1960 PLP 412 (PTD)

The mining venture, which was in form one of the activities of Booth&. (Africa) Ltd.m was in fact almost entirely managed from London. J. W. Booth authorized the purchase of a claim on a visit to Nairobi; after certain initial steps had been taken, it was financed entirely by Alfred Booth & Co. Ltd., without recourse to the African subsidiary's bankers ; the decision to start mining was taken by the executive directors in London; they sent out an expert to advise and report on the mine, and they decided what the rate of production should be, how much labour should be employed and what vehicles should be used. The manager of the mine made reports from time to time direct to them, without going through the channel of Booth & Co. (Africa) Ltd. The agreement with Hollander Hyams Ltd., under which Booth &. Co. Ltd. Disposed of most of its hides, was negotiated in London between Hollander Hyams Ltd. and Alfred Booth & Co. Ltd., as agents for Booth & Co. Ltd. In the day-to day working of the agreement, Hollander Hyams Ltd., normally dealt directly with Booth & Co. Ltd. In 1952 and 1953 it was part of the policy of the board of directors of Alfred Booth & Co. Ltd., to sell any of the assets or undertakings of the African subsidiaries if opportunity offered, and they supervised negotiations (mainly carried out on their instructions by Meinertzhagen in Africa) for selling the tannery and, on another occasion, the mine. These negotiations proved abortive. Throughout the material period the staff and officials of the African subsidiaries were making decisions concerning the day-to-day running of the trading activities of the African sub sidiaries, within the general policy directions of Alfred Booth & Co. Ltd. The United Kingdom Subsidiaries of Alfred Booth & Co. Ltd., were managed by the parent company in the same way as the African subsidiaries. The company also had two sub sidiaries in the United States of America which, however, were not subject to the same detailed control. It was contended on behalf of Unit : (1) that each of the African subsidiaries was resident in the United Kingdom at all material times, within the meaning of section 20 (9) of the Finance Act, 1953 ; (2) that Unit was accordingly entitled to deduct the payments referred to above ; and (3) that the assessments be reduced accordingly. It was contended on behalf of the Crown : (1) that, as the African subsidiaries were admittedly resident in East Africa at all material times, they could not also at those times be resident in the United Kingdom ; (2) that in any event none of the African subsidiaries were resident in the United Kingdom at any material time ; and (3) that Unit was not entitled to the deductions claimed. The commissioners who heard the appeal gave their decision as follows: "We think, in addressing our minds to the question whether the African subsidiaries were resident in the United Kingdom in the material period, that the first question we have to con sider is what was the real situation regarding their management and control. "A number of (what have been described as) the acts of interference in their management by the directors of Alfred Booth & Co. Ltd. are equivocate being equally well explained as acts of parental or group control, or as the taking over of the reins of management ; others again are equivocal, being equally well explained as the financial control of creditor, or as the taking over of the reins of management . . . . ." "We find that the position was at the material times that the boards of directors of the African subsidiaries (who are the people one would have expected to find exercising control and management) were standing aside in all matters of real importance and in many matters of minor importance affecting the central management and control, arid we find that the real control and management was being exercised by the board of directors of Alfred Booth & Co. Ltd. in London. "But it was contended on the part of the Crown that that finding would not be enough to conclude the question before us; it was said that there must be something more, that is, that before we could find that the African subsidiaries were resident in the United Kingdom, we must find control exercised here under the constitution of the company con cerned, by those officers to whom such constitution gives it ; in other words, the Crown contended that we must find some `formal' control and management here. We have considered this contention very carefully and have come to the conclusion that the authorities cited to us do not constrain us to accept it nor do they point very strongly to the conclusion that it is right. On the contrary, we notice that Lord Loreburn in his judgment in De Beers Consolidated Mines Ltd. v. Howe ((1906) A C 455) directs attention to where the central management and control actually abides,' and we think it would be consistent with Lord Loreburn's reasoning to stress the word `actually.' In the course of the arguments before us both sides relied on the remarks of Evershed M. R. in Union Corporation Ltd. v. Inland Revenue Commissioners ((1952) 34 T C 207, 271), and in particular on his reference to `where the controlling power and authority which, according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and authority, is to some substantial degree to be found.' In the appeal before us, we find the controlling power and authority, which according to the constitution of each of the African subsidiaries is vested in its board of directors, is actually exercised, to a very substantial degree, by the board of Alfred Booth & Co. Ltd. in London. We bold, on our understanding of the authorities, that once we