Klincke v Revenue & Customs [2009] UKFTT 156 (TC)

FTT-Tax
Klincke v Revenue & Customs
[2009] UKFTT 156 (TC) · 2009-07-01
[1][2009] UKFTT 156 (TC) TC00122 Appeal number SC/3146/2008 CGT – Exemption and relief – Disposal of qualifying corporate bond: ("QCB") – Taxpayer acquiring loan notes in exchange for shares – Loan notes not QCBs at time of acquisition – Loan notes containing currency conversion right exercisable by issuer – Right cancelled – Whether notes becoming QCBs following cancellation of issuer's currency conversion right - TCGA 1992 s117(2) CGT – Conversion of securities – Crystallisation of capital gain on securities while non-QCBs – Whether transaction required to cancel issuer's currency conversion right amounted to conversion – Yes – TCGA 1992 s132 FIRST-TIER TRIBUNAL TAX M. R. KLINCKE Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents (Capital Gains Tax) TRIBUNAL: SIR STEPHEN OLIVER (Chamber President) NICHOLAS ALEKSANDER Sitting in public in London on 6 and 7 May 2009 Julian Ghosh QC and Elizabeth Wilson, counsel, instructed by KPMG, accountants, for the Appellant Michael Gibbon and Ruth Jordan, counsel, instructed by the General Counsel and Solicitor for HM Revenue and Customs for the Respondents © CROWN COPYRIGHT 2009 DECISION Mr Michael Klincke, the Appellant, appeals against an estimated assessment to capital gains tax in respect of the redemption proceeds of certain loan notes ("the Notes"). His appeal to HMRC was dated 14 November 1996, it was referred to the Surbiton General Commissioners. The General Commissioners transferred the appeal to the Special Commissioners on 24 April 2008. The tribunal hearing the appeal was the First-tier Tax Chamber. Short summary of the issues[2]The "first issue" here is whether the gain that accrued to Mr Klincke in respect of the Notes was a chargeable gain. The issue arises in the context of Taxation of Capital Gains Act 1992 section 115. (All statutory references in this Decision are to the Taxation of Capital Gains Act 1992 unless otherwise stated.) Section 115(1) provides that a gain which accrues on the disposal of qualifying corporate bonds ("QCBs"), as defined in section 117, "shall not be a chargeable gain". This requires us to identify the asset disposed of at the time of disposal and to determine whether it was then a QCB. There is no dispute that the assets disposed of were the Notes. Nor is there any dispute that the time of disposal was the date when the redemption proceeds of the Notes fell due for payment.[3]The "second issue" arises because the Notes had been obtained as part consideration for the sale of shares in a trading company controlled by Mr Klincke and others. The Notes had not been QCBs at the time of issue. If the transaction designed to transform the Notes into QCBs had ranked as a "conversion" of the Notes within the meaning of section 132 (as HMRC contend) any "latent" gain "rolled" into the Notes would have crystallised at the time of their later redemption when they were QCBs. Outcome[4]We dismiss the appeal on the grounds that the transaction designed to transform the Notes into QCBs was a "conversion" within section 132 with the consequence summarised in paragraph 3 above. As to the first issue we have not been able to agree. The interpretation of the words defining QCBs in section 117(1) was the subject of the decision of the Court of Appeal in Harding v Revenue and Customs Commissioners [2008] EWCA Civ 1164 and [2008] STC 3499 . We have reached different conclusions as to the application of the Harding reasoning to the present circumstances. The Facts[5]Mr Klincke, a United Kingdom resident and domiciled individual, contracted (on 2 July 1993) together with others for the sale of the entire issued share capital of High Speed Productions (Holdings) Ltd ("HSP") to Rubicon Group Plc ("Rubicon"). The consideration obtained by Mr Klincke from Rubicon comprised 1,109,134 10p shares in Rubicon (a small part of which were held for another shareholder) and the Notes which had a nominal value of £1,857,992. The Notes were issued to Mr Klincke on 20 August 1993.[6]The Notes were governed by a Loan Note Instrument of 20 August 1993 ("the Loan Note Instrument") constituting 3,503,004 loan notes. The parties to this instrument were Rubicon and Lloyds Bank Plc (as guarantor). As guarantor Lloyds Bank agreed (in clause 9) to pay to the note holder any amount unpaid by Rubicon 90 days after the due date for Rubicon's payment to such note holder. Other relevant terms provide:(a) The Notes were not redeemable until after 1994 (condition1.1 of Schedule 1). Thereafter the Notes were redeemable at the holder's option on 30 days' notice (condition1.2 of Schedule 1);(b) Rubicon had an option to satisfy the redemption in US Dollars on notice to the holder, such notice to be given within 15 days of receipt of the notice of repayment (clauses 4.2 and 4.3). Clause 4 is set out in its entirety in the Appendix to this Decision; and(c) An extraordinary resolution passed at a meeting of noteholders had effect to assent to any modification of the provisions of the Loan Note Instrument which was proposed by the Company (paragraph 16(e) of Schedule 3), and such an extraordinary resolution bound all noteholders whether or not present at the meeting (paragraph 17 of Schedule 3).