Kahn & Vooght v. Commissioners of Inland Revenue [1999] EWHC Ch 205 (30th July, 1999)

Court of Appeal 1980 1 WLR p 96 agreed with Mr Justice Brightman. At page 99 Lord Justice Buckley giving the lead judgment said:- "The first question for consideration is, I think, whether Brightman J was right in holding that the tax constitutes a necessary disbursement within the meaning of the rule. It would, in my view, be a very remarkable thing if the proper priority of a liability under rule 195 were to depend upon whether the liquidator decides to pay or not, which seems to be the effect of Mr Dillon’s argument, for he says that if the liquidator had paid the tax it could properly be described as a disbursement but that until he pays it cannot so be described. … The company is liable for the tax which is due. The tax ought to be paid. The liquidator is the proper officer to pay it. When he pays it he will clearly make a disbursement. In my judgment it will be a necessary disbursement within the meaning of the rule. Moreover common sense and justice seem to me to require that it should be discharged in full in priority to the unsecured creditors, and to any expenses which rank lower in priority under rule 195. The tax is a consequence of the realisation of the assets in the course of the winding-up of the company. That realisation is a necessary step in the liquidation; that is to say, in the administration of the insolvent estate. The fact that in the event there may be nothing available for the unsecured creditors does not, in my view, mean that the realisation was not a step taken in the interests of all who have claims against the company. Those claims must necessarily be met out of the available assets in due order of priority. Superior claims may baulk inferior ones, but the liquidator’s duty is to realise the assets for the benefit of all in accordance with their rights. If in consequence of the realisation, the company incurs a liability, the discharge of such liability must, in my judgment, constitute a charge or expense incurred in the winding-up within section 267 of the Companies Act 1948 and must also, in my view, fall within rule 195." Lord Justice Buckley then expressly agreed with the passage from Mr Justice Brightman’s judgment, set out above, in which he concluded that the tax was a "necessary disbursement" within section 195(1) because in was tax which the liquidator was bound to discharge under section 243(2) of the 1970 Act. He then continues:- "Brightman J expressed the opinion that corporation tax on a capital gain, made when a liquidator sells an asset, is not an "expense incurred in realising that asset". I agree with this. The liability to tax is a consequence of, amongst other things, the realisation, but it is not a direct consequence of the realisation. It depends upon the amount of the company’s "profits" as defined in section 238 [of the 1970 Act] (if any) for the entire relevant accounting period. It is, as the Judge said, merely a possible consequence of a sale at a profit. He consequently reached the conclusion that the tax did not fall within the expression "fees and expenses…incurred in… realising… the assets" in the opening words in rule 195, but did fall within the words "the necessary disbursements of any liquidator appointed in the winding-up by the Court… in the fifth paragraph of paragraph 1 of the rule. On the question raised by paragraph (2) of the summons, he held that the corporation tax was a charge or expense incurred in the winding-up within section 267. In my judgment the Judges conclusions were correct…". In re Atlantic Computer Systems Plc 1992 CH p 505 the Court of Appeal were considering claims by the lessors for rentals becoming due on chattels leased to the company which, after an administration order remained in the possession of the company and were used by the administrators. At page 522 of the report Lord Justice Nicholls having referred to the example of the case where a person seeks leave to seize the property of a company in liquidation which would if allowed by the Court, be inconsistent with the purpose for which Parliament imposed a prohibition on proceedings against the company continued:- "However, the matter stands differently if the debt, in respect of which the creditor seeking to exercise a remedy against the company’s property was a new debt incurred by the liquidator for the purposes of the liquidation. In such a case the grant of leave would not be inconsistent with the purpose of the legislation. In such a case it is just and equitable that the burden of the debt should be borne by those for whose benefit the insolvent estate is being administered. The Court should exercise its discretion accordingly. The creditor should be at liberty to enforce his rights against the company’s property if his debt is not paid in full. Further, and by way of corollary, since the debt was incurred for the purpose of the liquidation, it is properly to be regarded as an expense of the liquidation and it ought to be paid as such. The Court will direct the liquidator accordingly." In re Kentish Homes Ltd 1993 BCC p212 Lord Nicholls by this time Vice Chancellor was considering a claim by a local authority to be paid standard community charge as an expense in the liquidation of a property development company which was not due at the commencement of the