have found that as a fact, it is not necessary to go further and inquire whether such power and authority is exercised under the constitution of the company concerned by the officers to whom such constitution gives it. "For these reasons we find, and so far as it is a matter of law we hold, that each of the African subsidiaries was resident in the United Kingdom in 1952 and 1953. We do not think that we are precluded from coming to this conclusion by reason of the admitted fact that the African subsidiaries were at the material times resident in East Africa, having regard to the judgment of the Master of the Rolls in Union Corporation Ltd. v. Inland Revenue Commissioners 34 T C 207." The points of law for the opinion of the Court were (1) whether there was evidence upon which the commissioners could arrive at their findings of fact; and (2) whether their con clusions were wrong in law. Roy Borneman Q. C. and Alan Orr for the Crown. The African subsidiaries were set up with the intention that they should not pay United Kingdom tax : See section 20 of the Finance Act, 1953. Assuming that the test of residence of a company is where the central management and control of the company actually abides, and, if it be right, that a company can be resident in two countries (see Swedish Central Railway Co. Ltd. v. Thompson ((1925) A C 495), then as regards the country in which the companies are alleged to be resident in the circumstances of this case, it must be shown that there is some part of the supreme and directing authority there. When using the phrase "supreme and directing authority" it must mean power and authority vested according to the ordinary constitution of a limited liability company, that is, it, own board, and it is not enough to point to directors of the parent company whose only interest is that of a controlling shareholder. The corollary to that is : the supreme and directing authority either as a whole or in part cannot be present when no part of the formal legal entity of the company is to be found in the country in which it is alleged to be resident. The articles of the company remain the same and the person who holds the purse strings cannot alter them. The minutes show the constant attention by the board of the parent company to the affairs of the African subsidiaries. The Crown admits that all aspects of the subsidiaries were under constant survey in London. But this is a feature of any company controlled by a parent, especially if its investments are in jeopardy. The parent, when it appoints members of its own board as directors, is acting solely as corporator, especially if it is an investment holder and not a trader. Before this case there was no suggestion that a residence could be found where no part of the legal entity of the company was to be found. [Reference was made to the provisions regarding board meetings and general meetings and to Gramophone and Typewriter Ltd. v. Stanley ((1908) 2 K B 89).] The directors cannot be heard to say that the constitution is of no account. It is, to be remembered that the directors of the African subsidiaries cannot meet in the United Kingdom. [Reference was made to the Kenya Companies Ordinance, 1933, p. 107, and to the Articles of Association of Booth & Co. (Africa) Ltd.] If the taxpayer's contention were right, where would the matter end? There would be a shuttlecock from country to country following the movements of the controlling shareholder who directed policy. What would be the position if there was someone controlling him? He would not be entitled to say that the supreme and directing authority was outside the constitution of the company. If a company wants to come back to the United Kingdom it must change its articles. Heyworth Talbot Q. C. and J. Creese for the taxpayer: There is no judicial authority for the proposition that a company cannot be held to be resident in the United Kingdom unless some part of the supreme and directing authority is located in the United Kingdom, that authority being conferred by the written constitution of the company, and that one must, therefore, find articles or regulations or a bye-law vesting authority in a person in this country. All that one need do is to provide in the constitution of the company where the company resides, and then it does not matter what control there is from the United Kingdom. There is no admission by us that' some part of the supreme and directing authority is in Kenya. The admission was that the African subsidiaries were resident in Kenya, but that may have been made under a misapprehension of law. In this case one must look at realities, for reality is what matters in tax law. A company resides where the de facto management and control is to be found, and looking at the paragraph of the case stated dealing with the entries in the minute books of the African subsidiaries it is clear that the boards of the African subsidiaries never functioned as such at all. The facts of this case are without precedent, but the test to be applied is where, on these facts, the control and management of the African subsidiaries was in fact. All the authorities look at the matter de facto, not de jure : see especially De Beers Consolidated Mines Ltd. v. Howe ((1906) A C 455 ; 5 T C 198), per Lord Loreburn L. C., where he said ((1906) A C 455, 458) : " . This is a pure question of fact to be determined upon a' scrutiny of the course of business and trading." That passage bears out the submission that the Court will look only at facts in order to determine where the central management and control actually abides. [Reference was also made to the judgment of Buckley L. J. in Gramophone and Typewriter Ltd. v. Stanley ((1908) 2 K B 89, 106, 107).] In American Thread Co. v. Joyce ((1912) 6 T C 1, 30, 31) Buckley L. J. used the words "in fact controlled." In Union Corporation Ltd. v. Commissioners of Inland Revenue (34 T C 207, 271) Lord Evershed's phrase "controlling power and authority" is capable of two constructions. In applying it to this case it is ambiguous. To summarize, one starts with the proposition of Lord Loreburn's in De Beers Consolidated Mines Ltd. v. Howe ((1906) A C 455, 458), which has been un-assailed for 50 years. In the phrase "where the central management and control actually abides, abides means "is to be found." By the constitutions of the companies it was vested in the respective boards, but it was to be found actually in the parent company (see the Commissioners' findings). It is not open to us to set aside the admission that the African subsidiaries were resident in Kenya, but we challenge the inference made from it that some part of the central management was in Kenya. Such an admission is stultified by the findings. [Todd v. Egyptian Delta Land and Investment Co. Ltd. ((1928) 1 K B 152) was also referred to.] Borneman Q. C. in reply : It was admitted that the African subsidiaries were resident in Kenya. It is clear from the Egyptian Delta case that mere incorporation is not enough, but there is ample material to add to that in this case. Taking one only of the many facts that support the admission, it is clear that the chairman of the African subsidiaries spent most of his time in Africa. Cur. adv. vult. July

22. WYNN-PARRY, J.-read the following judgment: In the case the special commissioners rightly pose the question as follows : "The sole question in dispute was whether Booth & Co. (Africa) Ltd., Booth & Co. Ltd. and Bulleys Tanneries. Ltd. were, in 1952 and 1953, companies resident in the United Kingdom within the meaning of section 20 (9) of the Finance Act, 1953." In paragraph 4 of the case the special commissioners say: "It was admitted on behalf of Unit that the African subsidiaries were at all material times resident in East Africa." Mr. Heyworth Talbot, on behalf of Unit, submitted that I should give no colour to that admission, because it could not be said with precision what were the grounds on which it was made or how far it was intended to go. I cannot accept this submission. A study of the case convinces me that the admission was not only proper, but inevitable. In my view, if it had been contended that the African subsidiaries were not resident in East Africa, the special commissioners would have been bound to find that they were resident in East Africa for taxation purposes. Not only were all those companies registered in East Africa, but they carried on business there ; the members of the respective boards were resident there ; and the articles of association provided in each case that the board meetings and general meetings of the company concerned could be held anywhere except in the United Kingdom. In short, every necessary step was taken to ensure that, having regard to the state of the authorities, if the residence of the African subsidiaries should become a material matter for con sideration, the inevitable conclusion would be that they were each resident in East Africa. The next, and indeed the main, submission put forward by Mr. Heyworth Talbot was that, as the special commissioners held, the African subsidiaries were also resident in the United Kingdom over the material period. As will be seen from the careful and exhaustive statement of the evidence on behalf of the respondents, which the Special Commissioners accepted, the board of directors of Alfred Booth & Co. Ltd. (the parent company) in effect told the boards of the African subsidiaries what to do, and those boards accepted the instructions and acted accordingly. In those circumstances, it is argued that the reality of the matter is that the real business of these companies is carried on in the United Kingdom as being the country where the central management and control abided. It is accepted by Mr. Talbot that this argument involves going further than any authority to be found in the books. I do not intend to multiply reference to authority, but I would say this. Speaking broadly, prior to Swedish Central Railway Co. Ltd. v. Thompson ((1925) A C 495) the Courts were concerned with cases in which the dispute was as to which one of two or more alleged places was to be regarded as the place where the company concerned was to be regarded as resident. No question of dual residence arose. It is against that background that the cases prior to the Swedish Railway case have to be considered. In De Beers Consolidated Mines Ltd. v. Howe ((1906) A C 455) Lord Loreburn said ((1906) A C 455, 458) : "Mr. Cohen propounded a test which had the merits of simplicity and certitude. He maintained that a com pany resides where it is registered and nowhere else. If that be so, the appellant company must succeed, for it is registered in South Africa. I cannot adopt Mr. Cohen's contention. In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise, it might have its chief seat of management and its centre of trading in England, under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Kelly C. B. and Huddleston B. in Calcutta Jute Mills v. Nicholson and Cesena Sulphur Co. v. Nicholson ((1876) 1 Ex. D. 428), now thirty years ago, involved the principle that a company resides, for purposes of income tax, where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule ; and the real business is carried on where the central management and control actually abides." I desire to lay emphasis on the reasoning of Lord Loreburn which led him to state the