[7]Condition 5 in the Loan Note Instrument provided that the provisions of the Instrument and the rights of the noteholder could from time to time be modified, abrogated or compromised in any respect with the sanction of an Extraordinary Resolution of the noteholders and with the consent of Rubicon. (At the time of issue of the loan notes there were six noteholders.)[8]The transactions of July and August 1993 constituted a "reorganisation" for the purposes of section 126. The gain arising to Mr Klincke on the disposal of his HSP shares was therefore "rolled over" into his Rubicon shares and the Notes. The effect of section 135 was for his HSP shares and his Rubicon shares and the Notes to be treated as the same asset acquired as the HSP shares were acquired. By the time of the transactions to which this issue relates, ie 17 October 1995, a substantial capital gain had accrued and was potentially chargeable on disposal of the Notes.[9]On 17 October 1995 an Extraordinary Meeting of the noteholders took place. An extraordinary reslution to which Rubicon consented, was held and this approved the modification of the terms of the Loan Note Instrument (by Deed of Variation executed on 17 October by Rubicon and Lloyds Bank ("the Deed of Variation")) whereby Rubicon's foreign currency conversion right was cancelled.[10]Prior to the execution of the Deed of Variation and the Extraordinary Resolution, Rubicon had the right to discharge its redemption obligation in dollars. The effect of that right, if exercised by Rubicon, was that the noteholder would receive a US Dollar amount whose value in Sterling on the redemption date would lie in a narrow band extending above and below the Sterling amount, being the amount that would have been repayable had Rubicon not exercised the right.[11]The tax implication of Rubicon's right (in Clause 4) was that the Notes were not QCBs for the purposes of section 117. Preparation for the Extraordinary Resolution of 17 October 1995[12]In April 1995 (19 months after the date of the sale agreement), Mr Klincke (with some of the other former HSP shareholders) sought advice from KPMG (accountants) on ways in which the capital gain which would arise on a disposal of the Notes might be mitigated or avoided. No tax avoidance or mitigation had been considered by Mr Klincke before then.[13]On 25 May 1995 Mr Klincke's advisers wrote to a Mr Allenza of Rubicon. The letter points out that as things were the Notes might, at the option of Rubicon, be redeemed in US dollars. That provision, it was noted in the letter, had been introduced to prevent the Notes being QCBs for tax purposes. The proposal would involve the removal of those parts of clause 4 covering Rubicon's foreign currency redemption right. The writer stated that he was not aware of any disadvantages to Rubicon that might arise from the proposal "and indeed there may be some limited advantages". Rubicon were asked if they would confirm in principle that they had no objection to the proposal. On 12 June 1995 Rubicon confirmed that it had no objection. Mr Klincke's advisers then asked that Rubicon confirm with Lloyds Bank, the guarantor, that the latter would be prepared to undertake the change. On 10 October 1995 Lloyds Bank consented to the proposed alteration of the Loan Notes Instrument and the terms and conditions of the Notes. The events of 17 October 1995[14]At 10.00am a meeting of noteholders attended by two representatives of Rubicon and five noteholders, including Mr Klincke, took place in Hamilton, Scotland. Mr Klincke was chairman.[15]The meeting of noteholders was held on short notice (with the consent of all the noteholders). The following resolution was proposed and passed by the noteholders as an extraordinary resolution:
"THAT the terms of an instrument dated 20 th August 1993 made between the Company and Lloyds Bank plc constituting £3,503,004 Loan Notes and the rights attached to the Loan Notes constituted by the said instrument be and are hereby modified and abrogated by the deletion of Clauses 4.2 and 4.3 of the said instrument and that a proposed Deed of Amendment to be made between the Company and Lloyds Bank plc effecting such amendment, a draft of which was produced to the meeting and initialled by the Chairman for the purposes of identification, be and is hereby approved."
