COMMISSIONERS OF INLAND REVENUE v LAIRD [2002] EWCA Civ 576

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR. JUSTICE LIGHTMAN
CHANCERY DIVISION
[2002] EWCA Civ 576Case No Case No: A3/2001/1514Venue Royal Courts of Justice, Strand,, London, WC2A 2LL
Between
COMMISSIONERS OF INLAND REVENUEAppellantLAIRDRespondent
Before
Lord Justice MummeryLord Justice LongmoreMr. Michael Furness QC (instructed by The Solicitor of Inland Revenue) for the AppellantsMr. Andrew Thornhill QC and Mr. James Henderson (instructed by Messrs Ashurst Morris Crisp) for the RespondentDate 30 April 2002
[1]The Vice-Chancellor : By s.28 Finance Act 1960 provision was made for the counteraction of tax advantages obtained in prescribed circumstances in consequence of one or more transactions in securities. The legislation by which this was achieved has been amended from time to time and consolidated with such amendments, most recently, in Part XVII Chapter I Income and Corporation Taxes Act 1988 (“ICTA”). Whilst changes have been made to the definition of tax advantage and to the prescribed circumstances there has been no amendment to the definition of transaction in securities. That definition, now contained in s.709(2) ICTA, provides that “transaction in securities” includes transactions, of whatever description, relating to securities, and in particular –(i) the purchase, sale or exchange of securities;(ii) the issuing or securing the issue of, or applying or subscribing for, new securities;(iii) the altering, or securing the alteration of, the rights attached to securities;” “Securities” is defined to include shares, stock and the interest of a member in a company not limited by shares.[2]The relevant legislation has been considered by the House of Lords on three occasions, namely Commissioners of Inland Revenue v Parker [1966] AC 141 and 43 TC 396 (the redemption of a debenture representing previously capitalised profits), Greenberg v Commissioners of Inland Revenue [1972] AC 109 and 47 TC 240 (the creation and sale of preference shares for a price payable by instalments measured by reference to the dividends paid on such shares) and Commissioners of Inland Revenue v Joiner [1975] 1 WLR 1701 and 50 TC 449 (the distribution of assets in a liquidation so that the business of the company was continued by a transferee but assets representing accumulated profits were returned to shareholders).[3]The issue on this appeal, which did not arise directly in any of those cases, is whether the payment of an interim dividend constitutes a transaction in securities; it is common ground both that one of the prescribed circumstances existed and that the taxpayer, Laird Group plc (“Laird”) thereby obtained a tax advantage.[4]If the law to be applied is complicated the facts of the case are unusually simple. On 12th June 1990 Laird acquired the issued share capital of Stanton Rubber and Plastics Ltd (“Stanton”) for £8,267,500m. Both were in a substantial way of business but they differed in their liability for mainstream corporation tax (“MCT”) or advance corporation tax (“ACT”). Laird derived much of its profits from overseas operations not liable to MCT but pursued a progressive dividend policy. The consequence was that its liability for ACT on dividends and other distributions was increasingly unrelieved by set off against its liability to MCT. By contrast, Stanton had substantial liability for MCT but, as the profits had not been fully distributed, little or none for ACT.[5]On 5th December 1990 Laird declared, and subsequently paid to its members, a final dividend of £3,484,000 on its own shares. On 17th December 1990 Stanton paid to Laird an interim dividend of £3m. There was no group election in force under s.247 ICTA so that the interim dividend paid by Stanton gave rise to a liability to ACT of £1m but in the hands of Laird constituted franked investment income with a corresponding tax credit. Accordingly the ACT payable by Stanton was set off against its own liability for MCT and against Laird’s liability for ACT on its own dividend. By this means Laird benefited to the extent of £1m.[6]The Revenue contended that Part XVII Chapter I of ICTA applied. They gave notice as required by s.703(3) and raised an assessment under Schedule 13 para 13(2). Laird appealed to the Special Commissioners. On 8th February 1999 they (Messrs Everett and de Voil) dismissed the appeal and confirmed the notice and assessment. Laird appealed to the Tribunal constituted under s.706. The Tribunal (Stephen Oliver QC and Messrs Ring and White) allowed the appeal and discharged the notice and the assessment. The appeal of the Revenue from the decision of the Tribunal came before Lightman J who, for the reasons given in his judgment reported at [2001] STC 689, dismissed it. This is the appeal of the Revenue from the order of Lightman J.[7]As I have indicated the only question for our decision is whether the interim dividend paid by Stanton to Laird on 17th December 1990 was a transaction in securities as defined in s.709(2). That definition, which I have set out in paragraph 1 above, is to be applied in the context of ss.703(1)-(3), 704 A (d) and 709(1) and (4) which so far as relevant provide as follows:
“703. Cancellation of tax advantage (1) Where— (a) in any such circumstances as are mentioned in section 704, and (b) in consequence of a transaction in securities or of the combined effect of two or more such transactions, a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction or those transactions. (2) For the purposes of this Chapter a tax advantage obtained or obtainable by a person shall be deemed to be obtained or obtainable by him in consequence of a transaction in securities or of the combined effect of two or more such transactions, if it is obtained or obtainable in consequence of the combined effect of the transaction or transactions and the liquidation of a company. (3) Where this section applies to a person in respect of any transaction or transactions, the tax advantage obtained or obtainable by him in consequence thereof shall be counteracted by such of the following adjustments, that is to say an assessment, the nullifying of a right to repayment or the requiring of the return of a repayment already made (the amount to be returned being chargeable under Case VI of Schedule D and recoverable accordingly), or the