rule as he did in the passage which I have quoted. It is, I think, to be found in the words: "Otherwise, it might have its chief seat of management and its centre of trading in England, under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad." When Lord Loreburn says: "its chief seat of management," he must mean the company's chief seat of management, and not the seat of management of any other com pany : in other words "the chief seat of management as set up within the constitution of the company." If that be the true implication to be drawn from Lord Loreburn's words, then De Beers Consolidated Mines Ltd. v. Howe does not help Mr. Heyworth Talbot. To my mind, however, the matter does not rest on mere implication. There are two authorities, both Court of Appeal decisions, which I regard as negativing the proposition which Mr. Talbot puts forward, and as supporting the view that in order that a company resident abroad can claim the benefit of residence in this country, it must be shown that the acts relied on as constituting such residence were done within its constitu tion. If they were not so done, they are not the acts of the company, and are not to be taken into consideration. The first of the two authorities is Gramophone and Typewriter Ltd. v. Stanley ((1908) 2 K B 89). In that case the company held all the shares in a German subsidiary. The German subsidiary was not shown to be a mere simulacrum of the English company, the mere existence of a power of ultimate control not being held sufficient to lead to such a conclusion. In. the course of his judgment Lord Cozens-Hardy M. R. said ((1908) 2 K B 89, 95, 96) : "The German company was established in Germany in 1900 in accordance with German law. It was undoubtedly a company with several shareholders who brought in considerable capital. One of those shareholders was an English company, whose undertaking was subsequently acquired by the present English company. At some date which is not stated, the English company acquired all the shares of the German company, and I assume in favour of the Crown that this event had happened before the material dates. The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the control of the company in the sense that it may enable him, by exercising his voting powers, to turn out the directors and to enforce his own views as to policy, but it does not in any way diminish the rights or powers of the directors, or make the property or assets of the company his as distinct from the corporation's. Nor does it make any difference if he acquires not practically the whole, but absolutely the whole of the shares. The business of the company does not thereby become his business. He is still entitled to receive dividends on his shares, but no more. I do not doubt that a person in that position may cause such an arrangement to be entered into between himself and the company as will suffice to constitute the company his agent for the purpose of carrying on the business, and thereupon the business will become for all taxing purposes his business. Whether this consequence follows is in each case a matter of fact. In the present case I am unable to discover anything in addition to the holding of the shares, which in any way supports this con clusion. The German company was not at first, and there is no evidence that it has ever become, a sham company or a mere cloak for the English company. It has its board of management and its board of supervision as required by the German law. Its accounts are made out in accordance with German law. On the other hand, the English company has its board of directors, some of whom are on the German board. It has a proper account and balance sheet in which its interest in the German company is described accurately as so many shares in the German company, and the gross profits of the German company are in no way brought into the profit and loss account of the English company. Against this the only thing to be said' is that the chairman of the English company made a foolish speech in which he treated the gross profits of the German company as profits of the English company ; but the dividend declared by the English company did not proceed upon this footing. In my opinion it would be wrong to attribute to the loose and inaccurate language of the chairman a force sufficient to override the formal acts of both the English company and the German company and all the other circumstances of the case." Buckley L. J., in a well-known passage, said ((1908) 2 K B 89, 105, 106) : "Further, it is urged that the English company as owning all the shares can control the German company, in the sense that the German company must do all that the English company directs. In my opinion this again is a misapprehension. This Court decided not long since in the Automatic Self Cleansing Filter Syndicate Co. Ltd. v. Cuninghame ((1906) 2 Ch. 34) that even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company's affairs. The directors are not servants to obey directions given by the shareholders as individuals ; they are not agents appointed by and bound to serve the shareholders as their principals. They are persons .who may, by the regula tions, be entrusted with the control of the business, and if so entrusted they can be dispossessed from that control only by the statutory majority which can alter the articles. Directors are not, I think, bound to comply with the directions even of all the corporators acting as individuals. Of course the corporators have it in their power, by proper resolutions, which would generally be special resolutions, to remove directors who do not act as they desire, but this in no way answers the question