[16]Mr Whiteman and Mr Allenza of Rubicon were in attendance at the meeting. We note the following passage in the minutes of the meeting:
"… It was further explained that the Loan Noteholders had received advice from KPMG and Counsel that the proposed alteration should take place in advance of a possible change in legislation concerning corporate bonds for capital gains tax purposes. The proposed amendment to the terms of the Loan Note Instrument and the rights attached to the Loan Notes would convert the Loan Notes from a non-qualifying corporate bond into a qualifying corporate bond which would allow the Loan Noteholders the opportunity to redeem the Loan Notes without incurring a liability to capital gains tax."
[17]This passage in the minutes of the meeting is consistent with the evidence of Mr Klincke, who told us that the meeting and the amendments were part of a "scheme" to convert the Notes into QCBs, as QCBs were not liable to capital gains tax, and that the amendments had no other purpose. So far as this is relevant we find that the sole purpose of the amendments was to turn the Notes into QCBs with the intention of avoiding the capital gains tax that would otherwise arise on the disposal of the Notes.[18]Later on 17 October 1995, following the meeting, the Deed of Variation was executed by Rubicon and Lloyds Bank plc giving effect to the Extraordinary Resolution. The deed recited in full the terms of clauses 4.2 and 4.3 of the Loan Note Instrument and recited the Extraordinary Resolution of noteholders approving the deletion of these clauses. The operative provisions of the deed were as follows:
"Now it is agreed and declared by and between the parties as follows: 1. To modify and abrogate the wording of the Loan Note Instrument and the rights attached to the Loan Notes constituted thereby by deleting clause 4.2 and 4.3 of the Loan Note Instrument in their entirety. 2. That subject to the modification and abrogation set out in clause 1 above, all the terms and conditions of the Loan Note Instrument and the rights attached to the Loan Notes constituted thereby shall remain in full force and effect and shall be binding on all the parties. 3. That this Deed is Supplemental to the Loan Note Instrument."
[19]Following the Extraordinary Resolution Mr Klincke travelled to HSP's offices in Wandsworth, London. From there a notice of repayment was sent to Rubicon requiring repayment in respect of £1,857,942 nominal value of his Notes Subsequent events[20]On 27 October 1995, £1,857,992 plus £3,125.48 interest was paid into Mr Klincke's bank account. The discrepancy between the amount specified in the redemption notice and the nominal value of Mr Klincke's actual holding (which was the amount actually paid on redemption) was not explained. We assume that it was a typographical error, and that nothing turns on it.[21]On 24 September 1996, Mr Klincke submitted his 1995/6 tax return on the basis that his disposal of the Notes was exempt from capital gains tax. An assessment to capital gains tax was issued on 6 November 1996 in the amount of capital gains of £2,500,000 of which £1,831,323 is attributable to the redemption of the Notes. The Legislation[22]We first set out the overall scheme of the legislation, and address the provisions in detail later.[23]Where there is a reorganisation of a company's share capital, and as a result shares previously held by a taxpayer become reorganised into other shares and possibly debentures, the result could be that the shareholder would be treated as disposing of his original shares, and a taxable capital gain or allowable loss could arise. Section 127 avoids this result by deeming there to be no disposal and treating the new shares or debentures as acquired as and when the original shares were acquired. Thus in computing the gain or loss on the later disposal of those new shares or debentures the calculation is performed by reference to the original cost of the original shares. Any gain or loss that would otherwise have arisen at the time of the reorganisation is rolled forward into the computation of the subsequent gain or loss.[24]Section 132 applies reorganisation treatment under section 127 to a conversion of securities. So, for example, on the conversion of convertible bonds into the shares of the issuing company, there is deemed to be no disposal of the bonds and the shares acquired on conversion will be treated as having the acquisition cost of the convertible bonds for the purpose of calculating any gain or loss on the later disposal of those shares.[25]Section 135 extends reorganisation treatment to shares and debentures acquired in takeovers and like transactions: where company A issues shares or debentures to the shareholders of company B in return for their shares or debentures in company B and the exchange is (very broadly) part of a takeover, the shares and debentures in company A will be treated as having the same acquisition cost as the shares and debentures originally held in company B.[26]There are additional complexities where debentures (such as loan notes) are involved. This is because some debentures are QCBs, and gains and losses on QCBs are by section 115 outside the CGT regime. The definition of a QCB is contained in section 117. The relevant parts of section 117 read (as they applied at the time) as follows:
"(1) For the purposes of this section, a "corporate bond" is a security, as defined in section 132(3)(b) – (a) the debt on which represents and has at all times represented a normal commercial loan; and (b) which is expressed in sterling and in respect of which no provision is made for conversion into, or redemption in, a currency other than sterling. And in paragraph (a) above "normal commercial loan" has the meaning which would be given by sub-paragraph (5) of paragraph 1 of Schedule 18 to the Taxes Act if for paragraph (a)(i) to (iii) of that sub-paragraph there were substituted the words "corporate bonds (within the meaning of section 117 of the 1992 Act)" (2) For the purposes of subsection (1)(b) above – (a) a security shall not be regarded as expressed in sterling if the amount of sterling falls to be determined by reference to the value at any time of any other currency or asset; and (b) a provision for redemption in a currency other than sterling but at the rate of exchange prevailing at redemption shall be disregarded."
[27]As a result, without further statutory provision, if a share were exchanged for a QCB in circumstances where reorganisation treatment applied, then, although the QCB would be treated as acquired as the share was acquired, the latent gain or loss in the share at the time of the reorganisation or exchange would not be brought into the CGT regime because it would be exempted by section 115. Section 116 contains provisions to address this problem (and also the converse circumstance where a QCB is exchanged for shares). Where shares are reorganised into, converted into, or exchanged for a QCB, it provides in effect that:(a) you calculate the gain or loss which would have arisen had the shares been sold at that time for market value;(b) you freeze that gain or loss; and(c) when eventually there is a disposal of the QCB, although any gain or loss from fluctuations in value of the QCB itself remains exempt, the frozen gain or loss comes into charge to CGT.[28]If Mr Klincke had sold his HSP shares in 1993 for market value, a substantial gain would have arisen. If the Notes had at all times been QCBs for the purpose of section 116, then the gain arising on the exchange of the HSP shares for the Notes would have been frozen. That frozen gain would have become taxable on the redemption of the Notes. If the Notes had at all times not been QCBs, then at the time of the issue of the Notes no gain would have become frozen. Instead reorganisation treatment would have applied – with the result that on the disposal of the Notes a chargeable gain would be calculated by reference to the (relatively modest) original acquisition cost of the shares. Summary of the arguments on both issues[29]The analysis of what happened in this case (as argued for Mr Klincke) is that:(a) at the time of the exchange of the HSP shares for the Notes, the Notes were not QCBs. (It was common ground that the Notes were a security but not, because of Rubicon's right in clause 4 to redeem them in US Dollars, QCBs at the time of issue.) Since section 116 has effect only by reference to their status at the time of the exchange no frozen gain falls to be computed;(b) at the time of their redemption, the Notes were QCBs. The determination as to whether or not they were QCBs for the purposes of section 115 falls to be made at the time of disposal. At that time Rubicon's clause 4 right had been excised from the Loan Note Instrument, and as a result the Notes were QCBs within section 117; and(c) there was no event between the issue of the Notes and their redemption which gave rise to a disposal on which the latent gain would have become chargeable. In particular the amendments made on 17 October 1995 did not amount to a conversion of the Notes into QCBs which required a frozen gain to be calculated (and which would become taxable on redemption). Nor were the amendments so fundamental that they amounted to the rescission of the original Notes such that there was a disposal of the Notes at that time for CGT purposes. As a result, so the argument ran, no chargeable gain arises on the redemption of the Notes.[30]HMRC say that the position of Mr Klincke is in substance "exactly the same" as that of Mr Harding in Harding v Revenue and Customs Commissioners [2008] EWCA Civ 1164 and [2009] STC 3499. On that basis HMRC say that the Loan Note Instrument in its original form remained in place throughout. The asset disposed of was therefore a non-QCB. The Loan Note Instrument and the Deed of Variation of 17 October 1995 (approved at the Extraordinary Meeting of the Noteholders) can, to quote from HMRC's skeleton argument), 'only be understood by being metaphorically stapled together; and together they then represent the security. Section 117 is applied to the security at the date of redemption of the loan note; and the ratio in Harding is precisely in point. The foreign currency redemption was at the date of redemption just as much "made" as it was in Harding where the relevant provision was inoperable and had expressly "ceased to have any effect" – but was still regarded by the Court of Appeal as a "provision" made in respect of the security'. The security represented by the Note was therefore excluded by virtue of section 117(1)(b) from being a QCB.[31]HMRC go on to say that the Deed of Variation of 17 October 1995 was executed by Rubicon and Lloyds Bank to further Mr Klincke's tax avoidance purpose. The purpose was to prevent any "conversion" taking place as the result of the events of 17 October 1995 (with the consequences summarised below). To achieve this Mr Klincke and his advisers had to ensure that (again to quote from HMRC's Skeleton) "the loan note instrument was left in being, rather than replaced by a new instrument, ie there was a deliberate preservation of the original instrument (and thereby the provision for redemption in US Dollars)." To reach that conclusion was to take a realistic view of the facts as required by Lord Nicholls in BMBF v Mawson [2004] UK HL 51 and [2005] 1 AC 684 .[32]HMRC say (on the first issue) that the construction advanced by Mr Klincke would lead to the "anomalous position that a substantial sum which was clearly intended to be within the charge to tax is in fact capable of being enjoyed tax-free by [Mr Klincke]: an anomaly which would … amount to an absurdity. Moreover, it would appear that a further absurdity arises, that by virtue of similar such deeds of variation, taxpayers could shift a loan note in and out of the non-QCB status at will with no tax consequences – which cannot have been intended".[33]Alternatively, say HMRC, the events of 17 October 1995 caused the conversion of Mr Klincke's loan notes within the meaning of that term in section 132(3). The effect of the conversion was for Mr Klincke's loan notes to have been disposed of and for the charged CGT to have been deferred until the eventual redemption. That, in essence, is the second issue. Divergence of views on the first issue[34]There is no dispute that until the events of 17 October 1995 the loan notes were not QCBs for the purposes of capital gains tax. The effect of the Deed of Variation coupled with the Extraordinary Resolution of that date, was to remove Rubicon's right to redeem in US Dollars from the terms of the Loan Note Instrument. There ceased to be any provision made for redemption in a currency other than Sterling. Is that a relevant contrast to the circumstances in Harding ?[35]The taxpayer in Harding had received loan notes as consideration for a share sale. The notes were denominated in Sterling but contained an option for the holder, exercisable within 10 days of giving a redemption notice, to have the notes redeemed in US Dollars, Canadian Dollars or in Deutchmarks. The loans were not therefore QCBs. They were excluded by the words of section 117(1)(b): see paragraph 25 above. Notice of redemption had been served, on 13 January 1995, for redemption in July 1995. The taxpayer had not exercised his option by 23 January. Consequently the foreign exchange rights attached to the option lapsed and redemption took place in Sterling in July. The Court of Appeal decided that the taxpayer's loan notes remained "non-QCBs" until redemption. "Provision" for a currency conversion right made in respect of the loan notes endured until redemption, notwithstanding that the taxpayer had allowed his right to lapse. The word "provision", said Lawrence Collins LJ in paragraph 56, "is a reference to the terms of the agreement and not simply to subsisting rights".[36]Mr Aleksander prefers the analysis of HMRC as summarised in paragraph 30 above. At the time of disposal, that is when redemption of the Notes took place, "provision" was made for redemption in a foreign currency. The effect of the Deed of Variation of 17 October had not been to cause the Loan Note Instrument no longer to include any provision for redemption in a currency other than Sterling. This is because the Deed of Variation was a document expressed to be supplementary to the Loan Note Instrument; it did not therefore supersede it. Following 17 October, the Loan Note Instrument had to be interpreted in the light of the Deed of Variation, and vice versa – the two documents were legally stapled together and had to be read together. Following 17 October the Loan Note Instrument continued to include a provision for redemption in US Dollars, even though that provision was no longer operative. For Mr Klincke to be successful in converting his Notes into QCBs, the Deed of Variation would have had to have superseded and replaced the Loan Note Instrument altogether (for example by restating the terms of the Loan Note Instrument but without the foreign exchange rights given by clause 4). In that case, there might well have been a conversion of the Notes for the purposes of section 132, as the Notes would have been replaced by new debentures on new terms.[37]Sir Stephen Oliver sees it differently. At the critical time, which was redemption date (27 October 1995), there was no provision respecting the particular Note and the debt that it represented, that made for redemption in a foreign currency. In the words of section 117(1)(b), "no provision is made for … redemption in a" foreign currency. The effect of the Deed of Variation of 17 October 1995 to which Rubicon and Lloyds Bank agreed coupled with the approval of the noteholders through the Extraordinary Resolution had been to discharge all parties from all rights and obligations in relation to Rubicon's entitlement to redeem the Notes in US Dollars in exercise of the right given by clause 4. Clause 4.2 and 4.3 had ceased to exist by common consent of all the parties to the Loan Note Instrument. All parties continued to be bound by the remaining terms of the Loan Note Instrument. The effect of the Deed of Variation could (he recognises) only be understood by reading the Loan Note Instrument. But the events of 17 October 1995 changed the contractual position. Reverting to the words of Lawrence Collins LJ in paragraph 56 of Harding , not only had the "subsisting rights" of Rubicon been discharged by the mutual agreement but also "the terms of the agreement" contained no provision for redemption in a foreign currency. In Harding , by contrast, the provision made for Mr Harding's foreign currency option remained as a provision of the relevant Loan Note Instrument. Nothing had been done to excise or remove it from that instrument. Mr Harding had failed to exercise it in time; his right to take up the issuer's option had therefore lapsed. But, again to use Lawrence Collins LJ's words, the "terms of the agreement" still continued to operate notwithstanding that Mr Harding's right was no longer existing right.[38]Sir Stephen Oliver has reached his decision in the full awareness that the events of 17 October 1995 took place for no purpose other than the avoidance of the capital gains tax that would have been imposed had the Notes been redeemed as "non-QCBs". Despite a general similarity between this and Mr Harding's case, the difference between the two is sufficiently clear to support the conclusion that the asset disposed of on 27 October 1995 was a QCB. Had there been no "conversion" of Mr Klincke's Notes within the meaning of section 132(3) in Mr Klincke's case (contrary to the conclusion on the second issue), the contrast between this case and Harding might have disappeared. But that is not the case, for the reasons that we will explain.[39]For reasons that will have become apparent, we express no view on the first issue. The second issue : Did the transactions of 17 October 1995 amount to a conversion of securities?[40]If the events and transactions of 17 October 1995 amounted to a "conversion" of Mr Klincke's loan notes within the meaning of section 132(3), the latent chargeable gain in his Notes at that time would have been be fixed in those Notes: see sections 116(1), (4) and (10) and section 132(1) and (3).[41]The legislation on QCBs and the relevant provisions of the CGT code are summarised in the Court of Appeal's decision in Harding at paragraphs 9-26. There is no dispute as to the consequences of those provisions: the only issue is whether, as HMRC contend and as Mr Klincke seeks to refute, the events culminating with the Extraordinary Resolution amounted to such a conversion.[42]Section 132 is headed "Equation of converted securities and new holding". So far as is relevant it provides as follows:
"(1) Sections 127-131 shall apply with any necessary adaptations in relation to the conversion of securities as they apply in relation to a reorganisation (that is to say, a reorganisation or reduction of a company's share capital). … (3) For the purposes of this section and section 133 – (a) "conversion of securities" includes – (i) a conversion of securities of a company into shares in the company, and (ii) a conversion of the option of the holder of the securities converted as an alternative to the redemption of those securities for cash, and (iii) any exchange of securities effected in pursuance of any enactment (including an enactment passed after this Act) which provides for the compulsory acquisition of any shares or securities and the issue of securities or other securities instead."
[43]Section 126 is headed "application of sections 127-131". It reads:
"(1) For the purposes of this section and sections 127-131 "reorganisation" means a reorganisation or reduction of a company's share capital and in relation to a reorganisation – (a) "original shares" means shares held before and concerned in the reorganisation, (b) "new holding" means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain)."
[44]The argument for Mr Klincke is that the consequences of the Extraordinary Resolution approving the Deed of Amendment to the Loan Note Instrument were outside the scope of the reorganisation provisions. Those provisions (section 126 and 127) apply to a "reorganisation or reduction of a company's share capital" and involve the "original shares" held before the reorganisation and concerned in the reorganisation on the one hand and a "new holding" (being the shares in and debentures of the company which as the result of the reorganisation represent the original shares (section 126(1)(a) and (b)) on the other). The reorganisation therefore involves the disposal of an asset and its replacement with another asset. The same applies to section 132 (in the form in which it existed on 17 October 1995); there must be a replacement of an interest in one asset (or security) with an interest in another (being shares, securities taken as an alternative to a cash redemption or an exchange of securities in pursuance of a compulsory acquisition: see section 132(3)). Section 132, in common with section 126 to 130, is aimed (to quote from the Appellant's skeleton argument) at a situation where the person in question "has not, in any commercial sense, realised his holding." The variation of the loan note instrument and the extraordinary resolution did not, it is said for Mr Klincke, result in the replacement of his interest in one security (his holding of loan notes in Rubicon) with a different security; all that happened was for Mr Klincke's loan notes to be varied.[45]The correct analysis, it is said for Mr Klincke, is that a part disposal of an asset under section 42 took place when the Extraordinary Resolution was passed. We will revert to that later.[46]We accept HMRC's arguments that the passing of the Extraordinary Resolution on 17 October 1995 approving the Deed of Variation and the execution of that Deed amounted to a conversion within section 132. The purpose and the effect of the Extraordinary Resolution and the Deed was to change the nature of the loan notes. Rubicon as issuer gave up its rights to repay in dollars (by reference to the foreign exchange rate on that date) and was left with the obligation under clause 6.1 to repay in Sterling. Mr Klincke, as noteholder, was left with the right to be repaid the nominal amount in Sterling; until then he had been entitled to be repaid something, but he could not say whether it would be Sterling or US Dollars until 15 days passed from the date on which he had send notice of redemption. The rights and obligations of issuer and noteholder were changed by the Deed and the Extraordinary Resolution of 17 October. That was a conversion in the ordinary sense of the word. There is no necessary implication in the language of section 132 or in the wording of the reorganisation code in Chapter II of Part IV (as it existed at the time) which requires a different meaning to be given to the word "conversion"[47]The ordinary sense of the word "conversion" is found in the Shorter Oxford English Dictionary where it is defined as, among other things, "change in character, nature, form or function" or "change by substitution of an equivalent in purport or value". The change that came about as the result of the execution of the Deed and the Extraordinary Resolution of 17 October 1995, as summarised in the previous paragraphs, falls squarely within the words "change in [the] character, nature [or] form" of the Notes. The purpose of the participants, ie Rubicon, Lloyds Bank and the noteholders, was fundamental and not simply a tidying up operation. On 17 October they participated in transactions that affected the determination of the amount to be repaid on redemption.[48]We do not think that the three situations referred to in section 132(3) are together a complete definition of "conversion of securities". We read those three situations as non-exhaustive examples. The most obvious further example not expressly dealt with is of course a conversion of securities into other securities; and what amounts to such conversion must be a question of fact and purposive construction of a statutory provision.[49]We turn now to the submission made on Mr Klincke's behalf as to the rationale of the reorganisation provisions, namely that a reorganisation within the meaning of section 126 must involve the disposal of an asset and its replacement by another. That will, we accept, frequently be the case. But even the definition of reorganisation in section 126 contains no express requirement that the concept of disposal is implicit. It will be noted that section 126(2)(b) provides that the reference to reorganisation includes the alteration of rights attaching to a class of shares. This provision is directly at odds with the submission made for Mr Klincke.[50]Looked at overall, it seems to us that the reorganisation provisions in Chapter II of the Act are intended to ensure that any disposal on a reorganisation or conversion is deemed not to have happened. The overall purpose of those provisions is to ensure that the latent chargeable gains are brought into charge the time when assets are realised; to achieve that they focus on reorganisations. They certainly cover all actual disposals, but the drafting goes wider.