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TMI Blog1944 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... w situation which has caused the difficulty. 2. By an agreement in writing dated September 27, 1933, made between the appellants (who were then carrying on business under the name of G.B. Ollivant & Co., Ltd.) as vendors of the first part, the respondents the United Africa Co., Ltd., of the second part and Leonard Chadwick of the third part, it was agreed inter alia, that the appellants should sell to a company to be incorporated for the purpose, its property and assets of various kinds including in particular the business of West Africa merchants which had, until then, been carried on by the appellants. Among the assets agreed to be sold by the appellants was the goodwill of the business. The consideration to be paid by the new company for such goodwill was provided for in the agreement by elaborate clauses which for the present purpose may be summarised as follows. Within 28 days after the accounts of the new company for each financial year of the new company which comprises any part of the period of eight years commencing on October 1, 1933, and ending on September 30, 1941, were made up and certified for submission to the shareholders, the new company was to pay to the vendor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate deduction in computing the vendor's profits for the year ended August 31, 1940, then no sum is payable to the appellants for the said year. If, on the other hand no deduction for excess profits tax should be made for this purpose from the profits earned in that year, then the sum of £ 82,502 is payable to the appellants in respect of the said year. 6. The joint liquidators of the appellants, being in doubt as to which was the right method of computation, have adopted the convenient course of taking out an originating summons for the determination of this question of construction. On the hearing of this summons, Far-well, J., decided that excess profits tax should be deducted, and, on an appeal to the Court of Appeal, that Court (Lord Greene, M.R., Lord Clauson and du Parcq, L.J.) reached the same conclusion for somewhat different reasons. 7. The view taken by Lord Greene, M.R., was that, when the agreement required the auditors, for the purpose of computing the profits of the purchasers, to apply "the general principles of ordinary commercial practice", the reference must be to the computation of the profits of a trading company in order to arrive at the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to see why the amount thus taken should not be regarded as part of the profits. Both by name and by nature it is part of the profits, and it is none the less so because the Crown takes this part and leaves only the balance, if any, available for distribution among shareholders. If the excess profits tax were to be retrospectively repealed this would not increase the profits of the company in the least: it would only change their destination. The profits would be the same as before, but, as the Crown in that event would take less, the shareholders could receive more. 11. The second difficulty arises from what appears to me to be an error in describing the purpose and incidents of a profit and loss account. The Court of Appeal speaks of such an account as though its primary object was to ascertain what balance of profit was available for distribution to shareholders, and this leads to the assumption that a properly constructed profit and loss account must include on the debit side the amount of excess profits tax. This is not my understanding of the matter. The primary purpose of a profit and loss account is to ascertain what balance of profit or loss the enterprise has achie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween expenditure which should be deducted against income and expenditure which should be treated as incurred on capital account. 13. I am, therefore, unable to accept the proposition that the profit of a trading company is only what is left after deducting excess profits tax, or that the profits of this company should be so calculated. The profit is surely the figure before that deduction has been made. Excess profits tax is not an expenditure incurred in the earning of profits. It is an impost which has to be paid as a portion-and a very large portion in many cases-of the profits which the company has made. I may add that excess profits tax demanded in any year is not finally fixed, but is liable to be revised and even to be entirely repaid in the light of subsequent losses-a circumstance difficult to reconcile with the stipulation in the agreement that the vendor company was in no circumstances to repay what it received. I would allow the appeal. Lord Thankerton :-My Lords, I am of opinion that the appeal should be dismissed, and I am quite satisfied with the opinion expressed by Lord Greene, M.R., with which his colleagues were in agreement. Were it not for some difference of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matively. Counsel for the appellants, as I understood him, did not dispute that the ordinary purpose for which profits were computed by a trading company was the ascertainment of divisible profits, which was done by means of a profit and loss account, but he disputed that the "general principles of ordinary commercial practice" referred to the ascertainment of divisible profit. As I understood his argument, it was that these words related to the computation of profits for the purposes of this contract. The express terms of the provision under construction appear to me to exclude any such idea, for, as I read them, they direct the application of general principles which are in ordinary commercial use outside of and apart from this particular agreement, but the application of such general principles is to be modified by the express provisions of this agreement, which direct the adjustments required in this particular agreement. 18. If then one is to look outside this agreement to find the "general principles of ordinary commercial practice", it surely must relate to the ordinary practice of trading companies, and I should have, without difficulty, come to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... among us, I would content myself with stating that I agree, as I do, with Lord Greene, M.R., both in his analysis of this very unusual form of agreement, and in his opinion as to its true construction. I will, however, add only a very few words of my own. Lord Greene, M.R., has taken the view that the provision in the third schedule that the auditors in computing the profits of the purchasing company are to adopt the general principles of ordinary commercial practice refers to the general principles of ordinary commercial practice adopted by auditors in computing the profits of a trading company for the ordinary purpose for which those profits are computed, viz., to prepare a profit and loss account on the basis of which the profits (if distributed) are to be distributed. He reaches this conclusion because, as he says, he can think of no other ordinary commercial practice in computing the profits of a trading company save the practice of computing those profits for that purpose. 23. I agree with Lord Greene, M.R., in this. The same conclusion is in my opinion also reached by a consideration of clause 4(L)(2) in the body of the agreement. That is the clause which requires the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial year" nor would the computation which led up to such a certificate be such a computation as is contemplated by the third schedule. The account which is contemplated by the schedule is a complete though highly artificial profit and loss account. Para. (2) testifies to its completeness. Para. (4) is eloquent of its artificiality. I would dismiss this appeal with costs. Lord Macmillan.-My Lords, I find myself unable to agree with the view of this case which has commended itself to the majority of your Lordships. The transaction in question is concerned with the sale of the goodwill of a trading business and is embodied in a written agreement. I shall call the appellants "the vendors" and the respondents, who have acquired right to the agreement, "the purchasers." 27. The goodwill of a business consists of the profitable connection which it has established with its customers on which a reasonable expectation of future profit-making is based. The sale of the goodwill of a business is thus the sale of an expectancy of making future profits, and it is accordingly appropriate, as has been done in this case, to make the price dependent on the realisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax under the Finance (No. 2) Act, 1939, and this tax has since been continued with certain modifications. 29. The question is whether in computing the profits of the purchasers for the year 1939-40 in terms of the agreement there should be debited the amount of excess profits tax, viz., £ 1,92,000. If this is so, the vendors instead of receiving an instalment of £ 82,502 would be debited with a loss of £ 26,996 to be carried forward against the profits of the eighth and last year. 30. Now the agreement says nothing about excess profits tax for the very good reason that no such tax was in existence or in contemplation when the parties entered into it. Nevertheless your Lordships have to say what is to be done about it and must arrive at your decision by the interpretation of the provisions of an agreement which makes no reference to excess profits tax and which was framed by the parties without any intention of dealing with such a tax. It is the familiar but always hazardous judicial operation of imposing upon parties by the interpretation of words which they have used an intention or at least an effect which they never entertained or contemplated. 31. The agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing profits this would be a necessary implication. How can it be a necessary implication of this agreement that income-tax should not be deducted and at the same time a necessary implication that excess profits tax should be deducted; that a tax on profits should not be deducted but that a tax on excess profits should be deducted? 33. Then there is the reference to "the principles of the agreement" to which the auditors are entitled to have regard in adjusting the profits account. The principle of the agreement, as I see it, is that the price to be paid for the goodwill is to be dependent on the realisation of the anticipated earning power of the business. Its value is to be tested by the experience of the purchasers over eight years. In my opinion this clearly points to their experience as traders not as taxpayers. It is the volume of profitable business done that is to be the measure of the price, subject to a maximum. The question of the amount of taxation which the purchasers have to bear on what the goodwill has earned for them seems to me irrelevant. If over eight years the business whose goodwill they have bought yields £ 400,000 of profit then the ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. Lord Wright (read by Lord Macmillan).- My Lords, I agree with the judgment of Lord Greene, M.R., and should be content simply to indorse his judgment. But I shall very briefly state in my own words why I think the appeal fails. 39. The issue depends on the meaning of the agreement of September 27, 1933, and in particular on what is the consideration for the sale to the respondents of the goodwill of the appellants' business as West African merchants. For shortness I refer to the former as the vendors and the latter as the purchasers; I disregard changes of name or new formations. The consideration was expressed to be £200,000, but payable only by annual instalments over eight years ; each instalment was to be a sum equal to one-half of the sum which the auditors of the purchasing company (whose certificate was to be final) should certify to be the profits of the financial year in accordance with the provisions contained in the agreement. The eight years over which the obligation was to extend were to begin on October 1, 1933, and end on September 30, 1941. 40. No question arises here as to the years 1934, 1935, 1936 or 1937. In 1938 and 1939 there were losses. In 1940 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e problem : on the answer to it will depend what is meant by "profits" in the agreement. I have already stated my view that there is nothing in the special provisions of the agreement to modify these general principles if there are any such. The accounts which are to be certified are to be those of a trading company for submission to its shareholders with the object of showing them what are the profits available to be distributed. Such an account could ordinarily be the profit and loss account. Lord Greene, M. R., conveniently described the profits thus intended as "the divisible profits." The word "divisible" is not used in the agreement, but it does not introduce something new, not already covered by the agreement. It merely concentrates in a word the effect of the provisions of the contract as to how the profits are to be computed, and fairly describes what is meant and for the purposes of the agreement by the otherwise undifferentiated term profits. Counsel for the appellants admitted before the House that for the purpose of drawing up the profit and loss account of a trading company excess profits tax must be deducted if ordinary commercial practi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, which must be reduced accordingly when they come into the profit and loss account. 43. The substance of the agreement is to provide for what is in effect a sharing of the annual profits of the company between the vendors and the company for the specified period, subject to qualifications not here material. The agreement cannot, I think, be fairly construed, in the absence of clear words, as including in the computation of the profits, which give the standard of what is to be paid, profits which the company never had in any relevant sense. 44. The question here is not what is the technical form in which accountants may or may not prepare the accounts (about which there is no precise evidence before your Lordships) but the practical computation. 45. I do not get any help from para. (3) of the third schedule, which provides for including all usual and proper expenditure in working the business, because I do not think that the excess profits tax falls within that description for purposes of this agreement. 46. The purchasing company is a subsidiary of Levers and Unilever, Ltd., but questions between the principal and the subsidiaries do not here affect the possession as between ..... X X X X Extracts X X X X X X X X Extracts X X X X
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