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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Unilever (UK) Holdings Ltd. v Inspector of Taxes [2002] EWCA Civ 1787 (11 December 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/1787.html Cite as: [2002] EWCA Civ 1787, [2003] STC 15

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Justice Burton)

		Royal Courts of Justice Strand, London, WC2A 2LL
		Wednesday 11 December 2002

Lord Justice Jonathan Parker :

INTRODUCTION

1. This is an appeal by Unilever (UK) Holdings Ltd ("Unilever") against an order made by Burton J dated 14 December 2001 dismissing Unilever's appeal against a decision of the Special Commissioners dated 19 December 2000. Permission for a second appeal was granted by Carnwath LJ on 20 February 2002.
2. By their decision, the Special Commissioners dismissed Unilever's appeal against an assessment to corporation tax on chargeable gains for the calendar year 1998. In formal terms the issue in the case is whether Unilever is entitled to set against its chargeable gains for that year a loss incurred on the disposal in June 1992 of its 100 per cent holding of ordinary shares in British Oil and Cake Mills Ltd ("BOCM"). That in turn depends on the fiscal effect of a reduction of BOCM's capital which took effect on 29 April 1965 pursuant to a scheme of arrangement approved by the court under section 206 of the Companies Act 1948, whereby two classes of preference shares ranking in priority to the ordinary shares were cancelled, leaving the ordinary shares (all of which had for many years been held by Unilever) as the only issued shares in BOCM. Since the preference shares carried voting rights, one of the consequences of their cancellation was to increase the combined voting power of the ordinary shares from 62 per cent to 100 per cent, with the consequence that BOCM thereupon became a wholly-owned subsidiary of Unilever.
3. The primary question is whether, as Unilever contends, on the cancellation of the preference shares on 29 April 1965 there was, for the purposes of Schedule 2 to the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"), a deemed disposal and reacquisition of the ordinary shares at market value. If there was, then the application of the straight-line method of time-apportioning chargeable gains or (as in this case) allowable losses arising on the disposal of assets held as at 6 April 1965 will be materially altered, with the result that Unilever will be able to claim a very much greater allowable loss on the disposal of the shares in 1992. On this appeal, however, we are not concerned with the figures; only with the question of principle.
4. Should Unilever succeed on the primary question, a secondary question arises as to whether a sum of around £6.9M paid by Unilever to the holders of the preference shares pursuant to an undertaking which was incorporated in an order sanctioning the scheme of arrangement is a deductible expense in calculating Unilever's allowable loss. The Revenue has issued a Respondent's Notice in relation to this secondary question.
5. The Special Commissioners' decision ("the Decision") and the judge's judgment ("the Judgment") are reported in full in [2002] STC 113 and for the purposes of this judgment I shall take them as read, referring to them only to the extent necessary to render this judgment intelligible. I do, however, wish to pay respectful tribute to the Special Commissioners and to the judge for the detail of their exposition and for the rigour of their analysis of the various points which arise.

THE RELEVANT STATUTORY PROVISIONS

6. The relevant statutory provisions are to be found in the 1992 Act and in Schedule 2 to the 1992 Act. The provisions of particular relevance are sections 126 to128 in Chapter II of Part IV of the 1992 Act, which form part of a group of sections headed 'Reorganisation or reduction of share capital', and paragraph 19 in Schedule 2.
7. For a full citation of the relevant provisions, together with their legislative history, I refer once again to the Decision and to the Judgment. For convenience of reference, however, I set out the relevant provisions once again below, with the critical words in italics.
THE 1992 ACT

22. Disposal where capital sums derived from assets

(1) Subject to sections 23 and 26(1), and to any other exceptions in this Act, there is for the purposes of this Act a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum, and this subsection applies in particular to –

(a) capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset,

(b) capital sums received under a policy of insurance of the risk of any kind of damage or injury to, or the loss or depreciation of, assets,

(c) capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights, and

(d) capital sums received as consideration for use or exploitation of assets.

(2) In the case of a disposal within paragraph (a), (b) (c), or (d) of subsection (1) above, the time of disposal shall be the time when the capital sum is received as described in that subsection.

