The Gala Film Partners, LLP v The Commissioners for HMRC [2023] UKFTT 699 (TC)

“The following is a summary of events in relation to an individual (“the Partner”) contributing £10 million to the Partnership. 1 The Partner contributes £10 million to the Partnership. £7.754 million of the contribution can be borrowed by the Partner on a full recourse basis from Société Générale (“the Partner’s Loan”). 2 The Partnership borrows £1.35 million (“the Partnership Loan”) for every £10 million gross contribution of the Partner. 3 The Partnership acquires certain distribution, sequel and remake rights for a portfolio of films from the studio for a period of 21 years by paying in advance on the purchase price of £1.35 million. The Partnership also spends £10 million on prints and advertising expenditure for the portfolio of films and other trading expenses of the Partnership. The prints and advertising expenditure is a normal trading expense that is incurred by the owners of the distribution rights for films. 4 The Partnership will enter into a distribution agreement with an affiliate of the studio for a period of 8 years. The studio affiliate will be required to pay an annual Minimum Royalty Payment during the term of the Distribution Agreement. This Minimum Royalty Payment will be an amount equal to the difference between the income received by the Partnership in the normal course of distribution in any year and a sum equal to the interest due in that year on the Partner’s Loan and the interest due in that year on the Partnership Loan. In year 8 this minimum payment increases to ensure repayment of both the Partnership’s Loan and the Partner’s Loan of £7.754 million. 5 As it is expected that no distribution income will be received by the Partnership until its second period of trading the Partner’s share of the first year’s trading loss would be £10 million. 6 By utilising Section 380 and Section 381 of [ICTA] the Partner would be able to claim tax relief at 40%, assuming the income in which he is setting the trading loss against was taxable at 40%. 7 In the event that the studio does not take up the option to acquire the business from the Partnership, the Partnership will receive income from the distribution of the portfolio of films for a total of 21 years. The Partnership will also have the right to exploit all sequel and remake rights to those films. In this event it is anticipated that income in excess of Minimum Royalty Payments will be received by the Partnership and thus the Partner will share in the profits of the Partnership. 8 There is a possibility during year 3 of the distribution of the agreement and in subsequent years that the studio will exercise an option to buy the Partnership’s business including the distribution rights for a purchase price being the greater of the market value of the Partnership’s interest in the portfolio of films and the net present value of the unpaid Minimum Royalty Payments at the date the option is exercised. In this example the net present value of these unpaid Minimum Royalty Payments would approximate to £9.19 million in year 3 enabling the Partner’s Loan and the Partnership’s Loan to be repaid. 9 The purchase by the studio of the Partnership’s business during year 3 would result in a capital gain of about £7.98 million (£9.19 million received less £1.35 million as the base costs of the rights originally acquired, adjusted accordingly by the wasting asset rules). 10 The capital gains tax liability would ordinarily be £798,000 (tapered capital gains tax rate of 10%), however any capital losses brought forward would extinguish the capital gain of £7.98 million. 11 Should the studio exercise its option and no further income in excess of the Minimum Royalty Payments is received by the Partnership from the distribution of the films the net outcome for the Partner is a positive cashflow of approximately 10.2% of his original capital contribution.” (Emphasis added.)

“42 Computation of profits of trade, profession or vocation (1) For the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation must be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in computing profits for those purposes”. “46 Minor and consequential provisions about computations (2) Except where otherwise expressly provided, the same rules apply in computing losses of a trade, profession or vocation for any purposes of the Tax Acts as apply in computing profits.”

“118ZA Treatment of limited liability partnerships (1) For the purposes of the Tax Acts, where a limited liability partnership carried on a trade, profession or other business with a view to profit– (a) all the activities of the partnership are treated as carried on in partnership by its members (and not by the partnership as such), (b) anything done by, to or in relation to the partnership for the purposes of, or in connection with, any of its activities is treated as done by, to or in relation to members as partners; and (c) the property of the partnership is treated as held by the members as partnership property. References in this subsection to the activities of the limited liability partnership are to anything that it does, whether or not in the course of carrying on a trade, profession or other business with a view to profit.”

“As an ordinary word in the English language “trade” has or has had a variety of meanings or shades of meaning. Its meaning in tax legislation is a matter of law. Whether or not a particular activity is a trade, within the meaning of the tax legislation, depends on the evaluation of the activity by the tribunal of fact. These propositions can be broken down into the following components. It is a matter of law whether some particular factual characteristic is capable of being an indication of trading activity. It is a matter of law whether a particular activity is capable of constituting a trade. Whether or not the particular activity in question constitutes a trade depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles. To that extent the conclusion is one of fact, or, more accurately, it is an inference of fact from the primary facts found by the fact-finding tribunal.” (Emphasis added.)

“… it is well known, and there was no dispute that: (1) by “for the purposes of the trade” is meant for the purposes of enabling a person to carry on the trade and earn profits in it; (2) a dual purpose, where not saved by section 34(2),was not exclusively a trading purpose; as a result an expense incurred both for the purposes of trade and another purpose is not deductible; (3) the purpose referred to is that of the taxpayer subjectively determined; (4) the purpose of the taxpayer must be distinguished from the effect of the expense. Thus a private benefit which is merely a consequence or an incidental effect does not give rise to a dual purpose; (5) although the purpose is to be subjectively determined this does not limit the investigation to the taxpayer’s conscious motives; a pinch of salt is necessary – some consequences are so inevitably and inextricably involved in a payment that unless merely incidental they must be taken to be a purpose for which the payment is made.”

“the essence of the new approach was to give the statutory provision a purposive interpretation in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. This brought the interpretation of tax statutes into line with general principles of statutory interpretation and required notice to be taken of the reality of the transaction in issue….” (2) He added that the effect of the Ramsay case and the modern approach was elegantly summarised by Ribeiro PJ in the following statement (approved by the Appellate Committee in BMBF) in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46 (“Arrowtown”), at [35]: “the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

“Many transactions take place by the entry into a series of contracts…In such cases, where the transaction is in truth one transaction all the contracts may be read together for the purpose of determining their legal effect. This principle is a more specific example of the general principle that background is admissible in interpreting a written contract. It applies to other documents executed as part of the same transaction, whether they happen to be executed before, at the same time as, or after the document requiring to be interpreted.” (3) At [110], the UT continued that, therefore, “where there is in truth one transaction, the tribunal is entitled to read the contracts together for the purpose of determining their legal effect”

“That set of documents…reflected what was undeniably a single, albeit multi-party, transaction as a commercial matter. Even though it was common ground that none of the documents in question could be regarded as a sham, the absence of any allegation of sham does not prevent the tribunal following the approach outlined above or, for example, examining critically whether the written provisions of the documents had the effect when read together that the LLPs maintained that they did. This is consistent with the principle, illustrated in Antoniades v Villiers as discussed above, that the tribunal is not bound by labels that the parties have chosen to apply if those labels do not reflect the true nature of the legal rights and obligations created pursuant to the contractual arrangements.” (5) As regards the Ramsay approach, at [111], the UT rejected the view that, at the first stage of contractual construction, the Ramsay approach is to be ignored provided its scope is properly understood and the principles are correctly applied. There is no reason why the tribunal should not come to a conclusion as to the overall effect of the arrangements through a process of construing the relevant contracts alongside a consideration of the extent to which the application of the Ramsay principle affects the position. Nevertheless, in their view, it is equally permissible to take the approach of first construing the relevant contracts conventionally, and then considering whether and to what extent the Ramsay principle applies. Whichever process is followed, “the facts must be analysed in the light of the particular statutory provision being applied and taking account of the need (depending on the relevant question) to view the transaction realistically”

“any annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A or by virtue of ITEPA 2003 as employment income, pension income or social security income”

“if a scheme has been effected or arrangements have been made (whether before or after the time when the payment is made) such that the sole or main benefit that might be expected to accrue to that person from the transaction under which the interest is paid was the obtaining of a reduction in tax liability by means of any such relief.”

“shall be to carry on the Business and any business activity relating thereto or arising therefrom including without limitation: (a) entering into the Transaction Documents and any agreements pursuant thereto; (b) engaging in the acquisition of distribution rights and sequel and remake rights in theatrical films and arranging for the distribution of those theatrical films and entering into and performing and exercising the LLP’s obligations and rights under the Transaction Documents relating thereto and other agreements entered into pursuant thereto or in connection therewith; (c) lending money, giving credit or providing any other form of credit on such terms as the Ordinary Members determine; (d) carrying out the duties of the LLP in relation to the rights and obligations of a rights holder and film distributor; and/or (e) acting as distributor of theatrical films.”

“the acquisition of a portfolio or portfolios of distribution rights and remake and sequel rights in theatrical films, such portfolio or portfolios to be acquired in the course of trading with a view to gain, and the exploitation of the distribution rights by means of the Distribution Agreements in consideration of a share of the distribution receipts arising therefrom all as more particularly described in the IM.” (2) Each of the members agreed to use “all its reasonable and prudent endeavours to perform the Business at all times in such a way so as to maximise the profitability of the Business”. (3) It was stated that (a) the agreement was conditional upon Gala receiving duly completed applications for admissions by prospective members whose prospective “Contributions” (defined as “any money or assets paid into the accounts of or transferred into the ownership of [Gala] by [a member]..”) committed unconditionally to Gala were in aggregate not less than £50 million, (b) if that condition was not met by 28 February 2004, any monies received from the members would be reimbursed with any interest earned thereon, (c) no new members would be admitted to Gala after 5 April 2004, and (d) admission of a member would be effective on Gala receiving his Contribution in cleared funds and the counter-signature and dating of his admission form by or on behalf of Gala. (4) It was stated that (a) a member would acquire a “Member’s Share”, defined as a share of and interest in Gala’s capital (its excess of assets over liabilities as shown in its accounts) equal to the amount of his “Contribution”, plus or minus a share of the profit or loss of Gala to be attributed to him, and (b) members would share any profits and bear any losses relating to “the Slate” (defined as “a set of distribution rights and sequel and remake rights in theatrical films acquired by”

“1. To investigate, evaluate, identify, recommend and advise in respect of Slates which may be suitable for acquisition, exploitation and realisation by Gala. 2. To negotiate the terms and conditions of any agreement or arrangement on which each Slate shall be so acquired (provided that such acquisition terms and conditions shall not be binding on [Gala] without prior Members’ consent as set out in the [MA]), and on which each theatrical film shall be distributed by [Gala] with a view to the receipt of distribution income by [Gala]. 3. To negotiate the terms and conditions for loan financing to [Gala], whether on a secured or unsecured basis (provided that such terms and conditions shall not be binding on [Gala]). 4. To represent [Gala] in all negotiations and dealings with studios, producers, distributors, banks, institutions and persons having prior interest in or security over each Slate (and rights therein) to be acquired, exploited and realised by [Gala]. 5. To provide [Gala] with the benefit of contacts, know-how and specific expertise in film distribution. 6. To advise on employment of such agents, investment advisers, employees, managers, accountants, lawyers, consultants and other persons necessary or appropriate to carry out the Business and to advise [Gala] on the terms of all relevant contracts and documents (whether or not any such persons so employed are affiliated or related to any Member). 7. To advise [Gala] in relation to the exercise of any and all rights, privileges and powers available to [Gala] or any trustee or nominee of [Gala], in connection with any Slate acquired by [Gala] and rights therein. 8. To provide such other services as may be agreed from time to time between the parties.”

“certainly our understanding was that the operator simply was there to service the obligations and the needs of…the LLP, in terms of compliance. It was a compliance mechanism and compliance requirement.” (2) Whilst there is a general catch-all clause in the OA, Chiltern’s role was in fact “very limited and to the point” and was akin to that of a company secretary. There is: “no way in which - at no time did they get involved in the actual business, which is to identify assets, negotiate, acquire the assets, and do all of the other things that are within the confines of the services that were rendered by [Invicta]. Chiltern is a non-entity, from the point of view of the business.” (3) So the catch-all provision does not “properly describe or accurately reflect the function of Chiltern in those circumstances”; rather the proper analysis is to look at what Invicta did in the MSA given this is “after all a media business. Chiltern were not equipped to perform that role and they were not asked to perform that role”

“They were not qualified or competent to report to the LLP, and those functions are expressly reported and undertaken by Invicta in the [MSA].”

“The real bread and butter operation, media operation as opposed to corporate operation of the business was undertaken by Invicta at all relevant times, before and after the execution of the documents…At no time was Chiltern involved in any of these activities…They were not competent to do that. The members were not looking for them…we have to look at the actual operation as it actually happened. Operationally, Chilterns were nothing more than a…Company Secretary.” (4) There is a contradiction inherent in the documents. It is provided that the operator has exclusive operational capacity but the MA contemplates that a third party could be engaged to do other things in relation to Gala’s business. So the situation is “at very best unclear…and ambiguous”

“I draw a distinction between operating the LLP and conducting the business….Chilterns were at all times responsible for operating the LLP, in much the same way that a company secretarial company is engaged to provide company secretarial services. That’s the distinction that was made at the time and that’s the distinction which is the reality….The agreement makes this quite clear that it contemplates the possibility that the LLP would engage others. It’s quite clear that Chilterns didn’t have the competence to do the services that are at the heart of this transaction. Organising the Company Secretarial aspects of the enterprise, though important, it was important for everybody, including the members that the LLP was run in a compliant way, and that was Chiltern’s function, the guts of the transaction in terms of the trade was at all times undertaken by Invicta….We were always clear in our minds that we needed Chiltern for the operational aspects and not for the business trading aspects of the business.” (5) Chiltern had no competence in the film business and neither Invicta nor the members looked to them, for an understanding of the film industry: “They had no connection with Sony, wouldn’t know how to get involved with Sony, and...the true relationship and the business mind of the partnership...is embodied in the [MSA]...When one takes the full menu of services, you see that that’s where the proper brains, business brains...or business mind of the partnership resides…”

“The partnership relied on us to be the face of the partnership in its dealings with the studios and also eventually the licensee or the licensor and our sub-licensee. That was our role at all times.”

“To the extent a subjective determination of the view of the LLP has to be made the parties were agreed that it would be that of the controlling minds of the LLPs: the LLPs delegated their running to the Operator, so if one asks about the conduct of the business it is the Operator’s conduct of it which is relevant, and that in turn is that of its directing minds.” (2) In their view, the controlling mind was Chiltern/those controlling it, given that, pursuant to the MA, it was appointed as operator and was “exclusively responsible” for the provision to Gala of the very broadly framed services listed in the OA. HMRC noted that this accords with the view expressed by solicitors in Instructions to Counsel dated 23 January 2004 produced on behalf of Gala (for a conference which Mr Yusef attended) that: “Day-to-day operation of the LLP would seem to vest in [Chiltern] under the [OA]”

“From this line of authority I derive the following principles in the context of the present case: (1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action. (2) If a court is willing to draw such inferences they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness. (3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue. (4) If the reason for the witness’s absence or silence satisfies the court then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.” (2) Lord Hodge in Royal Mail Group Ltd v Efobi [2021] 1 WLR 3863 (“Efobi”) at [41], that: “The question whether an adverse inference may be drawn from the absence of a witness is sometimes treated as a matter governed by legal criteria, for which the decision of the Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 is often cited as authority. Without intending to disparage the sensible statements made in that case, I think there is a risk of making overly legal and technical what really is or ought to be just a matter of ordinary rationality. So far as possible, tribunals should be free to draw, or to decline to draw, inferences from the facts of the case before them using their common sense without the need to consult law books when doing so. Whether any positive significance should be attached to the fact that a person has not given evidence depends entirely on the context and particular circumstances. Relevant considerations will naturally include such matters as whether the witness was available to give evidence, what relevant evidence it is reasonable to expect that the witness would have been able to give, what other relevant evidence there was bearing on the point(s) on which the witness could potentially have given relevant evidence, and the significance of those points in the context of the case as a whole. All these matters are inter-related and how these and any other relevant considerations should be assessed cannot be encapsulated in a set of legal rules.”

“the detailed marketing plan prepared by Gala or, at Gala’s request [the Sony sub-licensor]…which includes: (i) a detailed breakdown of the Distribution Expenses including the [Gala Expenses]….to be incurred in connection with that Picture (ii) the final date at which all [Gala Expenses] in respect of the Picture are intended to have been incurred.” “Gala Expenses” are defined as specified types of “print and advertising costs” involved in the marketing and distribution of “Pictures”, namely: “(1) the duplication costs for theatrical prints, trailer prints, DVDs and videos, (2) the following advertising costs: (i) the cost of buying media time for the purpose of advertising the Pictures; (ii) the cost of print advertising; (iii) the cost of outdoor advertising and (iv) the cost of Internet advertising SAVE THAT where a Picture has been theatrically released in part of the Territory, [Gala Expenses] shall not mean the duplication costs for theatrical and trailer prints in that part of the Territory.” “Distribution Expenses” are defined as a broader description of costs relating to the marketing and distribution of “Pictures”

“we wanted to have an input on final decisions that were made in relation to the P&A marketing strategy...we wanted to be sure that we had some sort of oversight and control as to what was being spent. We knew that if we simply funded the P&A, and the distributing studio knew that money was available regardless, they would spend it, and they knew that if they spent it, the fee would come from a higher level in the food chain....In short, were we not to be involved in the distribution process, they would spend our money and make more money (by virtue of increased Distribution Expenses) at our expense – i.e. the more P&A that was spent, the lower the pot at the end. We wanted to be able to control that to some extent so that we could ensure there was a greater eventual return for us.” (2) However, “we very much had in mind the advantages to be gained by deploying the infrastructure already in place with the studio” and were seeking “to engage with a studio to enjoy all of the groundwork that they have put in and contacts that they have established over many years” so that “by forming a joint venture-type arrangement with one of the Major Studios, Gala would immediately obtain the advantages of scale and market share enjoyed by that studio”. (3) In determining the amount of Gala’s share of profit from the film: “the studio’s recoupment of production cost would be limited to 60% (rather than 100%) of adjusted Distributor’s Gross, therefore increasing the potential pot available for distribution and, since the studio would not provide all of the funds for Distribution Expenditure, the members have the chance to reach profitability sooner...by participating in distribution so that the distributing studio does not take 100% of the Distribution Expenditure, the lower the deduction that is made at that stage, the higher the balance that would potentially be available as a profit share.” (4) Gala would participate in the distribution of a range of films to give investors the maximum chance to invest in a project that is likely to succeed at the Box Office, and would be able to choose the films from the studio’s entire slate of films for the year; it was important to avoid the studio “cherry picking” only those films they considered potentially less likely to be a commercial success: (a) The studios field a broad range of films for distribution each season “on the principle that they would have the benefit of a portfolio effect and cross collateralisation” so that “the gains from one asset could mitigate any losses of another. Across a portfolio of films, the [studios] have more successes than failures (which is evidenced by how successful the [studios] are)”

“we were not interested in simply reimbursing costs to them...otherwise we would just be acting like a bank and we were not interested in bankers’ returns. We wanted to be actively involved in the P&A process and we wanted to have approval rights over the marketing, and so on, so that, over time, the studio would be able to see that Gala’s experienced team was able to add value to the distribution process. This would then put us in a better bargaining position with a Major Studio when we were negotiating further deals in the future….”

“we knew that, for any Major Studio to be interested in what we were proposing, it had to be large enough to make it worth their while getting into something with us. Accordingly, we were always looking at trying to get to an amount in the hundreds of millions, with a prospect of further raises over subsequent transactions...” (2) Initially they decided that the participants would each be required to contribute a minimum of £1 million. They saw this as the first of a series of transactions and wanted “people in the partnership that would have the capacity to be involved in further raises down the line; people with substantial income and who were sophisticated, the kind of HNWI who has some experience in evaluating and dealing with these kind of opportunities”

“as we were only interested in a deal which would maximise the prospect of a successful commercial exploitation of the rights we acquired, we declined the deal as we did not consider it would meet the needs of our intended participants (who we knew would want a genuine prospect of making a return on their investment).” (5) All of the studios, except Sony, said that they would be willing to transact but only with the effect of giving Gala the right to reimburse the studio for the cost of the Gala Expenses, without any say as to which films Gala would acquire. Sony were prepared at least to consider “what we regarded as a proper “joint venture” type arrangement” where “we would be fully involved in the process and could choose films from their slate that we considered would give us the best possible prospect of making a return”

“we were able to convince Sony that our objective was not to obstruct the distribution process, rather, that Gala would be able to add value to the process by being involved in it with the common goal of maximising the potential for returns”. (2) It was agreed that “we would use SPR, the distribution arm of SPE, to distribute the films”

“we were only looking to set up an arrangement which maximised our chances of successfully exploiting the films and making a return, and therefore that this was a critical aspect for the deal to go through.”

“we would have no control over what had been spent...it was vital that Gala was able to participate in new projects across the slate because we were not interested in acting simply as a financing party, analogous to a bank. We wanted to be a business partner, acting alongside the studios.”

“we were eventually able to reach an agreement on the basis that would be acceptable to both parties, and which gave us confidence that we would be able to make a return if we selected the right films and they were a commercial hit.”

“very much a two-way conversation, with Sony looking to achieve what they wanted (access to regular and large sums of money to outsource their financial outlay) and with us wanting to achieve terms that would maximise the prospect of us making a return on our involvement.” (2) After weeks of discussions the parties agreed heads of terms on 5 November 2003, which encapsulated the outcome of the discussions. Invicta were “extremely pleased to have secured an agreement with Sony because of the success that Columbia had had in the previous year” and felt they had “stolen a march on” competitors, as “the only way that they could overcome barriers to entry was to accept terms or deal structures that were not as favourable as ours and that we had already rejected”

“In short, once we knew what films were available in the slate, we would determine the likely expenditure, and then work out whether or not we would be able to entice prospective members to participate to an amount that equal or exceeds that amount, otherwise we would be wasting everyone’s time having discussions with the studios.”

“The SPE-Revolution deal would complicate P&A financing from Invicta and Gala’s point of view”. (3) His research caused him to be concerned about the commercial viability of SPE’s “sub-label Screen Gems’ films, whose genres and small budgets will make market profile difficult”

“Screen Gems’ You Got Served and Breakin’ All The Rules are both commercially oriented low budget films targeting the under-served African-American and youth audiences. These films should be tracked for audience awareness as the summer and fall progress and, if SPE can promote effectively to these niche markets, then both could have some commercial success proportionate to their respective budgets.” (4) He thought it best for Invicta to focus on SPE’s Christmas and winter mainframe releases - Something’s Gotta Give, Big Fish, 50 First Dates, and Secret Window as: “Word of mouth in the local creative community is strong on all these four films, and I believe SPE will have an excellent Christmas 03-04 season heading off with Something’s Gotta Give.”

“the fact that our not having the materials could scupper the deal meant they were keen to complete put us in a good position”

“Sony could appreciate why we wanted to be fully involved in agreeing changes to the marketing plans....and they agreed that we could have full control in terms of making key decisions as to how the [distribution] expenditure was spent.” (Emphasis added.)

“certainly Mr Yusef and I met multiple times and discussed both in person and by phone the process of entering into an arrangement - agreement with one of the studios...it focused down on Sony based partly on relationships and partly on the result of discussions with Sony’s team as compared to other studios…”

“I would be looking at quite a lot of films given my profession in any given week...but I know I went through a lot of this material with a sense of certain professional diligence and given my reputation I would not be making a recommendation without having done some thorough research on these materials…I do not remember the full list of all the elements, as I said, that I may have or certainly would have seen.” (2) When questioned as to why he said he “would have” done things as opposed that he did do them, he said he thought this is perhaps a difference between British English and American English, but certainly he was implying in his statement that these things did indeed happen and he believed he did these things albeit he could not fully remember in exact detail 19 years later. (3) When it was put to him that he recommended rejecting Sony Revolution films not on the basis of how he thought the films would do at the cinema but because he thought the producer involved would block Gala’s involvement, he said that the two “are not mutually separable actually”: (a) the producer’s relationship with a studio would have an impact on the commercial terms of the film (in addition to many other factors) and, (b) from knowing him, he thought the producer may block Gala’s active involvement. The producer was a former chairman of Disney, who had taken up a producing role for “Revolution” a relatively new company which had a distribution deal through Sony. He added: “I probably in this case would not have read all of these screenplays. However, I certainly would have looked at the synopses and the cast. I would also have had a discussion with Sony about the situation. My research and intel at the time led me to believe that Sony was more committed to its own movies than to Revolution’s movies, even though it was a distributor of those movies....[and that] [the producer] would not welcome the level of involvement that we were looking for....in terms of development of the release plans, marketing assessments and again the dynamic day-to-day business of distribution.” (4) He said that his comment about tracking You Got Served and Breakin’ All the Rules was made on the basis of his research and intel. He explained that, at the time (a) Screen Gems was a relatively new division of Sony, (b) Sony had had some fairly poor performance in terms of its overall corporate revenue, and (c) the first place that a studio would look to generally shift its activities would be in its more commercial and more expensive productions. The Screen Gems movies he was concerned about initially were those that he thought might not have the full level of support from the studio that he/Invicta were looking for. However, Screen Gems did have some good traction in terms of word of mouth and there was a positive opinion at the studio on the other films; that is why he recommended that they should be tracked. (5) He said that in his reference to “tracking” he meant his discussions on a very frequent basis with the Sony marketing team and with various agencies and producers, maybe even other distributors, and his “word of mouth” research as to what people were saying about these films, packages and talent. This included tracking “the star rating of the lead talent involved” as “part of assessing commercial potential is to look carefully at the ups and downs of that particular talent and there is a star rating for that”

“The Invicta Gala Film Fund - a new opportunity which combines film distribution with print and advertising expenditure with the potential to earn profits over the medium term, whilst allowing individual partners to mitigate any potential losses by the application of tax reliefs. The Invicta Gala Film Fund brings together the proven film industry contracts and expertise of [Invicta], the limited liability partnership structure and the tax advisory services of Stellar Financial Partners Ltd.”

“To the extent that the scale of the Partnership’s minimum P&A Expenditure generates a loss in the Partnership’s first year of trading, the loss may be mitigated by the application of tax reliefs available to Partners under Section 380 and Section 381.”

“Under current tax legislation, the Partnership will be able to write off the expenditure incurred directly in connection with the Partnership’s exploitation of any Portfolio, together with the Partnership’s operational expenditure (including the fees and expenses paid to Invicta, the Placing Agent and the Operator). In the event that the Partnership incurs a trading loss in relation to a Portfolio in the year of the P&A Expenditure on that Portfolio that trading loss can be set off in a variety of ways by each Partner whose capital contribution has been utilised in the exploitation of that Portfolio in accordance with his or her Partnership share, as described on page…Note that any interest paid on a loan taken out by a Partner to fund any part of his capital contribution to the Partnership can only be relieved against income or gains of the year in which that interest is paid. Profits may be generated in future years by the Partnership, and each Partner will be responsible for timely payment of tax on his or her share of those profits. Any trading losses incurred by the Partnership may be mitigated by the reliefs granted under Section 380 and Section 381. Please refer to the risk factors on pages…If you are in any doubt about whether investing in the Partnership is a suitable investment for you, you should contact your Independent financial adviser for advice.”

“The Partnership will provide the opportunity for Partners to acquire the Distribution Rights to Films from the Studio and through the Partnership to trade in the exploitation of those Distribution Rights with a view to profit.” (2) The proposed transactions were described in broad terms that accord with the actual terms of the deal with Sony and details were given of the financing arrangements, the shortfall guarantee and related LC and the Call Option. However, no studio was named and it was made clear that the terms of a deal were still to be negotiated and no details were given of the waterfall. It was stated that “the Agent Distributor will receive a distribution fee from profits to be negotiated at arm’s length” and “thereafter all profits after the deduction of participations, for example actor’s profit share and third party expenses, will be shared between the Partnership and the Agent Distributor in a ratio to be negotiated with the studio on an arm’s length basis”

“…the Partnership will trade in the acquisition and exploitation of Distribution Rights in a number of Films. The Minimum Royalty Payments over the term of the Distribution Agreement should ensure that the Partnership is trading profitably over its lifetime but, given the amount of the Partnership’s capital that it is anticipated will be spent on P&A Expenditure…the Partnership is expected to incur a trading loss in its first accounting period to 5th April 2004.”

“Under this arrangement print and advertising expenditure and film distribution are combined to generate trading profits over the medium term whilst allowing individual partners to benefit from the same loss reliefs as those afforded by vanilla sale and leaseback arrangements. When a major studio film is made the costs of production are often matched or exceeded by the costs of distribution which includes printing and advertising costs. Until recently the major US studios were able-to write these costs off over an extended period. The accounting Standards have now been changed to the extent that all of these costs are now to be recognised immediately. As a consequence US studios have been considering ways of outsourcing these P&A costs in order to remove the Profit & Loss Account hit on their balance sheet.” (2) She set out details of the structure including of (a) the Call Option, which she described as giving Sony “an unfettered right that has no performance criteria or trigger”, and (b) the Minimum Sums and security arrangements. She noted the following: “…Not all films offered to the LLP will be accepted or necessarily passed on for distribution. Only those films judged to be commercially viable will be included. This decision will be made by a team of analysts employed by the LLP, based in Los Angeles. As part of the agreement to distribute the films on behalf of the LLP the LLP will make approximately 90% of its working capital available to the distribution company to undertake the printing and advertising of the films that have been chosen. In return for making these funds available the LLP will receive 30% of any profits generated from the distribution of the films and 70% will be paid to the distributor… The L/C is a bank guarantee, with embedded triggers - so in effect you are relying on a bank guarantee from a bank with an external Credit rating of AA- or better… The risk therefore of the loans remaining unpaid is that the bank(s) issuing the standby Letter of Credit is unable to meet its obligations….” (3) She noted that Gala would have the option to select the films to acquire and the intention was to acquire 5 to 7 films amongst which are 2 major blockbusters subject to release dates: Spider Man II and Terminator III. (4) Under a heading “Taxation” she made the following main points: (a) It was anticipated that Gala “will make a loss in its first year of trading because of the level of expenditure required to undertake the print and advertising of the chosen films” and Gala was “to be structured and operated in such a way as to allow members…to benefit from the tax relief for losses available” under ss 380 and 381 ICTA (and she described how the loss could be relieved under those provisions). If the studio called for the rights to be sold back “any gains arising on this disposal will benefit from Business Asset taper relief and will therefore be taxed at only 10%”. (b) Scenarios of the cash flow projections are detailed in the IM. She gave a brief description of the assumptions on which each scenario is based and noted that if the studio did not exercise its option as under scenario 1 the distribution would be treated as an income tax liability in year 8 and a loss would be created due to the income tax liability. (c) Gala is predicated entirely on general accountancy principles and is not dependent on existing tax breaks offered to film makers. (5) Under a heading “Loss Relief Claim”, she set out the following: (a) Members had to make a minimum contribution of £1 million financed by (a) an initial cash contribution of 22.46% which could either be financed by cash or borrowing. Interest on any loan should qualify for income, tax relief against UK earnings whilst Mr Mallett had an interest in Gala, with (b) the balance (77.54%) of investment to be covered by a loan repayable at the earlier of (i) the date Sony exercised its call option or (ii) the stand by letter of credit being called in to repay the loan in year 8. Gala would raise a non-recourse loan equal to 13.5.% of the contributions to acquire the distribution rights of the films. (b) An example illustrating the estimated cash flow position in year 1 “assuming that you wish to shelter £1m income in 2003/04” which she said is similar to that of sale and leaseback in year 1. This showed that Mr Mallett’s cash contribution of £224,600 would give a “Cash advantage year 1” of £175,400 as a result of a tax refund of £400,000. (c) At the end of year 2, if Sony exercised its option, the gain should be liable to CGT at 10%, examples of the cash flow position are illustrated in the IM, and if Mr Mallett had capital losses, “such as Mansworth and Jelly losses”, he could utilise them to reduce any capital gains that may arise on the disposal. She gave details of when and how a claim for relief for the loss could be claimed. (6) Under a heading “Risks” she said that the main area of risks are described in the IM and then summarised them as follows: (a) Trading: “This is central to the arrangements if the members are to be able to claim the relief’s referred to above. Counsel was of the opinion that the structure, provided it is implemented in full would be regarded as trading since: Only those films that, after analysis, were expected to be profitable would be acquired by the members, and if, as predicted, the films were successful the members would benefit from a 30% share of any distribution profits made. • The LLP could top up the fund if required. • Members had placed a substantial amount of risk capital into the venture by way of cash and full recourse loan. • The acquisition and marketing of the films are acknowledged commercial activities. • The infrastructure of the transaction will be such that full business records will be kept and made available for inspection by the Inland Revenue if required.” (b) Ramsay/Furniss v Dawson Risk: “This is unlikely since the structure appears to be designed to operate on strict commercial grounds with all commercial activities documented within the business records. As previously stated the LLP will have the option to cherry pick the films it intends to acquire; the studio has no say in this decision. There are no artificial steps inserted to create a tax advantage. There is no pre-arranged exit. The studio may have the right to call for the return of the rights from the LLP but: • There is no absolute certainty that the studio will exercise the option; and • It can only do so by paying a commercially computed price.” (c) Security: “If Sony goes into liquidation and the Bank providing the stand by letter of credit defaults then the full recourse loan (77.54% of the participation) would revert to the partner. This is similar to the arrangement -under Sale & Leaseback.” (d) Other risks were listed as (i) these arrangements may be challenged by HMRC and Invicta had appointed Steve Bold to defend the position, (ii) it is an illiquid investment and anyone moving abroad prior to the disposal of their interest in Gala would need to check the tax position in the new jurisdiction as it may be less favourable than the UK’s, (iii) the taxation treatment described is based on current tax legislation and if the rules change this may affect the tax treatment of a partner’s participation, and (iv) if Sony did not exercise the option in year 8 the repayment of the loan would, under current legislation, trigger an income tax charge. She also set out details of a member’s liability as a member of Gala, as an LLP and according to the terms of the MA. (7) HSBC Republic Bank (UK) Ltd will be remunerated by an introducer’s fee and Mr Mallett will therefore not be asked to pay any fees. (8) A loss arising from The Gala Film Fund could be set against Mr Mallett’s income from 2000/01 to 2002/03 but his income in 2001/02 “has been largely utilised by the losses arising from your participation in the Castle Film Partnership” and given the level of his income in 2000/01 “it would be more beneficial for any loss claim to be offset against your income in 2002/03 as we could relieve the income which is subject to higher rate tax”

“Estimated initial refund £400,000 Initial cash or loan contribution at 22:46% £224,600 Estimated cash advantage in year £175,400”

“we were not looking for someone with significant income or gains, taxable at 40%, who wished to have the ability to shelter current and earlier year tax liabilities. This is UBS’ targeting of people who they thought would find the downside protection that we were offering useful. What we were looking for were people who had the wealth and the appetite to get involved with the film trade, other than something that they were probably used to, which is sale and leaseback…UBS has been approached to invite their customer base to look at our structure. I didn’t prepare this [presentation]. Nobody in our office prepared this document. They then went out there and harvested their database, and then in many instances we then met with these people to explain what was happening in terms of the actual trade, the actual business of Gala. This doesn’t even deal with the business of Gala.” (4) He added that this was a client gathering exercise, but it would not begin and end with this presentation. After this process was finished, Invicta would meet with the vast majority of suitable individuals (at Invicta’s or UBS’s offices) and would explain: “not just this is all about tax and downside protection. There is more to this structure...as is reflected in my witness statement, and that would be what we would be looking to ensure that the prospective members understood.” (5) It was put to him that UBS put tax at the centre of their marketing material. He said they had to do that, because they had to explain to their customers what the tax consequences of the transactions would be. However: “At the presentations I was certainly involved in UBS and other institutions, my emphasis was more on what the transactions involved and what we would be doing in terms of participating in the film trade. Obviously, it did in turn also involve me having to explain the tax consequences, but I did in every single instance explain to people that the tax treatment was not the driver. They obviously had to qualify for that in order to get the downside protection, but that shouldn’t be the driver. There were other ways for these people to get involved in tax mitigation or tax deferral…as I say their objective was to explain to their clients what the consequences of the transaction would be. It wasn’t their job, nor were they qualified to talk about the film side of the business, which was the trade that these people were entered into. That was my job.” (6) In re-examination, he emphasised that the UBS analysis was not prepared by Invicta and did not represent “the way in which we pitch or try to explain the way the transaction worked”

“We would have explained in detail how, because it was relevant to the concern that some people would have at the time. It was important to distinguish what we were trying to do here from what they were used to, which is sale and leaseback type of transactions. It was, therefore, important to explain to them that this was intended as a trade. There was a profit motive. There was an element of risk but that the risk would be mitigated in this way.”

“We could have done that elsewhere, in a different way. I wanted to build a company similar to the Silver Screen project...This was the beginning of what I hoped would be that case. So, my ambitions on a personal level went way beyond this phase of the transaction.”

“…they could have achieved somewhere close to that by doing a deferred tax arrangement, for example, or some other tax things that were available at the time. They didn’t need to do this to achieve that. That wasn’t the sole driver. That was a mitigant to what they would otherwise consider to be a high-risk transaction.” (2) When it was put it to him that this just sounds too good to be true, he said that he thought that: “if it was too good to be true in terms of the overall…objective, I don’t think 65 people would put their money into it…If this was credible, the objective of entering into the film business at a high level was also credible and I think this set of people were minded to enter into the film business in a sensible way. I have already said what my motivations or what everybody else’s motivations were in the witness statement. It wasn’t simply to make tax work. That wasn’t the primary objective. We achieved that differently.” (3) It was put to him that this is an absolutely whopping return and it was all about the tax. He said: “I intended to participate in this so that we could be involved, as I say, in a sensible position, in a sensible way in film distribution. I had visions that...this phase would be one of many phases. Each time the phases would be slightly different, but essentially the idea is to be involved in film distribution for quite some time. That’s why I did it…No, it wasn’t all about the tax. We could have achieved that without going through all the bits and pieces at various stages in the transaction…if it was just all about tax, we could have achieved that without doing this.”

“That was the thing that drove me as the instigator of the scheme and what drove the members that did come in I believe. Had we performed, that’s what would have happened in my opinion. That’s what we certainly were projecting to have happen at the outset.”

“It is essential for the success of the scheme that the payment of the [Initial Expenditure] is allowed in full as a revenue expense of the LLP in the year in which it was paid…The existence of the [call] option potentially chokes off any upside…As a result the members’ commercial interest in contributing to the LLP will be focused on the tax saving that can be achieved coupled with the potential for limited upside versus capped downside.” (Emphasis added.)

“Well, it has to be, yes. If it’s meant to be there in order to entice people to deal with the risk that otherwise would be there, it is essential that it does succeed. It would be curious if it said it would be nice or we would desire it or it would be welcome. No, it has to say that it is essential. My objection was not to that. My objection was to the suggestion or the inference that I prepared, or Gala or Gala’s agents prepared those instructions. We never instructed Mr Thornhill.”

“This fact alone confirmed to me that there was a real sense of commerciality behind the Gala proposal”

“My understanding at the time was the statute allowed for favourable tax treatment of investments in films, period. I did not have an understanding, nor did I ever come across anything which said otherwise”

“Essentially, I understood that if things go particularly badly I would lose money, just like any normal investment scenario, and if it goes well, I would make a return and it would be something fun to do.”

“but by the process of having the tax as part of the structure that you invested in, you are part of an LLP, which is carrying on a business which exists as an entity...there is a lifetime to this business when it’s carrying on a trade, it is carrying on an activity. It wasn’t I put my money in. There’s my tax. There is no involvement. There’s a business and there’s a process. The fact that we are here representing [Gala] should illustrate that I am still fully involved as a minor partner.” (2) It was put to him that in his statement he said he did not think he would have an active role. He said he was still a member of an LLP and whilst he was not claiming to be actively involved, his point is “you don’t cease to be a member of the LLP when you achieve the tax”. (3) He agreed that (a) he hoped personally to make a return on his money, (b) he was not familiar with the terms of the waterfall and so could not have known, when he went into this, how much income, if any, was going to come into Gala but thought that “whenever you invest in any business you never know the outcome”, and (c) he did know about the projected tax relief and he noted that tax relief is part of very many IMs. He said the tax relief was a key part of what this was about, but he thought there was a suggestion that it would have to occur as part of something generally credible and it was not as if there was an immediate repayment although he was certainly hoping for it within a year. He added that tax efficient investing is certainly not unusual and more recently he had invested in EIS and SEIS related business and a “very large part of my willingness to do that is for the associated tax benefits, because they insulate me from the fact that it’s a very risky process”

“That’s the tax treatment. What we were anticipating was income which would go on for many years if the option was not exercised. So whether it was exercised or not was, as I say, entirely a matter for Sony and not for us, but we went into this on the basis that there would be profits - we had a reasonable expectation of profit and that’s what would have come out of that.”

“At the time our client believed he had Mansworth v Jelley losses and subscribed to participate in the LLP in August 2003, anticipating that Sony would exercise its option, which it did. The availability of capital losses were the factor that influenced our client’s decision to invest. Our client accepts that it was not the only factor that was taken into account, but considers this was a key factor and one that tipped the balance in favour of proceeding” (Emphasis added.)

“we thought we... had the potential to earn a substantial amount of money through film, and just perhaps as an example, you mentioned a bit earlier the Spiderman and Terminator films. Obviously, we didn’t know how they would turn out and we didn’t go into them. However, that was what most interested me and I did do some initial research into what their predecessors were and look at sort of precedents. The predecessors of those two films made...1.4 billion. On that basis that was the sort of transaction we were looking at. That was the potential for our upside...”

“we would be earning significantly greater sums from being in a slate of successful films owned by - produced by Sony and distributed by them with our investment going towards the P&A. That was what the whole purpose of the arrangement...” (3) When pressed he said again that the members went into this for a very different reason - “the arrangement was to put us in a position whereby we could earn significant amounts of money from it” as supported by the expert opinion of HL and one could have put a series of other illustrations of how much would come out of it. That is why they went into this transaction and at that point it is quite clear that the members, HMRC and Gala would have benefited. He said counsel was looking at the position with hindsight and when “we entered into this the proposition was very different....the option might not have been exercised on the first or any of the 4 anniversaries. It might not have been exercised at all.” (4) He agreed that a return was guaranteed due to tax relief in scenario 2 but added that there was no certainty that the Call Option would be exercised. He agreed that, in each scenario, the member obtains upfront tax relief. He said the expectation was that in that first-year money would be invested and that it would come back over a period of years. There was the potential for the transaction to go on for many years. He agreed that the upfront tax repayment was not wiped out by tax due on the gain arising on exercise of the Call Option, so that a member made money overall through tax relief alone. He said this is 20/20 hindsight by looking at what happened: “When we went into this the expectation was that we would be earning a significant amount of money either because the call was exercised at some point during that period or not. The first year that is the correct accounting treatment but over the period we would have made…considerably more.”

“So it was a statement of intent backed by an organisation which was putting it together, and a team in Los Angeles, and on that basis you would anticipate that there would be an attractive slate which would lead to profits being generated.....in the medium term.” (3) When pressed, he said that clearly he could not individually calculate exactly what the numbers were going to be but a framework was being put in place whereby “we would enter into a sensible commercial agreement which should be a win-win for both ourselves and the studio”

“This really impressed me as it wasn’t a case of Gala simply signing a document and letting the studio do what it wanted - there seemed to be genuine participation in trying to pick the right films and being involved in how they were distributed. Even the example films provided on the third page of the 12 September 2003 Letter were Spider Man II and Terminator III, which demonstrated to me the high standard of films that would be involved, and led me to believe that the films Gala would purchase would have every opportunity of being successful and, hopefully, turning a profit.”

“I saw these as 3 scenarios. There could have been 53 scenarios. I saw the first one would result in a loss. That could have just been as likely to happen if Sony decided not to exercise their option. It was their call option. I saw.. scenario 2 as being a way of almost putting a footing on to the conversation, but the reason I was interested in this opportunity was the quality of the films and therefore the likes of 1.5 million would be achievable.” (5) When it was put to him there was no information on the films in the IM, he said when he saw the IM he said he was interested and it was only later when he saw the quality of the films that he was ready to sign up. (6) It was put to him that Ms Challons set out an illustration of the outcome for him of investing in Gala based only on scenario 2 and specifically drew his attention only to that, because that was what was expected to happen. He said: “That’s not the way I recall the conversation or my expectation.” (7) He agreed that (a) in year 1 he recovered his cash contribution plus £376,593.20, and (b) the tax relief of around £893,000 does not simply reduce the burden of a loss but resulted in him making a positive return, and (c) he was still in a positive position, even taking account of the tax on the capital gain which arose on exercise of the Call Option. He added, however, that in each of the scenarios, any of which could have happened, there would be a subsequent tax liability, which offset the year 1 positive cashflow. (8) It was put to him that a serious investor would view the tax benefit as the fundamental and real attraction, because there is no risk involved other than the risk of the tax analysis being faulty and anything else is simply a bonus. He said: The tax relief was part of it but there was also the profitability part of it which he was happy with. He emphasised again that there would be subsequent tax liabilities that would reduce the initial benefit of the tax relief and that if the option was not exercised, then under scenario 1 he would make a loss. He accepted, however, it is correct that the tax relief alone would result in a profit for a member even after CGT. When pressed he emphasised that he had no control over whether Sony exercised the option and, if it did not, he did not get the tax benefit. (9) It was put to him that the only risk of not making a huge return just based on the tax relief arose if Sony did not exercise the Call Option. He said in that case, there is a capital gain and that would then return in a profit and if Sony did not exercise the option, there is scenario 1 or 3. When pressed, he said: “Subject to what I said before in terms of the option, correct, the figures shown, that’s correct.” (10) He agreed that the vast majority of the risk factors Ms Challons set out in her letter relate to tax and said that there is “no doubt that tax is an important part of this transaction”

“Economically yes, but the reality is from my background in banking operations with structural transactions you expect cash to flow through different entities for different reasons. So economically the cash ends up in the same place I guess, but that doesn’t mean it hasn’t happened.” (3) He seemed to agree that, as a matter of principle, there is no inconsistency between Sony entering into the arrangements because of a change in accounting standards, and Gala and its investors doing so for tax reasons. He said that is the way the world works and: “There’s a need and there’s sources of financing, and if those sources of financing could be done in a legitimate, tax-optimised way, I think that’s what is happening all the time.” (4) He agreed that he did not have the DA when he had his discussions with Ms Challons. He said that his understanding about film selection was based upon the IM which suggested there would be a team of experts employed by Gala in Los Angeles who would work with the studios. He did not have any more facts than that. He agreed that Sony is a major well-known film studio and it is reasonable to think that they would be better placed than Gala or any experts hired by Gala to work out how to exploit and distribute its films but he thought Sony were not necessarily looking for Gala to help with their distribution: “They were looking to Gala to help them finance their films - the printing and distribution.”

“I trusted my financial adviser to give me the right guidance. I didn’t think she would come and tell me lies…my concern was that I would end up having the same situation as I had previously. I would enter into a transaction that I was perfectly happy with, but then HMRC would come after me. I didn’t want that to happen at all and hence my questions were much more around how legitimate is this…I trusted she wouldn’t be coming and telling me untruths.” (6) He was asked if, in his references in his statement to making money on the investment in Gala, he meant he would make money on his cash contribution, he said that he saw it as making money on his whole investment as he regarded the loan as his obligation as well. He confirmed that he was aware that there were arrangements in place for his SG loan to be guaranteed to be repaid but said that: “as we have subsequently seen over the last decade or so, nothing is really guaranteed. Banks do fold. So there was still some liability, some potential risk there…I just saw the total amount as the amount I was putting in, even though some of it was funded and some of it guaranteed, but rather than go through that loop again, yes, I expected to make a return on the amount I put in.” (7) He agreed that, in scenario 2, a member makes money irrespective of how the films perform but noted that he had understood that there was a reasonable prospect of making money irrespective of whether Sony exercised their option or not. He agreed, in effect, that the difference in outcome in scenarios 1 and 2 results from Sony exercising the Call Option but noted that scenario 1 applies if the films did not do well whereas scenario 3 applies if they did do well. He agreed that he did not know how well the films would have to do for anything to come to Gala under the waterfall: “but reading the [IM] which had the 3 scenarios, my assumption was that if the films did well there was a reasonable prospect for me to make some money, irrespective of Sony exercising their option. That was my statement, because that was the fact. That was how I felt at the time.” (8) It was put to him that his comment that Gala would endeavour to make commercial gains and returns for members over the coming years cannot be right, because the intention was that the structure would be wound up after a couple of years when Sony exercised its option. He said that was never his intention or expectation. (9) When it was put to him that he was not in a position to evaluate whether realistically Gala could generate any revenues, as he did not know its position in the waterfall or how the waterfall worked or how likely it was that revenues would arise, he said the quality of the films led him to believe that there was a likelihood that there was a profit to be made in the exploitation of these films and he therefore expected, particularly based on the 30:70 split, that there would be a positive commercial outcome for the members. It was put to him that a 30:70 split was not agreed but, in any event, he was not in a position to know how many Gross Receipts would be needed before that split kicked in or how likely that level of receipts was. He said that he did not have the detail, but he based his understanding on the conversations he had with Ms Challons, who convinced him that the detail and expectation of the return on these films would be commercially attractive. (10) He was asked if he was surprised to hear that under the waterfall there is a split of 334:1 and was taken through the transcript where Mr Yusef agreed with that. He said: “Of course but without understanding the context of what all the figures mean, they are just a list of numbers, but “I was surprised if I thought it was 30:70 and you are suggesting it is 99.7 to 0.30”

“I have read the final draft screenplay for SPE’s upcoming theatrical motion picture [name] directed by [name], produced by [name], and starring [names]. Given this film’s storyline, the high quality of the final draft script, and the committed talent, I believe this film has excellent chances of commercial success in the US and international theatrical and home entertainment markets. I recommend this film for the Gala Partners P&A fund.”

“that would have been very, very initial documents in terms of what we ultimately received, but notably a screenplay. It may have been in certain cases a production budget recording the cost or anticipated final cost of the movie and very possibly some initial campaign release information…of the most general kind to begin with.” (2) When also asked, in effect to expand on what happened at this stage he said, “we simply commented in initial form on the screenplays and the general release concept that Sony had”

“It was not a matter simply of our reaching agreement with their studio attorneys and head of business affairs, notably Mr Stefan Litt, but the deal went all the way to headquarters in New York and to Tokyo…because there was a tax component in the structure of the investment with the UK, they were concerned that the deal not be done in any improper way that would impact Sony’s overall business in the UK…and for that reason they were instructed by New York, the people in Los Angeles, to ensure that the relationship with us was built on a fully transactional basis and that our needs were met to the best of their ability.”

“When I speak about the most general elements and so forth, I am speaking also with a knowledge of the massive amount of material that my office received as these films went into distribution. So a screenplay and number of preliminary marketing plans and different expenditure strategies, production budgets would definitely have been already with me. However, I would consider that, while critical in making a commercial assessment and offering an opinion, essential elements, I would also consider that a small amount of material in comparison to the voluminous amount of data that we would receive on a weekly basis as the movies went into commercial release. Again because of the dynamic nature of the trade or trading, this was coming from Sony. It was being double checked with data coming from McCann Erickson and there is a tremendous amount of data in that process. So that for me is the full body of data from Sony over the lifetime of my involvement advising Invicta on behalf of Gala”. (5) He then seemed to accept that he had received only some of the relevant documents before he sent the earlier November letters but could not recall which particular documents he received. He said that, however, he would have had all the information he needed to make the assessment he made: “Otherwise I would not have issued the letter, however brief it is. I would not have issued the letter”

“we had already received a lot of the elements that are referred to in this letter...I had spoken to the elements that I was assessing to make an opinion. That is different from the elements I would receive subsequently leading up to commercial release, again because of the dynamic nature of the market and the voluminous amount of data coming from multiple sources, both Mr Litt’s office, Paul Smith’s office and the McCann Erickson team and other people as well. So this was material that would be added in as part of a process. This process that we are discussing here is a very fluid one, and information is flowing in, not just one documented legal definition of that flow. It is flowing sometimes on an informal basis, certainly leading up to the relationship, as the relationship with Sony was being built, developed and managed, both by Sony personnel, not just Mr Litt. In fact, other people were quite more involved than Mr Litt once the relationship proceeded.” (6) He did not agree that he advised in the November letters without having some of the relevant documents: “I am advising on documents needed to provide a commercial opinion at that time”

“However, there are many further letters and written exchanges between myself, Mr Yusef and Mr Bamford in which I am updating them on changes that Sony is wanting to make in distribution plans, and as being discussed between myself, Paul Smith and the distribution teams. Those meetings were happening 2…3 times a week...and I would very frequently update by phone both Mr Bamford and Mr Yusef immediately after meetings or the day following as well as provide written analysis of some of the changes which would often be based on changes within a given city according to how a film was performing in its opening week or two, and the changes that we agreed in consultation with the Sony team should be made in order to increase or endeavour to enhance the commercial performance”

“to express an opinion on the likelihood of the Slate, as of 21st November 2003, to achieve profitability by virtue of economic performance in the Slate, along with the guaranteed loan payments due under the Term Sheet [the term sheet dated 5 November 2003]. It is our understanding that the minimum partners' capital will be 85 million sterling and the maximum partners' capital will be 250 million in the partnership.” (2) They said that they had made “such reviews, analyses and enquiries as we have deemed necessary and appropriate” and “among other things” (a) reviewed the Licence Agreement and the Term Sheet and met with certain senior members of the management of Gala to discuss those documents, (b) discussed those documents with certain employees of SPE, (c) reviewed the “Schedule of Theatrical Films to Be Released between 24 October 2003 and 15 February 2004” and the “Schedule of Films Post Theatrical Release Pre Video/DVD Release” and (d) conducted such “other studies, analysis and enquiries as we have deemed appropriate”. (3) They summarised their process as follows: “We have relied upon and assumed, without independent verification, that the information provided to us had been reasonably prepared and reflected the best currently available estimates of such information. In conducting our analysis we utilised data regarding the financial performance over time from a number of feature films, all produced and distributed by a major studio. In addition, each motion picture we examined was a significant major studio release, with similar cost structures and talent. We have not independently verified the accuracy of bits of information supplied to us with respect to the Slate and don’t assume any responsibility with respect to it.” (4) They set out that they understood that the films which “may be included in the Slate” (a) that have yet to be released theatrically include but are not limited to: Something’s Gotta Give, Mona Lisa Smile, You Got Served, Fifty First Kisses, and (b) that are post theatrical release but pre video and DVD release include but are not limited to: Bad Boys II, S.W.A.T., The Medallion, Once Upon A Time in Mexico and Underworld. (5) They concluded that: “It is the assessment of [HL] that in order to determine the profitability of studio released feature films, the appropriate time-frame to which reference should be made is typically the first cycle of exploitation of the feature film in question. Based upon the investigation, premises, provisos and analyses outlined above it is our opinion there is a reasonable expectation of profit from the capital introduced by Gala by virtue of economic performance of the Slate, along with the guaranteed payments due under the Term Sheet, during the first cycle of exploitation of the Slate and the reasonable expectation of further profits during the first cycle of exploitation of the Slate and a reasonable expectation of further profits after the expiration of the term under the Term Sheet.”

“[HL] (and Mr Ackerman) reached in relation to Gala, namely that there was a reasonable prospect that a profit could be achieved, was based on the extensive set of data that it received from Sony and its own propriety methodology. I can confidently say that none of the members of Gala would have proceeded with the transaction had [HL] concluded that a profit in that transaction was not achievable in light of the terms and waterfall that were agreed after negotiating with…Sony.” (Emphasis added.)

“it was an essential part of the transaction that we had the right to pick which ones. It was never the intention that we would take all of them. It was only those that we wanted. We cherry-picked..”

“The waterfall is actually reviewed by them. It is important that people understand that. They have looked at the waterfall. We had discussions at the time about what it would mean to get to profitability under that specific waterfall…I am sure there were discussions that took place between me, Sony, [HL], Justin Ackerman. There was a flurry of activity at the relevant time.” (6) It was put to him that the likelihood of profitability of the slate was simply not a concern given that, despite the resources devoted to these arrangements, the only formal appraisal regarding slate profitability is a single sentence which it seems was obtained as an afterthought at the last minute, only a few days before the closing of the first transaction, on the basis that HL did not independently verify matters. He did not agree: (a) He said HL was one of 3 companies that are in the regular business of making such appraisals, they would not make a statement like that unless they believed that they could justify it, and the document does not properly reflect the amount of work that Mr Davis and his team at HL would have done in order to reach that short, concise statement: “it doesn’t reflect the flow of work that would have taken place internally and within their own organisation to reach that point…It isn’t extraordinary…Gala was very interested. It was very interested in the profit…”

“we ended up with a waterfall where we were guaranteed the minimum payments coming back for the distribution expenses that we incurred, and we were concerned to ensure that the profitability in excess of that was a reasonable proposition. Both Mr Ackerman and I talked to the people at [HL] and various other people. The number that we would need to reach was discussed in order to achieve profitability, which is a sum in excess of the 100% of partner capitalisation, and based on that, including the [HL] report, we concluded that we had a reasonable prospect of achieving sums from the waterfall in excess of what we put into the project. That’s the work that we did.” (b) He said that the independent verification point relates to the accuracy of the documents provided by Sony and not the verification of the work that HL did. They were saying that in terms of the documents supplied by Sony, or even by Invicta, they are relying on the accuracy of those documents, and they have not independently verified, which is perfectly standard and normal: “I have seen that caveat in both valuation appraisals, on countless occasions. It’s perfectly recognisable wording. They are not going to stand behind and verify documents that they don’t control.” (c) As for counsel’s assertion this was a last-minute job, the timetable flow he had set out does not “accurately reflect the fact that there were simultaneous things happening at the same time” and: “So the first time we looked at this before the conclusion. It was a lengthy process that went throughout the whole period that you’ve been reviewing. So…for a transaction of this complexity and size, I do not find it surprising that this should fall into place at the last moment. That’s not because it was an afterthought that occurred a day or two before the transaction. It was always contemplated that we would get a [HL] report.” (d) He said that the likelihood of profitability of the slate was a concern to those who signed up and to him: “I wouldn't have closed the completion. If [HL], at that point, had said, "There is no possibility of achieving profitability based on the documents that we have", then we wouldn’t have done the transaction, or we would have looked at other films or we would have re-examined the whole proposition. There is no way that a report without [HL] would have led to completion.” (7) It was put to him at length that HL was not in a position to say whether Gala would be able to make a profit from the slate as it did not have knowledge of expenditure, deductions and of receipts and that he knew HL was not in a position to opine on profitability. He said that was absolutely not the case and he strongly rejected that. (8) He agreed that HL could not have known what the Initial Expenditure would be when they sent the letter because by then not all members who participated in the first transaction had joined Gala and no licences had been signed. He said, however, that (a) the amount needed in order for Gala to take up the licences was known and HL would have known that from the information that they had from Sony, and (b) the extent to which “Gala actually did put into the thing was not necessary in order to arrive at a profitability figure....it is not necessary for [HL] to know how much actually the partners would have spent”; rather HL just needed to know “what the total amount of distribution expenditure would be”

“Those were the kind of figures that we were talking about with Justin Ackerman and [HL] and the question was would the waterfall achieve that. I know that you said yesterday that it was fanciful, but it wasn’t. As things turned out, we were not that far off.” (10) He said that HL almost certainly would have known matters such as actors’ salaries because: “we would have told them at that stage which of those films we were interested in, and the information was readily available to them via Sony. So they would have known things like the participations”. (11) It was put to him that HL did not know the likely level of receipts because they refer to 9 films only 3 of which were the subject of the transactions. He said: “HL and we would have known which films we are interested in. That’s the slate that they would have known. Out of the 9 - we were never going to take 9 - that was the availability…We considered all films including some that are not on that list.”

“at the relevant time we talked about what would be required, in terms of Gross Receipts, and [HL] would have known the aggregate amount of distribution expense that was planned to be spent on each of the films in that list and the films we eventually acquired….” (12) He agreed that HL did not know the 3 things counsel referred to but that was subject to the qualification he hoped somebody would put to him and he added that: “we and [HL] were in a position to have that information, and they did come to a conclusion on the specific films that we actually acquired, and they would have known the aggregate amount that we and Sony, in aggregate, would have put in, and could therefore have analysed whether or not we could have exceeded the minimum amount that we thought it would require under that waterfall for Gala to make a profit.” (13) It was put to him that HL did not know how much the Initial Expenditure would be because it was based on the SG loans and HL did not have the full final figures: (a) He said it was mistaken to focus on the borrowings as HL was looking at the Gross Receipts in relation to the amount of distribution expenditure that was projected to be spent. They knew what that was, because they had access to Sony’s information on that: “Whether it was 50%...or 30% shared by us, the global amount they would have known, and it’s that which is relevant” and not the amount in the deposit agreement. (b) He clarified that he meant that HL would have known the projected number for the amount globally that was to be spent by Sony on the distribution of the films and “it is that total number…that known number or projected number which would have to be deducted in order to arrive at the profitability”

“So I was left satisfied that sufficient information, including information regarding the waterfall, that they would be in a position to provide us with what we needed, which was to determine whether or not this slate had the potential to make a profit to Gala…They did know what the aggregate of the print and advertising budget for each of the films would be. Therefore, from the waterfall that they had in front of them, they could determine where we were likely to end up, should the films perform in the way that was projected.”

“our roles and the remit of our advice was completely independent. I provided very detailed analysis of the marketing plans from my meetings with Sony and considered the merits of the specific films comprising the slate whereas [HL] were providing an opinion on the broader parameters of the overall deal and financial implications of the investment in Sony’s slate to Gala.” (2) He agreed that this comment is consistent with the fact that, under the contract, his services did not include the provision of financial analysis. He added, however, that should not be construed as him not providing the financial analysis that he did to Invicta, there is no language in the contract that forbids him from providing financial services or advice and recommendations to Invicta in connection with the Gala business and it is common in the film industry for “often services to exceed a narrowly defined scope in a specific contract”

“Everybody looked at the production schedules. Everybody looked - commented on the titles we were proposing to acquire. These were serious people about to embark on this endeavour, and yes, they were focused. They had put a lot of money into this or potentially were going to commit to this. So…a 48-hour turnaround before the meeting is not in the circumstances unreasonable….” (2) He added that “it was quite clear from the way that they were behaving that they were focused. We believed that they were focused because they had actually parted with money to be held on deposit. It was something that we had a right to expect, that they would be focused...I think if you talk to the Referrers, that will be substantiated”

"What does the [HL 2003 letter] say? What does Gala say? What do the people in Gala believe?"

“we had countless discussions with everybody in the partnership. I met with the vast majority of them personally, which is not something that I do in a retail project such as sale and leaseback. So I don’t accept the conclusion that it was a rubber stamp…everybody that did become unconditionally committed to the project would have had to signify that they had gone through this process, whether they attended the meeting or not.”

“We were relying on a whole series of months of investigation, spending time with Mr Yusef and discussing the approach and how we were going about it. We had looked at the films and we were satisfied that there is always risk in any business transaction...[of] not achieving your goals...My belief was that we had a reasonable chance of making a profit for Gala” and the basis for that belief was principally the confidence he had in the principals involved and the films chosen. (7) He seemed to be aware that Gala’s entitlement to money from these films depended on the performance of all of the films as a whole. He said that his view was that 3 of the films had a great prospect of being profitable, so that even if the fourth film dragged it down, it would not have made a substantial difference. He thought that Something’s Gotta Give was going to be very, very profitable and the money “we would earn as a partnership from it would be substantial”

“I relied on the fact that I had great faith in Mohammed Yusef and his judgment and his experience that...we would be successful. I mean, in the end you are only as good as the team you have around you, in any business.” (8) He agreed that Gala had not received a penny from the films by 2006. When it was put to him that his expectation and hope was that Sony would exercise the Call Option after 2 years, he initially said “my expectation was that we would have been in a very high revenue situation at this time. It would have changed the profile completely”

“Of course, yes. I’m focused on us making a profit and having to pay tax on that, which I am perfectly happy to do”

“Therefore the 30:70 distribution would work and the 30% would go to Gala and the members would therefore make the return”

“(a) Collecting, filing, reviewing, analyzing and evaluating information relating to the marketing, sales promotion, advertising and distribution of the Films; (b) Monitoring SPR’s efforts towards the marketing, sales promotion, advertising and distribution of the Films; (c) Reviewing, evaluating and auditing SPR’s P&A expenditures with respect to the exploitation of the Films and the receipt of the underlying P&A services from the engaged P&A vendors; (d) Responding to inquiries from Invicta, Gala and/or SPR for information regarding SPR’s marketing, sales promotion, advertising and distribution of the Films and market research on film distribution, generally, including financial and statistical data on such activities; (e) Attending meetings with SPR and other related parties and furnishing written reports to Invicta and/or Gala with respect to such meetings; and (f) Furnishing regular, written reports to Invicta and/or Gala with respect to the foregoing services on a weekly basis (or at such other intervals as the parties mutually agree).” (3) Invicta and LBPC acknowledged and agreed that the services to be provided by LBPC were of an auxiliary nature and “in no event shall LBPC or any of its employees, officers or agent” (a) “interfere with, insinuate itself into, or otherwise be involved in, the negotiation, conclusion, enforcement of contracts with third parties by Invicta, SPR or Gala, with respect to the marketing, sales promotion, advertising or distribution of the Films, including, without limitation, the P&A expenditures with respect to the Films” and/or (b) “have any authority to solicit, negotiate or conclude any contracts or agreements which may bind Invicta, SPR or Gala in any manner whatsoever”. (4) The services were to be provided “diligently and to the best of such provider’s talents, skills and expertise,” and the relevant persons, including Mr Ackerman were “to devote, such time to the performance of the Administrative Services as may be necessary therefor. In particular, Justin Ackerman shall attend all meetings with SPR and other related parties.... and prepare or actively supervise and approve all written reports furnished by Administrator...” (5) LBPC agreed not to delegate the performance of any of the services to any individual or entity (other than its employees or officers) without the prior written consent of Invicta. (6) Subject to Invicta’s prior written approval as to the material terms of their engagement, LBPC was required to engage 2 independent contractors or employees to assist in providing the services to Invicta. (7) It was provided that no agency relationship was intended or created during the term of this agreement, LBPC was an independent contractor and that nothing in the agreement shall be “deemed or construed to create a partnership or joint venture...the relationship of principal and agent or otherwise create any fiduciary duty or any liability whatsoever of either party hereto....” and that neither LBPC nor any of its employees or officers, “shall make any representation that it is authorised to act as agent of Invicta, SPR or Gala, nor “have any right to incur any obligation or liability on behalf of Invicta, SPR or Gala or to bind any of them in any manner whatsoever.”

“fix reproduce, perform, display, exhibit, distribute, market, promote, publicize, advertise and otherwise exploit, and cause and license others to exhibit, distribute, market, transmit, communicate to the public, make available, promote, publicize, advertise and otherwise exploit, the Pictures, trailers and clips and excerpts therefrom, in any and all languages and versions…”

“the sole and exclusive option upon the same terms as set out in [the Option] to acquire the Distribution Rights in that Sequel on the same terms as set out in this Agreement.”

“do or cause or permit to be done anything which may in any way depreciate jeopardise or otherwise prejudice the value to Licensor of any of the Charged Assets save as otherwise agreed by the Licensor in writing (and Licensor hereby agrees to Distributor entering into the Transaction Documents and the Permitted Encumbrances)… …carry on any business (without prior consent in writing of the Licensor) other than the business of contracting with Licensor, sublicensees approved by Licensor, and vendors providing services relating to the exploitation of the Pictures approved by Licensor for the purpose of the licensing, marketing and distribution of the Distribution Rights and incurring of associated Distributor Exploitation Expenditure relating thereto.”

“in its sole and unlimited discretion, to control the timing, manner and terms upon which each Picture is to be released, marketed, advertised, promoted, distributed, exhibited, licensed or otherwise exploited and subject to all Applicable Third Party Rights, SPR shall have the right in its sole and unlimited discretion to make such changes, alterations, cuts, additions, deletions and/or interpolations into and from each Picture as SPR may deem necessary or advisable for the effective release, marketing, advertising, promotion, distribution, exhibition, licensing or other exploitation of such Picture, and to select, designate or change the title of each Picture in SPR’s sole discretion.”

“shall only have a right of approval in respect of a decrease or a material increase of the [Gala Expenses] and not of any changes in any other aspect of the Marketing Plan including (without limitation) any increase or decrease in Distribution Expenses which do not constitute [Gala Expenses] and any non-monetary aspects of distribution of the Pictures (including, without limitation, release dates) and SPR shall not be required to submit such changes to [Gala] for approval SAVE THAT for the avoidance of doubt, [Gala] shall not be entitled to disapprove [Gala Expenses] previously approved AND FURTHER SAVE THAT [Gala] does not have a right of approval over those Distribution Expenses that do not constitute [Gala Expenses].” (6) As regards a decrease in Gala Expenses in respect of a “Picture”: (a) if Gala disapproved the decrease, SPR was entitled to terminate the agreement with respect to that “Picture” by written notice to Gala and the unspent Gala Expenses relating to that Picture were to be treated as unspent “Distributor Exploitation Expenditure” in accordance with clause 9.3 (clause 7.3), and (b) if Gala approved or was deemed to approve the decrease, an amount equal to such decrease was to be applied in payment of Gala Expenses in respect of another “Picture” or, if not so applied by 5 April 2004, was to be treated as unspent “Distributor Exploitation Expenditure” in accordance with clause 9.3 (clause 7.5).

“Nothing in this agreement is intended to or shall operate to create a partnership or joint venture of any kind between the parties or, except as provided in clause 6, to authorise either party to act as agent for the other. Neither party shall have authority to act in the name or on behalf of or otherwise in any manner which would indicate or imply any such relationship with the other.”

“not to sequel rights that had not even been given birth. It was not in the forefront of people’s minds to talk about sequel rights when they were still dealing with whether or not to exercise options over the pictures. That was the focus, not sequels.”

“Once you agree what the parameters of a commercial transaction will be, you look to see and try to formulate an understanding of those figures within the context of that transaction. So you could say most things boil down to a formula. In this case what we had was a finite amount of money that we knew we could raise, and therefore it’s unsurprising that we would start off with, if you like, a pot of money and say: How can we make the best economic use of that money?” (2) He added that “the amount that we had was finite”, and it was necessary to allocate that to ensure that the full amount of cash available would always be enough to ensure that Gala could (a) acquire all of the selected films, and (b) have enough money to pay for the approved Gala Expenses. (3) He agreed that the amount of the licence fees is “fixed “but said that: (a) This was “the product of the negotiation or the straitjacket that we placed on the studio” and basically, in simple terms, Gala/Invicta said from the outset that this was the maximum amount that they had and they would pay an amount which cannot exceed that and “if you want to do the deal, this is what it has to be”. (b) In accepting this, Sony made a commercial decision: Sony knew they could not get more, they did not want less, so “they agreed on the maximum amount we agreed to pay”. (c) The number had to add up to 13.5% because “we had…to come to a definite number because that is all we had. We didn’t have an open tap of money that we could resort to. We had a finite amount of money”. (d) This is commercial because Sony accepted it because they wanted the main benefit to them from this transaction which was not: “the measly, in their view, £15 million that they got for the so-called studio benefit, but the fact that they were getting a third party to pay for part of their P&A. That was the driver for the studio.” (e) £15 million is less than the annual salary of a middle ranking executive in those circumstances and the board of Sony: “would not get excited about $15 million coming to the bottom line at a time when their profits had gone down by 92.3%. The driver for this deal and the commercial logic for this deal for the studio was the fact that they needed our P&A money.” (4) He agreed that he had not referred to this reduction in profits in his witness statement but said that it is in the 2002 financial statements of Sony group and: “the figure is embedded in my mind. It shows 92.3% reduction in net profits for that year. It was a disastrous year for them. They were very, very keen to talk to us. Remarkably, it was in a year when their studio was experiencing better results than the rest of the divisions, but they were hungry for money, and that was the reason why they did this deal.”

“When a producer is granted intellectual property rights by a third party, customarily there will always be a debenture to ensure that the rights are dealt with in the way that was commercially contemplated. There was nothing unusual about being granted rights and then by way of security...those rights being granted back [so that the] grantor can sleep at night knowing that the rights they granted are going to be dealt with in a proper fashion and that if the licensee, in this case Gala, behaved in a way that was contrary to what was contemplated, they had the right to enforce their security, which would be in addition to the rights that they would have had under the contract.”

“The very nature of a debenture is to restrict the activity of the grantor, and in all of those circumstances the restrictions were within the boundaries of commerciality and standard practice. So, for example, it would be inconceivable that SPE would grant rights into their assets without placing a restriction on where those assets could be sub-licensed. It would be inconceivable that Sony would agree that we could go and sub-licence to Paramount. It would never happen. So the restriction there is commercially logical and…standard. Similarly, the debenture that we grant to SPR, there is nothing there which is not standard and not uncommercial. Also, I have never come across, over almost 40 decades, a loan agreement for any amount...where the borrower does not grant a debenture, a charge.”

“We did nothing in terms of granting security that is uncommercial or non-standard or artificial for that matter.” (4) It was put to him that Sony was not going to let Gala, a special purpose vehicle, which was set up for the purposes of a tax avoidance scheme, anywhere near its rights to distribute films. He said: (a) That is precisely what they did because they needed money and, whilst counsel suggested they did it for the sake of $15 million, Sony would describe that “as chump change” and that is not “a consideration that would move a studio of this size. They were looking to vast sums of money coming by way of additional distribution rights. That is what drives this deal”. (b) The agreements reflect what would normally happen, which is “rights are granted. The rights are secured. The rights are restricted so that rivals cannot take advantage of the rights that were granted”

“We in effect rented the studio system” and, for the reasons given it was “not a paper transaction...Gala was an institution of substance in this transaction is the position that I not only adopt but believe in sincerely...it is not a funnelling exercise”. (5) He did not agree that Gala never owed a substantive obligation. His view was based on (a) his view of the legal effect of the transactions, in particular, that Gala had obligations under the LAs which it retained, and (b) the assertion that the real purpose of this activity was to enter into a DA with a studio where Gala participated in the distribution. He added that there are things that go on in addition to that, some of which relate to providing security to each party to ensure that “what we say will happen does happen”, but: “there is not one single step in this series of transactions which is artificially introduced in order to simply give effect or, as you say, window dress the real purpose of this transaction. There is not one single artificial step that you would not see in a similar transaction of this nature.” (6) He was taken to a provision in the LAs that the “Distributor may procure that distributor’s sub licensee undertakes to perform....If and to the extent distributor procures such undertaking from distributor’s sub licensee, distributor shall have no further liability pursuant to this clause 7 to the licensor.”

“These are designed to do what they actually achieve, which is to grant rights to us. We don’t grant the same bundle of rights down. We retain important rights and the document achieves what was designed to achieve.”

“No, because there were certain things that could have happened and in some instances did happen after the [DA] was entered into…we wanted to ensure that what Sony was spending either on its own behalf or on our behalf as its agent, or we were spending directly by way of invoicing to us, was in accordance with what we had agreed, and any deviation from that to the extent that it was material...would have been the subject of our approval with certain consequences arising from that. This was not a passive role that...Gala had both before and after the event.” (3) It was put to him that if Sony wished to increase the marketing spend on the films, it could do so by simply incurring that expenditure. He said that Sony could not just simply arbitrarily do that halfway through the distribution of a film without going through the approval process set out in the DA and could not just do whatever they liked: “The commercial reality, which...is what governs how people behave in this contractual situation, is that it was not SPR’s preferred position to simply spend all the money however it liked in any single way. If it wanted to do that, it wouldn’t have involved us in the first place. Its desire for our money meant that they would have to get from us consent or... more like consensus. They obviously have to have a mechanism that ensures we do not destroy the distribution process mid-course. So what was agreed was if they came to us with a material change and we disapproved of it, we couldn’t use that as a mechanism to stop the production. So it was commercially realistic and plausible that they would then have the right to spend that money, but that was not what they were choosing to do. It would be commercially not sensible for them to say: “Let us enter into this complicated transaction and then just do what the hell we like”

“within the context of why the studio wanted to enter into this transaction, they wanted more and more of our money, not less and less. The likelihood that that situation would arise, in circumstances where we knew upfront how much the overall expenditure would be, and we had decided that we could cope with that, we didn’t think that that kind of situation would arise, given that Sony -- they are not really interested in spending more money than they need to maximise the performance of a film.”

“of course, the members...would want to know that in the worst-case scenario, if they don’t make the profits...anticipated, there would be sufficient monies to repay the full recourse loan. They were totally on the hook to the bank. They would need to have that assurance. And that’s perfectly normal…the payments themselves are not dependent on the performance of the business, but then they were a minimum guarantee. They were never intended to be. They were meant to be a guarantee of a minimum amount.”

“We just wanted a letter of credit. How it was funded was not our concern”

“In general, consideration needs to be given to whether there will be multiple letters of credit and deposit or whether we have a single letter of credit and deposit.” (c) In an email of 12 November 2003 to Sony and the lawyers, Barclays said that “[SG] have confirmed the requirement for separate letters of credit for each transaction, and understand that Invicta has also confirmed this. We will also be speaking to Steve [at Sony] on this point.” (d) In an email of 12 November 2003, SG said to Barclays that Mr Yusef had discussed “the single/multiple LC point with both Lin and Steve at Sony last night” and “I understand that all parties are now in agreement that there will be a separate letter of credit and deposit for each tranche”. (3) Mr Yusef said that this demonstrated his point that the deposit was not provided for at the outset as a done deal and that it was during the course of the discussions and the negotiations for the LC that this was confirmed. He added that “all we cared about was that there would be a letter of credit to back up the obligation. How Sony did that was their affair. I guessed, because it is not abnormal, that that is what would happen”

“The distributor will be required to procure a standby letter of credit from a bank acceptable to Gala and its bankers to secure payment in the event that the distributor fails to pay...Distributor must fund this incident from its own resources.”

“So at that point it didn’t matter to me how the letter of credit was funded, as long as it was funded….Whether it was funded from its own resources or from using the money that it received from Gala, it did not matter at that point to me…I didn’t know at the point in question that the studio would use the money that it received as part of the transaction to fund this letter of credit, because it didn’t matter as long as it funded it…What we are talking about is how it funded it. I always accepted that the studio - in fact, we insisted that the studio funds it. It is a question of how it funds it...As long as they put up a deposit for the letter of credit, how they did it was not of concern to me.” (Emphasis added.)

“I won’t go into why I said that, but I do accept that what I said was incorrect. I wish to apologise to the tribunal for that mistake, error, incorrection, and to also say that what I should have said, unreservedly, without any ambiguity, I should have said that my answer to Mr Davey’s question was an unqualified "yes". I was aware of the deposit and again I apologise to the tribunal for that.”

“So there was not a circularity of the same money washing around the banking system. The money that goes on deposit from Sony is completely Sony’s money, and the money that goes in to pay the distribution expenses and can only go out of the [expenditure account] against invoices in the name of Gala is a completely different set of money coming from a different bank and owned by a different entity…it is not just a circular wash...”

“The only way in which this deal was ever going to get done was if we satisfied the avaricious nature of the studio. They would not have got out of bed for 15 million, which is the studio benefit you describe. They were only interested in volume. The only way to achieve that volume was for the borrowing to take place. Anything else that flowed from that was a consequence of that…the reason to borrow the money was to ensure that we could get to the negotiating table with a volume of cash that the studio would accept.”

“Sony’s main interest was to secure alternative funding for its P&A burden at a level and at a volume that would make an impact on its overall business…had we said that we were going to raise and participate at a level of, say, 20 million, they wouldn’t have entertained this transaction at all…they were disappointed with the fact that we only introduced 100 million…the primary purpose of the borrowing of each individual member was to put the partnership in a position where it could become…a player in the transaction. Had we not done that, we wouldn’t have done the transaction. The transaction wouldn’t have happened…the primary motive…was to raise enough money for the partnership to make an impact…”

“$15 million in the scheme of things does not get the executives of Sony excited. What excited them was...the fact that somebody else was going to pay a portion of their distribution fees and, more importantly, the possibility that a larger sum would be paid in that way, thus relieving part of the burden that they had arising from the accounting problems that they were encountering at the time.” (2) It was put to him that it was a scheme fee, and the purpose of the scheme is the generation of the purported loss and the tax relief. He said that he disagreed very strongly for the reasons he had stated. When pressed, he said “no” and: “The principal purpose of the borrowing was to put [Gala] in a position where it could engage in a meaningful way with the studio…the studio wasn’t interested in contracting with us unless we were able to provide a deal size that would make sense for them…the real benefit to the studios is that under this transaction as contemplated a significant amount of money was going to be put on the table to enable the studio to be relieved of a portion of its P&A commitment. That was the real purpose of this transaction and it was the driver, and the amount of money was significant. The level of input had to be significant and therefore the borrowing was to enable [Gala] to contribute a significant sum…a £15 million fee would not have got Sony or any other studio to the negotiating table, if that’s all that they were going to benefit from.” (3) When it was put to him that he was speculating about Sony’s intentions he said he was not speaking for Sony or any other studio but “for the state of mind that existed on our side and what we needed to do to get Sony to the table, not only in relation to my negotiations with SPE and SPR, but it was clear to me that from discussions with all of the studios that volume was king”

“The sum…was expended and disbursed for the sole purpose of investment and security and not for Icebreaker’s film trade properly so regarded.”

“they would have come up with that one sentence without putting the films and the assets into their model. They would know exactly what the breakeven point would be…[and] what the profit point would be. That information would be available to David Davis...and in addition to that, there would be a variety of other things he would have done before he would have issued that report”. (b) There is also the evidence of Mr Ackerman and himself who were the: “ones that were going through that exercise on a regular basis, not just once, but several times...in particular Mr Ackerman would have gone through film by film to determine the potential profitability of the films within the context of the recoupment position that we had”

“our downside….was protected, first of all, by the amount that we restricted Sony in terms of their production recoupment and, secondly, because we had the downside protection of the tax. The combination of these three elements made this a very good deal for the investors.” (4) He agreed that, on the basis of the Sony figures, in order for Gala to recoup £102 million of Initial Expenditure/principal of the SG loans around a further 300 million of Gross Receipts (in addition to the $735,000,000 shown in the document) would need to come through the waterfall. (5) It was put to him that for Gala to receive a sum equal to the cash contributions of around £25 million prior to the Call Option being exercised in 2006, $7 billion would need to come through the waterfall. He asked for this to be explained. Counsel said he had been through every millimetre of the waterfall, shown Mr Yusef the relevant percentages and, on the basis of the Sony figures, Mr Yusef had agreed that to get to the starting blocks a billion of Gross Receipts would need to come through the waterfall. Counsel added that around $13 billion of Gross Receipts would need to come through the waterfall on the assumption that the Call Option was not exercised in 2006. Mr Yusef said that he did not recognise that “in terms of the exercise that we did at the time”

“They are not a fly by night firm. They would have looked at that. They would have looked at the waterfall. They would have examined the films,…and they would have come to the conclusion that we can make a profit.” (6) It was put to him that many billions of Gross Receipts would be required for Gala to receive £25 million but that is totally fantastical and in practice not a penny came through. Mr Yusef said that: “in practice not a penny came through, because the films didn’t perform as projected, but the reality is, had they [performed as] projected, we think that we would have made a profit. That’s what we believed at the time…because of the work that we did and the appraisal that we received. That’s what we believed. If you are saying to me, "What you believe wasn’t correct", that’s a different matter, but what I believed, what Mr Ackerman believed and what [HL] believed was that based on that waterfall we would make a profit.” (7) It was put to him that he did not believe or was disinterested in a profit on the basis of film income and/or there was no possible rational basis for any such belief, as billions and billions of Gross Receipts would have to come through the waterfall for a profit to be realised and that, whilst the aspiration was a 30% profit share for Gala, the parties signed up to a profit share of less than a third of 1 cent. He said that he disagreed very strongly. (8) It was put to him that (a) from the INDb website there were $741 million of box office receipts in respect of the transaction films, (b) a letter from Mr Bold at SFP dated 18 October 2005 states that all the films apart from Breakin’ All the Rules were successful box office releases earning between them over 700 million and a further 300 million from home entertainment, and (b) the films were successful and the actual receipts were exactly in line with Sony’s projections. He said that “in terms of what we needed the films did not perform” and Sony’s predictions “were not our predictions” and: “our predictions were based on the information that we got from Sony, plus also the projections that were made by Mr Ackerman and myself and the total bundle of analysis that was undertaken by [HL]. So for the films to perform to three-quarters of what we anticipated and hoped is I think a good result, not a bad result, but it nevertheless was not what we were hoping for…It was not Sony’s expectation that these films would only gross 750 million…” (9) He later noted that the figure Mr Bold referred to constitutes Sony’s gross receipts and not the Box Office receipts; first, there is the aggregate ticket price from which theatre owners take their cut which could be as much as 50%, depending on the film, then the distributor receives its share from which it pays the participants (people like the actors and the director) which is usually calculated by reference to box office receipts. So he thought Mr Bold’s reference to “Box Office” receipts is wrong but he is right to say that the films were successful in terms of the performance. (10) He added that (a) Sony’s document is not a prediction of receipts as such but a statement of actual receipts of Sony, as at March 2006, plus a projection of receipts for the next 10 years, whereas (b) “at the time we believed that….the slate of pictures could generate in excess of $1 billion” and in 2004 when they made their projections, they were not projecting income of 730 to 750 million but “monies far in excess of that as being the projected possibilities for those 6 films” and “that is a totally different exercise” and it was disappointing because that did not happen in terms of the actual performance. When it was put to him he had not put this figure in his statement and he was asked what the figure was that he hoped for, he said “we believed...we needed to get to break-even was 1.1 billion” and, when pressed on what he thought the films would result in “a low of 1.2 and a high of 1.5 billion…for the first cycle”

“The fact is that we submitted the waterfall to interrogation at the time. We engaged one of the 3 foremost appraisers of film libraries and film performance, which is [HL]. They had all of the relevant information that was needed in order for them to make the appraisal that they did. Most notably, it was a condition of our discussions with Sony that [HL] would have the same level of access to the material that Mr Ackerman had in terms of the information that he was given…they weren’t interested in the screenplays - but all of the other information to do with the distribution of these pictures, they would have had direct access to, not through Mr Ackerman but directly from Sony. They also had their own independent information based on not just their knowledge of the distribution business generally but specifically of Sony distribution and Sony pictures. They had the specific information about the slate, and in addition to that they had the actual waterfall, which was at various stages, various iterations, but the final one we are talking about now, they had access to that directly as well, and that's a matter of fact. It was embodied in the term sheet, which is one of the documents that they specifically refer to. So based on that, the conclusion that they came to was unequivocal. That conclusion, whichever way you want to look at it, led me and others within our side of the organisation to the belief that there was a possibility, and that that possibility was reasonable, in the light of what they say…that the slate in aggregate could exceed in revenue to Gala what was actually received. That is what I recall at the time and that’s what we relied on.”

“The minimum guarantee payments, is a feature of the distribution business. It is very rare for a licence holder to grant distribution rights without a minimum guarantee. Very rare indeed. I’ve seen it on a couple of occasions when the parties have got a very close relationship, but the payment or the demand for a minimum guarantee is standard. Nobody argues with it. The only issue that comes under discussion is the level of that guarantee. But the concept of a guarantee is not one which anybody in the industry would have a problem with. So to ignore it, and say you would need twice the amount is a statement of fact, but it is illogical, in the context of what we are trying to do.”

“The objective of cross-collateralisation is to use the profits of one to subsidize the losses of the other. But also, the objective is to maximise profits over a portfolio of films so that you’re not dependent on the performance of one to get results. This is a very speculative business. Even the most fancied of films can often, because they also tend to be very expensive...end up not making the kind of profits that one would expect…the whole concept of cross-collateralisation is the reason why studios are profitable. If they had to put all of their money on each occasion on the performance of each of the films that they make, their profitability would be less assured. So what we were trying to do was exactly that; it was spread our bets. That is a prudent thing to do. It is also...an industry accepted way of investing in film distribution. We didn’t invent this concept. It’s something that we simply followed.” (3) He added that counsel’s example is arithmetically correct but there would be other circumstances where that example would not work and: “cross-collateralisation does not always have the result that you are claiming. It’s not a given fact that every single circumstance where you have a slate of films it is bound to work in the way you have suggested.” (4) It was put to him that you do not spread your bets by aggregating expenditure and performance but by having separate waterfalls and that would be the commercially sensible thing to do. He said that in his experience it would be “very, very rare....to have a slate of films where the investors would...uncross-collateralise” and it would not be sound. He had never come across it and most people in the film industry would say, from a finance point of view, that it makes more sense to aggregate or cross-collateralise not just expenses but also profit potential. In the end, over time, the experience in the industry has been that that is a sounder way to invest in a portfolio than in a single picture enterprise. (5) He did not agree “as strongly as it is possible for me to do so” that if there was a serious interest in making profit from film receipts, cross collateralisation would not have been a feature of the arrangements. He said that (a) it would not have been normal or wise, to enter into a single picture programme at any level, (b) the portfolio method of investment in film, which is a highly speculative business, is definitely the standard method of operation, and (c) anybody who sought to invest on a single picture programme would not be in a serious pursuit of profit, because it is not normal. This is not what happens in the industry. What Gala did was completely in conformity, in terms of a methodology of investment, with what anybody else would do in similar circumstances. (6) He agreed that he did not suggest a single picture programme but said that was for a good reason as he had already set out. He added that he would have had less trouble getting the deal across the table, from a studio point of view. They would have been happy with that “because over a period of time and over a slate, that would have been better for them. Worse for us; worse for Gala.”

“I have now reviewed SPE’s initial media marketing plans for the release of [name of transaction film], I believe this marketing plan demonstrates optimal planning by the studio in all sectors of the advertising and marketing process. I believe the marketing plan indicates SPE’s strong commitment for the commercial success of the film. I recommend Gala Partners approve the initial marketing plan.”

“The data and the granular activity of those marketing plans, it was my responsibility to identify and point that out to them, which I would have done in multiple calls with them and which I would also discuss with the Sony team.” (2) He added that he considered that it was a “unique” feature of the deal with Sony (as compared to trading with another studio) that: “the head of distribution and the head of business affairs invited me to participate as a member of their distribution team and their meetings. I was free to comment and to advise and participate in discussions that were not made by one person. They were made by a team of people, of which I participated on, and which would involve, as I said before a dynamic market. As a film comes close to a theatrical release, many factors are involved in the media by the advertising plans, and they change sometimes week by week and day-to -day during the initial release of the picture. All of that would have been covered in my work prior to issuing a letter like this.” (3) He agreed that the LA for “Big Fish” was entered into on 2 December before he sent his letter on 5 December 2003. It was put to him that as approval of the Initial Plan was a pre-condition of SPE entering into that agreement, necessarily that approval had already been given before he wrote this letter. He said that such a requirement is customary in entering into any engagement with a studio and one: “would want to see what the very basic initial plan was, and... the marketplace is extremely dynamic and changes week to week and day by day, and it is those variations that determine the success or failure of a film as it is placed in the distribution network a studio has.” (4) When it was put to him that this letter is necessarily immaterial to Gala signing up to the agreement, he said that he provided it: “on the basis of having done the work that I was asked to do with Sony and provide an opinion. We did so as soon as we could. As to the timing of Gala’s commitments or Invicta’s commitments with Gala here, I can’t comment on what the situation was here in the UK.” (5) He said that the December letter relating to 50 First Dates was again referencing the work he would have done in the preceding month or 2 with the Sony marketing team, and “this would be referring to a marketing plan that has now changed very significantly from the initial marketing plan, and this would be a letter on my behalf recommending to London that the changes I have monitored and participated in are worthwhile…”

“We looked at the cast, the budget, the financial paradigm of each movie. The initial marketing plan that is referred to in this letter from me on December 14th would be referring to the plan that had been developed since that very first initiation by Sony....However, this initial marketing plan [referred to in the December letter] would be….a very considerable number of iterations from what we first looked at, and this word "initial" plan would refer to what happens next, as the movie now goes into a theatrical release activity...” (6) He added that Mr Yusef and Mr Bamford had been kept informed by him in several consecutive months prior to this letter being issued of his multiple meetings with the Sony marketing team and noted that: “we would have had more than bi-weekly, probably 4 times a week, phone conversations as to what had been discussed in each of those meetings....I would usually have a meeting either around 10.00 in the morning at Sony or..; around 4.00 in the afternoon. Those meetings would be 2 to sometimes 4 times a week and I usually would call either Mr Bamford or Mr Yusef the following day to discuss with them what had been addressed at those meetings. Therefore, this letter, while it appears extremely brief, has background to it both in our files, in the business that we were conducting at the time.” (7) He did not agree that the letters relating to the first transaction films are of no practical import. He said that they “followed extensive work and extensive communication and extensive documentation to multiple different variants of the marketing plan with the Sony marketing team”

“Again I find that statement difficult to accept. In terms of the dates, I see what you are alluding to, but in terms of the background of these letters, which needs to be taken into account, I beg to differ in that there was again extensive activity in connection with the marketing plans and with the studio prior to these letters being signed. So Mr Yusef and Mr Bamford would have been intimately aware of the same details in the various workups of the marketing plan by Sony from the period following our initial receipt of screenplays to the date of this letter. I am certain that all of that information and data was taken into consideration by people here in London when they entered into their agreements with parties here.” (8) When it was put to him that the letters in relation to the first transaction films were of no consequence and were “window dressing”, he said that he strongly disagreed and: “These letters were provided as soon as was feasibly possible based, as I have said previously, on my work with the Distribution Department at Sony and the many iterations that were flowing from those meetings, all of which I shared on a bi-weekly, four times weekly basis with Mr Bamford and Mr Yusef. They are extensive, voluminous files documenting different changes in radio, media buying. There is a process in which I am involved, as I mentioned before, with McCann Erickson, to make sure that the accounting that Sony is using in terms of the cost of different media buying is being adhered to, and most people never get that level of access in a studio's distribution and financial systems.....They are of consequence, because they follow an extensive amount of work on my behalf with the studio and I am only issuing a letter at which point I feel that the studio has said “We now have the plan, the optimal plan and we are moving forward”

“in different categories of media where the studio would be researching where to achieve optimal spending. It might be more in radio in Chicago and less in print in Dallas. It might be more in advertising, billboard advertising in Brooklyn than in Manhattan. That would depend upon the genre of film, the timing in the market, the competition in the marketplace, many, many different factors again in a very dynamic market. The dynamism I refer to is not just Sony’s...”

“It had to do with the use of my own personal premises….There is also liability when you operate a business out of your own home my accountant did not want me to incur..”

“we would have received the letter on the 15th in relation to something that we say that we approved a week before, unless we actually had a basis on which to do that. We wouldn’t have just approved those documents without having had the benefit of Mr Ackerman’s advice prior to that date…, he did a lot of meaningful work. It wasn’t window-dressing, as you have suggested….I do think that the work that was done was certainly done before we entered into those agreements. The documents don’t reflect that, but I do not believe for a moment that we would have entered into the [DA] blind, without any reference to the marketing plans, because we spent so much time on them. The documents don’t reflect the work that was actually done in terms of the dates. I accept there’s a discrepancy of the dates but I don’t accept...that the work could not have been done prior to the 2nd...” (3) In re-examination he said that these letters were, as far as he and Mr Ackerman were concerned “a recording or memorialisation of what we actually discussed or agreed prior to that time”

“we knew what Mr Ackerman’s recommendations would be, and the document is simply a recording of what was actually agreed prior to whatever date it may be. So the date itself is not the first date that we were made aware of his recommendation in relation to whichever part of the slate that the letter refers to.”

“We now have the plan, the optimal plan and we are moving forward”

“I have now fully analysed SP’s P&A most recent campaign strategy and budget proposal for their upcoming film "Secret Window". The film is scheduled for release on 12th March 2004. This thriller genre film stars Johnny Depp. Comparative films for your information would be What Lies Beneath, Identity, Panic Room, Along Came a Spider...Having seen the film and looked at the overall competition in the marketplace in the upcoming quarter in question I would recommend that Gala Film Partners consider limiting its P&A spend on this film. While SP have already long since committed their media allocation for this film and while Gala has approved such early P&A expenditures, including a previously allocated major spend in connection with the Super Bowl game, one of the most expensive, high profile and high effective campaign points in the system, I am nevertheless concerned that the campaign proposal exceeds the film’s commercial potential. I also note that some of their latter "Secret Window" campaign activity will fall after our own deadlines [Mr Ackerman confirmed at the hearing that he meant after the end of the 2003/04 tax year]. I would therefore suggest that Gala consider curtailing its spend to approximately 25 to $27 million and let SPE carry the balance on their proposed budget total. I note that the current SPE approved pre-opening budget stands at $27 million odd. I note that per SPE SW approved budget, $11 million odd will have already been spent by 1st February. This would represent a little less than half of the revised Gala commitment I am suggesting.” (Emphasis added.)

“it would be curious if I was sitting at Sony digesting, volunteering and participating in all of the financial planning with regard to the distribution of these movies and having no financial opinion whatsoever. There is documentation and many, many phone calls and discussions…between myself and Mr Yusef and Mr Bamford as to my interpretation of the financial data that we were receiving on a dynamic basis from Sony and McCann Erickson.”

“often a studio if they have a film which is not a rip-roaring success out of the gate or that has tracking that is off the charts and they are...experts in that tracking, different distribution teams will make different types of educated decisions which are calculated risk. Those decisions may involve spending over and above their original marketing budget in order and with the belief of the executive or the team that by pushing more money into this film and creating more exposure, they will ride out and be able to lift the film. That is borne out again and again as a very standard occurrence in the motion picture industry. Sometimes it succeeds and other times it fails, and here in this letter I am recommending to Gala that whatever may go forward not to get drawn into that potential process, to try to cap its involvement.”

“the commercial performance of individual films would have an impact on the results of such cross collateralisation. If you invested in films that were all losers, you would do very badly. If you invested in films that were all winners, you would be better than making 6 Titanics. If you invested in a slate that was a mixed bag, as is generally the case with the motion picture industry, you would have some that performed well and that carried others that performed less well, and that would be determined in the cross-collateralisation, not to be confused with a waterfall structure, which is separate from cross-collateralisation, or an additional component of a commercial venture with a studio partner.” (2) He suggested that the notional allocation made a difference “in the end result” but did not give any clear or coherent explanation as to why that is the case. He commented that: (a) “the movies did not perform as we had hoped and as an aggregate generated around some 730 or some millions of dollars shy of what we had initially hoped for at around 1 billion, 1.2 billion” and said “there are certainly differences that result from loss as opposed to a return in terms of profit”, (b) Sony had “an option to spend deeper” which “would enable Sony to....take a deeper recoupment in terms of money they spent” and would potentially set a partner like Gala back; that is part of what a cross-collateralisation and dynamic trading relationship is, where if Gala decide not to invest the full amount, “Sony did not want to be tied to a reduced distribution situation as the distributor with the potential that they could then spend that variance if that was their choice”, and (c) the process of deciding whether to spend more or less money “in realtime based on real market” can be described as a form of spot trading, whereby Sony would look to leverage and maximise commercial results: They could be right or wrong in some of their campaign assessments or expenditures. For example, a television ad may fail and they may decide to change the ad and do a new campaign or to change a poster and attract a specific segment of the population who they feel will buy more tickets: “These are all issues that actually do have real impact and create real change. In any trading with a studio, whatever fund structure you may have, there will be changes brought about constantly in that relationship.” (3) He said Gala spent more on the film than he recommended but the advice was followed in that “they did not commit to going out to raise more money and go deeper into supporting a film in partnership with Sony that I had said “don't go there””

“Gala’s P&A business by nature is a commercial enterprise, it is last money in, first money out....So if you want to compare it to an investment in production where you would have a far longer tail and a far greater number of variables to assess on an ongoing basis, yes, you would have a greater share of profits because you are in a longer stream, but the actual cost of money would be far greater in the scheme of things. In the P&A business you have the advantage of seeing the product, seeing the scripts, knowing where the talent is in realtime in terms of reputation and star appeal, and you are able to participate in this case, which was exceptional at Sony, to a very significant degree in the marketing plans and the making of those marketing plans, and then in terms of the joint expenditure supporting those plans.” (4) When it was put to Mr Ackerman that the idea of Gala “going deeper” and raising more money is an invention, he said he thought initially Gala had hoped to raise £250 million but raised less. So his original support team proposal was probably made on the basis of £250 million expenditure but when it was clear that Gala would invest less and was being more cautious, “we downsized the team accordingly. That saved overheads and was what both Mr Yusef and Mr Bamford wanted”

“but before that happens the important stage is that we would have the right to spend the money and if we had made an informed decision not to, then and only then would the right to spend the money fall on Sony…They even had the right, if I recall, of termination in such circumstances if the issue was substantial or material, but before that could happen we would have the right to spend the money as contemplated. It wasn’t in their gift in that sense.”

“we had considered it very carefully at the time. We took his points very seriously. We discussed it at length both within Invicta and also with him, and he could have just as easily have asked us to spend more or recommend more. At the time I recall that Sony was toying with the idea of spending more, I think largely because of the artistic elements that were involved, but the feedback that we got quite clearly from Mr Ackerman was that this film was not going to perform, or was unlikely to perform, as was originally contemplated, and that’s what I took away from that encounter.”

“we needed to be sure that there would be enough money there at the end of the day that all 6 films could be serviced from the limited amount of money that we had…originally, we anticipated or hoped that we would be able to raise 250 million. As it turned out we had less. So at the time it was important to us that we made sure that we had money for all of the films, not just one. So that’s the reason behind the decision as to how much was incurred in relation to each of the films.”

“I didn’t know the letter was coming until it actually came in that form. I did know that there were discussions taking place between Sony and him regarding, amongst many other things, Secret Window. I did know that he was going to make a recommendation, but the actual contents of the letter, which was what we discussed subsequent to me receiving it, was not something that I asked him to write or....encouraged him to write, and it was only the next day or that evening, if it came within our working day, I am certain and I am confident that we did discuss it at length, and the underlying points that he’s making, which is an earnestly held view about the performance potential of that picture is something we would have discussed at length.”

“That’s almost certainly what happened.”

“We were looking at more than the 6 films that we acquired…the situation was fast moving, but…at the relevant time [HL], Justin Ackerman and we in turn by the time we received the film file,…everybody would have known which of the films we were going to include in the slate…this document was intended by all parties to be as fluid as possible, because the situation was changing daily. Release dates were changing daily. For example, I recall that one of the films, "Bad Boys 2", that fell out simply because….it fell foul of our definitions of which films we could include, because it had already been released and more than 30% of the expenditure had been incurred. So the situation was very, very fast-moving…but certainly in terms of the bundle of documents that [HL] would have needed from Sony, they had them, and altogether between Sony, ourselves and [HL] we were working to solidify which of the films that were actually going to be acquired so that they could make this opinion…we had actually included all of the films we ended up acquiring.” (2) When pressed, Mr Yusef added: “everybody in the triangle knew which films we were targeting…I remember that I was on the calls pretty much on a nightly basis and the situation moved from one day to the next. That’s the way the movie business at this level functions, not for this deal but for all deals. The variables were many. It isn’t because they didn’t know. They had access to all of the information that Justin Ackerman would have had, that I would have had, either directly physically by fax or I would have made -- it would have been made known to me by Justin Ackerman over the phone…they knew 4 of the slate, because they would have known we had already signed them. The 2 others were still in a state of flux, but at the end of the day all of the films that we ended up with were in the frame for them to include in their assessment as to whether or not the slate would be profitable. They had the opportunity to look at the 6 films, 4 of which they knew for certain, 2 that were in the frame. The only reason why those 2 were still speculative is because there was the possibility that right up to the last minute that we could substitute one against the other. They would have known that.”

“That sum was known to everybody. It might have taken counsel 2 weeks to come to the conclusion that it did, but to everybody that was involved in the transaction they were very clear as to what needed to happen...[HL] is not an embarrassing company. It is one of the 3 top people. They are not in the business of handing out letters like confetti…..I stood by it then and I stand by it now…..it was reasonable to believe that the slate of movies that we finally selected and did engage with were capable of achieving a profit to Gala…that sentence is more than enough, bearing in mind what I have just said.”

“It really felt like it had some structure and substance. Now did I take a lot of that on trust from a general awareness of what was happening? Yes. Did I spend 500 hours examining every transactional document and cashflow? I admit I did not, but I tend not to do that in any of the investments I do, and…In any investment I make, unless I am managing it myself,...I’m relying upon the people who are involved to do what they say they’re going to do and do the best they can for the investors. So, you know, at a certain point I can never know as much as other people about this, because it’s not my speciality. You have to bet that the people who are doing it know what they’re doing.” (8) When it was put to him out that there were 2 meetings on 2 February 2004, he said he stood by his comment in his statement; he was assuming that his admission to the partnership, with others, was a relative formality and he imagined that the partnership business would proceed accordingly. It was put to him that he did not attend because he wanted to sign up to the scheme, sit back and eventually the tax relief would roll in. He said he thought the process of Gala would continue, there were many members other than him, there are LLPs or situations he has been involved with that “would not jump through quite as much documentation as this…this is a decent amount of documentation to evidence the activity of an LLP in my eyes.”

“the work that we did prior to the start of the theatrical release of these pictures, the analysis that was made in relation to which pictures out of the overall portfolio of Sony films should be selected to form the slate, the analysis that was undertaken on our behalf by Mr Ackerman, the appraisals that were undertaken on Gala’s behalf by [HL], the daily interactions that Mr Ackerman had not only with Sony, but also with the agents that were working to book the slots. There lies the evidence. The degree of work that Mr Ackerman, for example, undertook was not a cursory thing. It’s true to say that he was and is a very well-known person within film production as well as film distribution and the work is there to see. It is represented in the fact that there’s a huge amount of written material, particularly in the form of the purchase orders, the invoices, all of which were available on many, many occasions to HMRC, and that represents that body of documentation, which….is huge. It is not one or two boxes. Therein lies the evidence. Therein lies the result of all of the work that culminated in the expenditure being incurred and in the invoices being rendered in the name of Gala. That is a complete answer to your question.”

“we demanded, and we got a meaningful engagement at the highest level with the studio, and it wasn’t so much what benefit that had to Sony. It was a condition precedent to the deal actually happening. Sony agreed it because they knew they didn’t have a choice.”

“That is not the way that the film industry at any level works, particularly when dealing with a fast-moving dynamic situation.”

“They’re partly administrative…we needed to ensure…that the films that the partnership was licensed to exploit were the films that the expenditure that we were paying related to”

“A factor which is not to be considered insignificant is that Gala had a very, very deep transparent understanding of the minutiae of this transaction in a way that was unique. No other transaction that has been undertaken by high-net-worth individuals coming together in a partnership had achieved that level”, and (4) it is noteworthy that this transaction is not “another tired old tax scheme, like Icebreaker, like Ingenious, like a whole slew of transactions that have come to the courts”

“We weren’t a copycat. We were the first. There is a fundamental difference between us, Gala, and Ingenious and Icebreaker....we didn’t just enter a whole bunch of transaction documents and then wait for the outcome. We were directly actively involved in the business and trade of film distribution in a way that marks Gala as being fundamentally different from all these other transactions.”

“our desire to ensure that we actually ended up being involved in all of the films...would have governed more than anything else how much was allocated to each of the films. We wanted to make sure that all of them were covered, because, contrary to what has been asserted, cross-collateralisation can work both ways. It can work against you and it can work for you. It is not just a one-way street.” (2) He added that obviously, the starting point was how much initially Sony proposed to allocate in the draft Plans because one of the attractions of being involved with Sony was that they have a very sophisticated distribution apparatus and enjoy great relationships with all of the parties that supply the relevant services. Mr Ackerman would have been given access to that and it would then be the basis for the discussion at the distribution meetings. (3) Those distribution meetings, which included at all material times Mr Ackerman, would have consisted not only of people directly involved in the marketing department, but also representatives of the studio across the board who had any interest in the outcome of the movie. It was a high-level meeting of decision makers: “for us to have access to that meeting was unique. As far as even today, almost 20 years later, I don't think that there is anybody that has access to those kinds of meetings. During those meetings, no-one person, including Paul Smith, (the head of marketing and a very key and powerful figure in the studio) did not have what they call a green light capability. It was a consensus forum. Mr Ackerman was part of that consensus.” (4) Prior to entering into the DA, “there was significant resistance from the operatives within the distribution company to the idea of somebody else coming along and being involved in that process” given it had never been done before. The sort of information that Mr Ackerman and therefore Invicta had prior to the release of the picture, was “commercially hugely sensitive”

“I do recall when I sat with Mr Smith and a couple of other of his colleagues, when Justin wasn’t there, and I did make some enquiries. It was quite clear from the way they were talking that they didn’t treat him as a nuisance. They didn’t treat him as anything other than a professional person who was, you know, making a contribution. So that was the process within the distribution...”

“at the point at which the option was exercised we didn’t just shut up shop immediately…We continued with him and the lease for quite some time after that. I can’t recall the date, but I have in mind that at least for one more year the offices were going and that Mr Ackerman rendered services in much in the same way that he rendered them outside of the contract in the early part. So what he did substantially wasn’t tied to a contract either before or after the date of termination. He continued to do work for us, as I recall.” (2) It was put to him that Mr Ackerman’s contract was not renewed because he knew that Sony would be pulling the plug shortly, that was always the intention and that was why he approved a lease on US premises for 1 year rather than 2 – hence, the revised lease ended on 28 February 2006, which was the original first exercise date. He said again that the reason for terminating LBPC’s contract was financial: “No. The issue right from the very beginning was to control costs as much as possible...when we first started to talk about budgets with Mr Ackerman, the original first pass of the budget was much greater than we wanted it to be, but what he was suggesting was not unreasonable. It was just that some of it was a duplication of what we in London were doing or could do. For example, a lot of the accountancy work could and was done in London.”

“not only he but we would have the ability to renegotiate our deal, him in relation to his relationship with Invicta and us in relation to our arrangements with Gala. It is for that reason that he agreed that deal. If it was something which he knew or we knew was just going to be a short-term deal, he would either have not agreed to the level of fees that he did agree or he wouldn’t have done the transaction. He believed, as did I, that the relationship would endure way beyond that, and certainly that wasn’t a foolhardy belief at the time.”

“I still continue to talk to him on a regular basis about Gala. We still harbour the belief and hope that we could continue the business within Gala in a slightly varied way. It took a long time after that to conclude that that was not going to be possible, but I think both what I am saying and what Mr Ackerman was saying is that the contract date doesn’t reflect what happened after that.”

“It was substantive, particularly at the point at which the primary activity of the partnership took place...2 to 3 [days a week] is still a substantial element of his time during the height of the distribution process, and certainly there would have been weeks where he would have spent more time rather than less and…it is a matter of fact that the period after the termination date he nevertheless continued to work with us and to continue giving me and therefore the partnership advice on anything that may relate to the business. It was done so…on the understanding, as we had at the outset, that should it all evolve in a different way, that he would be compensated with a new contract that would be higher than the existing one to reflect the changes that took place. That’s the basis upon which he got involved...Most people operate without a contract until the day that the money drops...I know that he rendered services to us. He did operate without a contract, but he did so in the hopes that what happened the first time would happen again…Your emphasis on the contractual dates misses the fact that the reality was that he had rendered services to the partnership prior to the contractual date and he rendered services to the partnership post the contractual date, and those services were significant and not trivial.”

“It isn’t a circular transaction…The rights that are granted to Gala are not simply funnelled down to SPR…you raised issues about the sequel rights, but that agreement would not have made any sense whatsoever unless it was the intention of the parties that Gala would have sequel rights and that the sequel rights would be on substantially the same terms as the rights that they had. The document makes no logic unless that is the case. Even if it was true that the correct interpretation of that contract is that the sequel option terminates after a certain date, even if it was a matter of weeks or months, that option is not a right that is granted to SPR. But more significantly, the term of the rights that are granted to SPR are years shorter than the rights that SPE grants to Gala. Gala ends up retaining as a reserved right those 2 bundles of rights, which is perfectly…what you would expect in the film industry, and at the end of the day Gala’s involvement is financially recognised in the direct expenditure of distribution expense in relation to films that it had acquired and it had agreed to distribute and sub-distribute to Sony. That’s how I understood it. That’s how I believe it was. We paid a lot of money to some very experienced lawyers to reflect the arrangements that I’ve just stated, but certainly that’s my belief at the time and it’s my belief now.”

“you have to go back to the reason why Sony entered into this transaction in the first place. You have tried to suggest to me that the reason why it did so is for the studio benefit of $15 million. I have explained that that is what in America is called chump change for them. It’s not a justification for them to go into the transaction. Why it does make commercial sense for the studio to get involved with us is because of the collateral benefit that it got from somebody else, in this case Gala, agreeing to spend distribution expenditure not on Sony’s behalf but on its own behalf. The reason why the studio agreed to this structure is because it came to understand that’s the only basis it could get somebody to spend this money…”

“It was inherently commercially very logical, commercially logical for the studio to agree to the terms and conditions that we insisted on, and there wasn’t really a major leap for them to do that once they got used to the idea that we were not there to put their programme at risk, but to ensure that there were checks and balances to ensure that we weren’t going to be paying for things that didn’t belong to us. That was the biggest danger that we were looking to do. So we were not saying “We control these rights”

“even though the formal contract was terminated, at that stage we were still hopeful that we would be able to continue in the format or a variation of that format. It was still necessary for us to have…Mr Ackerman on board, but not in a formal way, but my recollection is that the degree of contact that I personally had with him in relation to Gala, it wasn’t as intense as a daily conversation, because, of course, we weren’t in the distribution programme for any of the films. But it was certainly regular and wouldn't be less than once a week. The conversations were detailed, to do with variations on the way in which this business was done. He and I had hoped that we would continue much in the same way, that the period leading up to the December 2nd contract -- he did an enormous amount of work for Invicta, and therefore [Gala]….it wouldn’t have been possible to enter into those agreements with the knowledge that we had without the work that was done, and that is the way the business works. It’s highly speculative. So people don’t normally commit until the piece of paper is there that funds the project. Films are made that way. Distribution deals are made that way, and ours was no different. The period after the end of the contract is really another phase that was very similar to the way in which we hoped it would work. So the dates are less significant than what was actually done, and this is what that points to.” (Emphasis added.)

“I can’t believe they waited this long to let us know that they would not be paying these invoices. Can I please proceed and pay these invoices? DADC [Sony Digital Audio Disc Corporation] has been waiting for months for payment.” (3) An email of 1 July 2004 in which Miss Nielson replied: “What the heck is going on?....I want an accounting asap on what to date has been paid by Gala…” (4) An email from Mr Litt to Ms Nielson of 1 January 2004 in which he said that: “The DVD costs are to be paid for. I had [Mr Goffman] look into this and they are supposed to be paying for DVD costs. If you like [Mr Goffman] can send a note to Justin...” (5) An email from Mr Goffman of 2 January 2004 to Ms Nielson and Mr Litt in which he said that he had “just got Justin’s voicemail and explained it all to him. Let’s see what happens” and further email from him on the same day in which he said: “Justin called back. He agrees that Gala is supposed to pay for the DVDs…He says the directive not to pay came from one of Invicta’s UK accountants. He’s going to check on it over the weekend.”

“One could infer that, yes”

“many of the documents that I wrote followed an extensive amount of work, extensive amount of communication and involvement with Sony, and in terms of the work I did, as Mr Davey says, for free, I did on reliance of entering a contract on the strength of a relationship, professional relationship with Mr Yusef, whom I had known for some years, and on the basis of honour and trust, which is again often based on the relationships in the motion picture industry not uncommon. Following the termination of my contract in December of 2005, I continued to provide Invicta with a service insofar as storing all of the files until 2018. That is an example again of a relationship of trust. Nobody was compensating me to do that and that was quite a period of time from 2005 to 2018 before those files were shipped to London.” (Emphasis added.)

“we decided that Gala should cease trading and not attempt to complete any more transactions until the opportunity was right to do so (to this day, I have ambitions to execute fully an opportunity similar to Gala, but a combination of factors have to be present for it to be a success, and I am waiting for the right opportunity to do it again).”

“That form of downside protection was no longer available…we needed the downside protection that the tax element produced…Tax was an important element of the transaction...in order to attract people and give them the confidence of entering into the transaction until such time as they could see how this would operate without the tax but…I accept that we needed the tax in order to give people the comfort, but that wasn’t the sole driver…”

“we could build and develop a lasting relationship that could work between the parties - in short, we had to gain their trust. No Major Studio (Sony or anyone else) would be willing to give away such extensive rights relating to the distribution of their key assets for 21 years without a break clause that they could exercise if the relationship did not run as smoothly as had been anticipated...We concluded that Sony would be not willing to give us a meaningful involvement over such a long period if they did not have a way out (effectively a “divorce mechanism”) if things were to not work out (for example, if there was a change of personnel at Gala) and the Option seemed like a sensible way in which we could provide the comfort that Sony required.”

“we perhaps oversold our capacity for future funding to them during the negotiations with them. We did not convey the fact that the process of raising a billion dollars for them...would be a more gradual process than they were anticipating at the outset of the relationship, such that Sony started to lose interest. Once they realised the billion dollars was not coming in the near future, especially with the adverse legislative changes discussed which made it harder for us to secure sufficient interest, they were willing to sever their ties with us.”

“Whether the option price would constitute a capital receipt”

“The deadline for the Gala option exercise is March 3 2006 (25 months after the last partner joined, which was February 3, 2004). We can give notice no sooner than 28 days before that. The closing of the option will be 5 business days after we give the notice. Keep it on your calendar and let’s deal with this in February”. (2) On 5 January 2006 (a) Mr Fan informed Ms Nielsen at SPE that he had been informed that MPG was thinking about delaying the repayment of the Gala P&A Fund to April and said: “Would you please confirm? If it is true, we do not have sufficient defeasance deposit in the account to cover the added interest. We will need to purchase additional Sterling to put on deposit”, (b) Ms Nielson replied that “We won’t know until early next week whether or not this can get delayed to sometime mid-April” but assuming it was, she asked how much more sterling would be needed to deposit. (3) On 1 February 2006 Mr Fan informed Mr Litt that he had spoken to SG regarding rolling over the loan for 2 months and that, as regards incremental interest expense, Sony only needed to pay the margin on the loans of around £70,000, there would be a loan re-structuring fee of £110,000 and they would need to pick up SG’s and the defeasance bank’s fees so that the bank cost may run slightly above £200,000 or $355,000. He said “These are a real cost to the company because we do not have offsetting inter- company interest with SGTS since the money to pay off the loans is already on deposit”

“If not, we will finalise the calculation of the option, and exercise before the end of the month”, and (b) Mr Falcetti said in his response that this “is still a big help for cash this year and we should try to get this done even with” the costs Mr Litt referred to. (5) On 10 February 2006 (a) Mr Fan queried with Ms Kelly of SG whether “the original due date of the [SG] loan was Feb 28” or whether there was an amendment which changed the date to 3 March, (b) Ms Kelly replied stating that it appears the 3 March date was a mistake: “as any Call Option should be designed to occur on the same day as the loan cashflow interest rollover periods in order to eliminate mid-period interest rate breakage costs. As you are aware, all cashflows are based on annual payments being due on 28th January each year…Given this, please can we ensure that any amendment to the Call Option agreement, includes the facility for any Call Option to occur on the 28th of a month to coincide with the loan.” (6) On 21 February 2006 (a) Mr Litt informed Mr Falcetti and others that Gala had voted to approve the extension and: “We will be able to move the payment into the next fiscal year. Subject to final documents, I will let you know the incremental costs of the extension of the payment in the next day or so.”, (b) Ms Nielson said in her reply “very cool. We’ve put the payments (approx. £173 m) in late April 06.” (7) On 3 March 2006 (a) Ms Mary Jo Green of SPE asked Mr Goffman for an update on the exercise of the Call Option: “On the “Schedule of Important Dates” you had for March 3, 2006 – deadline for SPE to notify [Gala] of SPE’s exercise of option to acquire back distribution rights to [the transaction films]. Please update me if this option has been exercised. Thanks.”, and (b) Mr Goffman responded: “We have negotiated an extension of the deadline until February 28, 2007.”

“...at the outset, when we set this transaction into motion, we did not know with a racing certainty that Sony would exercise the option. We did not believe they would. They had no reason to. If we had delivered as we had anticipated, that would have been a reason for them not to mess with the option.”

“We acknowledge that should the studio exercise its option” and not that the studio will do so. It was put to him that the fact that Sony were willing to incur costs to revise slightly the first exercise date rather than to wait for the next exercise date clearly indicates they wanted to get out at the first opportunity. He disagreed and said that is just an assumption. It was put to him that all of the evidence referred to above supports that the exercise of the Call Option was inevitable as an integral part of the scheme. He said that he did not believe it was inevitable at the time and he does not believe that now and there is nothing, so far as he can see, that indicates otherwise: “What you have pointed me to is documents which talk about what they were looking to do in 2006, but I was concerned at the time with whether or not they would exercise the option from the outset, and it was my belief that they would not.”

“that was a significant driver” for the transaction from Sony’s perspective in addition to this benefit. As he understood it there had been changes in the way in which they accounted for their distribution costs, which had a detrimental effect of changing the accounting processes for expenditure in an adverse way and that is why they were looking for partners to be involved in that process. He agreed that there is no evidence from Sony of this alleged additional benefit but said that the evidence is the incurring of the relevant expenditure by Gala and not by Sony. He added “he did not think that the situation was as clear cut as you say”

“..at the beginning when we were in negotiations with Sony, it was quite clear that they were looking to enter into a long-term series of contracts or agreements. They were not interested in a one-off deal, which is why they were putting tremendous pressure on me to commit to a certain number, not just the one-off picture. So they had an incentive...that if this first phase of the transaction was successful, then that would make it easier for us to raise more funds and to continue the business. So…[when] we were drafting these contracts - everybody was looking towards a long-term relationship. So, it is certainly not inevitable that the call option would be less, because the state of mind of everybody - the principals involved in the transaction was to build for the benefit of the studio and for the benefit of Gala a successive arrangement and not one that was just for the benefit of securing the £15 million…advantage. They saw the business as being far greater than that, as did we.”

“So the studio at the time wasn’t solely focused on receiving an additional 15 million, which for them is not a huge amount of money in the context of their overall turnover. They were looking to build a system with us where a trusted third party, which hopefully we would become, would provide additional prints and advertising to alleviate the cashflow position of the company. That’s the background against which all of this has to be seen, not in isolation. The studio would not have gone to all of this bother, as they used to call it, just for 15 million. It is not in their interests. Their overheads are huge, and they don’t frankly get excited at the prospect of earning just 15 million. They were excited at the thought that we would partner with them in a slate of films that extended far beyond and for a longer period than that, and that’s what would have coloured their entire decision-making process and why they wouldn’t have at the outset decided that they were inevitably going to call the option at the end of two years. I don’t believe that. I didn’t believe it then and I don’t even believe it now with the benefit of hindsight.” (2) It was put to him that it was obvious that all this bother for Sony, as he put it, was always going to be ended straightaway as within 1 year Sony and all parties received what they expect to get; Gala incurred the losses to generate the tax relief, Sony had its benefit and Invicta and SG had their fees. Hence, within the first year, for Gala, the matter had run its course and his own evidence is that without the loss relief available in year 1 the structure was not viable (hence there were no further transactions once the law changed). Mr Yusef insisted again that the object of the exercise for Sony was considerably more than obtaining £15 million and made the following main points: (a) If he had gone to Sony on the basis that was what they were going to get he would not “have got past the first junior set of lawyers”

“something far, far greater from me than 15 million....to do with the partnership in terms of prints and advertising. On the day that this agreement or set of agreements was signed it was not a foregone conclusion that the option would be exercised, because SPR and SPE were looking for far more than what they actually got in the end.” (b) Had circumstances developed differently Gala could have introduced more capital, that was always envisaged by him and Sony, that is why Sony got involved and why at the end of the initial 2-year period they were concerned to see whether or not Gala had the ability to raise more money. Had he been able to say at the end of the second year that he had another 100 or 200 million of investment, the result would have been far different. There was no indication to him either in the negotiations or in the first couple of months of the transaction that the studio was minded to terminate the arrangement at the end of year 2. (c) It is true that “the loss relief was an influential factor in the raising of the money”, but: “for the 65 members ...it wasn’t the only reason to do this deal. They could have achieved the loss relief in a different way. They were interested to try to achieve the trade and the loss received in the way that we actually transacted. It was hinted at the time that perhaps we could try to raise money -it wasn't hinted. We worked to see whether or not we could put - you know, continue the structure, but it proved not to be the case, I think largely because the sentiment had gone from the marketplace.” (d) Whilst it is true that the scenarios demonstrate that it is positively preferable to Gala for the Call Option to be exercised, the members/Gala could not be certain that that would be the case and they anticipated at the time that situation would arise “if the results of the performances were poor such that...there would be downside protection for the partners. What they were focused on was the possibility” that they could make more money this way with the downside protection that existed. That was the attraction for them. (e) It was envisaged from day 1 that there would be a series of Gala transactions so that “we could build a distribution company or entity over a period of years”

“Funds had to be paid even if they were covered by a guarantee at a time when cashflow was not necessarily easy for Sony”, and (b) the internal Sony communications show that any cashflow issues did not stop Sony from exercising the Call Option in 2006. He said that there were cashflow considerations at Sony and they would have preferred not to exercise the option if Gala were continuing to provide funding under the Gala structure but that did not happen and may have led to the decision to exercise their option: “If the transaction had gone the way it was contemplated from day one, I believe that option would not have been exercised, because there were funds and deals flowing through”. (3) It was put to him that (as his Counsel also said) Sony’s intentions were irrelevant and that for the reasons given he knew and intended Gala arrangements would come to an end with Sony’s exercise of the Call Option in 2006. He said he “strongly” said “no” to that. It was not discussed in those terms. The opposite was discussed in that the desire on both parts was to have a long-term relationship. It was never put to him at any time during the negotiations that Sony were going to exercise in 2006. That would have been the end of it. It was never directly said or hinted at, and the option programme was to deal with a different point, which all the studios raised in discussions with him and that is why it became a feature of the transaction. Everybody said: “You are asking us to enter into...a 21-year arrangement with an entity we don’t know and there has to be a mechanism whereby if it doesn’t work for us any longer, we can terminate the situation….”

“they managed to get themselves convinced that this was a structure that would churn out a very long-term relationship between Gala and the studio. So, I don’t think they had a settled, formal situation at all. I think the main motivation - they could have easily let this go into the next session and the session thereafter, and I think would have been happy to do so if we were still providing them with the kind of money that they had hoped for.”

“The Chairman also suggested that a sum of £75,000 could be a reasonable level of consideration”

“It is necessary to stand back and look at the whole picture and, having particular regard to what the taxpayer actually did, ask whether it constituted a trade.”

“the most they can do is to provide common sense guidance to the conclusion which is appropriate; and that in each case it is necessary to stand back and look at the whole picture and, having regard to the words of the statute, ask whether this was an adventure in the nature of trade.”

“A man cannot be trading or engaged in an adventure in the nature of trade unless there is someone with whom he is trading – someone to whom he supplies something such as goods or services for some return. Here there was no one with whom Mr Higgs can fairly be said to have "traded" … Mr Higgs … simply told the parties concerned to carry out the transaction which the scheme which he had adopted required them to carry out.”

“what the LLPs did, not their members, and not what was done by Ingenious for itself or other persons. It will involve a weighing of a number of factors, the relevance and importance of which will depend on the circumstances. There is no complete list of those factors and no rule that any one or more of them are decisive…”

“the commissioners’ whole decision betrays a confusion between the motives of the taxpayer company and the purpose or object of the transaction which led them to concentrate on the motives of the taxpayer company and the Thomas Tilling group in investing in the partnerships instead of on the purpose or object of the transactions into which the partnerships entered” (see [59]). (2) They set out, at [61], that Millett J described the Commissioners’ reasoning as “an astonishing mixture of error and irrelevance” at 1237B, before concluding, at 1239C, that the only possible conclusion from the facts they had found was that the partnerships were trading and that this accorded with the justice of the case: “The fiscal advantage which the commissioners found so unpalatable was obtained by the element of "gearing" which inflated the amount of the first-year allowances beyond the sums which the partnerships had to finance out of their own resources…But that was the result of the use by the partnerships of borrowed money to finance their activities, not of anything uncommercial in the nature of those activities.” (3) They continued, at [62], that Millett J then considered, and rejected, an argument that the limited partnerships were not trading at all, but merely investing in films to be made and distributed by others. He said, at 1239G, that the submission appeared “promising at first sight”, but it had to be rejected because: “the subject matter of the purchase was an uncompleted film, and the partnership arranged for it to be completed on its behalf with a view to its commercial exploitation. The returns were incapable of calculation. The film might have yielded substantial profits or no net receipts at all. Once fully exploited, the film would have negligible residual value. The transaction has all the characteristics of a typical though speculative trading transaction and none of the characteristics of an investment.” (4) The Court of Appeal then set out extracts from Millett J’s understanding of the relevant law as set out at 1232D to 1234B (and noted that the whole passage is set out in the UT’s decision in Ingenious at [164]): “(1) In order to constitute a transaction in the nature of trade, the transaction in question must possess not only the outward badges of trade but also a genuine commercial purpose. (2) If the transaction is of a commercial nature and has a genuine commercial purpose, the presence of a collateral or ulterior purpose to obtain a tax advantage does not "denature" what is essentially a commercial transaction. If, however, the sole purpose of the transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose. (3) Where commercial and fiscal purposes are both present, questions of fact and degree may arise, and these are for the commissioners. Nevertheless, the question is not which purpose was predominant, but whether the transaction can fairly be described as being in the nature of trade. (4) The purpose or object of the transaction must not be confused with the motive of the taxpayer in entering into it… (5) The test is an objective one… (6) In considering the purpose of a transaction, its component parts must not be regarded separately but the transaction must be viewed as a whole…” (See [63].) (5) The Court of Appeal commented, at [64], that Millett J’s judgement illustrates the need to find “a genuine commercial purpose”, and the general irrelevance of fiscal motive in answering the objective question whether the transaction viewed as a whole constitutes a trade. They noted that Millett J not merely disagreed with the reasoning of the Commissioners, but was satisfied that they had erred in law in finding that no trade was carried on by the partnership and that his conclusion on that critical issue was not overturned in the higher courts, although: “the House of Lords (in the leading speech of Lord Templeman) disagreed with his acceptance at face value of the non-recourse borrowing, and relied in part on the Ramsay principle (as it was then understood) to analyse the true legal effect of the transaction as a joint venture which contained no element of loan: see [1992] 1 AC 655 at 666 to 667. So viewed, the only real expenditure of [VP] was the $3.25 million contributed by the limited partners, and the partnership's claim for capital allowances had to be reduced accordingly. In very general terms, it may be said that the approach espoused by Millett J to the analysis of the facts had much in common with the Ingenious basis in the present case, whereas the approach of the House of Lords accorded much more closely with the 30:30 basis.” (6) At [65], they noted that in the House of Lords Lord Templeman said at 669A that “the contribution by [VP] to the cost of the film of the sum of $3¼ m. in consideration for 25 per cent of the net receipts from the exploitation of the film can only be described as trading”

“if there were any room for doubt about this point, it is laid to rest by the explicit statements of Lord Templeman at 677D-E and 680A-C that the transaction was a trading transaction. As Lord Templeman said, in the second of those passages: "In the present case a trading transaction can plainly be identified. [VP] expended capital in the making and exploitation of a film. That was a trading transaction which was not a sham and could have resulted in either a profit or a loss."” (Emphasis added.)

“The principles of Ramsay and subsequent cases do not authorise the court to disregard all the fiscal consequences of a single composite transaction read as a whole on the grounds that it appears that the transaction is a tax avoidance scheme…In the present case the commissioners felt bound to ignore all the fiscal consequences which are beneficial to the taxpayer because [VP] had entered into the scheme with ‘fiscal motives as the paramount object’.” (2) He said, at 677A, that similarly Sir Nicolas Browne-Wilkinson V-C had applied the wrong approach in holding that “the taxpayer is deprived of all the beneficial effects of the scheme if the scheme was entered into essentially for the purpose of obtaining a fiscal advantage under the guise of a commercial transaction: [1991] 1 WLR 341, 357.”

“if the commissioners find as a fact that the sole object of the transaction was fiscal advantage, that finding can in law only lead to one conclusion, viz. that it was not a trading transaction....if the commissioners find as a fact only that the paramount intention was fiscal advantage…the commissioners have to weigh the paramount fiscal intention against the non-fiscal elements and decide as a question of fact whether in essence the transaction constitutes trading for commercial purposes.” (3) He criticised that approach in the following well-known passage, at 677 D to F: “My Lords, I do not consider that the commissioners or the courts are competent or obliged to decide whether there was a sole object or paramount intention nor to weigh fiscal intentions against non-fiscal elements. The task of the commissioners is to find the facts and to apply the law, subject to correction by the courts if they misapply the law. The facts are undisputed and the law is clear. [VP] expended capital of $[3.25m] for the purpose of producing and exploiting a commercial film. The production and exploitation of a film is a trading activity. The expenditure of capital for the purpose of producing and exploiting a commercial film is a trading purpose. By section 41 of the Act of 1971 capital expenditure for a trading purpose generates a first year allowance. The section is not concerned with the purpose of the transaction but with the purpose of the expenditure. It is true that [VP] only engaged in the film trade for the fiscal purpose of obtaining a first year allowance but that does not alter the purpose of the expenditure. The principles of Ramsay and subsequent authorities do not apply to the expenditure of $[3.25m] because that was real and not magical expenditure by [VP]. The Vice-Chancellor referred to authorities in which intentions sometimes illuminated and sometimes obscured the identification of a trading purpose. But in every case actions speak louder than words and the law must be applied to the facts.” (4) Following his review of the cases, at 680A to C, he made the comment set out by the Court of Appeal in Ingenious CA above and added: “…The expenditure of $[3.25m] was a real expenditure. The receipts of $3m were real receipts. The expenditure was for the purpose of making and exploiting a film and entitled [VP] to a first year allowance equal to the expenditure. The receipts imposed on [VP] a corporation tax liability.”

“It must be the actual subjective intention or purpose of the putative partners to make profits from carrying on their trade, profession or business. It is not a question of motive. People may have many reasons why they aim to make profits, including, for example, to support themselves and their families, to make charitable gifts or to create tax losses. For these purposes, they are beside the point. It is the genuine subjective purpose of the partners to make profits from their trade, profession or business which is the defining feature of a partnership.” (2) At [121], the Court of Appeal endorsed the way the test was expressed by the UT at [333] of their decision in Ingenious UT: “We consider the better view to be that the test is a purely subjective one. There is no need for profit to be the predominant aim. As is noted in Lindley & Banks, difficult questions can arise when any profit-making aim is subsidiary to other purposes. In those circumstances, it is necessary to consider at what point the line is crossed and there is in fact no view to profit. Some sort of "reality check" is needed. It is necessary to identify whether there is a "real" intention rather than something that was not, in fact or reality, aimed for. The question as to whether a trade was carried on "with a view to profit" also cannot be answered in isolation, divorced from the context of the business in question. The context of "carries on a trade…" directs attention at least to some extent to the way in which the trade is conducted. Furthermore, an indifference to whether a profit is realised is not sufficient to meet the test. In this case, therefore, the FTT would have had to have been satisfied that the LLPs had genuinely intended to seek a profit from their activities.” (3) The Court of Appeal continued, at [122], that, while there is no objective element to the requirement for a view to profit, the likelihood of profits and the timescale in which they might be achieved will often be relevant to testing whether there is a genuine subjective view to profit. They considered this was well expressed by the UT, at [345], as follows: “Where the intention being tested is that of experienced businessmen, the lack of any realistic potential for or likelihood of profit on an objective basis may call into question whether there is a (subjective) view to profit. Experienced businessmen of course take risks, and different individuals will be willing to take differing levels of risk, but businessmen will generally seek to satisfy themselves that the risks are worth taking for the potential return on capital employed, at least if they are risking their own funds. The dynamics may differ where it is someone else’s money that is at risk of being lost. HMRC repeatedly submitted that this was a case where the investment was being made with other people’s money, namely that of the Exchequer in the form of the monies that the investors expected to receive from HMRC by way of tax repayments. And the extent of the risk taken may depend not only on the risk appetite of the investors but on the degree to which the individuals making the decisions are answerable for any failure, or incentivised by success.” (4) They said, at [123], that other aspects of the test are uncontroversial. “[a] First, "profit" has an objective meaning. If putative partners only have a view to making what they wrongly believe to be profits, for example gross revenue, they will not have a view to profit. [b] Second, there is no maximum period during which the partners must intend to make a profit, although no doubt the longer the period the more searching the inquiry into the real subjective purpose of the partners. [c] Third, in broad terms, "profit" has the basic meaning of an excess of income over costs over a possibly indefinite period. It follows that the complex mosaic of generally accepted accounting practice (GAAP), which enables accounts to be properly prepared for defined periods, most commonly for a year, will generally have little part to play. [d] Fourth, as noted by the UT at UT/333, the view to profit need not be the predominant subjective purpose, but it must be part of the partners' subjective purpose.” [Numbering added for ease of reference.] (5) At [125] they set out that many of the propositions, which derive from a variety of authorities and writings over many years, were considered by the Supreme Court of Canada in Backman v The Queen 2001 SCC 10, [2001] 1 RCS 367. In its unanimous judgment, the Court said: “22. A determination of whether there exists a "view to profit" requires an inquiry into the intentions of the parties entering into an alleged partnership. At the outset, it is important to distinguish between motivation and intention. Motivation is that which stimulates a person to act, while intention is a person's objective or purpose in acting. This Court has repeatedly held that a tax motivation does not derogate from the validity of transactions for tax purposes…similarly, a tax motivation will not derogate from the validity of a partnership where the essential ingredients of a partnership are present…The question at this stage is whether the taxpayer can establish an intention to make a profit, whether or not he was motivated by tax considerations… 23. Moreover, in [Continental Bank Leasing Corp v The Queen [1998] 2 SCR 298], this Court held that a taxpayer's overriding intention is not determinative of whether the essential ingredient of "view to profit" is present. It will be sufficient for a taxpayer to show that there was an ancillary profit-making purpose… 24. An ancillary purpose is by definition a lesser or subordinate purpose. In determining whether there is a view to profit courts should not adopt or employ a purely quantitative analysis. The amount of the expected profit is only one of several factors to consider. The law of partnership does not require a net gain over a determined period in order to establish that an activity is with a view to profit. For example, a partnership may incur initial losses during the start up phase of its enterprise. That does not mean that the relationship is not one of partnership, so long as the enterprise is carried on with a view to profit in the future.” (6) They also cited [25], where the Court said: “…to ascertain the existence of a partnership the courts must inquire into the whether the objective, documentary evidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on business in common with a view to profit.”

“to monitor [DE’s] exploitation of the Films in order to check whether [DE] was proceeding in line with the plans, to question any variations proposed by [DE] to the strategy laid out in them and to suggest any variations which [W] thought appropriate as matters unfolded following the release of the Films”. ([61]) (2) In view of the expertise within the Disney group as to the marketing and distribution of film rights, there was little by way of intervention by W in DE’s activities following the release of the films ([61]). (3) W could not be regarded as an agent of Eclipse despite W’s apparent appointment as such as it “is of the essence of a relationship of agency that the agent, when engaged on its principal’s business, should act exclusively and in a fiduciary manner in the interests of the principal” but that was not the case as is evident from the provisions referred to above ([62]). (4) Neither Eclipse, W nor SCI (a) “had any capability whatsoever to be a part of any strategic or day-to-day planning for the marketing or release of the Films, or to monitor or supervise [DE’s] performance relative to any agreed plan”, and (b) that capability resided within the Disney group, and in particular in the Buena Vista companies ([63]). (5) It was noted that “whatever the contractual documents provided, there was not convincing evidence that what the documents provided for matched what happened in fact” ([63]). (6) Mr Salter, with his long experience, may have had such capability but his role was limited to liaising between the designees and W ([64]). (7) The tribunal said (at [349]) that the Buena Vista companies would: “regardless of the involvement of [Eclipse], have used their vast resources and expertise to market and distribute the Films to the best of their considerable ability; and the Disney group had a direct interest in their so doing in order to maximise the variable distributions which flowed back to Disney as variable royalties, and to maximise also the likelihood of generating Contingent Receipts (60 per cent of which went to the Disney group).”

“356.…we do not consider that Mr Salter’s activities establish that [Eclipse] was, even on a collaborative basis, engaged in directing and supervising the marketing and release of the Films. [Eclipse] cannot be said to be directing and supervising matters in circumstances where [DE] had already come to a conclusion as to what it should do. 357. Finally, although there was undoubtedly a well-planned and well-executed regular flow of high quality and relevant information gathered by SCI and Mr Salter from the relevant Disney companies to [W] and [Eclipse], with pertinent comment by Mr Salter, and although that information was considered at board meetings of [W] and by the Designated Members (that is, in effect, the executive Members) of [Eclipse], that does not in itself establish the case which [Eclipse] is asking us to accept. 358. Whilst we can conclude that, through [W], [Eclipse] monitored the activities of [DE] with regard to the marketing and release of the Films, and was kept fully aware of the activities in that regard which [DE] undertook and of the financial performance of the Films, we are unable to conclude that [Eclipse] had a part, or at least a meaningful part, in directing and supervising the marketing and release of the Films by [DE].”

“…..The proper characterisation of the business of [Eclipse] depends upon the totality of its activity and enterprise. Stripping the business down to its essential elements, the transactions on which [Eclipse] was engaged had two aspects. One aspect was that a payment by [Eclipse] of £503 million would be repaid with interest over a 20-year term and would produce a profit unrelated to the success or otherwise of the exploitation of the Rights sub-licensed. That aspect had the character of an investment... The second aspect was the possibility of [Eclipse] obtaining a share of Contingent Receipts and the activity on the part of [Eclipse] to secure such a share. The FTT considered that this second aspect was in real and practical terms insufficiently significant in the context of [Eclipse’s] business as a whole to lead to a proper characterisation of [Eclipse’s] business as one of trade within the meaning of the tax legislation. In our judgment, that was a conclusion which the FTT were entitled to reach and, indeed, with which we agree.”

“His role was to receive information from, or the work product of, others (such as the [designees] seconded to [W]) and to pass that on to [W] and generally to act as a liaison between [W], [Eclipse] and the Buena Vista companies”. (3) They concluded: (a) At [137], that in the circumstances the tribunal’s statement that witness evidence from one of the Buena Vista staff would have shed light on the commercial reality of the arrangements provided for in the network of contractual documents is understandable and was justified. (b) At [138], the tribunal was perfectly justified in concluding that: “reducing the transactions to their core and notwithstanding some contribution by SCI and Mr Salter, the substantial reality was that Disney produced the Films; let the rights in them to [Eclipse], and immediately took them back again; Disney personnel created marketing plans and implemented them; and they reported back to [Eclipse] what Disney was doing.” (c) At [139], against that background, the tribunal’s conclusion that Eclipse “was not in reality carrying on a trade was justified and indeed correct” and: “[Eclipse] did not discharge the evidential burden of showing that it was engaged in trade in any realistic or meaningful way. The possibility of obtaining a share of Contingent Receipts did not give the business of [Eclipse], looking at it as a whole, a trading character: having regard to the business as a whole, the right to Contingent Receipts was no more than a potential additional return on a fixed term investment.”

“There was repetition, with a number of distinct transactions in the case of each LLP”

“There was, realistically (and we would say legally) speaking, no acquisition of any beneficial right in a film or game of any value and no disposal of it. But a bank trades in making loans. A bookmaker trades in money and risk. Each of them tends to do it over a long period and with a degree of organisation.” (2) At [417] they concluded, in effect, that this factor did not point away from trade. They noted that in Ensign Lord Jauncey said that, as Lord Templeman had pointed out, expenditure “of [25%] on the making of the film in return for 25% of the net receipts carried all the characteristics of trade”

“We find this requirement is satisfied. In commercial substance the LLPs paid and were obliged to pay 30% (35%) of the budgeted cost and received and were entitled to receive 30% (35%) of GDI. That was a genuine commercial deal. If we were wrong and the legal effect or commercial substance of the transactions was that the LLPs bought the film or game for 100% of budget and became entitled to at best 54.45% of GDI we would find that the deal was not commercial, and that this test was not satisfied.”

“In relation to Independent films there was more substance to the LLPs’ activities; for Studio films the activities had more of the characteristics of arranging and monitoring investments in an income stream (that was particularly the case where an LLP came into the picture at a very late stage when almost all the elements of the film had been pulled together and principal photography was about to start). But the two activities were part of the one business. Taking all this together we conclude, on balance, that the LLPs were trading: the Operator did more than act as an investment manager of a portfolio of investments: through its actions and those of its agents the LLPs engaged in speculative, organised, repeated transactions in a way which involved work beyond that which would have been involved in the mere making of an investment.”

“The point is made, although in effect [VP] didn’t have to do a lot, so those arrangements did not call for any significant degree of activity on the part of [VP], but it is not true that the partnership can act only through its partners. It is open to a partnership, like any other trader, to act through agents or independent contractors. Were it not for the availability of first year allowances and the effect of the gear introduced by the form which the arrangement took, no-one would think the absence of subsequent activity by [VP] deprived the arrangements made on 14th July 1980 of their commercial character.”

“The question that the court has to determine is whether the transaction was in disposal of the KDI. If a man wished to sell his house to his mistress at an artificially low price and conceal it from his wife, he might need the cooperation of friends who have a controlling interest in the company to sell the house to the company at that low price, in the knowledge that his friend would ensure the house was sold to the mistress. No legal obligation on the company to do this. Nonetheless, in my opinion, the original owner were to dispose of his house to his mistress. Qui facit per alium facit per se is a maxim which does not depend on contractual relationship of principal and agent. A man may act through the hand of another whose conduct he manages to manipulate in some way, and whether or not he has so acted is often a question of fact to be considered by looking at all that is done.”

“if the lessee chooses to make arrangements, even as a preordained part of the transaction for the sale and lease back, which result in the bulk of the purchase price being irrevocably committed to paying the rent, that is no concern of the lessor. From his point of view, the transaction is exactly the same. No one disputes that [BF] had acquired ownership of the pipeline or that it generated income for [BF] in the course of its trade in the form of rent chargeable to corporation tax. In return it paid £91m. The circularity of payments which so impressed Park J and the special commissioners arose because [BF], in the ordinary course its business, borrowed the money to buy the pipeline from Barclays Bank and Barclays happened to be the bank which provided the cash collateralised guarantee to [BF] for the payment of the rent. But these were happenstances. None of these transactions, whether circular or not, were necessary elements in creating the entitlement to the capital allowances.”

“[M] (unlike BGE in BMBF) really did need up-front finance in order to roll out its software and give effect to its business plan. It saw itself as parting with potentially very valuable rights indefinitely (the investor members dropped out after ten years, but the founder members did not) for only a modest part (just over 18% before fees and expenses, or just under 17% after fees and expenses) of the total capital apparently being raised. That was because 75% of the capital raised, although not simply a sham, was really being used in an attempt to quadruple the investor members' capital allowances. That is what the tough bargain which Tower struck with [M] enabled Tower to offer to its investor members.”

“there was a loan but there was not, in any meaningful sense, an incurring of expenditure of the borrowed money in the acquisition of software rights. It went into a loop in order to enable the LLPs to indulge in a tax avoidance scheme…”

“The transfer of ownership (or at least of rights) indicated the reality of some expenditure on acquiring those rights, but was not conclusive as to the whole of the expenditure having been for that purpose. Moses LJ was also wrong…in saying that in Ensign the loan never had to be paid, whatever success the film achieved…”

“though it was disposed of at once under further pre-arranged transactions, those transactions were entirely for the benefit of BGE. BGE had no pressing need for upfront finance (which is not, contrary to what Park J supposed, an essential feature of a leasing scheme capable of generating capital allowances).” (2) In Tower, on the other hand: “the borrowed money did not go to [M], even temporarily; it passed, in accordance with a solicitor’s undertaking, straight to [the bank] where it produced no economic activity (except a minimal spread for the two Guernsey banks) until clearing fees began to flow from [M] to the LLPs (in an arrangement comparable, though not closely similar, to the arrangements between LPI and VP in Ensign).” (3) Having concluded that only 25% of the claimed allowances were available he noted, at [80], that it was to be expected that commentators would complain that the court had abandoned the clarity of BMBF and returned to the uncertainty of Ensign but he would disagree: “Both are decisions of the House of Lords and both are good law. The composite transactions in this case, like that in Ensign (and unlike that in BMBF) did not, on a realistic appraisal of the facts, meet the test laid down by the CAA, which requires real expenditure for the real purpose of acquiring plant for use in a trade...”

“it required it to be demonstrated that the whole of the claimed expenditure was actually incurred on acquiring rights in the software, which was a factual enquiry, the extent and depth of which will always depend on the circumstances of each case.”

“the payment of cash was a permanent and real economic burden; any recognition of a capital contribution had no economic effect, and the reduction in the drawings liability was not a benefit of its business. The only economic burden it suffered was the outflow of 30. That is all that was incurred.”

“There is no indication in these words that the ultimate use of the monies by the recipient is to be relevant to a determination of the purpose for which they were expended” and at [39]: “The starting point in this case is the purposive construction of s. 74, which points the tribunal towards a consideration of the use that was made of the disbursement in question in relation to the taxpayer’s trade, and does not require consideration of how the money was ultimately dealt with by the recipient”, and (3) Vos J concluded that the relevant sum was paid for the purpose of securing the “annual advances” and the “final minimum sum”

“…..Not only was it not needed by Shamrock, it was not wanted by Shamrock who found it a nuisance. It was not in any sense used by Shamrock in fact for exploitation. That last point of course does indeed look at what the recipient does with the money, but in circumstances where this is to the knowledge of, and indeed intended and required by, the payer. The borrowing of the 80 and its payment to Shamrock by the LLP was in short artificially designed to multiply the losses. There is no commercial difference between the members paying 15 for Shamrock’s services without having borrowed 80 and without any rights to guaranteed repayment of the 80, and the members paying 95, of which they have borrowed 80 and are guaranteed to be repaid 80 (save for the extra costs in terms of margin and arrangement fees in the latter). The only practical difference is that in the first case the LLPs’ expenditure would clearly be limited to 15 and that would be the most that they could argue qualified as a trading loss for tax purposes. In the artificial world, since the money that is actually paid over is 95 that enabled them to argue that the whole 95 amounts to a deductible trading loss. The conclusion that the 80 was injected into the system to increase the apparent size of the amount paid for the exploitation of the intellectual property rights (as the FTT said at [147]) is not the only one which they were entitled to come to, but was I think an inevitable conclusion from the facts that they found.” (Emphasis added.)

“It seems to me to be comparable to the so-called loan in Ensign which was held not to be a loan in any meaningful sense at all; or to the expenditure in Tower MCashback where Lord Walker said (at [75]) [the UT cited [75] of Tower which is set out above]…. Nothing in BMBF, or the factors which these cases happen to share with BMBF, can turn these wholly artificial and manufactured arrangements into a genuine commercial transaction under which 95 was really paid for the exploitation services. I therefore do not see any difficulty in rationalising the three decisions in Ensign, BMBF and Tower, nor do I find in BMBF any principle of law which would enable the Upper Tribunal to declare that the factual decisions come to by the FTT involved erroneous legal principles or impermissible reasons.”

“The trade in which the Icebreaker partnerships were engaged was the exploitation of rights whether…the exploitation of film rights, or…rights in the format for a book or for songs. Once the FTT had found that the purpose of the LLPs in paying 80 of the 95 was not for such exploitation but for the securing of the guaranteed income stream, it follows that it was not for the purposes of the trade. Mr Peacock at one stage in his submissions referred to the fact that certain institutions such as banks and other financial institutions may be engaged in the trade of purchasing income streams in the form of financial instruments of one form or another. That is no doubt the case, but I do not see how the acquisition of a guaranteed income stream on the facts of these cases can be said to be part of the LLPs’ trade of exploiting intellectual property rights…”

“The provisions governing fees payable to Invicta, the Placing Agent and the Operator in respect of the Partnership are contained in the [MSA], Placing Agent Agreement, and the [OA] respectively and the aggregate of such fees are expected to approximate to 8.2% of the capital raised. Out of such fees all initial costs of establishing the Partnership will be met, as will the general administration costs of the Partnership, and the cost of the US and UK distribution personnel (but excluding any extraordinary and currently unanticipated costs and expenses which may arise and also excluding legal costs and expenses in connection with enforcing the rights under the Transaction Documents and any costs or expenses in connection with any other legal proceedings). The fee payable to the Placing Agent will be up to £50,000 and a quarterly fee of £15,000 will be payable to the Operator (in each case exclusive of value added tax).”

“277. The payment in these cases of a large part of what was described as an exploitation fee was one-off, and it secured for the partnership, and through it the members, a secured income stream followed by a capital payment which, in substance even if not in strict form, amounted to reimbursement of the payment. In our view it is quite clear that what was acquired was an asset of a capital nature, and the jurisprudence indicates equally clearly that the payment made in return for it too was of a capital nature. 278. Our conclusion on this issue, therefore, is that in each case so much of the payment to the principal exploitation company made by each appellant partnership as matched the amount borrowed was the consideration for the acquisition of a capital asset, namely a guaranteed income stream.”

“…it was suggested that the best guide is to view commercial as the antithesis of uncommercial and I do find that a useful approach. A trade may be conducted in an uncommercial way even because the terms of trade are uncommercial (for instance the hobby market-gardening enterprise where the prices of fruit and vegetables do not realistically reflect the overheads and the variable costs of the enterprise) or where because the way in which the trade is conducted is uncommercial in other respects (for instance, the hobby art gallery or antique shop where the opening hours are unpredictable and depends simply on the owner's convenience). The distinction is between the serious trader who whatever his shortcomings and skill, experience or capital, is seriously interested in profit, and the amateur or dilettante.” (Emphasis added.)

“As a matter of ordinary language to run a trade or business on a commercial basis suggests running the trade or business in a way that is at any rate designed to succeed as a commercial venture, that is, one which is worth doing from a financial point of view. It is true that this means that there is an inevitable overlap between the commercial limb and profits limb, but the alternative would be to empty the commerciality limb of any connection with profit or profitability when that’s a central part of what would normally be understood by reference to acting commercially” (2) Having referred to Wannell v Rothwell, the UT referred to the UT’s decision in Samarkand Film Partnership No.3 and anor v HMRC [2015] STC 2135 (“Samarkand UT”) where, at [96]: (a) The UT agreed with the tribunal’s comment on the passage from Wannell v Rothwell (at 253) that: “It seems to us that the serious interest in a profit is at the root of commerciality”. (b) The UT said that whilst “commercial” and “with a view to profit” are 2 different tests, that does not mean that profit is irrelevant when considering whether a trade is being carried on “on a commercial basis” and the tribunal were right: “in regarding 'profit' in the context of commerciality as a real commercial profit, taking account of the value of money over time, and not simply an excess of income over receipts...[and] to conclude that the trade that involved transactions that were intended to produce a loss in net present value terms, with no compensating collateral benefits, was not conducted on a commercial basis. No-one who was seriously interested in running a business or trade on commercial lines would pay £10 for an income stream with a net present value of £7 unless there was some good reason to do so. Of course, in this case the reason why the partnerships were willing to do this was because they believed that tax relief would be available to the partners.” (3) The UT noted that, in the Court of Appeal’s decision in Samarkand CA, Henderson LJ rejected the taxpayers challenge to this. At [90], he said that the passage in Wannell must be correct but: “it shows that considerations of profitability cannot be divorced from an assessment of commerciality of a business. In my judgment it is wrong to regard the profitability and commerciality tests in the legislation as mutually exclusive and they necessarily overlap to an extent which will vary from case to case. I therefore see no error of law in the approach which the FTT adopted to this question, and I agree with the observations of the UT in [96] and [97] of the UT Decision, quoted above”

“The availability of loss relief to the individual partners in their personal capacities cannot in my view be a relevant factor in assessing the commerciality of the partnership’s business.”

“So I agree that a trader can fail the commerciality limb either because of a lack of commercial organisation...or because of a lack of any interest in making money...but I do not think it follows that as long as the trade is sufficiently organised and the trader hopes to make a profit...that is always enough…A trade on commercial lines seems to me to be a trade run in the way that commercially minded people run trades. Commercially minded people are those with a serious interest in profits or, to put it another way, those with a serious interest in making a commercial success of the trade. If, therefore, a trade is run in a way in which no-one seriously interested in profits or seriously interested in making a commercial success of the trade would run it, that trade is not being run on commercial lines. That is in effect what we said in the Upper Tribunal in Samarkand, which has been endorsed by Lord Justice Henderson in the Court of Appeal. If that is right, it is not I think an answer to point to the hope of the trader that profits will nevertheless be made. In other words, the concept of trade carried on on commercial lines has an objective element to it and cannot be satisfied by proof merely that the trade is well organised and that the trader had a purely subjective hope or desire to make a profit.” (5) The UT noted, at [54], that, in the context of the “with a view to profit” test, in Ingenious FTT the tribunal said (at [475]) that “profit” means the excess of income over expenditure as a “cruder, everyday understanding” of profit but the mere fact that there is a realistic possibility of profit in this sense does not entail that a person is carrying on a trade on a commercial basis. The UT gave an example: “It may not make commercial sense to carry on a trade even if it is likely to make a profit in the crude everyday sense. A trade which lays out 100 in year one and recovers 101 in year 10 is a trade which makes a profit in the simple sense that its income exceeds its expenditure, yet it is unlikely that anyone with a serious interest in making a commercial success of the trade would regard that as a satisfactory return even if it were virtually certain to happen.” (6) The UT added that, most significantly, all the tribunal decided in Ingenious was that there should be some realistic possibility of a profit and whilst this “cuts out the extreme case where there is no realistic possibility of a profit” it “says nothing about how probable or likely such a profit needs to be”, but “the likelihood of profit seems” to be “central to an assessment of” the trade’s commerciality: “The question is whether the trade is being carried on in a way that a person seriously interested in commercial success would carry it on. Such a person would be unlikely to regard a trade which had a remote possibility of a small profit as worth carrying on as a commercial venture even though it could be said that there was a realistic possibility of profit.” (7) At [59], the UT noted that the tribunal decided that this test was not met on the basis of the absence of revenue predictions at the outset, the members’ lack of relevant expertise and the fact that a loss in the trade was virtually certain and, at [61], that the taxpayers “accepted that the real finding was the third one”

“No business is certain to succeed and the making of a loss or only modest profit is not necessarily an indication that its proprietor has not pursued the trade on commercial lines. But if, as [HMRC] demonstrated it can be shown that at the moment the business was started the prospect of recovering the capital invested even without a surplus was dependent on the realisation of an unrealistically high profit with the consequence that loss was, if not certain, then much more probable than not. It does not seem to us that it can fairly be said that those embarking on the trade can have entertained a serious profit motive and their claim to have intended to conduct the trade on commercial lines must at the least be doubtful. The amateur may be content to make a loss, since the pleasure of the activity is reward in itself. The ordinarily prudent and commercial person would not enter into a partnership whose business was more likely than not to result in a loss.” (Emphasis added.)

“a person with a serious profit motive would not embark on a trade which was dependent on the realisation of an unrealistically high profit and hence where loss was much more probable than not...” (9) At [64], the UT noted that the taxpayers said that the tribunal had not taken account of the fact that the LLPs did not transact for the prospect of receiving their percentage of returns from a reasonably successful project but for the “moonshot” possibility of a very successful act which would deliver their percentage of a very large number. The UT commented that the tribunal did not ignore this and referred repeatedly to the fact that only a small proportion of projects of the kind pursued by the Icebreaker partnerships can be expected to make significant profits, although any one project might make very large profits but: “The adoption of a limited number, typically fewer than six, of such projects necessarily limits the chances that a project with true potential has been identified. Projections produced later show that in the absence of outstanding success, no partnership could reasonably expect to recover the capital invested...the members of each partnership could have had no genuine expectation on joining that partnership that trading profits would be received.” (10) The UT added, at [66] and [67], that (a) the tribunal was well aware that it was possible that any one or more of the projects could achieve enormous success or very large profits, and that if it had done so, the trade of the relevant LLP would have been profitable and hence a commercial success, but “nevertheless concluded that such success was a rarity and speculative”, and (b) it was not suggested that these factual findings were not open to the tribunal. The UT concluded that “once it is accepted that the correct test is whether the trade is being carried on in a way that commercially minded people might I do not see that their conclusion involves any error of law or is not open to them...”

“..one has to bear in mind that the statute presupposes that losses could well be suffered for four years before an individual begins trade and, according to the nature of the trade and the economic circumstances, it may be that losses could well be suffered over a longer period of time and, if so, one has to consider whether profits could reasonably be expected to be realised within a reasonable time afterwards, having regard to the way in which the trade was carried on.” (Emphasis added.)

“The concept of a true and fair view lies at the heart of financial reporting in the UK…It is the ultimate test for financial statement and, as such, has a powerful, direct effect on accounting practice. No matter how skilled the standard-setters and law-makers are, it is the need to show a true and fair view that puts their requirements in perspective… It is inherent in the nature of the true and fair view concept that financial statements will not give a true and fair view unless the information they contain is sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom they are addressed.”

“to ensure that the substance of an entity’s transactions is reported in its financial statement. The commercial effect of the entity’s transactions, and any resulting assets, liabilities, gains or losses, should be faithfully represented in its financial statements.” (3) Paras 2, 3, 4 and 5 which define: (a) “Assets” as: “Rights or access to other future economic benefits controlled by an entity as a result of past transactions or events”. (b) “Control in the context of an asset” as: “The ability to obtain the future economic benefits relating to an asset and to restrict the access of others to those benefits.” (c) “Liabilities” as: “An entity’s obligations to transfer economic benefits as a result of past transactions and events.” (d) “Risk” as: “Uncertainty as to the amount of benefits. The term includes both the potential for gain and risk of loss.” (4) Para 11 which stated that subject to para 12 (which excludes from FRS5 certain listed transactions/events), FRS5 applies to all transactions of a reporting entity whose transactions are intended to give a true and fair view of its financial position on the basis that the term “transaction” includes both: “a single transaction or arrangement and also a group or series of transactions that achieves or is designed to achieve an overall commercial effect.” (Emphasis added.)

“A reporting entity’s financial statements should report the substance of the transaction into which it has entered. In determining the substance of the transaction all its aspects and implications should be identified and greater weight given to those more likely to have a commercial effect in practice. A group or series of transactions that achieves or is designed to achieve an overall commercial effect should be viewed as a whole.” (Emphasis added.)

“To determine the substance of a transaction it is necessary to identify whether the transaction has given rise to new assets and liabilities for the reporting entity and whether it has changed the entity’s existing assets and liabilities.”

“17. Evidence that an entity has rights or other access to benefits (and hence an asset) is given if the entity is exposed to the risks inherent in the benefits, taking into account the likelihood of those risks having a commercial effect in practice.” “18. Evidence that an entity has an obligation to transfer benefits (and hence has a liability) is given if there is some circumstance in which the entity is unable to avoid, legally or commercially, an outflow of benefits.” “19. Where a transaction incorporates one or more options, guarantees or conditional provisions, the commercial effect should be assessed in the context of all the aspects and implications of the transaction, in order to determine what assets and liabilities exist.” (8) Para 20 which sets out when an asset or liability should be recognised in the balance sheet: “Where a transaction results in an item that meets the definition of an asset or liability, that item should be recognised in the balance sheet, if - (a) there is sufficient evidence of the existence of the item, including, where appropriate, evidence that a future inflow or outflow of benefit will occur, (b) and the item can be measured at a monetary amount with sufficient reliability.” (a) there is sufficient evidence of the existence of the item, including, where appropriate, evidence that a future inflow or outflow of benefit will occur, (b) and the item can be measured at a monetary amount with sufficient reliability.” (9) Para 29 which states that assets and liabilities should not be offset except in limited circumstances: “Debit and credit balance should be aggregated into a single net item where and only where they do not constitute separate assets and liabilities, ie, where and only where all of the following conditions are met: (a) The reporting entity and another party owe each other determinable monetary amounts denominated either in the same currency or in different but freely convertible currencies… (b) The reporting entity has the ability to insist on a net settlement…. (c) The reporting entity’s ability to insist on a net settlement is assured beyond doubt…” (a) The reporting entity and another party owe each other determinable monetary amounts denominated either in the same currency or in different but freely convertible currencies… (b) The reporting entity has the ability to insist on a net settlement…. (c) The reporting entity’s ability to insist on a net settlement is assured beyond doubt…” (10) Under a heading “Assessing commercial effect by considering the position of other parties”, paras 51 and 52 which state: “Whatever the substance of a transaction, it will normally have commercial logic for each of the parties to it. If a transaction appears to lack such logic from the point of view of one or more parties, this may indicate that not all related parts of the transaction have been identified or that the commercial effect of some elements of the transaction has been incorrectly assessed. It follows that in assessing the commercial effect of a transaction, it will be important to consider the position of all of the parties to it, including their apparent expectations and motives for agreeing to its various terms. In particular, where one party to the transaction sees a lender’s return but no more (comprising interest on its investment perhaps together with a relatively small fee), this indicates that the substance of the transaction is that of financing. This is because the party that receives a lender’s return is not compensated for assuming any significant exposure to loss, other than that associated with the creditworthiness of the other party, nor is the other party compensated for giving up any significant potential for gain.”

“G3 The following additional definitions apply in [Note G] - Performance The fulfilment of the seller’s contractual obligations to a customer through the supply of goods and services. Right to consideration A seller’s right to the amount received or receivable in exchange for its performance. This right does not necessarily correspond to amounts falling due in accordance with a schedule of stage payments which may be specified in a contractual arrangement. Whilst stage payments will often be timed to coincide with performance, they may not correspond exactly. Stage payments reflect only the agreed timing of payment, whereas a right to consideration arises through the seller’s performance.” “G4 A seller recognises revenue under an exchanged transaction with a customer when, and to the extent that, it obtains the right to consideration in exchange for its performance. At the same time it typically recognises a new asset, usually a debtor.” “G7 Revenue should be measured at the fair value of the right to consideration. Subject to paragraphs G8-G9 or other evidence to the contrary, this will normally be the price specified in the contractual arrangements.” “G8 Where the effect of the time value of money is material to reported revenue, the amount of revenue recognised should be the present value of the cash inflows expected to be received from the customer in settlement,…” “G9 Where at the time revenue is recognised on a transaction there is a significant risk that there will be default on the amount of consideration due and the effect is material to reported revenue, an adjustment to the price specified in the contractual arrangement will be necessary to arrive at the amount of revenue to be recognised.” “G14 Statement of Standard Accounting Practice 9 ‘Stocks and long-term contracts’ (SSAP 9) sets out requirements for accounting and disclosure under a long-term contract. [Note G] provides additional guidance on the recognition of turnover derived from such contracts, but does not amend the requirements of that accounting standard.” “G18 A seller should recognise turnover in respect of its performance under a long-term contract when, and to the extent that, it obtains the right to consideration. This should be derived from an assessment of the fair value of the goods or services provided to its reporting date as a proportion of the total fair value of the contract.”

“i) Gala has correctly recorded, as an intangible asset, its distribution Rights over the Films; those Rights were purchased from funds provided to Gala by SG, by way of a loan; ii) The SG Loan represents a liability (as that term is defined in UK GAAP) of Gala since Gala had an unavoidable obligation to make payments of interest and capital to SG under the loan agreement; iii) Gala incurred expenditure in the course of its operations – this included expenditure on prints and advertising, pursuant to the [DA]. Such expenditure represents a sacrifice of resources in one period (a loss) to obtain an economic benefit in that, or a subsequent period (again). Gains and losses may be excluded from the profit and loss account only if they are specifically permitted or required to be under an applicable accounting standard, or in the absence of such standard, by law. Expenditure on prints and advertising would not qualify for “capitalisation” on the balance sheet, save as relating to a prepayment or an accrual, and therefore is correctly recognised by Gala in its financial statements as an expense. iv) Gala’s incurred expenditure was, in practice, funded from members’ contributions. Members’ contributions were in the form of capital (i.e. equity contributions) because, once in the hands of Gala, a Member could not oblige Gala to return that contribution. The financial statements correctly record members’ contributions within Members’ Interests. v) Amounts received by Gala from members’ contributions are therefore assets of Gala. That Members’ contributions were funded, in part, by loans taken out by those Members does not, in my analysis, change anything. Such financial arrangements relating to Members’ capital, in particular, where a Partnership such as Gala has offered security over its assets in respect of personal loans of its Members, is covered by contemporary (and current) accounting guidance. Thus, the means by which the Members funded their capital contributions (whether by own resources, a bank loan, or otherwise) does not affect the accounting for Members’ capital, which was appropriately treated as equity. Similarly, the fact that the LLP may have agreed to remit funds from Members’ interests to SG, to repay the loans and interest does not impact on the accounting for the initial contribution.”

“You take each point and you decide if there are assets and liabilities that arise from each step of that. That is a fundamental principle of accounting. You do not offset asset and liabilities and/or collapse transactions. You account for each individual transaction, but in doing so, in looking at the substance, it is important to consider not just the transactions of the entity, but transactions that impact on that as part of this overall commercial effect.” (3) He said that it is absolutely correct that, notwithstanding that there is “a group of transactions”, one subsequently unpicks them to try to deal with the individual elements of the group and: “If you have a series of transactions, you consider them as a whole for the purposes of identifying the assets and liabilities caused by the transactions…you do not aggregate transactions that give rise to different assets or different liabilities. You do not offset assets and liabilities. So if A borrows from B for the purposes of lending to C, there are two transactions to account for there and you would consider the assets and liabilities depending on the overall commercial effect, but you would not necessarily offset any of those assets and liabilities unless very specific requirements apply…and in the context of doing so you would consider that overall commercial effect as to whether it gives rise to assets and liabilities, but you don’t collapse transactions. The transactional basis of accounting doesn’t do that…a reporting entity’s financial statements should report the transactions in which it has entered into. So that means that you effectively account for each individual transaction...That’s what we call the transactional basis of accounting.” (4) He added that FRS5 does not change the transactional basis of accounting as he had described it. It says that, in order to account for the substance of transactions: “you might need to look at in the case of complex transactions the overall commercial effect and the question of whether assets and liabilities have arisen as a result of those transactions, but you don’t collapse all the transactions down to a single sort of consolidated matter…That is because… paragraph 29 won’t allow us to offset assets and liabilities…”

“We account for the liabilities as a whole and we account for the assets as a whole…What we don’t do is offset…”

“They could be relevant on the question of valuation in the same way that a bank has collateral for a loan. It doesn’t put that collateral on its balance sheet. The loan is on its balance sheet up until the point that the bank calls on the collateral and then it puts the collateral on the balance sheet and takes the loan off. So from an accounting perspective pretty much as a general principle the security arrangements are not accounted for. They are sort of separate. So the fact there’s [a LC]….a fixed and floating charge and all of those sort of legal and security arrangements, they are not part of the accounting.”

“Where a transaction incorporates a whole gamut of different things you have to take into account those things and the commercial implications and…what the likelihood of exercise or calling on those guarantees or options would be…That will lead you to determining what assets and liabilities exist…the general principle is you don’t account for the general security arrangements that support a transaction. You account for the transaction.”

“we need to do it once for the [DA] and once for the [LAs]. We don’t do it in sort of one… go…We don’t offset assets and liabilities. We don’t combine assets and liabilities. We simply look at assets and liabilities under that transaction…” (2) In other words, to ascertain economic substance one has to look at the LAs and DA together but, for accounting purposes, there is not 1 transaction with 1 composite economic substance. There are 2 transactions that share “a common matrix or a common economic substance or a common contractual substance” and “we need to account for the transactions under one and the transactions under the other.”

“all of the money from commercial exploitation flows through the waterfall after the cinema cut. Everything else flows through the waterfall. So it is of consequence to the LLP, depending on…the construction of the waterfall.” (4) When pressed, he acknowledged again that there is a separate question about the terms of the waterfall, but noted “we are not talking about profit here” or Gala’s overall position but about “cash or economic resource flowing through the waterfall” and “there’s no money that doesn’t flow through the waterfall” and Mr Ackerman was looking at prospects of commercial success and “that translates to a flow under the waterfall”. (5) He did not agree that the HL letters and Mr Ackerman’s letters do not support his view and the basis for his view is illusory. He said that, as clearly anticipated by these letters, the transaction films would have a theatrical release, and that would generate income at the box office that flows through the waterfall. In accounting terms, that means there is a flow of economic benefit or the receipt of an economic resource by Gala. He again seemed to accept that whether Gala actually received any economic benefit depends on the terms of the waterfall but said that the issue is: “is there a flow - expected flow of benefits from these films into the LLP, into the waterfall”

“Information provided by financial statements needs to be relevant and reliable…Information is relevant if it has the ability to influence the economic decisions of users…..Information is material to the financial statements if its misstatement or omission might reasonably be expected to influence economic decisions of users.”

