[1952] EACA 321

# **MISCELLANEOUS CIVIL**

### Before WINDHAM, J.

# IN THE MATTER OF HUGHES AND COMPANY LIMITED

### (In voluntary liquidation)

#### **AND**

## IN THE MATTER OF THE COMPANIES ORDINANCE

## Misc. Civil Case No. 4 of 1952

Companies winding up-Income Tax Ordinance, section 21 (3)-Election by. shareholders—Whether amounts paid by company could be charged by liquidator against the shareholders respective shares of the assets of the company.

Before a company's voluntary liquidation the Commissioner of Income Tax under section 21 (1) of the Income Tax Ordinance ordered that certain undistributed profits of the company shall be deemed to be distributed.

The respondent shareholders each elected under section 21 (3) of the Income Tax Ordinance that the taxes payable by them respectively upon their proportionate shares in these undistributed profits shall be recoverable from the company. The company accordingly paid these taxes. The liquidater applied by originating summons under section 248 of the Companies Ordinance for the determination of the following question of law.

Whether the sums paid as taxes should $(a)$ be charged by the Liquidator against the shareholders respectively and deducted from their respective shares of the assets of the company or $(b)$ be charged against and deducted from the general assets of the company in the hands of the liquidator before distribution by him amongst the shareholders.

Held (18-4-52).—The taxes paid by the Liquidator should be charged against the shareholders respectively and deducted from their respective shares of the assets of the company. Cases referred to: In re Alexander Drew & Sons, Ltd., (1935) 1 Ch. 93.

Mathews for applicant.

Salter for respondent.

JUDOMENT.—This is an application by way of originating summons under section 248 of the Companies Ordinance (Cap. 288) by the liquidator of Hughes & Co. Ltd., a company in voluntary liquidation, for the determination of a question of law arising in the course of the winding-up of the company. The Commissioner of Income Tax, acting under section 21 (1) of the Income Tax Ordinance (Cap. 254) has ordered that certain undistributed profits of the company shall be deemed to be distributed. The two respondents, John Joseph Hughes and G. L. Bellhouse, who are shareholders in the company, have each elected under section 21 (3) of the Income Tax Ordinance that the taxes payable by them respectively upon their proportionate shares in these undistributed profits shall be recoverable from the company; and the company has accordingly paid to the Commissioner of Income Tax these taxes, which amount to Sh. 2,678,808 in the case of John Joseph Hughes and Sh. 72,354 in the case of G. L. Bellhouse. The question submitted for determination by this Court is whether these two sums should now: $(a)$ be charged by the liquidator against John Joseph Hughes and G. L. Bellhouse respectively and deducted from their respective shares of the assets of the company, or $(b)$ be charged against and deducted from the general assets of the company in the hands of the liquidator before distribution by him among the shareholders.

Little assistance in the determination of this question is afforded in the Income Tax Ordinance itself. But a similar question, arising out of section 21 of the United Kingdom Finance Act, 1922, upon which section 21 of the Kenya Income Tax Ordinance is based, was determined in re Alexander Drew & Sons Ltd. (1935) 1 Ch. 93, where it was held that the first of the above two alternatives should be adopted. It is true that Eve. J. based his decision upon paragraph 8 of the first schedule to that Act, which has no counterpart in the Kenya Ordinance. He held: "In my opinion, the second of the two alternatives is the proper one to adopt:" (the second alternative in that case being the first alternative in the present case) "the other would be to apply assets distributable amongst all the members or a particular class of them in part payment of moneys charged upon and payable by other members, and this, in my opinion, would be to disregard the express provisions in paragraph 8 of the first schedule to the Act, that the apportionment is to be made in accordance with the respective interests of the members and that the income as apportioned to each member is for the purposes of surtax to represent his income from his interest in the company for the year or other period. Accordingly, I answer the question by saying that the second method is the right way of distribution."

Paragraph 8 of the first schedule to the United Kingdom Act reads as follows: ---

"8. The apportionment of the actual income from all sources of the company shall be made by the special Commissioners in accordance with the respective interests of the members, and the income as apportioned to each member shall, for the purposes of super tax, be deemed to represent ... income from his interest in the company for the year or other period and shall be included in the statement of his total income or in an amended statement of total income which the special Commissioners are hereby authorized to require and shall be deemed to be the highest part of that income."

But notwithstanding the absence from the Kenya Ordinance of any provision corresponding to paragraph 8 of the first schedule to the United Kingdom Act, I consider that the alternative decided to be the proper one in re Alexander Drew & Sons Ltd. is the proper and more equitable alternative under the Kenya legislation, for as I see it, the alternative whereby the payments for income tax should be charged against and deducted from the general assets of the company in the hands of the liquidator before distribution by him among the shareholders, would enable every shareholder whose proportionate share in the undistributed profits was higher than the average figure for the proportionate shares of all shareholders, to gain financially at the expense of smaller shareholders by electing under section 21 (3). For if his proportionate share was higher than the average, so too would the tax payable in respect of it be higher than the average tax. And that amount by which his tax exceeded the average would not be recovered from or even paid indirectly by him if his tax was chargeable against the general assets of the company before distribution of the residue among the shareholders. For in such a case shareholder (including himself) however large or small their respective holdings, would suffer equally by the deduction of all electing shareholder's taxes from the general assets before distribution, so that the small shareholder would in effect be shouldering a portion of the large shareholder's tax. The result would be that election under section 21 (3) would

be a gamble, and would always be to the pecuniary benefit of a large shareholder such as the respondent Hughes, and to the pecuniary disadvantage of a small one such as the respondent Bellhouse. Such a result would be inequitable, and would in my view give to section 21 (3) an effect not intended by the legislature; for it seems clear to me that the object of section 21 (3) is no more than to provide alternative machinery for the collection of the tax, and not to allow the ultimate incidence of that tax to be affected, in whole or in part, by the election.

For these reasons I answer the question by holding that the sums of Sh. 2,678,808 and Sh. 72,354 should be charged by the liquidator against John Joseph Hughes and G. L. Bellhouse respectively and deducted from their respective shares of the assets of the company. Costs of all parties will be costs in the winding-up.