(3) In this section "capital sum" means any money or money's worth which is not excluded from the consideration taken into account in the computation of the gain.

38. Acquisition and disposal costs etc.

(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to –

(a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired by him, any expenditure wholly and exclusively incurred by him in providing the asset,

(b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being the expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly or exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset,

(c) the incidental costs to him of making the disposal.

…………

126. Application of sections 127 to 131:

(1) For the purposes of this section and sections 127 to 131 "reorganisation" means a reorganisation or reduction of a company's share capital, and in relation to the reorganisation -

(a) "original shares" means shares held before and concerned in the reorganisation,

(b) "new holding" means, in relation to any original shares, the shares in and debentures of the company which as a result of the reorganisation represent the original shares (including such, if any, of the original shares as remain).

(2) The reference in subsection (1) above to the reorganisation of the company's share capital includes –

(a) any case where persons are, whether for payment or not, allotted shares in or debentures of the company in respect of and in proportion to (or as nearly as may be in proportion to) their holdings of shares in the company or of any class of shares in the company, and

(b) any case where there are more than one class of share and the rights attached to shares of any class are altered.

(3) ………

127 Equation of original shares and new holding

(1) Subject to sections 128 to 130, a reorganisation shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired."

128 Consideration given or received by holder

(1) Subject to subsection (2) below, where, on a reorganisation, a person gives or becomes liable to give any consideration for his new holding or any part of it, that consideration shall in relation to any disposal of the new holding or any part of it be treated as having been given for the original shares, and if the new holding or part of it is disposed of with a liability attaching to it in respect of that consideration, the consideration given for the disposal shall be adjusted accordingly.

(2) ……

(3) Where on a reorganisation a person receives (or is deemed to receive), or becomes entitled to receive, any consideration, other than the new holding, for the disposal of an interest in the original shares, and in particular –

(a) where under section 122 he is to be treated as if he had in consideration of a capital distribution disposed of an interest in the original shares, or

(b) where he receives (or is deemed to receive) consideration from other shareholders in respect of a surrender of rights derived from the original shares,

he shall be treated as if the new holding resulted from his having for that consideration disposed of an interest in the original shares (but without prejudice to the original shares and the new holding being treated in accordance with section 127 as the same asset).

SCHEDULE 2 TO THE 1992 ACT PART III OTHER ASSETS

16 Apportionment by reference to straightline growth of gain or loss over period of ownership

(1) This paragraph applies to Parts I and II of this Schedule.

(2) On the disposal of assets by a person whose period of ownership began before 6^th April 1965 only so much of any gain accruing on the disposal as is under this paragraph to be apportioned to the period beginning with 6^th April 1965 shall be a chargeable gain.

(3) Subject to the following provisions of this Schedule, the gain shall be assumed to have grown at a uniform rate from nothing at the beginning of the period of ownership to its full amount at the time of the disposal so that, calling the part of that period before 6^th April 1965, P, and the time beginning with 6^th April 1965 and ending with the time of the disposal T, the fraction of the gain which is a chargeable gain is –

T ? P + T

……..

Election for valuation at 6^th April 1965

17 – (1) If the person making a disposal so elects, paragraph 16 above shall not apply in relation to that disposal and it shall be assumed, both for the purposes of computing the gain accruing to that person on the disposal, and for all other purposes both in relation to that person and other persons, that the assets disposed of, and any assets of which account is to be taken in relation to the disposal under section 43, being assets which were in the ownership of that person on 6^th April 1965, were on that date sold, and immediately reacquired, by him at their market value on 6^th April 1965.

(2) Sub-paragraph (1) above shall not apply in relation to a disposal of assets if on the assumption in that sub-paragraph a loss would accrue on that disposal to the person making the disposal and either a smaller loss or a gain would accrue if sub-paragraph (1) did not apply, but in a case where this sub-paragraph would otherwise substitute a gain for a loss it shall be assumed, in relation to the disposal, that the relevant assets were sold by the owner, and immediately reacquired by him, for a consideration such that, on the disposal neither a gain nor a loss accrued to the person making the disposal.

The displacement of sub-paragraph (1) above by this sub-paragraph shall not be taken as bringing paragraph 16 above into operation.

(3) ………

(4) For the avoidance of doubt it is hereby declared that an election under this paragraph is irrevocable.

(5) An election may not be made under this paragraph as respects, or in relation to, an asset the market value of which at a date on or after 6^th April 1965, and before the date of the disposal to which the election relates, is to be ascertained in pursuance of section 42.

Reorganisation of share capital, conversion of securities etc

19 – (1) For the purposes of this Act, it shall be assumed that any shares or securities held by a person on 6^th April 1965 (identified in accordance with paragraph 18 above) which, in accordance with Chapter II of Part IV, are to be regarded as being or forming part of a new holding were sold and immediately reacquired by him on 6^th April 1965 at their market value on that date.

(2) If, at any time after 5th April 1965, a person comes to have, in accordance with Chapter II of Part IV, a new holding, paragraph 16(3) to (5) above shall have effect as if –

(a) the new holding had at that time been sold by the owner, and immediately reacquired by him, at its market value at that time, and

(b) accordingly, the amount of any gain on a disposal of the new holding or any part of it shall be computed –

(i) by apportioning in accordance with paragraph 16 above the gain or loss over a period ending at that time, and

(ii) by bringing into account the entire gain or loss over the period from that time to the date of the disposal.

(3) This paragraph shall not apply in relation to a reorganisation of a company's share capital if the new holding differs only from the original shares in being a different number, whether greater or less, of shares of the same class as the original shares.

8. On the primary question Unilever, through Mr Robert Venables QC and Mr James Kessler (both of whom appeared before the Special Commissioners and before the judge), submits that its holding of ordinary shares in BOCM following the reduction was a 'new holding', resulting from a 'reorganisation' of BOCM's share capital, within the meaning and for the purposes of Chapter II of Part IV of the the 1992 Act, with the consequence that paragraph 19(2) of Schedule 2 has the effect of introducing a base valuation date of 29 April 1965, thereby modifying the straight-line method of apportionment provided for by paragraph 16 of that Schedule. The Revenue, through Mr Nicholas Warren QC and Mr David Ewart (Mr Warren alone appeared before the Special Commissioners, both appeared before the judge), contends that there was no 'reorganisation' and no 'new holding' here, and that in consequence paragraph 19(2) has no application.
9. On the secondary question, Unilever submits that the £6.9M payment was 'consideration for' its 'new holding' within the meaning of s.128(1). The Revenue submits the contrary. On the conclusions which the judge reached on the primary question, this secondary question did not arise. However, the judge indicated (in paragraph 46 of the Judgment, at p.146 of the report) that were his conclusions on the primary question wrong he would have decided the secondary question in Unilever's favour: hence the Respondent's Notice.

THE DECISION

10. As will appear, the case has had a somewhat tortuous forensic history, and the focus of the argument has reflected that. Thus, before the Special Commissioners the Revenue conceded that the reduction was a 'reorganisation' within the definition in section 126(1)(a) ('a reorganisation or reduction of a company's share capital'); and for its part Unilever conceded that there was no 'reorganisation' otherwise than by virtue of the reduction of capital. It was, therefore, common ground before the Special Commissioners that there was a 'reorganisation' by reason, albeit by reason only, of the reduction; and the argument proceeded from that starting-point. In the event, however, the Special Commissioners did not accept the Revenue's concession, holding that there was no 'reorganisation' by virtue of the reduction of capital. In paragraph 22 the Decision (at p.120j of the report) they concluded, relying on a passage from the judgment of Balcombe LJ in Dunstan v. Young Austen & Young Ltd [1989] STC 69 at 74-75, that:

"…. there is a necessary implication in section 126(1) …. that the expression 'reduction of a company's share capital' requires a transaction by which 'original shares' exist at the start and the holders of those shares become holders of a 'new holding' as a result of the transaction. Moreover, there must be a common economic ownership of the company before and after. Here the preference stock was cancelled and, as a result, the ownership of BOCM was left in the hands of the holders of the ordinary stock [i.e. Unilever]."

11. Although that was enough to determine the appeal in the Revenue's favour, the Special Commissioners went on to address the various other points which arose, on the footing that (contrary to their view) there was a 'reorganisation'. On that footing, they held: that the ordinary shares were not 'concerned in' the 'reorganisation' (see s.126(1)(a)); that the ordinary shares post-'reorganisation' did not constitute a 'new holding' (see s.126(1)(b)); and that, assuming that there was a 'new holding', paragraph 19(2) in Schedule 2 to the 1992 Act was not disapplied by paragraph 19(3) since the 'new holding' "does not differ at all from the original one". They further concluded that the £6.9M payment was not 'consideration for' the (assumed) 'new holding' within the meaning of s.128(1). They reached the latter conclusion on the ground that the payment was not made pursuant to any contract between Unilever and the preference shareholders, and that in the absence of such a contract the payment could not constitute 'consideration for' the cancellation of the preference shares and hence for the 'new holding'.

THE JUDGMENT

12. Before the judge, each side withdrew the concession which it had made before the Special Commissioners. Thus, the first issue before the judge (he referred to it as Issue 1) was whether there was a 'reorganisation'. As the judge analysed the position, if there was a 'reorganisation', further issues arose (i.e. the issues which had been argued before the Special Commissioners). Thus, Issue 2 was whether the ordinary shares were 'concerned in the reorganisation' (see s.126(1)(a)); Issue 3 was whether a 'new holding' was created 'as a result of the reorganisation' (see s.126(1)(b)); Issue 4 was whether paragraph 19(2) was disapplied by paragraph 19(3); and Issue 5 was whether the £6.9M was 'consideration for' the 'new holding' (see s.128(1)).
13. The judge records (in paragraph 40 of his judgment, at p.145b of the report) that in the course of the hearing it became common ground between the parties that for there to be a 'new holding' there had to be some difference between the 'original shares' and the 'new holding' other than simply a difference in the number of shares. This inevitably affected the way in which the judge addressed Issue 4.
14. As to Issue 1:

The judge agreed with the Special Commissioners that there was no 'reorganisation' in the instant case, but for different reasons.

Before the judge, the Revenue did not seek to support that Special Commissioners' conclusion that for there to be a 'reorganisation' the economic ownership of the company must remain the same before and after the carrying into effect of the arrangements in question. It accepted that a rights or bonus issue to a particular class of shares, or a rights issue where not all the rights are taken up by existing shareholders, would plainly constitute a 'reorganisation', despite involving a change in the economic ownership of the company. Rather, the Revenue submitted that a reduction of capital which takes the form of the cancellation of an entire class of shares (as happened in the instant case) is not a 'reorganisation' since it is of the essence of a 'reorganisation' that it results in a 'new holding' in the hands of the taxpayer; and that there was no such 'new holding' here, since the preference shares no longer existed and the ordinary shares remained precisely the same before and after the reduction. It further submitted that the consequence of accepting Unilever's submissions and deciding that there can be a 'reorganisation' where no 'new holding' results from it would be the creation of a loophole in the capital gains tax legislation by allowing chargeable gains (for example, chargeable gains resulting to the preference shareholders in the instant case from the £6.9M payment) to go untaxed, since such gains would fall outside s.128(3).

Unilever submitted primarily that there was a 'reorganisation' in the instant case, given that the definition of 'reorganisation' in s.126(1) expressly includes a reduction of capital. In the alternative, it submitted that the events of April 1965 constituted a reorganisation within the general meaning of that word. Unilever further submitted that an acceptance of its submissions would not result in any loophole in the legislation, since the gains in question would not go untaxed but would be caught by s.22. In the further alternative it submitted that there was a 'reorganisation' within s.126(2)(b) since the cancellation of the preference shares altered the rights attaching to the ordinary shares.

The judge concluded that the cancellation of the preference shares had not altered the rights attaching to the ordinary shares (see paragraph 24 of the Judgment, at p.138g-h of the report); that if there was a 'reorganisation' it must have been by virtue of the reduction of capital or not at all (see paragraph 25 of the Judgment, at p.139c of the report); and that no 'reorganisation' had taken place by reason of the reduction of capital. In paragraph 28 of the Judgment (at p.140h of the report) he said this:

"I am driven to the conclusion that where nothing other than the cancellation of a class of share capital is relied upon (together with any knock-on effects which themselves are short of amounting to a reorganisation, as I have found in this case) there is no reorganisation."