liquidation but had accrued due thereafter by reason of the company being the freeholder of empty but completed flats. He held that whereas the company was liable for the community charge, that charge was not to be treated as an expense of the winding-up nor was it provable in the winding-up pari passu with the ordinary creditors. At page 217 the Vice Chancellor says this:- "It is against this background that the Court is being asked to direct that the amounts due from the company to Tower Hamlets should be paid by the liquidators as expenses in the winding-up of the company. The obligation to make these payments is an obligation of the company and it arose while the company was being wound up. If the court directs the liquidators to discharge this obligation of the company out of the assets in their hands, the payment will constitute an expense properly incurred in the winding-up. It will rank for payment as a "necessary disbursement" by the liquidators in the course of their administration section 115 and rule 4.218(m)). An interesting illustration of the Court giving such a direction is to be found in re Mesco Properties … there several properties were sold after a company had gone into liquidation some of the sales were by the liquidator, others by a receiver appointed under legal charges, and one of the sales was by the mortgagee bank itself. In consequence a liability to corporation tax in respect of chargeable gains arose. In each case the tax liability was that of the company, even though some of the sales had been made by a receiver or the mortgagee. The liquidator was under no personal liability. Brightman J held that payment of the tax was a necessary disbursement which the liquidator was bound to make." The Vice Chancellor then sets out part of the passage from the judgment of Lord Justice Buckley which I have cited and continues:- "In that case the Court held that justice required that the post liquidation tax liability should be paid as a liquidation expense. In re Atlantic Computer Systems … this Court noted that in determining whether an obligation of the company arising after the commencement of the winding-up should be discharged as a liquidation expense, the Court is exercising a discretion, albeit the discretion is exercised in accordance with established principles. One of the circumstances in which the Court will normally direct payment of such an obligation as a liquidation expense is when the debtor’s obligation arises from property retained by a liquidator for the purposes of the liquidation…." It was Mr Jones’ first submission on behalf of the Commissioner’s that where it is established that a company in liquidation has made a payment or incurred a liability which constitutes an expense "incurred in the winding-up" the Court has no discretion but to award it the priority over the company’s ordinary creditors conferred by section 115. (see per Phillips LJ in re Exchange Travel 1997 2 BCLC 579 at 587h) . I accept that submission. It does not seem to me that the extract from the judgment of the Vice Chancellor in the Kentish Homes case, when properly analysed, is to a contrary effect. Those expenses are payable in the priority provided for in rule 4.218. if the assets are insufficient to pay the expenses the Court has a discretion under section 156 to vary that order of priority. Mr Jones second submission is that the decision of the Court of Appeal in re Mesco Properties is direct binding authority for the proposition that corporation tax on post liquidation profits is a necessary disbursement which the liquidator is bound to pay in full at the conclusion of the liquidation out of the assets of the company and in priority to any claim of the unsecured pre-liquidation creditors. I am not able to accept that submission. The Mesco case was decided under rule 195 of the Companies (Winding-up) Rules 1949. It decided that corporation tax arising as a result of the sale of the company’s assets in the course of its liquidation fell within the fifth paragraph of rule 195 being a "necessary disbursement of any liquidator". Although Lord Justice Buckley speaks of the tax as "a consequence of the realisation of the assets in the course of the winding-up of the company… a necessary step in the liquidation …" it is clearly arguable that because the Court of Appeal approved the judgment of Mr Justice Brightman including the passages which I have quoted from his judgment and because of the second passage from Lord Justice Buckley’s judgment which I have quoted, corporation tax from whatever source constitutes a disbursement within rule 195. However the Mesco Properties case was decided under rule 195 of the Companies (Winding-up) Rules 1949. Since then those rules have been replaced. The current equivalent of the fifth paragraph of rule 195 is rule 4.218(1)(m) of the Insolvency Rules 1986. It is clear that corporation tax resulting from gains on the sales of company assets such as was being dealt with in the Mesco Properties case will not fit into sub-rule (m) by reason of the last three lines of that sub-rule which expressly exclude "any payment of corporation tax in circumstances referred to in sub-paragraph (p) below" , namely, "tax on chargeable gain accruing on the realisation of any asset of the company…". The tax with which the Court was concerned in the Mesco Properties case