here to be considered which is, whether the corporators are engaged in carrying on the business of the corporation. In my opinion they are not. To say that they are involves a complete confusion of ideas. The inquiry may be put in another form by asking who would be liable upon the contracts of the German company? Obviously the German company, and not-those who are the holders of its shares." The second authority is Union Corporation Ltd. v. Commissioners of Inland Revenue ((1952) 34 T C 207). In this case Lord Evershed M. R. gave the judgment of the Court and, after an exhaustive review of the authorities, laid down a test for ascertaining whether or not it could be postulated of a company that it was resident in more than one place. It is true that, strictly speaking, his judgment on this point was obiter, but, given as it was after so much careful consideration.' I should feel myself bound to accept it, apart from the circumstance that, if I may say so with respect, I wholly agree with it. I need cite only one passage (1); "The company may be properly found to reside in a country where it `really does business,' that is to say, where the controlling power and authority which, according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and authority is to some subs tantial degree to be found. In our judgment, the formula `where the central power and authority abides' does not demand that the Court should look, and look only, to the place where is found the final and supreme authority. "We have upon this difficult question derived great assistance from the judgment of Sir Owen Dixon in the Australian case of Koitaki Para Rubber Estates Ltd. v. Federal Commissioner of Taxation (1940) 64 C L R 15, where the same problem was fully 'considered by that learned Judge and by the full High Court of Australia. We cite one paragraph from Dixon, J's. judgment Ibid : The better opinion, however, appears to be that a finding that a company is a resident of more than one country ought not to be made unless the control of the general affairs of the company is not centred in one country but is divided or distributed among two or more countries. The matter must always be one of degree and residence may be constituted by a combination of various factors, but one factor to be looked for is the existence in the place claimed as a residence of some part of the superior or directing authority by means of which the affairs of the company are controlled.' We accept and respectfully adopt that passage as accurately stating the solution of the problem." In my view this passage is conclusive of the question before me. In the first place, the words of the Master of the Rolls (34 T C 207, 271), "that is to say, where the controlling power and authority which, according to the ordinary constitution of a limited liability company, is vested in its board of directors, and the exercise of that power and authority is to some substantial degree to be found," indicate to my mind that he was contemplating only an exercise of authority which could properly be exercised within the framework of the constitution of the company concerned. This conclusion is, I think, inevitable when one considers the phrase used by Dixon, J., "the superior or directing authority." In that context "authority" must have a narrower meaning than "power." It must connote something which has been regularly established, and because of that regular establishment is entitled and able to exercise direction. To my mind, the board of the parent company cannot fall within the phrase "superior or directing authority." As such it has no authority over the boards of the African subsidiaries. True; those boards may accept the instructions of the board of the parent company ; but they are not bound to do so. It may be that they do accept instructions, because failure to do so would result in dismissal, but acceptance in fact of such instructions does not mean that the board of the parent company have authority to give the instructions. As I have said, they have no such authority. It must follow, to my mind, that in applying the test adumbrated by the Master of the Rolls no weight or attention can be given to the activities of the board of the parent company in relation to Unit and the African subsidiaries for the purpose of considering whether or not any of them are resident in the United Kingdom. In the result it cannot be said that any part of the superior and directing authority of these companies can be said to exist in the place claimed as a residence, namely, the United Kingdom. Further, even if "authority" could be regarded as being synony mous with "power," the word "power" in the context would have to be read as "power regularly exercised." If I have, 'as I hope is the case, rightly understood the test propounded by the Master of the Rolls, then there is furnished for the guidance of those interested in these matters a test clearly defined in its scope (and founded, if I may say so, on principles of common sense), with the result that certainty is achieved, the only possible difficulty (though hard to foresee) being in its application in a given case. If, on the other hand, Mr. Talbot's proposition were to be accepted, certainty goes, and the Court would have to take into consideration, as material state ment for the purpose of answering such a question as is posed here, acts (in this case the acts of the bard of the parent company) which, on the reasoning in the Gramophone case ((1908) 2 K B 98), must be regarded as irregular interference .by a parent company in the affairs of a subsidiary. In the result, in my view, the appeal succeeds and must be allowed with costs. Appeal allowed.