computation or recomputation of profits or gains, or liability to tax, on such basis as the Board may specify by notice served on him as being requisite for counteracting the tax advantage so obtained or obtainable. [(4)-(12) contain administrative or consequential provisions] 704. The prescribed circumstances The circumstances mentioned in section 703(1) are— A. That in connection with the distribution of profits of a company, or in connection with the sale or purchase of securities being a sale or purchase followed by the purchase or sale of the same or other securities, the person in question receives an abnormal amount by way of dividend, and the amount so received is taken into account for any of the following purposes— [(a)-(c)] or (d) the application of franked investment income in calculating a company’s liability to pay advance corporation tax, or ... [(e)-(g)] [B – E specify, in detail, other prescribed circumstances] 709. Meaning of ‘tax advantage’ and other expressions (1) In this Chapter “tax advantage” means a relief or increased relief from, or repayment or increased repayment of, tax, or the avoidance or reduction of a charge to tax or an assessment to tax or the avoidance of a possible assessment thereto, whether the avoidance or reduction is effected by receipts accruing in such a way that the recipient does not pay or bear tax on them or by a deduction in computing profits or gains. [(2)-(3)] (4) For the purposes of section 704 an amount received by way of dividend shall be treated as abnormal if the Board, the Special Commissioners or the tribunal, as the case may be, are satisfied— (a) in the case of a dividend at a fixed rate, that it substantially exceeds the amount which the recipient would have received if the dividend had accrued from day to day and he had been entitled only to so much of the dividend as accrued while he held the securities, so however that an amount shall not be treated as abnormal by virtue only of this paragraph if during the six months beginning with the purchase of the securities the recipient does not sell or otherwise dispose of, or acquire an option to sell, any of those securities or any securities similar to those securities; or (b) in any case, that it substantially exceeds a normal return on the consideration provided by the recipient for the relevant securities, that is to say, the securities in respect of which the dividend was received and, if those securities are derived from securities previously acquired by the recipient, the securities which were previously acquired.”
[8]Laird has contended throughout that the payment of the Stanton interim dividend was not a transaction in securities but that if there is a doubt about the matter then the court could and should have regard to the statement made by the Attorney-General in the House of Commons on 25th May 1960 at the Committee Stage of the Finance Bill for that year. By contrast the Revenue has consistently contended that the definition of “transaction in securities” is unambiguous but even if it is not the statement of the Attorney-General should not be regarded because it related to different legislation, did not address the point in issue and was insufficiently clear to assist.[9]ICTA is a consolidation act. It is not disputed that we can and should, as Lightman J did, have regard to what the House of Lords has said concerning its statutory predecessors in the three cases to which I have referred in paragraph 2 above. I have been concerned at this approach because it is clear that we cannot adequately consider those decisions without also taking account of differences in the terms of the legislation then in force thereby embarking on the detailed investigation of the statutory predecessors of the relevant provisions in ICTA which the decisions in Maunsell v Olins [1975] AC 373 and Farrell v Alexander [1977] AC 59 sought to prevent. Nevertheless it is clear from NAP Holdings UK Ltd v Whittles (HMIT) 67 TC 166, 206 and R v Secretary of State for the Environment, Transport and the Regions, ex p. Spath Holme Ltd [2001] 2 WLR 15 , 28 that the court is entitled to do so in the case of a recent decision on the true construction of the provision subsequently consolidated or if, exceptionally, the court finds it necessary in order fully to appreciate the social and factual context in which the original measure was enacted. I do not consider that the second principle applies, but we cannot determine the applicability of the first without embarking on such a detailed investigation.[10]As I have already pointed out the provisions with which we are concerned originated in ss. 28 and 43 of the Finance Act 1960. They are quoted in full in paragraphs 2 and 3 of the judgment of Lightman J. It is not necessary to quote them again. It is enough to draw attention to four points, namely(1) the definition of “transaction in securities” in s.43 was in the same terms as are now to be found in s.709(2),(2) the prescribed circumstances set out in s.28(2) were more limited than those now to be found in s.704,(3) there was no provision corresponding to what is now s.703(2) and(4) there was a proviso to s.28(1) excluding transactions in securities carried out before 5th April 1960.[11]In Commissioners of Inland Revenue v Parker 43 TC 396 a family company had capitalised accumulated profits by the issue to shareholders of debentures redeemable by the company at its option in certain prescribed events. The debentures were issued in 1953 and redeemed at par in January 1961. The Revenue claimed that s.28 applied and assessed the shareholders to surtax on the footing that the redemption moneys should be regarded as a dividend paid under deduction of tax. The assessment was resisted by the shareholders on a number of grounds which included the contentions that the redemption of the debentures was not a transaction in securities and that the tax advantage had been obtained in consequence of the issue of the debentures before 5th April 1960 not their redemption thereafter.[12]Ungoed-Thomas J rejected both contentions. He considered [p.409] that the generality of the words of the definition of “transaction in securities” should not be cut down by reference to the particular examples contained in it and that it was “self-evident that the redemption of securities is a transaction in securities within s.28”. He found [p.412] that it was the redemption which gave rise to the tax advantage so that the time limit prescribed by the proviso to s.28(1) did not preclude liability.[13]The Court of Appeal allowed the appeal. With regard to the definition of transaction in securities Lord Denning MR said [p.417] “If it were permissible to take the ordinary meaning of a "transaction in securities”, I would think of a sale or purchase of shares or debentures. I would not myself describe the payment off of a debenture as a transaction in securities. But the definition extends the ordinary meaning so as to include “transactions, of whatever description, relating to securities”. It is said that the repayment of a debenture is a transaction relating to securities. I think it is giving this definition far too wide an interpretation. I think that those opening wide words should be read together with the particular instances (i), (ii) and (iii) so as to show the nature of the transactions which the Legislature had in mind. The Legislature had in mind such transactions as the transfer and sale and issue of securities. It is plain to me that the phrase cannot be extended so as to include dividends paid on shares, nor money which is paid out on liquidation of a company, or a reduction of capital. It does not include the payment off of a debenture. I am confirmed in this view by looking at the general mischief which this section is designed to hit. It is designed to hit dividend stripping and not the redemption of debentures. On this point, therefore, I hold that s.28 does not hit this transaction at all because it was not a transaction in securities.”[14]Danckwerts LJ also disagreed with the judge [p.419] on the basis that “the payment of the money due on the debenture was not” a transaction in or relating to securities. Diplock LJ agreed with the judge on this point. All three members of the Court of Appeal considered that the tax advantage had been obtained in 1953 with the result that the proviso to s.28(1) applied.[15]The House of Lords disagreed with the majority of the Court of Appeal with regard to whether the redemption of the debenture was a transaction in securities. It was put in different terms by each of them. Viscount Dilhorne [p.431] rejected the submission that “the general and unambiguous words of the definition” should be restricted by regard to the supposed mischief at which the legislation was directed or in the light of the particular instances given. Lord Hodson, with whom Lord Morton of Henryton agreed [p.433], did not think it legitimate [p.434] “to cut down the width of this phrase by treating the examples which follow the words “in particular” as words of limitation”. They agreed with the judge that “there could hardly be a wider net connecting transactions and securities”. Lord Guest [p.437] rejected the submission that the particularisation which followed the wide inclusion of “transactions, of whatever description, relating to securities” in some way qualified the general words. Lord Wilberforce also rejected the argument [p.440] that the application of s.28 should be limited to one form of tax avoidance, namely dividend stripping on the ground that “the scheme and drafting...is far to general to admit of the suggested restriction”. He considered that “we must take the Act as we find it and endeavour to see what it fairly covers.”[16]Thus the decision in Parker is clear authority for the proposition that the definition of transaction in securities is not to be cut down by reference to any supposed mischief or the particular examples but is to be applied in accordance with its wide terms. In expressing their conclusions each member of the Appellate Committee must be taken also to have rejected the submission of counsel for the taxpayer [p.425] that there can be no transaction in or relating to securities “where all that happens is that rights already inherent in the securities take effect”. The House of Lords, Lords Hodson and Morton of Henryton dissenting, also considered that the tax advantage was received on redemption so that the proviso did not apply. Lord Wilberforce said in connection with that point, not the definition of transactions in securities, [p.441] that “the receipt in 1961 was not merely the automatic fruition of something he had already gained in 1953”. Accordingly the appeal of the Revenue was successful.[17]The speeches in the House of Lords in Parker were given in January 1966. Three years earlier, by s.25(5) Finance Act 1962, the provision which now appears in s.703(2) was introduced. This provision is crucial to the decision of the House of Lords in Commissioners of Inland Revenue v Joiner 50 TC 449 which, in turn, is at the heart of the argument for Laird. But before considering Joiner it is necessary to refer to the decision of the House of Lords in Greenberg v Commissioners of Inland Revenue [1972] AC 109 which preceded it chronologically.[18]At this stage it is also convenient to note other amendments made to ss. 28 and 43 Finance Act 1960 and its successors which were consolidated into ICTA. Amendments were made by Finance Act 1965 to take account of the introduction of corporation tax. In s.39(3) Finance Act 1966 an amendment was made to cover a point which arose in Parker as to when the tax advantage had been obtained. Schedule 10 para 13 Finance Act 1967 made amendments to the prescribed circumstances set out in s.28(2)(a) and (b). All these provisions were consolidated into ss.460 to 467 Income and Corporation Taxes Act 1970. Those sections were amended by Finance Act 1973 to take account of the introduction of ACT. In particular substantial changes were made enlarging the prescribed circumstances.[19]In Greenberg the taxpayer sold newly created preference shares which entitled the holder to receive all dividends paid over the next five years for a price payable by instalments measured by reference to the amount of the dividend. The preference shares were created and sold before 5th April 1960 but some of the dividends and instalments of the purchase price were paid thereafter. The issue was whether the relevant transactions had been carried out before 5th April 1960 so as to be excluded by the proviso to s.28(1). The House of Lords, agreeing with the Court of Appeal held that they had not.[20]Lord Reid considered [p.137] that the term transaction in securities applied to single acts done by one person alone, as established in Parker , and that he did not see how to stop short of giving the phrase, which he described as vague, a very wide meaning. He concluded, though not without reluctance, that the declaration and payment of a dividend were acts relating to shares. As such they must have been transactions in securities. Lord Morris of Borth–y-Gest considered only the instalments of the purchase price and expressed no view with regard to the dividends paid on the preference shares.[21]Lord Guest did. The report of his speech in 47 TC 240 at 279 records him as saying “There was a dispute...whether “carried out” in the proviso meant “effected” or “implemented”. If these words have the first meaning then I cannot escape from the conclusion that each payment of dividends and each consequential payment of an instalment of the purchase price was a transaction in securities..... Parker is authority for the view that the unilateral payment of money may be a "transaction in securities”." In the report in [1972] AC 145 the second sentence has been recast so as to read “If these words have the first meaning then I cannot escape from the conclusion that the payment of dividends being the instalments of the purchase price was a transaction in securities.”[22]Lord Wilberforce did not find it necessary or opportune [p.146] to decide whether the payment of a dividend or the consequent payment to the taxpayer, was itself, separately, a transaction in securities. He did not consider that there was anything in Parker compelling or involving that conclusion. By contrast Lord Simon of Glaisdale thought the opposite. He said [p.151] “In my view, the payment of each dividend by the company to [the purchaser], and the payment of the corresponding instalment of the purchase price by [the purchaser] to the [taxpayers], were themselves, being transactions ‘relating to securities’, ‘transactions in securities’ (within the meaning of section 43) in consequence of which a tax advantage was obtained or obtainable. I have already referred to Inland Revenue Commissioners v. Parker [1966] AC 141 , which I think is authority for this view. It was argued for the taxpayer that Parker’s case was distinguishable: there the redemption of the debentures after April 5, 1960, by which the tax advantage was obtained or obtainable involved a specific act of will on the part of the company (being something in the nature of a novus actus interveniens), whereas (it is claimed) in the instant case the tax advantage was an ‘automatic fruition’ (to use Lord Wilberforce’s expression in Parker’s case at p.178) of something that has been completed before April 5, 1960. I confess that seems to me to be an unreal distinction. The declaration and payment of the dividends by the company in the instant case (which might well vary according to the profits of the company) were surely just as much acts of will as, and no less novus actus than, the decision to redeem in Parker’s case. To attempt to differentiate between these cases would, in my view, be to introduce purely artificial distinctions into the law.”[23]It is not suggested that it formed any part of the ratio decidendi of the House of Lords in Greenberg that the declaration or payment of a dividend was a transaction in securities. But there is support for that view in the speeches of Lord Reid and Lord Simon of Glaisdale.[24]In Commissioners of Inland Revenue v Joiner 50 TC 449 a family company went into members’ voluntary liquidation and distributed its assets in accordance with a pre-liquidation agreement in part to a dormant company which continued the business and in part to the members. The value of the assets distributed to the members approximated to the credit balance on profit and loss account. Thus the taxpayer obtained in the liquidation of the company assets representing the value of his interest in the accumulated profits of the company. The Revenue considered that ss.460 and 467 Income and Corporation Taxes Act 1970, into which ss.28 and 43 (as subsequently amended) of Finance Act 1960 had by then been consolidated, applied and gave notice accordingly.[25]In the subsequent proceedings the Revenue sought to justify the notice on three grounds, viz.(a) (A) there was a single composite transaction in securities starting with the pre-liquidation agreement and ending with the distribution of the assets,(b) (B) the pre-liquidation agreement and an agreement for the sale of the assets to the dormant company were each transactions in securities from which when taken together with the liquidation of the company the tax advantage was derived and(c) (C) the distribution of assets in the winding up of the company was, by itself, a transaction in securities. Goulding J accepted ground (B) but not (A). He considered that ground (C) gave rise to a question of difficulty and importance but, as there was no need to do so, expressed no view as to the correct answer.[26]In the Court of Appeal the argument was primarily directed to ground (C) which Scarman LJ, giving the judgment of the Court, described as a point of importance. The Court pointed out [p.469] that the word “transaction” included a unilateral act and that the distribution gave effect to the rights attaching to the shares and in that sense related to those securities. The Court posed the question whether the fact that the distribution is a step in the liquidation made a difference. They concluded that it did not. The counterargument, based on s.25(5) Finance Act 1962, then to be found in s.460(2) Income and Corporation Taxes Act 1970 was rejected [p.470/471] on the grounds that, in the absence of any ambiguity, later legislation is irrelevant to the construction of earlier legislation, it was only a deeming provision and was not, by its express terms, to affect the operation of the prior legislation.[27]The appeal of the taxpayer to the House of Lords was dismissed on ground (B). In relation to ground (C) Lord Wilberforce considered [p.482] that the court must have regard to the subsequent legislation but that the question whether and to what extent a liquidation was a transaction in securities should not be decided. Viscount Dilhorne disagreed with the views of the Court of Appeal on ground (C). He considered [p.483] that it was plain from the terms of s.460 alone that a liquidation was not a transaction in securities for s.460(2) would have been pointless if it had been. With regard to the preceding legislation he said [p.483] “Section 460(1) re-enacts s. 28(1) of the Finance Act 1960. Section 460(2) replaces s. 25(5) of the Finance Act 1962. If Parliament in 1962 had thought that the liquidation was itself a transaction relating to securities, it is inconceivable that that section would then have been enacted. Parliament may of course have been wrong and it is not permissible for us to see what Parliament was led to suppose to be the effect and scope of s. 28 of the Act of 1960 by referring to reports of proceedings in Parliament. The device of obtaining the accumulated profits of a company without payment of tax by means of the liquidation of the company and distribution of the assets and, at the same time, securing that the business of the company liquidated continued to be carried on, was well known in 1960: see Commissioners of Inland Revenue v. Pollock & Peel Ltd [1957] 1 W.L.R. 822. If it had been the intention of Parliament when s. 28 was enacted that the liquidation should itself be treated as a transaction relating to securities I would have expected that to have been made clear by express words in that section. It certainly was not.”[28]Lord Diplock was of the same view. With regard to the terms of s.460 he said [p.486] “The language of subss.(1) and(2) in my view makes it clear beyond a peradventure that the draftsman of the section was using the expression ‘transaction in securities’ in a sense which, whatever else it may have included, did not include ‘the liquidation of a company’ —a term of legal art which connotes the series of operations which, in the absence of any agreement to the contrary by all interested parties, must follow the course prescribed by the Companies Acts 1948 to 1967, commencing, in the case of a voluntary liquidation, with the winding-up resolution and ending with the dissolution of the company after all its assets have been realised and distributed.”[29]He rejected the submission [p.486] based on the fact that s.25(5) Finance Act 1962 was a deeming provision. He considered that “What does make the actual language of s.460(2) conclusive of this as a matter of semantics is the contrast which it draws between the combined effect of “two or more such transactions” (sc.”transactions in securities”) on the one hand and the combined effect of a transaction or transactions in securities and the liquidation of a company on the other. Ex hypothesi the expression “transaction in securities” cannot have been used by the draftsman of the statute in a sense which included the liquidation of a company, since it would then itself have been one of the two or more “transactions in securities” from which the draftsman has been at pains to distinguish it in the actual words he used.”[30]Later [p.487] he observed “In the instant case the explanation in s. 467(1) of the expression ‘transaction in securities’, though introduced by the verb ‘includes’, speaks of ‘transactions, of whatever description, relating to securities’ as well as referring to particular examples of such transactions. This is so extensive as to leave no possibility of there being any transaction which could sensibly be described as a ‘transaction in securities’ without also falling within the longer description in the interpretation clause. So it is no more than a direction to the reader:
"Whenever you see the words ‘transaction in securities’ in this Chapter of the Statute you must treat them as being shorthand for the whole of the words in s. 467(1) that are preceded by the verb ‘includes’"
. To make this substitution can have no effect upon the validity of the reasoning based upon the language of s. 460(1) and (2). That language makes it clear that whatever else ‘transactions relating to securities’ may mean, it does not in the context of that section mean the liquidation of a company.”[31]Lord Kilbrandon agreed with Goulding J. Lord Edmund-Davies agreed, for the reasons given by Lord Wilberforce and Viscount Dilhorne, that the judgment of Goulding J should be upheld.[32]The decision of the House of Lords in Joiner is a crucial element in the argument of counsel for Laird. He accepts that divorced from its context the definition of “transactions in securities” would be capable of comprehending the declaration and payment of a dividend. He suggests that, though by no means conclusive, it would be odd if a particular feature were capable of constituting both the transaction in securities and the relevant prescribed circumstance. He submits that the speeches to which I have referred demonstrate that notwithstanding the width of the expression “transaction in securities” it is limited in some way so as to exclude the liquidation of a company and must therefore be subject to some implied generic limitation. The generic limitation for which he contends has varied. In his written argument he suggested that the best indication lies in the particular transactions specified in s.709(2). In his oral argument he submitted that the definition embraces only transactions involving a sale or other alienation or the creation or extinction of a right relating to a security. He contends that all such limitations necessarily exclude the declaration or payment of a dividend.[33]This argument appealed to the Tribunal. They stated in paragraph 48 of their decision 48. Joiner decided that, as a matter of construction of the definition of “transaction in securities”, a liquidation of a company was not one, whereas a liquidation accompanying a liquidation agreement varying the shareholders’ normal rights in a liquidation was. This reflects the thinking behind section 709(2) which includes a variation of rights within the definition of transaction in securities. By a similar process of reasoning it can, we think, be concluded that a straightforward dividend payment, such as the Stanton dividend, should be regarded in the same way as a distribution in an ordinary liquidation.”[34]Later, in paragraph 51, they added “...we think that the expression is aimed at the creation or transfers of securities or at the variation or extinguishment of rights attaching to securities such that a substantially new security is created. By contrast, the mere giving effect to existing rights is, as we mentioned in paragraph 49, outside the scope of the expression; that is the underlying reasoning of Lord Wilberforce in Joiner at page 481. On the same basis it seems to us that the giving effect to dividend rights following the declaration of a dividend is unlikely, in the context of section 703, to be a transaction in securities. There are two further reasons that reinforce this. First, section 703, in common with its predecessors, was self-evidently not designed to discourage the straightforward act of taking dividends out of a company, unless the dividend in question was connected with the transfer of shares or the creation of new shares or rights attaching to existing shares. Second, where Parliament has intended its legislation in Chapter 1 of Part XVII to cover dividends, it has made specific provision for them in the terms of the circumstances listed in section 704.” For the reasons they explained they went on to consider the statement made by the Attorney-General at the committee stage of the Finance Bill 1960 before concluding that the definition did not include the declaration or payment of dividends.[35]In his careful and comprehensive judgment Lightman J considered the course of the legislation and of the decisions in Parker , Greenberg and Joiner. Having referred to the rival arguments of counsel as to the principles to be derived from them he said [para 29] “My view....(as best informed as I can be by the three House of Lords decisions) is that the mere payment of money (whether a debt due or a dividend) giving effect to pre-existing rights (as held in Joiner) will not ordinarily constitute a transaction in securities; but it may do so if it operates to extinguish a security or if it may properly be regarded as a pre-ordained transaction implementing a tax avoidance scheme. This appears to me to be the explanation for the decisions in Parker and Greenberg. The fact that a liability is triggered or discharged at the initiative of one or other party is not decisive either way. This accords with the speeches in Parker. The one constant in all three House of Lords decisions is Lord Wilberforce who was a party to all of them. His speeches in my respectful view afford the clearest key to their proper understanding.” At this stage I would observe that I do not agree that Joiner established any such principle as the judge referred to in the fourth and fifth lines of the passage I have quoted.[36]In paragraph 31 Lightman J set out in sub-paragraphs (i) to (vi) a number of principles he derived from these three decisions regarding the approach to be adopted to the construction of the provisions and the meaning of the word “transaction”. He noted that in Parker the redemption discharged an existing liability and that in Joiner it was considered that a pure liquidation did not constitute a transaction in securities. He continued [para.31] “(vii) neither the declaration nor the payment of a final dividend nor the payment of an interim dividend alone constitute a transaction in securities. The declaration and payment involve no dealing with securities and no alteration of rights attaching to the securities. They merely give effect to the pre-existing rights attaching to the securities.”[37]Lightman J then justified his conclusion with two particular reasons. The first was that the decision in Greenberg did not preclude his conclusion. The second was that the reasoning of Viscount Dilhorne in Joiner for excluding the liquidation of a company was equally applicable to the declaration and payment of a dividend. Lightman J quoted and approved the passage from paragraph 51 of the Tribunal’s decision I have set out in paragraph 34 above. He concluded that the term “transaction in securities” does not embrace the declaration and payment of a dividend without more.[38]Counsel for the Revenue contends that Lightman J was wrong. He suggests that the decision in Parker precludes any generic limitation on the definition of “transaction in securities”. He observes that whilst a limitation on the term so as to exclude the liquidation of a company is required because of the terms of s.703(2) and the decision in Joiner there is no such express provision in the case of the declaration and payment of dividends. He submits that where Lords Reid and Simon of Glaisdale led in Greenberg , though not binding as authority, we should follow in our judgments on this appeal.[39]I prefer the arguments for the Revenue. I start with a consideration of the nature and scheme of the legislation. It is plain that it was introduced to counteract tax avoidance schemes. In and before 1960 there were a number of such schemes involving dividend stripping, bond-washing and many other variants. It is plain from the decisions of the House of Lords in Parker and Greenberg that it is not permissible to infer some limitation on the very wide words used by reference to any supposed mischief at which the legislation was aimed or by reference to the particular transactions set out in the definition.[40]In my view it is also impermissible to limit the scope of application of the definition for fear, conscious or subconscious, that a wide interpretation may lead to injustice in other cases. The legislation cannot apply unless each of the three conditions, transaction in securities, prescribed circumstance and consequential tax advantage are present. Even then there are the ‘escape routes’ of bona fide commercial reasons etc. for which s.703(1) provides. As Lord Wilberforce observed in Joiner [p.480], though it is the general rule that clear words are required to impose a tax a wide and general attack on tax avoidance requires that expressions which might otherwise be cut down in the interest of precision are to be given the wide meaning evidently intended even though they lead to a conclusion short of which judges would normally desire to stop. Avoidance of injustice lies in the need to satisfy the cumulative conditions and the existence of the escape routes for which Parliament has provided not by the implication of generic limitations to so wide a definition.[41]There is nothing in any of the speeches in Joiner which requires the implication of a generic limitation on the definition of “transaction in securities”. Lord Wilberforce specifically abstained from deciding the point. Lord Kilbrandon agreed with Goulding J who had abstained from deciding ground C. Lord Edmund-Davies also agreed with Goulding J, his concurrence with Lords Wilberforce and Viscount Dilhorne being expressly limited to ground (C). Lord Diplock limited his conclusion to the exclusion from the definition of the liquidation of a company “whatever else it may have included” because of the logical impossibility of a liquidation being a transaction in securities within s.460(2). Viscount Dilhorne alone considered that, absent s.460(2), the liquidation of a company was not included in the definition. He did not suggest any generic limitation, let alone one which excluded the declaration and payment of a dividend.[42]The argument for Laird depends on divining some reason, other than the express reference in s.406(2), why the liquidation of a company is excluded. But the decision of the House of Lords in Joiner does not call for such an exercise. In my view the submission is contrary to the decision in Parker both that it is impermissible to limit the wide words of the definition and that a unilateral act may be a relevant transaction. At this stage I would also note that in Parker the redemption of the debenture constituted both the transaction in securities and the prescribed circumstance on which the Revenue relied. Accordingly I do not accept that the argument for the Revenue would give rise to the oddity on which counsel for Laird relied to which I have referred in paragraph 32.[43]Given the decision in Parker I find the speeches of Lord Reid and Lord Simon of Glaisdale in Greenberg more persuasive than that of Viscount Dilhorne in Joiner . In summary the declaration or payment of a dividend is a transaction and such transaction plainly relates to securities in the form of the shares in respect of which the dividend is declared or paid.[44]For these reasons I do not agree with the reasoning of the judge in paragraph 31(vii), quoted in paragraph 36 above. The first sentence is his conclusion. The second sentence involves the implication of a limitation on the definition which is not, in my view, warranted by the words used or by any of the cases to which I have referred. The third sentence is in my view wrong in law. No doubt the holder of shares has a hope and perhaps an expectation that he will receive a dividend in respect of them. But until a dividend, if final, is declared or, if interim, is paid he has no right to it. Thus the declaration and payment do not just give effect to pre-existing rights. Certainly they are not “the automatic fruition” to which, in a different context, Lord Wilberforce referred in Parker or the series of operations legally prescribed by the Companies Acts Lord Diplock mentioned in Joiner .[45]I agree with Lightman J that there is no decision in Greenberg which precluded the decision he made. But, as I have already suggested, the speeches of Lord Reid and Lord Simon of Glaisdale in Greenberg are, to my mind, more persuasive than that of Viscount Dilhorne in Joiner . For all the same reasons, unlike the judge, I disagree with the views of the Tribunal expressed in paragraph 51 of their decision. Indeed it is not clear to me how, consistently with the decision in Parker , the Tribunal concluded that the aim of the definition was limited in the manner they suggested in that paragraph.[46]I should also note other arguments advanced by counsel for Laird. He submitted that Parker and Joiner show that the mischief at which the legislation is aimed is the alteration of rights to enable tax free distributions of capital to be obtained. He also submitted that the particular transactions specified in the definition establish a genus into which distributions do not fall. In my view both those submissions are contrary to the decision of the House of Lords in Parker and so wrong in law.[47]Counsel for Laird also submitted that the payment of a dividend does not alter any one’s rights. I do not accept that submission either. The payment undoubtedly alters the rights of both the company and the member in the money so paid in that the rights therein of the former are extinguished and of the latter are created, subject only to a liability to repay dividends improperly distributed.[48]Counsel for Laird drew attention to the fact that in considering whether an abnormal amount has been paid by way of dividend it is necessary to have regard to the length of the period for which the shares have been held and the price paid for them. This is apparent from the terms of s.709(4)(a) and (b). But he went on to suggest that this justified some gloss on the definition of transactions in securities. I do not accept the latter submission. The question of whether an abnormal amount has been paid by way of dividend is relevant to the circumstance prescribed in s.704 A. That circumstance itself requires the sale or purchase of securities. As I have already pointed out the existence of a prescribed circumstance is additional to the requirement for a transaction in securities. I see no reason to imply a limitation on the latter because of the terms of the former.[49]Counsel also relied on the provisions of s.22 Finance Act 1973, now ICTA s.235. This limited the right of gross funds, such as charities or pension funds, which owned more that 10% of shares of a particular class to recover tax paid in respect of distributions. I do not think that these provisions, which merely impose a limit in prescribed circumstances, throw any light at all on the questions which arise on this appeal.[50]The conclusions expressed so far have been drawn without such assistance as the statement of the Attorney-General to the House of Commons on 25th May 1960 may afford. Laird submits that we should have regard to what was then stated and that, having done so, we should draw the opposite conclusion.[51]The conditions in which the court may have regard to parliamentary material as an aid to the construction of legislation were laid down in Pepper v Hart [1993] AC 593 , 634. They may be summarised as requiring that(1) the legislation to be construed is ambiguous, obscure or has a literal meaning which, if adopted, would lead to absurdity,(2) the parliamentary material sought to be relied on clearly discloses the mischief aimed at or the legislative intention lying behind the obscure or ambiguous words and(3) the statement in question is that of the minister or other promotor of the bill. These conditions are to be insisted on. R v Secretary of State for the Environment, Transport and the Regions, ex p. Spath Holme Ltd [2001] 2 WLR 15 , 32. It is also to be borne in mind that even if the parliamentary material is admissible it is but one factor, amongst all the others, to be considered in determining the meaning of the legislation. Ibid at p.39.