[51]We turn now to the question whether, as is suggested for Mr Klincke, the execution of the Deal of Variation and the Extraordinary Resolution of 17 October 1995 amounted to a part disposal and, if so, what was the consequence. We recognise, as is pointed out for Mr Klincke, that a sale or assignment of dividend rights on a share may amount to a part disposal by the shareholder. That situation is not the one in which Mr Klincke found himself on 17 October 1995. The only person who could in the circumstances have made the disposal was Rubicon which, for no consideration and with the possibility of a limited advantage to itself (see the letter to Rubicon of 25 May 1995 set out in paragraph 17 above), gave up its foreign exchange right in clause 4.2. The execution of the Deed of Variation and the Extraordinary Resolution were both engineered by Mr Klincke for his CGT advantage. There is no evidence that he obtained any other benefit. Certainly he gave up nothing for which payment could be expected.[52]Reliance was placed for Mr Klincke on section 24 ("Disposals where assets are lost or destroyed, or become of negligible value") as the basis for an assertion that Mr Klincke's rights to receive US Dollars had been wholly destroyed. There was therefore a disposal. That was said for Mr Klincke to have excluded the operation of the conversion provisions of section 132. Mr Klincke cannot, we think, be said to have disposed of anything in the nature of an asset in the course of the transactions of 17 October 1995; instead he ceased to be exposed to currency fluctuation risk that would have arisen had Rubicon exercised its foreign exchange rights.[53]We have reached our conclusion on the second issue without regard to any suggestion that Mr Klincke had obtained an unintended windfall in the form of his relief from CGT on the latent gains. Our conclusion is based on the plain wording of the CGT code. On that basis we have concluded in favour of HMRC that the events of 17 October 1995 amounted to a conversion of Mr Klincke's loan notes with the result that the latent chargeable gains were crystallised at that moment.[54]For those reasons we dismiss the appeal. SIR STEPHEN OLIVER CHAMBER PRESIDENT NICHOLAS ALEKSANDER TRIBUNAL JUDGE RELEASE DATE: 1 July 2009 APPENDIX EXTRACT FROM THE INSTRUMENT OF 20 AUGUST 1993 CONSTITUTING £3,503,004 LOAN NOTES[4]REPAYMENT OF LOAN NOTES4.1 As and when the Loan Notes (or any part thereof) become repayable in accordance with the provisions of this Instrument and the Conditions, the Company will pay to the Loan Noteholder entitled thereto at the address shown in the register of Loan Noteholders maintained by the Company at its registered office the full principal amount of the Loan Notes to be repaid together with any accrued interest thereon up to and including the date of payment.4.2 The Company may, by notice in writing to the Loan Noteholders given within 15 days of receipt by the Company of a Notice of Repayment pursuant to Clause 1 of the Conditions elect that that part of the Loan Notes in respect of which the Loan Noteholder is entitled to require repayment on the relevant Payment Date ("the Election Amount") shall be redeemed in US dollars.4.3 If the Company serves a notice in accordance with clause 4.2 the Company shall on the Payment Date (and in full discharge of its obligation under clause 4.1 to repay the Election Amount) pay to the Loan Noteholder an amount in US dollars ("the Election Dollar Amount") obtained by converting the principal amount of the election Amount into US dollars at the Spot Rate on the Election Date PROVIDED THAT:-(i) if the Election Dollar Amount shall exceed (by more than 0.2 per cent per annum for each complete year between the date of issue and the Payment Date) an amount of US dollars obtained by converting the sterling principal amount of the Election Amount into US dollars at the Spot Rate on the Payment Date ("the Lesser Dollar Amount"), the Lesser Dollar Amount plus 0.2 per cent per annum for each complete year between the date of issue and the Payment Date shall be substituted therefore provided that the payment made shall in no circumstances be greater than the maximum amount of US dollars which can be paid without causing the Election Amount to become a deep gain pursuant to the provisions of paragraph 1(9) Schedule 11 of the Finance Act 1989 (as amended from time to time);(ii) if the Election Dollar Amount shall be less (by more than 0.2 per cent per annum for each complete year between the date of issue and the Payment Date) than an amount in US dollars obtained by converting the sterling principal amount of the Election Amount into US dollars at the Spot Rate on the Payment Date ("the Greater Dollar Amount"), the Greater Dollar Amount shall be substituted therefore but subject always to a maximum amount of US dollars which can be paid without causing the Election Amount to become a deep gain pursuant to the provision of paragraph 1(9) Schedule 11 of the Finance At 1989 (as amended from time to time).