“Whether information is material will depend on the size and nature of the item in question, judging it on the circumstances of the case…”

“This is not an exchange…that takes place on a particular date where I exchange something, consideration for an asset that pays up over X period of time…It…involves Gala entering into a transaction whereby its income over the next X number of years arises because of the Box Office performance of the films and there’s a Minimum Amount that will make Gala whole…at the end of 7 years. It is not an exchange of a right to receive sum A, sum B, sum C, sum D, sum E, because those sums are dependent on the performance of the films at the Box Office, because those amounts come off the minimum guarantee”. (3) He agreed that Gala was guaranteed to receive the Minimum Amount plus interest which necessarily comes back, whether under the DA or LC, even if not a single ticket is sold. (4) It was put to him that it does not make sense to talk of an outflow of economic benefit for Gala which ignores Gala’s right to receive back sums equal to principal of and interest due on the SG loans, in light of (a) how the loan repayment works, (b) it was a pre-condition to Gala’s obligations under the DA taking effect that Gala received the LC, (c) Mr Yusef referred to the LC as a key term of the transaction and as critical and a foundation stone, and (d) the need under FRS5 to focus on substance and overall commercial effect. He said that (i) there was a legal obligation on Gala to repay the relevant sums so its SG loan has to be accounted for, (ii) if there is an inflow and an outflow, one has to account for them both separately; one does not offset assets and liabilities, (iii) Gala was legally liable for the SG loan and there was an outflow of economic benefits required to settle it, (iv) even if there was an equal and opposite receipt they are separate. That is a fundamental point of accounting. There are exceptions in para 29 where an asset can be off-set against a liability but that does not apply here. So if there is an outflow of resources, however those resources are financed (whether from a different loan, equity or profits), that is accounted for separately, even if it is part of a framework of transactions because the definition of a liability is something where there is a legal, constructive or commercial obligation. (5) He said that the point is that there is no asset of £102 million to reflect in the balance sheet as an asset does not arise at the point of the contract. Rather: “It arises either over the life of the contract or it arises in the difference in…the shortfall guarantee, because the primary way that assets arise is through the exploitation under the [DA]…So….before the minimum royalty is paid, it becomes an asset and then it’s paid and the asset is replaced by cash…So you don’t recognise the minimum royalty until the minimum royalty has been…earned in year 2, year 3, year 4, year 5. So you will have a mismatch potentially of assets and liabilities, but that’s accounting.” (6) He added that a liability under a loan is recognised upfront even if it is payable over time. There is an imbalance between the recognition of an asset and of a liability due to the fundamental concept of prudence: “You recognise a loan. You do not recognise an asset necessarily on the same basis. So the right…to income in the future is not an asset now. The obligation to make payments in the future is a liability now but may be categorised as a current liability or non-current liability.” (7) It was put to him that the concept of prudence applies where there is uncertainty but here there is no uncertainty as regards the receipt of the Minimum Sums. He said that if there is complete certainty, then you would not apply prudence. He was taken to para 38 FRS18 which states: “However, it is not necessary to exercise prudence where there is no uncertainty….”

“I think the nature of these costs, being expenditure with third party, does not lend itself to qualifying them as an asset…So the question here is the expenses are incurred in 2003/2004 and the income is earned over the life of the contract up to 2011. So income is earned over a future period. Expenses are incurred in a current period. The nature of those expenses does not lend themselves to being capitalised because there’s no asset that comes with it. So I think the accounting is entirely permissible in recognising the expense and income in the future years…the right to the income arises in subsequent years.”

“earned over a number of future periods and arises or may arise at different points along the way. The revenue and the corresponding asset are recognised as they arise…I recognise those at the point that they are earned and they become assets at that point….”

“You need to recognise an asset when the asset arises. The asset arises when the income is earned and that income is earned at a future point in time. An annual royalty for year 2 is earned in year 2 and you recognise the asset and the income in year 2. It doesn’t matter about the performance obligations, because they are earned over the lifetime of the contract…I didn’t say when the money comes in, important point. When the money is earned and that earning takes place over the life of the contract. It is not saying it is when the cash arises. It is when it is earned. So if there is a royalty at the end for year 1 and year 2 and year 3 and year 4, that income is earned in year 1, in year 2, in year 3 and in year 4. It’s not all recognised upfront.”

“No. It is not. It has to sit there for the next X number of years earning revenue throughout the lifetime of that contract. You don’t recognise all of that revenue upfront. It is not paid upfront. Even if it was paid upfront, you wouldn’t recognise that revenue upfront. That revenue would be recognised over the lifetime of the contract…There is time. Gala sits there for the next 7 years and in year 1 revenue arises, year 2, revenue arises, year 3 revenue arises and it recognises that revenue at that point, because its income is earned over the lifetime of the contract…As I understand it, there’s nothing else that Gala needs to do except wait and earn revenue over the lifetime of the contract.”

“it is not that it’s more than 12 months. It’s that revenue under a contract is earned over the lifetime of that contract. You don’t recognise everything upfront. You just don’t…the accounting practice and everything else is that revenue arises over the lifetime of the contract, because of the impact of time. If there is an annual royalty for year 3, that arises in year 3 because the contract is 3 years old, it arises and is recognised in year 3. You don’t recognise it all at the beginning, because that overstates profit…it recognises things that have not happened yet. It recognises revenue that has not been earned yet.”

“In part, yes…Application notices are of general principle. There are other principles that apply to the recognition of revenue over a longer period of time. SSAP 9 is one of them. Leases is another. [Note G] does talk about performance obligations in the context of an exchange transaction. It is applicable as general principles, but it is not determinative, if you like, of how to account for transactions over a long period of time where the revenue arises over a number of years or in different accounting periods…you do not recognise all of the revenue over a multi-year contract in year 1. You just don’t. The reason for that maybe is you get to year 2….something is cancelled and you then have to reverse it in some way. As a general principle of accounting you…attribute [income] over the life of a contract. You don’t recognise it all upfront...certainly…you shouldn’t recognise any revenue in year 1, because none has been earned.”

“You don’t actually know what the fair value of the revenue is going to be in year 1. All you know is that there is a minimum amount that will be earned over the next 7 years or so. So, no, you wouldn’t recognise all of that upfront. You would recognise that as it was earned over the contract, but I wouldn’t know what number to put into for the first year…You recognise it over the lifetime of the contract as it is earned…the annual royalty arises in year 2, year 3, year 4, year 5 and the correct time to recognise that is year 2, year 3, year 4, year 5.”

“You don't get entitlement to twelve months of royalty when there’s only one month of a financial year.”

“we have to account for the primary transactions that the entity is involved with. So if the security comes into play because of the default, then you would account for it at that point”

“if I have a right to receive royalty income over a number of years…I may…need no more to do anything, but I would not recognise all of that royalty income in one go…royalties are measured using the accruals basis of accounting…if that right arises over multiple years, you account for it in those multiple years…That’s how accounting works, because to do otherwise I am not reporting the financial performance for a particular accounting year. The accruals basis of accounting is about matching revenues when they arise…”

“Like all assets, you would measure it at the estimated recoverable amount, and to the extent that there is security in place that would inform the amount which you would carry it at. If it’s covered by [the LC] it means, in essence, the valuation is backed by Barclays rather than Sony. So any relative credit difference between Sony and Barclays you would take account of, but, as I say, fundamentally the income arises and the assets arise through the exploitation of the rights, and then there is this - I described it as a note in the accounts that might be necessary.”

“a critical feature in differentiating a financial liability from an equity instrument is the existence of a contractual obligation of one party to deliver cash or another financial asset to another party” (para 32). (2) He said it is clear from the SORPs that the proper accounting treatment for the contributions depends on whether they meet the definition of a “liability”, as that term is defined under FRS5. He noted that (a) under the MA, a member’s ability to dispose of his interest in Gala was limited, (b) the circumstances in which a member could expect a return of their initial capital were limited to (i) insufficient contributions being received from subscribers, (ii) expulsion of the member by the LLP, and (iii) winding up of Gala, and (c) Gala’s accounts stated that new members were required to subscribe capital at a level agreed with the designated members and no member had the right to make any drawings or withdraw part of their capital without the prior agreement of all other members. He concluded that, on that basis, a member could not oblige Gala to return his contribution and, therefore, the contributions did not meet the definition of “liability” and were properly categorised as equity in Gala’s accounts. (3) He also noted that (a) it was stated in the members’ SG loans that the security offered by Gala to SG did not affect the liability of members in respect of their loans, and (b) set out the following guidance in paras 85 to 88 of the 2002 SORP on how to account for circumstances where a partnership has offered security over its assets in respect of loans of its members: “If the LLP has entered into any guarantee or indemnity with respect to the borrowings of a member or members personally, the existence of such a guarantee or indemnity where material should either be disclosed as a note to the accounts (where it is unlikely that the guarantee or indemnity would be called) or provided for in the primary statements where there is an actual constructive liability as defined under FRS12 and it is probable that the guarantee or indemnity will be called. It is common practice within partnerships for partners to borrow to fund their capital and similar interests in the firm. Such arrangements may involve the firm entering into guarantees, indemnities or undertakings toward the lender concerned. Broadly similar arrangements may occur with regard to members of LLPs and the LLP itself. Of itself, the extent to which members' interests have been financed by lenders who have lent funds to the member or members is not a matter for disclosure. Similarly any undertaking that the LLP may give as agent for the member, in remitting funds from members' interests to a lender or other third party, need not be disclosed. A provision would be required where, for example, an LLP has undertaken to repay a loan of a member, such that the LLP is under a legal or constructive obligation to ensure that the full liability to the lender is settled, and it is more likely than not that the guarantee will be called upon. Where a provision of this nature has been made in relation to a member who is a related party…, further disclosures should be given in accordance with FRS8.” (Emphasis in original.)

“An obligation that derives from an entity’s actions where, by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities and: (b) as a result the entity has created a valid expectation on the part of the other parties that it will discharge those responsibilities”. “An obligation that derives from a contract whether in explicit or implicit terms, legislation or other operation of law.” (5) He concluded that, on the basis of the guidance in the SORPs, the accounting for the contributions as equity is not affected by the means by which the members funded the contributions or by the fact that Gala agreed to remit funds from member’ interests to SG to repay the members’ SG loans. (6) He also said that (a) the security which Gala granted SG under the debenture was a contingent liability; Gala had a possible obligation to SG only on the occurrence of an uncertain future event, the default of the member, (b) the fact that there was no disclosure in the accounts presumably indicates that the contemporary view was that the prospect of the security being called on was remote, and (c) the amount shown in the accounts in respect of drawings reflects payments made by Gala in respect of members’ loans which is permissible under GAAP. He cited in support of this view para 5 of FRS12 which states: “A contingent liability is either (i) a possible obligation arising from past events, whose existence will be confirmed only by the occurrence of one or more uncertain future events, not wholly within the entity’s control; or (ii) a present obligation which arises from past events, but is not recognised because it is not probable that a transfer of economic benefits will be required to settle the obligation or because the amount of the obligation cannot be measured with sufficient reliability.”

“All present and future obligations and liabilities of the [members] or any of them, to [SG] in respect of any of the [members’ loans].”

“certainly not within the four walls of the…SORP. Capital of members is capital, regardless of how it is funded. The recipient of capital is not liable…to repay that amount unless there is some default or some obligation that arises…such as that the LLP is under a legal or constructive obligation. I don’t see what you have described to me as constructive. I think it is just an appropriation undertaking to remit funds on a particular basis…the only obligation that I can see here is the obligation to remit funds. I don’t see how the LLP becomes liable for the whole amount, certainly not as an accounting obligation. If it fails to remit funds…that doesn't make it liable to the bank for the primary amount.”

“What I see is capital being subscribed by the members. It’s accepted that the source of that capital - it says so in the SORP - is not a matter for disclosure. It only becomes a matter if there is an obligation on the LLP to become liable for the principal amount. All I can see is an obligation to remit funds, and if it doesn’t remit funds, then there’s a consequence that flows that could lead to a liability.”

“Drawings reflects amounts paid on behalf of members in respect of the members’ loans”

“I consider that the Agreements are linked, and that they have an overall commercial effect, viewed as a whole the substance of the transactions arising under the Agreements are separate”

“FRS5 was dealing with the issue of are the liabilities of an entity properly reflected, and the solution to that was substance. All of the examples on FRS5 are dealing with question of liabilities that do not arise because of their legal form, but nevertheless should be accounted for because of the substance. So that’s the point. It’s not about redefining transactions. It’s about bringing on to the balance sheet liability which prior to that date had been left off, but it is of general application.”

“In the present matter, none of the above apply.”

“…that’s the cash. That’s not a question of income. There is different concepts there. If the films, for whatever reason, generated Box Office receipts…sufficient to work their way through the waterfall,…that income should be recognised by Gala. The timing of when it gets the cash is what you are referring to. So Sony has the option to keep the cash. That’s not determinative of the accounting for the income. Yes, I see the proviso, but it wouldn’t affect how income is recognised. It would affect timing of the receipt of that income.” (3) When asked if a reader of the accounts would be surprised at his way of accounting for this, he said (a) the reader would see income that was not matched by a cash receipt, but the balance sheet would show a receivable for all monies that Sony held on to, (b) box office receipts are the driver in generating the income, and, ultimately, the timing is driven by the timing of the Gross Receipts. If the Gross Receipts give rise to income under the waterfall, then that is recognised in the accounting period in which that income arises. If the receipts are held by SPR, and not paid over, then there would be a receivable representing those receipts to be received in the future. So it would be credit income, debit receivable: “…the timing is driven by the Box Office receipts…The funds are Gala’s funds under the fourth and sixth provisions and the accounting takes place under those provisions…if that income is not received in cash, it is….a receivable that would sit on the balance sheet. So…if receipts arose under 9.1.4 or 9.1.6 and…SPR chose to retain those receipts…you wouldn’t wait until the end and account for it all at the end. There is an entitlement that arises under 9.1.4 and 9.1.6, and there’s a receivable that arises under the proviso…” (4) He was asked if he was really saying that he would treat sums paid under the fourth provision as belonging to Gala given they were to go direct to the licensor. He said: “There is a corresponding…liability under the [LA] to pay that money to the licensor. So the money arises under one contract and is paid for under the other contract. You don’t offset assets and liabilities. So they are, to all intents and purposes, part of the same arrangement, but they are separate transactions, one giving rise to the other.”

“you can’t offset assets and liabilities…You have to consider whether there are assets and liabilities that arise effectively in addition or as a consequence of the linked nature of the transactions. So there’s no muddle here...We have assets and liabilities with separate counterparties that arise under these 2 agreements and we have to account for them…we have to recognise that Columbia and Screen Gems and [SPR] are different counterparties. We can’t combine the transactions. That’s not what FRS5 is telling us to do.”

“You look at the overall commercial effect and you decide: does that give rise to assets and liabilities in addition to or as well as other assets and liabilities? I have said you don’t offset them, and a transaction may give rise to a legal obligation and it may give rise to another constructive obligation. So are there more assets and liabilities that arise from the commercial situation? There’s no muddle here. It is not the end point. The end point is the substance of the transaction giving rise to assets and liabilities that fall to be accounted for.”

“…do I have to recognise assets and liabilities because of a group or series of transactions…? As an entity…in fact, I am only entering into one transaction, but does that transaction give rise to assets and liabilities?...the transactional basis of accounting is about recognising an asset, a liability, an income or an expense or capital. That’s it. We don’t recognise transactions. We recognise assets and liabilities. This is why FRS5 was so important, because it was saying that if you enter into a transaction that gives rise to a liability, then you need to account for that liability. If you enter into a transaction that gives rise to an asset, then you would have to account for that asset, subject to…the rules of prudence and things like that. The fact that it’s a transaction that’s part of a chain that you may not be directly involved in, but it is nevertheless part of this overall commercial effect, doesn’t give you the ability…to say: "Well, I don’t need to account for that". So I account for the transactions that I enter into and I consider whether the overall commercial effect of which those transactions are a part require me to recognise assets and liabilities.”

“We have assets and liabilities. We can’t offset assets and liabilities. So in the circumstance where there is a transaction with Sony and there is a liability to Columbia, and there’s another transaction with Sony, you can’t combine those assets and liabilities. So we have to have separate accounting for the assets and liabilities. All FRS5 does, it says: “Find all the assets and liabilities and account for them.”

“We may see those transactions as part of an overall commercial effect, and we have to account for the assets and liabilities that arise from that overall commercial effect, but we cannot collapse transactions down and offset assets and liabilities…We have to account for each step. So to your point we have to start with the transactions, because those are the transactions that fall to be accounted for. If we hunt for and identify some other transaction, we are effectively netting off assets and liabilities, and we are not allowed to do that.”

“Cashflows under the agreements would be the same, dependent, for the most part, on the success, or otherwise, of the Films.”

“We measure accounting over single accounting periods. We account for things on an annual basis…my understanding of the [DA] and [LA] means that those cashflows could be wildly different over each one of those years. So I don’t think that the cashflows would be the same independent of the success or otherwise…the Minimum Amount is reduced by the amount that has been received prior. So if there are…payments under the waterfall, those come off…the minimum amounts. So Gala is guaranteed a minimum amount back, but the cashflows that may arise in any one year may be different.”

“FRS5 makes clear that an entity should account for a transaction based on its perception of changes in its assets and liabilities…Gala’s financial statements will, if true and fair, reflect the contemporarily perceived substance of the transactions it entered into...However, I have also considered the extent to which the contemporary assessment is correct…”

“You do not account for a transaction as a single unit of account, in the sense that Mr Yusef is describing the transaction. It is like an acquisition or a deal or something. You might get to the same place…But we also have to consider the transactions that legally have been entered into and whether we need to account for those as well…That’s why I said that the whole thrust of FRS5 was going beyond the legal form of a transaction and hunting for additional assets and liabilities that were created because of the commercial arrangements. It doesn't mean you can ignore the legal aspects of a transaction. Now there may be, you know, another transaction that has an effect on that, and then you consider how to account for it, but it’s not one transaction, because the LLP entered into a number of transactions, and those each have to be accounted for.”

“It follows from FRS5 that if the substance of certain transactions was that Gala did not have any obligation to transfer economic benefits in connection with the SG LLP loans on the one hand, or control of the rights or other access to future economic benefits on the other, it would not have an obligation, or an asset respectively, since the obligation to transfer, and rights or other access, are part of the definitions of liabilities and assets under FRS5.” “FRS 5 does not require an entity to recognise the obligation to spend the cash for a specific purpose, prior to the cash being spent on that purpose. While it might be a breach of the terms of the loan for a company to spend that cash on something else, the cash controlled by the entity could be spent in any way it wishes. Similarly, interest that is payable on the loan is not recognised until that interest arises.”

“we do not account for the purpose of a loan. We account for the loan and the proceeds of the loan as they are then applied for the assets. There’s no matching of one against the other. The entity controls the asset and it has the liability. So the intended purpose of the loan is not accounted for…we are carrying out substance, but we are also concerned with the rest of accounting principles and standards, assets and liabilities, not offsetting assets and liabilities, the separation between assets and the funding of assets, the separation between capital and the use of capital…”

“We account for how the money is actually used.”

“But we don’t account for risk. We account for assets and liabilities, income, expenditure and capital. There doesn’t have to be an expectation of gain or an expectation of loss. So the question of good commercial, bad commercial risk/reward are not…of determinative relevance. If I enter into an arrangement whereby I enter into some transactions, and those transactions have some other consequences, then we account for those transactions as they arise. We don’t have to step back and say: “Do you know what? There is not enough risk in this transaction or account.”

“We are accounting for the assets and liabilities that arise even if there is no risk attaching to them. Money in a bank account or a government bond is risk-free, but it’s still accounted for.”

“Well, there’s not enough risk in there. Therefore, we can’t account for it like that”, because risk is mitigated through security arrangements. In a scenario whereby there is a simple exchange of £100 for £100 to be received in the future, there may be no risk in that transaction, but I would still account for the receipt and…the loan an….the receivable. I still have to account for the transactions, irrespective of the risk or lack of it.”

“Only to the extent that their commercial effect is bound up with others or indeed they have no commercial effect”

“That’s why I say it depends on the terms of the loans. So without knowing what the terms of the loans are then I can’t just say”

“Take money out of the deposit and pay it into the account from which SG pays its interest”

“where we are looking at control of access to benefits, the funds that were in the [expenditure account] were not only - couldn’t be withdrawn without Sony’s permission, potentially could be withdrawn without Gala’s permission provided they were within a budget, and any economic benefits or substantial economic benefits that arose from the expenditure of those funds accrued to Sony, then they don’t appear to me to be an asset of Gala.” (2) He was referred to the following comment in para 54 and it was put to him that the fact that Sony could act as agent for Gala does not of itself give Sony control of the account: “Control can be distinguished from management, and although the two often go together, this need not be so. For example, the manager of portfolio securities does not have control of the securities, because he does not have the ability to obtain the economic benefits associated with them. Such control rests within the person who delegated to the manager the right to take day-to-day decisions about the composition of that portfolio.”

“Sony deposited 102 million at Barclays, which is paid out over time…which was security for [SG] to put 102 million into an account under the control of Sony, which Sony could pay out subject to counter signatory by Gala. So Sony put 102 million in one account and had 102 million in another account…That is the substance of what happened…They could spend that 102 million straightaway and then the interest on the 102 million just pays off the interest on the [SG] loans.”

“If there were sufficient receipts Sony would only have to pay the excess, because the rest could come out of the Barclays account to pay off the minimum guarantee and then Sony would have to pay surplus out of the waterfall. Sony is paying the guaranteed minimum plus the excess if the films is successful… whether that guaranteed minimum has come out of the Barclays account or from Sony and then Sony gets the money back from Barclays does not make any difference, but Sony will always pay 100 million [the assumed minimum] plus potentially an excess.”

“It is a debtor. The fact it might be paid in 7 years’ time does not affect when it is accounted for. It is when that debt is earned…that’s what one does with revenue recognition…a licensor is granting a licence that covers a period of time. Gala doesn’t have to do anything else.” (3) When questioned as to why he took different views as regards (a) the case of a licensor who does nothing more than grant a licence and enjoy the fruits of that licence over time, and (b) Gala’s position as regards the shortfall guarantee, as a right to payment over time, which guarantees/underwrites a right to income under the waterfall, he said that: “the difference is that here there is a right to income at the date the agreements are signed. It is a guaranteed minimum payment.” (4) When pressed, he said he was giving a very consistent answer. The seller has completed all his obligations and has therefore earned the right to consideration and that counsel gave him: “hypothetical examples without terms, conditions, whatever. What I am talking about are the terms of this agreement…Because the right to earn that aspect of the income is earned on the signing of the agreement”. (5) When it was put to him that this is no different to a licensor who licences something for a period of years for a fixed amount with security who he seemed to agree should bring in the receipts over the life of the licence, he said (a) it would depend on the terms of the licence such as whether it is exclusive or non-exclusive, and (b) that could make a difference as the essence of an asset is the right to use rights and to exclude others from using them: “It’s because it is a fixed guaranteed minimum amount. We use guarantee in the terms of the contract there rather than income guarantee…It’s a fixed amount that will come whatever happens”. (6) His overall conclusion whereby he excluded everything is based on who, as far as he can tell, controls the accounts. When it was put to him that, on his disaggregated approach, he sets-off the expenditure and the guaranteed minimum against each other, he said he did not do that and: “I would record the guaranteed minimum as income and a debtor…Income and debtors will always be the same amount, but if you are disaggregating things then it would represent income. The fact that it happens to exactly match the expenditure is partly why I don’t feel the accounts show a true and fair view.”

“you recognise revenue when you have performed your services. I could not see any further obligations on Gala to perform any services, and therefore given that the guaranteed minimum payment was always going to come in, if one looked at just the [DA] in isolation, one had to recognise it…Mr Vallat started talking about SSAP 9 and long-term contracts…the corollary of that and Mr Steadman's evidence also said about matching income and expenses. So if one looked at the [DA] as a long-term contract, then all the costs associated with that would become a work in progress. The net effect would be the same, but I still believe that all the contractual obligations had been completed and therefore….if one was looking at that agreement on its own, they would be recognised, but if for some reason there were further performance obligations, then the P&A expenditure was part of the cost of earning that guaranteed minimum payment and therefore should be matched largely to when that income arises.”

“A transaction whereby an entity receives value from another entity without directly giving approximate equal value in exchange or gives value to another entity without directly receiving approximately equal value in exchange”, and (b) whilst FRS12 was not applicable in 2003/04 there is no suggestion that the meaning of that concept is different now than it was then. Therefore, on its plain meaning “exchange transaction” is a broad concept which encompasses transactions where an entity receives value from a transaction and gives approximate equal value. (2) “Performance” is defined for this purpose as the performance of “the seller’s contractual obligations to a customer through the supply of goods and services” and a “right to consideration” as a “seller’s right to the amount received or receivable in exchange for its performance…”