Leeland v Boarland (Inspector of Taxes)

 Leeland v Boarland (Inspector of Taxes)

TAXATION; Income Tax

KING’S BENCH DIVISION

MACNAGHTEN J

22, 23 OCTOBER 1945

Income Tax – Sched E – Payment of lump sum to company director in consideration of acceptance of reduced salary and alteration of director’s tenure of office – Compensation not in nature of a capital receipt – Income Tax Act, 1918 (c 40), Sched E.

The appellant was one of two shareholders of United Thrift Assocn Ltd. The only business transacted by this company was the promotion of the Freehold Co-operative Investment Trust Ltd which was registered, on 13 May 1932, as an Industrial and Provident Society. The rules of Investment Trust Ltd provided, inter alia, that their board of directors should consist of not less than five nor more than seven persons, two of whom, United Thrift Ltd were entitled to appoint, and the remuneration of the two directors so appointed should be a sum equal to one-quarter of the net profits made by Investment Trust Ltd over and above an amount sufficient to pay the shareholders thereof a dividend at the rate of 6 per cent per annum. United Thrift Ltd the appointed the appellant and their other shareholder to be directors of Investment Trust Ltd on the terms that their appointment should be irrevocable except with their consent. Towards the end of 1938 the directors of Investment Trust Ltd decided to convert the company into a company limited by shares under the Industrial & Provident Societies Act, 1893, and it was considered advisable that the provisions as to the appointment of two directors by United Thrift Ltd and the remuneration of the directors so appointed should be cancelled. Accordingly, by an agreement, dated 21 January 1939, and made between all parties concerned, the two directors appointed by United Thrift Ltd in consideration of a payment of £10,000 each, agreed to relinquish their rights to receive any special remuneration, and United Thrift Ltd agreed to abandon their rights to nominate two directors. It was in the contemplation of the parties that the appellant and the other director appointed by United Thrift Ltd should continue to act as directors of Investment Trust Ltd and they in fact continued so to act on the same terms as to remuneration and tenure of office as the other directors. The sum of £10,000 having been paid to the appellant, the question for the consideration of the court was whether the sum so paid should be considered as a “capital” payment or as a profit arising from his office as director:—

Held – The payment was made in substitution for the reduction in salary and for the alteration of the appellant’s tenure of office. It was, therefore, a profit arising from his office as director and properly assessable to income tax under Sched E. 

Tilley v Wales (Inspector of Taxes) followed.

Notes

The court again applies Tilley v Wales to sums paid as compensation for reduction of salary of directors. It is argued that the compensation in fact belongs to the Association nominating the directors, but it is pointed out that it would be improper for a body having power to appoint directors to exact any part of the remuneration. The sums are, therefore, properly assessable as profits from office under Sched E. The case may be usefully compared with Wilson v Nicholson Sons & Daniels Ltd ([1943] 2 All ER 732.)

As to Payments Assessable under Sched E, see Halsbury, Hailsham Edn, Vol 17, pp 212–217, paras 431–438; and for Cases, see Digest, Vol 28, pp 85–88, Nos 490–507.]

Case referred to in judgment

Tilley v Wales (Inspector of Taxes) [1943] 1 All ER 280, [1943] AC 386, 112 LJKB 186, 169 LT 49.

Case Stated

Case Stated under the Income Tax Act, 1918, s 149, by the Commissioners for the General Purposes of the Income Tax for the division of St Marylebone in the county of Middlesex for the opinion of the King’s Bench Division of the High Court of Justice. On an appeal by the taxpayer against an assessment made upon him under Sched E for the year 1938–1939 in the sum of £10,000, received by him from the Freehold Co-operative Investment Trust Ltd the following facts were found by the Commissioners:—

‘On Apr. 8, 1932, a private limited company was registered under the name of United Thrift Association, Ltd. (hereinafter called “United”) with a nominal capital of £100 in 100 shares of £1 each of which two only have been issued, one to the appellant and one to … Berman … The only business transacted by United was the promotion of the Freehold Co-operative Investment Trust Ltd (hereinafter called “the Investment Trust.”), which was registered on May 13, 1932, as an Industrial and Provident Society … with a capital of £2,000,000 … [rr. 37, 47] of the rules of the Investment Trust [provide]: The board of directors shall consist of not less than five nor more than seven persons, two of whom the United Thrift Association, Ltd., so long as it shall maintain a holding in the shares of the Trust, shall be entitled to appoint and may remove from time to time, in writing, under its common seal … The two directors appointed by the United Thrift Association, Ltd., shall each be paid as remuneration for their services in respect of each half-yearly accounting period … a sum equal to one-quarter of the net profits made by the Trust over and above an amount sufficient to pay the shareholders thereof a dividend at the rate of 6 per cent. per annum, but such remuneration … shall be ascertained and computed before any amount is allocated to any reserve or to the writing off of preliminary expenses, or any other similar reserve or provision, or before provision for payment of income tax or any other tax, duty or similar imposition, should be levied or rendered payable at any time hereafter … By a letter dated May 13, 1932, from United to the appellant and Berman, United agreed so long as it held shares in the Investment Trust to nominate the appellant and Berman as directors of the Investment Trust.

By an agreement dated Aug. 15, 1932, between United and the Investment Trust it was agreed, inter alia, that (i) United shall be entitled to nominate two directors to serve on the Board of the Investment Trust, which right shall be exercisable by United so long as United maintain a holding of shares in the Investment Trust; (ii) United nominate the appellant and Berman as directors of the Investment Trust…

… Towards the end of 1938 the directors of the Investment Trust … decided to convert the Investment Trust into a limited company, under the Industrial and Provident Societies Act, 1893, s. 54. The Investment Trust was duly converted into a public company on Dec. 11, 1939, under the title of United Vested Properties, Ltd.

Negotiations were entered into between the Investment Trust, United and the appellant and Berman for the cancellation of the right of United to nominate two directors of the Investment Trust … [and] on Jan. 21, 1939, an agreement was entered into [between the said parties] in the following terms: … in consideration of the sum of ten thousand pounds now paid to [the appellant] and Berman … the Association agrees to relinquish all their rights to nominate two directors to the Trust as from Jan. 1, 1939 … and [the appellant] and Berman hereby agree to relinquish and cancel their right to receive the remuneration … as set out in the … agreement [of Aug. 15, 1932] as from Jan. 1, 1939. The payment made to [the appellant] and Berman by the Trust in consideration of the relinquishment by them of their right to the remuneration … shall be deemed to be compensation and/or liquidated damages for the loss or relinquishment of such rights…

The two sums of £10,000 were duly paid by the Investment Trust to the appellant and Berman. It was in the contemplation of the parties to the agreement of Jan. 21, 1939, that the appellant and Berman should continue to act as directors of the Investment Trust and they in fact continued so to act upon the same terms as to remuneration and tenure of office as the remaining directors.’

On these facts the Commissioners held that the sum of £10,000 was a payment from the appellant’s office as directors and properly assessable under Sched E. The taxpayer appealed.

Robert Fortune for the appellant.

The Attorney General (Rt Hon Sir Hartley Shawcross KC) and Reginald P Hills for the respondent Crown. 23 October 1945. The following judgment was delivered.

MACNAGHTEN J. On 8 April 1932, the United Thrift Association Ltd which I will call the “Association,” was registered under the Companies, Act, 1929, as a private company limited by shares, with an authorised capital of 􀂭 14􀀉 £100 divided into 100 shares of £1 each. Only two shares have been issued, one to the appellant and the other to Berman. On 13 May 1932, the Association promoted a company called the Freehold Co-operative Investment Trust, Ltd.

This company, which I will call “the Trust,” was registered under the Industrial and Provident Societies Act, 1883. The rules of the Trust provided for the appointment of directors and for their remuneration. By r 37 it was provided that the board of directors should consist of not less than 5 nor more than 7 persons, and that two of them should be appointed by the Association. The Association, in promoting the Trust, took care that the directors whom it appointed should be well remunerated; for, by r 47, it was provided that the remuneration of the directors, other than those appointed by the Association, should be fixed from time to time by the Trust in general meeting; and that the two directors appointed by the Association should each be paid as remuneration for their services in respect of each half-yearly accounting period a sum equal to one-quarter of the net profits made by the Trust over and above an amount sufficient to pay the shareholders thereof a dividend at the rate of 6 per cent per annum, and that such remuneration should be ascertained and computed before any amount had been allotted to any reserve or to the writing-off of preliminary expenses or any other similar reserve, and before provision for payment of income tax or any other tax, duty, or similar imposition. The Association under the provisions of that rule appointed the appellant and Berman to be directors of the Trust on the terms that the appointments should be irrevocable except with their consent.

Towards the end of 1938 the directors of the Trust, having regard to the provisions of the Prevention of Fraud (Investments) Act, 1939, which was then passing though Parliament, decided to convert it into a company limited by shares and it was considered advisable that before carrying out that operation the provisions as to the appointment of two directors by the Association and the remuneration of the directors so appointed should be cancelled. At a meeting of the directors of the Trust held on 13 January 1939, these matters were discussed, and the question as to the payment to be made to the appellant and Berman was considered. One firm of actuaries valued their rights as worth £27,000; and the company’s auditors valued theirs at £25,000. The appellant and Berman considered those fingers very low; but they were good enough to accept the moderate sum of £10,000 each, because they were “still very interested in the welfare and progress of the Trust.” It was in the contemplation of the parties at that time that the appellant and Berman should continue to act as directors of the Trust, and they in fact continued to do so. Accordingly, under an agreement, dated 21 January 1939, made between the Association, the appellant, Berman and the Trust, the appellant and Berman each received £10,000.

The question at issue on this appeal is whether the sums so paid to the appellant and Berman should be considered as “capital” payments or as profits arising from their office as directors. In my opinion, the payments were, in accordance with the defendant of the House of Lords in Tilley v Wales, plainly profit from their office as director. Counsel for the appellant, suggested that the appellant and Berman were not entitled to the payments made to them; that the Association was entitled to compensation, and the case ought to be treated as if the Association had got the money. But the argument presented by counsel overlooks the fact that the Association, the body corporate created by the appellant and Berman, had no right to the money at all. Indeed, as I ventured to indicate during the argument; it would be very improper conduct on the part of a person who had power to appoint a director of a company to exact from the person so appointed any part of his remuneration as director.

The appeal must be dismissed with costs. 

Appeal dismissed with costs.

Solicitors: D B Levinson & Shane (for the appellant); Solicitor of Inland Revenue (for the respondent).

P J Johnson Esq Barrister.

[1946] 1 All ER 16