would today be treated as an expense of the winding-up taking priority as being included in sub-rule (p). The present case does not concern corporation tax arising on the sale of assets. The Commissioners contend that corporation tax from what ever source derived is a disbursement by the liquidator within sub-rule (m) although the actual dispute has arisen because a substantial part, if not the whole, of the corporation tax chargeable to the company under section 8(2) ICTA 1988 arises from "notional" interest which the company has not actually received. There is no other sub-rule to rule 4.218(1) into which corporation tax can fall. Sub-rule (a) is clearly excluded. The question therefore is whether corporation tax generally fits into sub-rule (m). in my judgment it does not and the decision of the Court of Appeal in Mesco Properties does not bind me to find that it does. It seems to me that rule 4.218(1) is to be construed as only including so much of any charge to corporation tax payable by a company after its liquidation as is referable to sales of the company’s assets. Consistently with this construction provision made in sub-rule (p) for the priority of such corporation tax. There seems no logic in a scheme which gives different priority to corporation tax depending on the source from which it arises. In particular there seems no logic in giving corporation tax from income arising from a source other than the gains realised on a sale of the company’s assets, priority over remuneration of a liquidator while corporation tax arising from the sale of assets takes a lower priority. If it is right that the legislature did not intend to differentiate between sources of corporation tax and such tax is to be treated as a disbursement within sub-rule (m) there would be no need for sub-rule (p) at all. It was then contended on behalf of the Commissioners that corporation tax arising from sources other than gains on sales of assets by the liquidator falls within rule 12.2 of the Insolvency Rules being a charge "incurred in the course of winding-up … proceedings… ." It was argued that because in Mesco Properties Mr Justice Brightman and the Court of Appeal held that the corporation tax in that case fell within the words "costs charges and expenses incurred in the winding-up" within section 267 of the 1948 Act it must be taken to fall within "all fees, costs, charges and other expenses incurred in the winding-up…" for the purposes of rule 12.2. I have come to the conclusion that rule 12.2 is not to be construed in that way. Section 267 and its modern equivalent section 156 of the Insolvency Act are not concerned to define what "charges" constitute expenses in the winding-up having priority but are concerned to deal with the particular case where there are insufficient assets in the liquidation to meet all the charges which constitute expenses (see Insolvency Rules 4.220). By contrast rule 12.2 is a rule plainly intended to define the meaning of "expenses properly incurred in the winding-up" when used in section 115 of the Insolvency Act. Section 156 only speaks of "the expenses incurred in the winding-up" . Applying the ejusdem generis rule of construction to "fees, costs, charges and other expenses" does not, in my view, lead to a construction which makes corporation tax a "charge" . Tax of any kind and, in particular, tax on notional income which the company has never actually received, cannot, it seems to me, be treated as an "other expense" of winding-up proceedings. Further as I have concluded that corporation tax generally does not fit into Insolvency rule 4.218(1). That sub-rule was plainly intended to contain an exhaustive list of all " expenses" having priority subject to the provisions of sub-rules (2) and (3) which do not affect this case. (see per Phillips LJ in re Exchange Travel at p 587 and per Chadwick LJ in re RS & M Engineering Co Ltd unreported 15 th Jan 1999). For these reasons I reject the argument put forward on behalf of the Commissioners. It seems to me that the present state of the law is summarised in the passages which I have quoted from the judgments of Lord Nicholls in the Atlantic Computer and Kentish Homes cases. There is little to distinguish the facts in the Kentish Homes case from those of the present case. In the present case the company has not received nor sought to obtain any interest on its outstanding loans to TEE. The tax liability on the notional interest arising is not a consequence of any realisation of or use of property of the company by the liquidators. The compromise of the company’s claim against TEE in exchange for a percentage of the net proceeds of sale of TEE’s assets did not in any sense give rise to the tax charge. In that sense the facts in the present case are afortiori the decision in Kentish Homes where the claim for community charge resulted from the liquidators completing the unfinished flats. Payment of the tax would not be a "disbursement" rendered necessary by the proper performance of the liquidator’s duties (per Phillips LJ ibid. at p588). For these reasons I would answer the question posed by paragraph 1 of the Joint Liquidator’s originating application in the negative and direct the liquidators to administer the assets of the company in their hands accordingly. © 1999 Crown Copyright BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII