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Petitioner: BULLOCK VS Respondent: UNIT CONSTRUCTION Co. LTD.Honorable Justice Wynn-Parry
1960 P T D 412
1960 P T D 412
[Chancery Division]
Present : Wynn-Parry, J
BULLOCK
Versus
UNIT CONSTRUCTION Co. LTD.
(1959) Ch. 147, decided on 22nd July 1958.
Income-tax-Residence-Company-Test of residence " Superior or directing authority "-Finance Act, 1953 (1 & 2 Eliz. 2, c. 34), S. 20 (9).
Three companies, which were wholly owned subsidiaries of Alfred Booth & Co. Ltd., a company resident in the United Kingdom, were at all material times registered and' resident in East Africa. The boards of the three subsidiaries were entirely distinct from the board of the parent company but the board of the parent exercised control in matters of policy and in effect told the boards of the African subsidiaries what to do and those boards always accepted the instructions and acted accordingly.
The respondent company, also a wholly owned subsidiary of Alfred Booth & Co. Ltd., made certain payments to the African subsidiaries which it claimed to deduct in computing its profits for the purposes of its assessments to income-tax under case I of Schedule D. It was admitted that if the African subsidiaries were resident in the United Kingdom within the meaning of section 20 (9) of the Finance Act, 1953, then the payments in question were subvention payments which the respondent was entitled to deduct; [Finance Act, 1953, section 20 (9) : " For the purposes of this section " company " includes any body corporate, but references to a company shall be taken to apply only to a company resident in the United Kingdom and carrying on a trade wholly or partly in the United Kingdom . . . . .]
Held, (1) that a company was resident where the superior or directing authority was ; that authority being properly exercise able only within the framework of the constitution of the company concerned.
Dicta of Evershed M. R. in Union Corporation Ltd. v. Inland Revenue Commissioners (1952) 34 T C 207; 271 and Koitaki Parra Rubber Estates Ltd. v. Federal Commissioners of Taxation (1940) 64 C L R 15, 241 applied.
(2) That the board of the parent company did not fall within the phrase " superior or directing authority ", because it had no authority over the boards of the African subsidiaries, and because the boards of the African subsidiaries were not bound, under their respective constitutions, to accept the instructions of the board of the parent company.
(3) That the superior or directing authorities of the African subsidiaries could not, therefore, be said to exist in the United Kingdom and they were not resident there within section 20 (9) of the Finance Act, 1953.
Solicitors: Herbert Smith & Co. Solicitor of Inland Revenue.'
At a meeting of the Commissioners held on May 15, 17, 18 and 24, 1956 the Unit Construction Co. Ltd., (hereinafter called " Unit ") appealed against assessments to income-tax made upon it under Case I of Schedule D for the year 1953-54 in the sum of 110,000 less 36,388 capital allowances, and for the year 1954-55 in the sum of 200,000 less 50,000 capital allowances.
The appeal concerned certain payments made by Unit, which Unit claimed to deduct in computing its profits for the purposes of the assessments under appeal. These payments comprised substantial sums paid to Booth & Co. (Africa) Ltd., Booth & Co. Ltd., and Bulleys Tanneries Ltd. in 1952 and 1953.
The sole question in dispute was whether Booth & Co. (Africa) Ltd., Booth & Co. Ltd., and Bulleys Tanneries Ltd., were in 1952 and 1953, companies resident in the United Kingdom within the meaning of subsection (9) of section 20 of the Finance Act, 1953. It was common ground that if they were so resident then the payment in question were subvention payments which Unit was entitled to deduct in comput ing its profits, by virtue of the said section 20.
The following facts appear from the case stated : Unit was a wholly owned subsidiary of Alfred Booth & Co. Ltd. Booth & Co. (Africa) Ltd., Booth & Co., Ltd. and Bulleys Tanneries Ltd., (which when necessary to refer to them together, are hereinafter called "the African subsidiaries") were also wholly- owned subsidiaries of Alfred Booth & Co. Ltd.
It was admitted on behalf of Unit `that the African sub sidiaries were at all material times resident in East Africa.
