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TMI Blog1945 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... votes. Each ordinary shares carries one vote on a poll. There are eight directors, who are respectively beneficial owners and registered holders of ordinary shares, which amount to a total of 209,332 shares. Three of the directors are registered as joint holders of 57,500 other ordinary shares, which they hold as trustees of their sister's marriage settlement, under the trusts of which they are entitled to a contingent reversionary interest in the shares. Upon these facts it is apparent that, if these trustee shares are not to be taken into account in considering the question whether the directors have a controlling interest in the company, the answer must be that the company is only entitled to an increase of 8 per cent. Its business falls within Section 13(9)(a). If the trustee shares are to be taken into account the answer would seem equally clear. The company's business would then all within sub-section (9)(b), and it can claim an increase of 10 per cent. Macnaghten, J., affirming the decision of the Special Commissioners, held that the trustee shares must be excluded from consideration. His opinion was thus expressed: "As trustees they have no 'interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confined to beneficial interests appears to me to be but a repetition of the argument which was rejected by this House in the case of British American Tobacco Co. v. Inland Revenue Commissioners [1943] 11 I.T.R. Suppl. 29; [1943] A.C. 335 in relation to National Defence Contribution and the Finance Act, 1937. It may be that, as the appellants contended, an object of the sub-section now in question was to compensate a director-controlled company for the disability imposed on it by paragraph 10 of Part I of the Seventh Schedule to the Act, but I cannot deduce from this fact, if it be a fact, that controlling interests must be confined to beneficial interest which give control. I agree with the view of the Court of Appeal that upon the true construction of Section 13(9), standing alone, there could be no justification for so restricting the words, or reading into the sub-section a provision to the effect that control held as a trustees should be disregarded. A long and detailed argument was, however, addressed to us based upon other sections of the 1939 Act, and some provisions of the Finance Act, 1937, in which the phrase "the directors whereof have a controlling interest ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that and other Finance Acts. If this scrutiny and analysis were sufficiently close he might notice that sub-paragraph (2) of the same paragraph 10 suggests that a registered shareholder who is not a beneficial owner may directly control ordinary shares, and he might perhaps wonder, on reading the Finance Act, 1940, why the Legislature had not inserted in the 1939 Act a provision similar to that which is contained in Section 55(5) of the Act of 1940. Counsel for the appellants, at one stage of the argument, suggested that shares registered in the name of a director but held by him as trustee might be included in reckoning the controlling interest in cases where the trustee had also what was described as a predominating beneficial interest in the shares. For myself, I am unable to appreciate how these supposed different degrees of beneficial interest, or the existence in the trustees of any beneficial interest, can affect the question of control. The words "controlling interest" mean "controlling voting power"; that is the interest in view, not beneficial interest. As at present advised, I agree with the Court of Appeal in the view that there is no half-way hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by three of the directors are held by them as trustees under the marriage settlement of their sister. The contention is that these trust shares must, on a sound interpretation of the statute, be excluded from the reckoning for the present purpose, because the directors in question have not the sole, or at least not a predominant, beneficial interest in them. It is agreed that if these shares be excluded, then the directors do not among them hold a majority of the ordinary shares and so do not have a controlling interest in the company. In my opinion, the Court of Appeal rightly rejected the contention of the Inland Revenue Commissioners. The question whether the directors of the respondent company have the control of it by their voting power as shareholders must, in my view, be determined by the memorandum and articles of the company and by the register of shareholders. By the constitution of the company, as I have already mentioned, the voting power is vested in the ordinary shareholders, and the register shows that the directors hold a majority of these shares. As was said by Jessel, M.R.: "The company cannot look behind the register as to the beneficial interest, but mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ordinary share capital of the company" [Seventh Schedule, Part I, para. 10(2)], which at least suggests that when the Legislature means beneficial ownership it knows how to say so. I remain unconvinced by this line of argument. It so happens that the three directors in question have a remote contingent beneficial interest in the trust for which they hold shares. In the view which I take this is immaterial, but if beneficial interest were necessary, then, unless beneficial interest were taken to mean sole beneficial interest, I can conceive complicated questions arising as to the extent of the beneficial interest of the shareholder in particular cases, which would be unfortunate for the working of an emergency taxing measure. I would only add that I have not overlooked the fact that this legislation applies to Scotland as well as to England, and that in Scotland trustee shareholders are registered as such. The Act should, if possible, receive an interpretation which will be equally applicable on both sides of the border. "In construing a taxing statute which applies to England and Scotland alike, it is desirable to adopt a construction of statutory words which avoid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trustee might control but could not be said to have an interest. This contention, to my mind, lays far too great emphasis on the word "interest." I do not think one is entitled to split up the phrase and press the meaning of each portion in this way. The phrase is a composite one and the combination means no more than that the directors must have an interest such as enables them to control the activities of the company; it does not require some personal financial interest on their part which control enables them to exploit. It may be that trustees can ultimately be brought to book for activities which would not lay a beneficial owner open to attack or complaint. Nevertheless, for good or ill, the trustee, like the beneficial owner, controls, though if his powers be wrongly exercised they may in some way or other be capable of being challenged. The Court of Appeal qualify the meaning of the phrase by excepting "bare trustee" from those having a controlling interest. As to this qualification I desire to reserve my decision. In a case such as the present, however, where the shares giving control are held by the directors not merely as trustees but also with som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been directed to showing that to some extent in regard to this very provision, but more particularly in regard to other provisions of the same Act relating to excess profits tax, the purpose of the Act will be defeated unless the beneficial interest alone is regarded and the fiduciary interest disregarded. This is a cogent argument, if two conditions are satisfied, first, that the words in dispute fairly admit an alternative construction, and, second, that the purpose of the Act can be so clearly seen that one construction will serve it and the other defeat it. Neither of these conditions is, in my opinion, satisfied. I cannot ascribe to the words "controlling interest" a meaning which would impose alike on the taxpayer and the tax collector the duty of searching out the beneficial interest behind the veil of legal forms. For it is to be observed that, if this argument is to be effective, it is not sufficient to say that the controlling interest lies, not with the legal owner, but with the beneficial owner; the next step is to determine who, amidst all the complexities of successive interests, discretionary interests, mortgage and other interests, is for this purpose to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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