appellant company were entitled to succeed, a way would be shown whereby "companies could build up capital assets to a tremendous extent at the expense of taxable income." If such were in truth the result, no doubt Parliament would deal effectively with it as it has done in regard to other matters relating to taxation. But in my opinion such a result does not at all follow. The appellant company was allowed to treat its payments to the mutual company as proper trade expenses because they did in fact and in truth represent premiums paid in respect of its (compulsory) insurance liabilities. If, as the learned Master of the Rolls supposed, a mutual insurance company were established as a means to secure the building up of large capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company in a winding up, which takes the place of the simple distribution "among the members according to their rights and interests in the company." I can find nothing in section 302 or in article 130 which to my mind in the least advances the claim that the subject-matter of the distributions of assets made in the winding up of the mutual company was income rather than capital. What is the "property" which section 302 requires to be applied in satisfaction of the mutual company's liabilities, and subject thereto to be distributed amongst its members? To my mind it can be nothing more nor less than the entirety of the assets of the mutual company which (subject to the satisfaction of liabilities) must be distributed amongst the members of the mutual company in the way indicated by article 130 and constitute in their hands a capital, as distinct from a revenue, receipt. An argument was raised, which perhaps I did not fully understand, to the effect that the members of the mutual company should be regarded as having severally entered into contracts of insurance with the mutual company, each such contract being embodied in the articles of association of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectively in respect of the last five financial years of the company preceding January 1, 1947, and your share of such distribution amounts to [blank]. It is proposed to make the distribution on December 16, 1953, to members appearing on the register of members of the company on that date. To obtain this payment you should: (1) Complete and sign the enclosed form of instructions, and forward it to the above address as soon as possible: (2) Send at the same time your certificate of membership for marking in respect of this distribution.' Then, attached, is the form of instructions referred to, which is headed: 'First Liquidation Distribution to Members' and which opens with the words: 'We, being a member of The North Staffordshire Collieries Mutual Indemnity Ltd., hereby authorise and request you to pay the first liquidation distribution payable in respect of our membership in the company.' and so on. In the liquidator's statement of account in the liquidation of mutual, there appears on the credit side the item: 'Returns to contributories (no share capital)--first distribution, ? 700,000; second and final distribution, ? 82,180.' In those circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on in the years when the premiums were paid, albeit that one department of that business has now been discontinued. The contract under which the premiums were paid (contained in the articles of association of the mutual company) was a contract entered into in the normal course of trading. Thus, the premiums were allowed as a trading expense. By virtue of the same contract, the taxpaying company gets back moneys representing the excess of what it has paid. The whole transaction, from its beginning to its end, is in my opinion a transaction on trading account, and there is no warrant for treating the recoveries as anything else but revenue." At the conclusion of the argument I was of the same opinion, but I have since had the opportunity of reading the opinions prepared by my noble and learned friends Lords Reid, Evershed and Jenkins. I have been persuaded to the view that one cannot legitimately, by having regard to the special character of the "mutual company," a company limited by guarantee which does not make profits so as to be assessable to income tax, treat it differently from other companies on a winding up. Section 302 of the Companies Act provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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