Alfred Booth & Co. Ltd., was a company incorporated and resident in England, and was the parent of a group of 10 or more companies trading in many parts of the world. It was. incorporated in 1914 to carry on banking, merchanting and manufacturing businesses of all descriptions, and it did carry on a number of businesses in different parts of the world (including, in particular, building contracting, and businesses connected with the leather industry) all of which it had, by August, 1949, transferred to subsidiary companies incorporated for the purpose. In August, 1949, it adapted a new memorandum of association with the objects of an investment trust company, with power to carry on the business of banking.
The board of directors of Alfred Booth & Co. Ltd., met regularly in London. In addition to the board meetings, a committee of executive directors held weekly meetings in London. The chairman of the board of directors and of the executive committee was J. W. Booth ; he had been a director since 1935 ; in May, 1950, he became a managing director (with special responsibility on the board and on the executive committee for the African subsidiaries) ; in July, 1952, he became chairman, and at the same time the special responsibility for the African subsidiaries was divided as under;
J. W. Booth was responsible for their general trading and mining interests ; E. Booth (another of the directors of Alfred Booth & Co. Ltd.) was responsible for their building interests ; E. W. Espenhahn (another of the directors of Alfred Booth & Co. Ltd.) was responsible for their hide and skin and training interests.
The African subsidiaries, which were incorporated in 1948 and 1949 with the objects set out in their respective memoranda of association, were;
(a) Booth & Co. (Africa) Ltd. : Building contracting in East Africa. A mining venture in Uganda. A forwarding agency at Mobasa, which acted principally as agent for the African sub sidiaries themselves.
A merchanting business was carried on as a separate depart ment under the name of Bulleys Trading company.
(b) Booth & Co. Ltd. : The business consisted in the earning of commissions by purchasing hides and in the purchase and sale of skins, and was conducted through a number of posts set up in East Africa. In the case of hides, the company acted as agents for Hollander Hyams Ltd. (a company which had no connexion with the Alfred Booth & Co. Ltd. group of companies). This part of the business was governed by an agreement, dated October 17, 1950, which allowed Booth & Co. Ltd. to supply a limited number of hides to Bulleys Tanneries Ltd. and other tanneries within the Alfred Booth & Co. Ltd. group of companies. In the case of skins the company acted as principals.
(c) Bulleys Tanneries Ltd. : Manufacturing in Kenya leather for sale locally, and manufacturing or part-manufacturing leather for export in England, where the product was sold on behalf of Bulleys Tanneries Ltd. by Booth & Co. (England) Ltd.
Each of the African subsidiaries was incorporated in Kenya under the Kenya Companies Ordinance and had its registered office in Nairobi. The articles of association of each of them contained provisions placing the management and control of its business in the hands of its directors and providing that directors' meetings might be held anywhere outside the United Kingdom. It was the intention of the directors of Alfred Booth & Co. Ltd. (which intention they thought they had carried out) in forming the African subsidiaries that those companies should be solely resident in Africa in order that their profits could be used for development in' Africa without becoming liable to United Kingdom taxation and also in order to forestall any question which might arise in connexion with any future nationalization, particularly of the building industry. It turned out, owing to disturbances in Kenya and other difficulties, that they incurred losses (except for the department known as Bulleys Trading Company, which made profits), and this was a source of great anxiety to Alfred Booth & Co. Ltd. which had sunk considerable sums of money in them, as it reflected on the financial position of the Alfred Booth group of companies as a whole. J. W. Booth, who was brought into the detailed control of the African subsidiaries on his appointment as a managing director of Alfred Booth & Co. Ltd. in 1950, considered that the situation of the African sub sidiaries was becoming so serious that it was unwise to allow them to be managed in Africa any longer, and that their management must be' taken over by the directors of Alfred Booth & Co. Ltd in London. He considered that his principal job was to manage them. The board of directors of Alfred Booth & Co. Ltd., after discussions, decided that as a result of the lack of success of the African subsidiaries they were forced to take over management and control, in order to save their company's investment ; at the same time it was their policy to dispose of all or any of the African subsidiaries' undertakings if the opportunity should arise. There was at no time any formal agreement with the African subsidiaries that the directors of Alfred Booth & Co. Ltd. should manage them ; the intention of the said directors to do so was communicated to one P. Meinertzhagen (the chairman of the board of directors of each of the African subsidiaries) and accepted by him. As a result, from 1950 onwards the directors of Alfred Booth & Co. Ltd. in London began to intervene in the affairs of the African subsidiaries in the manner hereinafter set forth ; they were aware that their action in so doing might affect the question of the residence of the African subsidiaries and their liability to United Kingdom taxation.