[52]Counsel for Laird contended, as Lightman J held, that each of these conditions is satisfied. He relied on the speech of Lord Cooke of Thorndon in Spath Holme at p.40 in submitting that a provision reasonably open on orthodox rules of construction to more than one meaning is ambiguous. He contended that as the definition of transaction in securities is the same now as in 1960 when ss.28 and 43 were introduced it is permissible to have regard to what was then said. He suggested that ambiguity in the relevant sense was demonstrated by the conflicting dicta of Lords Reid, Simon of Glaisdale, Wilberforce and Guest in Greenberg .[53]In my view the definition of transaction in securities is not ambiguous, obscure or such as to lead to absurdity. I can understand that when the provision was first introduced it was both novel and of uncertain ambit. Such uncertainty is shown by the differences between the decisions of the judge, the Court of Appeal and the House of Lords in Parker and Joiner . But the effect of the decision of the House of Lords in Parker was to remove such uncertainty. As I have emphasised more than once, Parker established conclusively that the definition was not to be limited by reference to some supposed mischief and applied to a unilateral act which related to securities. Whether or not, in any given case, it is difficult to apply the definition it is not, on that account, ambiguous, obscure or such as to lead to absurdity. The point with which we are concerned did not arise for decision in Joiner and, with respect, I do not consider that any difference in judicial dicta in Greenberg constitutes ambiguity in the provision under consideration.[54]It is not disputed that the statement of the Attorney-General satisfies the third condition. But the Revenue do not accept that it satisfies the second. Given the decision of the House of Lords in Parker, if and insofar as the statement might indicate the mischief the provision was aimed at it can be of no help on the question of construction. For similar reasons I find great difficulty in understanding how, even if the statement does disclose some legislative intention behind the definition in question, that can help either. The House of Lords has decided in Parker that the wide words of the definition are to be given their full effect. It cannot be consistent with that principle, which is binding on us, that we should take into consideration statements to Parliament relied on as limiting the very width of those words.[55]For these reasons I do not consider that the statement should be admitted. In summary, the definition is not ambiguous, unclear or productive of absurdity and the statement relied on cannot help in determining its construction and application. But both the Tribunal and Lightman J admitted it. The former took account of it in reaching their conclusion. The statement includes this passage – “Thirdly, an ordinary liquidation is not caught. The reason is that liquidation is not a transaction in securities any more than is the payment of a dividend on shares. It represents the operation of giving effect to the rights attaching to the securities in the circumstances which have arisen.” In those circumstances it is appropriate that I should assume I am wrong in considering that the statement is inadmissible in order to demonstrate why, in my view, the statement does not help anyway.[56]The statement occurs in the course of a debate on an amendment moved by the Attorney-General in relation to the prescribed circumstances set out in what became s.28(2), now part of s.704. The Attorney-General considered that the amendment was the largest and most important one to be considered that day. He then proceeded to explain it at some length. He pointed out that there could be no liability unless all three conditions, transaction in securities, prescribed circumstances and tax advantage were satisfied. At the foot of column 510 he accepted that paragraph (c), which then also included what became paragraph (d) of s.28(2), deserved and required a fuller explanation. In that connection he reiterated (column 511) the need for all three conditions to be satisfied and pointed out that there must first be a transaction in securities. It was in that context that he made the statement relied on.[57]The committee was not then considering the terms of any definition of transaction in securities which became s.43(4)(1). We have not been shown what form the definition then took. But assuming, as I am prepared to do, that the definition in the bill as it then stood was not materially different I do not consider that this statement can be regarded as sufficiently clearly demonstrating any legislative intention lying behind the definition. The fact is that the payment of an ordinary dividend, assuming that the word ordinary is to be applied to dividend as well as liquidation, is not caught because, as it is not abnormal, it does not come within the prescribed circumstances set out in s.704 A. An ordinary liquidation is not caught because of the subsequent amendment made by s.25(5) Finance Act 1962 as held in Joiner . The suggested limitation to transactions which were not merely giving effect to rights attaching to the securities is wrong in law as held in Parker .[58]For these reasons I consider that the statement made by the Attorney-General is not admissible and if admissible cannot have the effect for which Laird contends.[59]In my view the special commissioners were right and the Tribunal and Lightman J wrong on the essential question whether the payment of an interim dividend is a transaction in securities. I would answer the question in an affirmative sense and allow this appeal. Mummery LJ: I agree. Longmore LJ: I also agree.

Order

Appeal allowed with the costs. Permission to appeal was granted. (Order does not form part of the approved judgment)

Cited in 1 later judgment