The chairman of the directors of each of the African subsidiaries was at all times P. Meinertzhagen. He had been (prior to 1948) an employee of Alfred Booth & Co. Ltd., in England, and went to Africa to form and supervise the African subsidiaries. He was not at any material time a director of Alfred Booth & Co. Ltd., he had no contract of service with any company in the group, and his remuneration took the form of a salary paid to him. by Booth & Co. Ltd., (the other two African subsidiaries refunding Booth & Co. Ltd., part of it). He was described in the correspondence and in staff lists as " Alfred Booth & Co. Ltd., senior representative in East Africa ".
The other directors of the African subsidiaries (who varied from time to time) were all persons employed by and holding contracts of service with the companies of which they became directors. Only one of them was a director of more than one of the African subsidiaries ; this was one Trembath, who left in 1952, and was occasionally described or referred to as " Number 2 " to Meinertzhagen. These directors were all elected to the boards of the African subsidiaries on the instructions of the parent company, Alfred Booth & Co. Ltd., and their contracts of service were made in London by Alfred Booth & Co: Ltd., as agent for the African subsidiary concerned. None of these directors was at any time a director of Alfred Booth & Co. Ltd. When occasion arose (as it did arise more than once) for removing one of them from office, the decision taken in London by the directors of Alfred Booth & Co. Ltd., to determine his contract of service and remove him, and instructions to that effect were issued by Alfred Booth & Co. Ltd., to Meinertzhagen. When any question arose (as it did arise) of compensating a director or a member of the staff of an African subsidiary for removal or dismissal, it was dealt with by the directors of Alfred Booth & Co. Ltd., for this purpose they used Meinertzhagen as an intermediary, or as happened on one occasion, one of their number flew to East Africa to negotiate terms. The directors of the African subsidiaries did not all have access to all the documents of, or information con cerning, the companies of which they were directors.
The minute books of the directors' meetings of each of the African subsidiaries, recorded, in the main, only formal business (such as particulars of annual general meetings, appoint ments and retirements of directors, secretaries and accountants, resolutions concerning the operation of banking accounts or the affixing of the companies' seals to documents and the acquisition or transfer of mineral claims or other 'property) at meetings held on irregular dates ; in a few instances they recorded more important business, but in each such instance a decision had in fact been taken by the directors of Alfred Booth & Co. Ltd., in London and the record in the minute book of the African sub sidiary merely formally records its implementation. Meinertzhagen was recorded as present at each such meeting, with one or two other directors ; in many cases, however, the directors recorded as being present had not actually met at all and might not have known that any meeting was supposed to be taking place, as directors as a rule were not notified of any meetings. All the minutes purporting to record meetings prior to 1952 were written up in 1952, to comply with law, on the instructions of the directors of Alfred Booth & Co. Ltd. They were written up from records that had been typed and kept loose in a book by previous company secretaries. In most cases, where the minute book recorded a meeting and business transacted thereat, the business recorded was in fact transacted by Meinertzhagen (in all matters of any importance, on the instructions of Alfred Booth & Co. Ltd.) and the minute was written afterwards. In no case did the directors of any of the African subsidiaries sit round a table as a board, and they never either took any decision as a board, met as a board, or were summoned to meet as a board.
At all material times the boards of directors of the African subsidiaries did not and for all practical purposes could not manage and control the businesses of their respective companies. If they had tried to manage and control their companies businesses (otherwise than in accordance with instructions from the directors of Alfred Booth & Co. Ltd.) Alfred Booth & Co. Ltd. would have removed them from office.
At all material times the whole of the trading policy of the African subsidiaries was dictated by the board of directors of Alfred Booth & Co. Ltd., and was implemented by Meinertzhagen as their senior representative and Chairman of the African subsidiaries. Meinertzhagen was, however, consulted on occasions before a decision was taken; and from time to time he made submissions to the parent board on behalf of the African subsidiaries which were taken into account in determining future policy. He made two visits to London in 1952 and 1953, having been summoned to attend discussions with the directors of Alfred Booth & Co. Ltd., on various aspects of the affairs of the African subsidiaries. There were also occasions when a visiting director of the parent company consulted the local directors on the spot before deciding what he wanted to do.
Article 145 of the Kenya Companies Ordinance provided that every company should keep at its registered office a register of its directors or managers, and provided for the case of registration of a corporation as a director or a manager. Sub paragraph (6) thereof provided that " . . . . . a person in accordance with whose directions or instructions the directors of a company are accustomed to act shall be deemed to be a director and officer of the company". At no time was the name of Alfred Booth & Co. Ltd. or of any director of that company included in the register of directors of any of the African subsidiaries.
At all material times every aspect of the businesses carried on by the African subsidiaries was under scrutiny by the executive directors of Alfred Booth & Co. Ltd., at their weekly meetings in London.
The commissioners found (as a conclusion of a fact from a great deal of detailed evidence before them) that the aim of the directors of Alfred Booth & Co. Ltd. was to have a single efficient executive arm in East Africa capable of exercising day-to-day management of all the East African undertakings, which could be relied on to implement their own policy decisions without the necessity of frequent visits to Africa by themselves. In 1952 and 1953 the day-to-day management of the under takings was broadly supervised by Meinertzhagen, who was responsible for local (East African) management within the instructions and limitations (financial and otherwise) imposed upon him by the directors of Alfred Booth & Co. Ltd., the work involved imposed too great a burden on him in view of the particular difficulties existing at that time and the fact that the undertakings were spread between Kampala and Mombasa. In particular, they were anxious to have a reliable " number 2 " to him who could act during his absence.
The mining venture, which was in form one of the activities of Booth&. (Africa) Ltd.m was in fact almost entirely managed from London. J. W. Booth authorized the purchase of a claim on a visit to Nairobi; after certain initial steps had been taken, it was financed entirely by Alfred Booth & Co. Ltd., without recourse to the African subsidiary's bankers ; the decision to start mining was taken by the executive directors in London; they sent out an expert to advise and report on the mine, and they decided what the rate of production should be, how much labour should be employed and what vehicles should be used. The manager of the mine made reports from time to time direct to them, without going through the channel of Booth & Co. (Africa) Ltd.
The agreement with Hollander Hyams Ltd., under which Booth &. Co. Ltd. Disposed of most of its hides, was negotiated in London between Hollander Hyams Ltd. and Alfred Booth & Co. Ltd., as agents for Booth & Co. Ltd. In the day-to day working of the agreement, Hollander Hyams Ltd., normally dealt directly with Booth & Co. Ltd.
In 1952 and 1953 it was part of the policy of the board of directors of Alfred Booth & Co. Ltd., to sell any of the assets or undertakings of the African subsidiaries if opportunity offered, and they supervised negotiations (mainly carried out on their instructions by Meinertzhagen in Africa) for selling the tannery and, on another occasion, the mine. These negotiations proved abortive.
Throughout the material period the staff and officials of the African subsidiaries were making decisions concerning the day-to-day running of the trading activities of the African sub sidiaries, within the general policy directions of Alfred Booth & Co. Ltd.
The United Kingdom Subsidiaries of Alfred Booth & Co. Ltd., were managed by the parent company in the same way as the African subsidiaries. The company also had two sub sidiaries in the United States of America which, however, were not subject to the same detailed control.
It was contended on behalf of Unit : (1) that each of the African subsidiaries was resident in the United Kingdom at all material times, within the meaning of section 20 (9) of the Finance Act, 1953 ; (2) that Unit was accordingly entitled to deduct the payments referred to above ; and (3) that the assessments be reduced accordingly.
It was contended on behalf of the Crown : (1) that, as the African subsidiaries were admittedly resident in East Africa at all material times, they could not also at those times be resident in the United Kingdom ; (2) that in any event none of the African subsidiaries were resident in the United Kingdom at any material time ; and (3) that Unit was not entitled to the deductions claimed.
The commissioners who heard the appeal gave their decision as follows:
"We think, in addressing our minds to the question whether the African subsidiaries were resident in the United Kingdom in the material period, that the first question we have to con sider is what was the real situation regarding their management and control.
"A number of (what have been described as) the acts of interference in their management by the directors of Alfred Booth & Co. Ltd. are equivocate being equally well explained as acts of parental or group control, or as the taking over of the reins of management ; others again are equivocal, being equally well explained as the financial control of creditor, or as the taking over of the reins of management . . . . ."
"We find that the position was at the material times that the boards of directors of the African subsidiaries (who are the people one would have expected to find exercising control and management) were standing aside in all matters of real importance and in many matters of minor importance affecting the central management and control, arid we find that the real control and management was being exercised by the board of directors of Alfred Booth & Co. Ltd. in London.
"But it was contended on the part of the Crown that that finding would not be enough to conclude the question before us; it was said that there must be something more, that is, that before we could find that the African subsidiaries were resident in the United Kingdom, we must find control exercised here under the constitution of the company con cerned, by those officers to whom such constitution gives it ; in other words, the Crown contended that we must find some `formal' control and management here. We have considered this contention very carefully and have come to the conclusion that the authorities cited to us do not constrain us to accept it nor do they point very strongly to the conclusion that it is right. On the contrary, we notice that Lord Loreburn in his judgment in De Beers Consolidated Mines Ltd. v. Howe ((1906) A C 455) directs attention to where the central management and control actually abides,' and we think it would be consistent with Lord Loreburn's reasoning to stress the word `actually.' In the course of the arguments before us both sides relied on the remarks of Evershed M. R. in Union Corporation Ltd. v. Inland Revenue Commissioners ((1952) 34 T C 207, 271), and in particular on his reference to `where the controlling power and authority which, according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and authority, is to some substantial degree to be found.' In the appeal before us, we find the controlling power and authority, which according to the constitution of each of the African subsidiaries is vested in its board of directors, is actually exercised, to a very substantial degree, by the board of Alfred Booth & Co. Ltd. in London. We bold, on our understanding of the authorities, that once we have found that as a fact, it is not necessary to go further and inquire whether such power and authority is exercised under the constitution of the company concerned by the officers to whom such constitution gives it.
"For these reasons we find, and so far as it is a matter of law we hold, that each of the African subsidiaries was resident in the United Kingdom in 1952 and 1953. We do not think that we are precluded from coming to this conclusion by reason of the admitted fact that the African subsidiaries were at the material times resident in East Africa, having regard to the judgment of the Master of the Rolls in Union Corporation Ltd. v. Inland Revenue Commissioners 34 T C 207."
The points of law for the opinion of the Court were (1) whether there was evidence upon which the commissioners could arrive at their findings of fact; and (2) whether their con clusions were wrong in law.
Roy Borneman Q. C. and Alan Orr for the Crown. The African subsidiaries were set up with the intention that they should not pay United Kingdom tax : See section 20 of the Finance Act, 1953. Assuming that the test of residence of a company is where the central management and control of the company actually abides, and, if it be right, that a company can be resident in two countries (see Swedish Central Railway Co. Ltd. v. Thompson ((1925) A C 495), then as regards the country in which the companies are alleged to be resident in the circumstances of this case, it must be shown that there is some part of the supreme and directing authority there. When using the phrase "supreme and directing authority" it must mean power and authority vested according to the ordinary constitution of a limited liability company, that is, it, own board, and it is not enough to point to directors of the parent company whose only interest is that of a controlling shareholder. The corollary to that is : the supreme and directing authority either as a whole or in part cannot be present when no part of the formal legal entity of the company is to be…
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