Notwithstanding that that conclusion was sufficient to determine the appeal in the Revenue's favour, the judge (as the Special Commissioners had done) went on to address the further issues on the assumption that there had been a 'reorganisation'.

15. As to Issue 2:

In paragraph 35 of the Judgment the judge, observing (at p.143j of the report) that the question whether the ordinary shares were 'concerned in the reorganisation' could not be divorced from the question whether there was a 'new holding', accepted the Revenue's submissions that the cancellation of the preference shares did not affect the rights attaching to the ordinary shares, but merely the enjoyment of those rights (a distinction drawn by Lord Evershed MR in White v. Bristol Aeroplane Co Ltd [1953] 1 Ch 65, to which further reference will be made below).

On that footing, he concluded that the ordinary shares were not 'concerned in the [assumed] reorganisation'.

16. As to Issue 3:

The judge, citing the judgment of Buckley LJ in Westcott v. Woolcombers Ltd (1987) 60TC 575 at 593H, concluded (in paragraph 38 of the Judgment) that there was no reason why a 'new holding' could not 'represent' itself, but that there had to be some change or difference between the old shares and the new (that is to say between the 'original shares' and the 'new holding') and that in the instant case there was none, whether as a result of the (assumed) 'reorganisation' or otherwise.

17. As to Issue 4:

As noted earlier, before the judge it became common ground that a finding that a 'new holding' existed would necessarily involve a finding that a difference existed between the 'original shares' and the 'new holding' which would not be a difference falling within paragraph 19(3). Hence, Issue 4 did not arise for separate consideration.

18. As to Issue 5:

The judge disagreed with the Special Commissioners' conclusion that the absence of a contract meant that the £6.9M payment could not be 'consideration for' the 'new holding'. He concluded (in paragraph 46 of the Judgment, at p.146a of the report) that, had he found that the necessary change or difference existed to lead to the conclusion that there was a 'new holding', then the payment would have been 'consideration for' such change or difference; but that since he had found that there was no 'new holding', the point did not arise.

THE ARGUMENTS ON THE APPEAL

19. By way of introduction to his detailed submissions, Mr Venables seeks to pray in aid general considerations of fairness, reminding us that fiscal legislation, like any other legislation, should be construed and applied so as to achieve a fair result where possible. In the instant case, he submits, the application of paragraph 19(2) to Unilever's holding would accord with the economic reality of the situation, which is that Unilever made a far greater loss on the disposal of its holding in 1992 than would result from the application of the straight-line method of apportionment.
20. Turning to the specific issues, Mr Venables' primary submission on Issue 1 is the straightforward submission which he made to the judge. He submits that the scheme of arrangement involved a reduction of capital; that s.126(1) defines 'reorganisation' as including a reduction of capital; ergo, the scheme was a 'reorganisation'. Accordingly (he submits) it is unnecessary to consider whether the scheme might also amount to a "reorganisation" within the general meaning of that word, as used in the definition of 'reorganisation'.
21. As to the Revenue's argument based on section 128(3) (an argument which Mr Venables describes, somewhat uncharitably perhaps, as "an ambush argument" since it was, he tells us, raised for the first time in the course of Mr Warren's reply before the judge), he submits that it is based on the misconception that s.128(3) itself deems a disposal to have occurred, whereas on their true construction the first three lines of the subsection do no more than assume that there has been a disposal. This assumption, he submits, is correct since, on its true construction, s.127 operates to deem there to be no disposal only to the extent that the consideration for the actual disposal consists of a 'new holding'. Where, as in the instant case, the consideration for the cancellation of the preference shares consisted wholly of cash, s.127 has no application and any chargeable gains realised by preference shares resulting from their receipt of the £6.9M payment will be taxable under s.22.
22. The purpose of s.127, he submits, is to prevent there being a taxable disposal only in cases where there is in reality an acquisition of the 'new holding', and in such a case to postpone the time of disposal until the 'new holding' is itself disposed of. He referred us to the well-known passage in the speech of Lord Wilberforce in Aberdeen Construction Group Ltd v. C.I.R. (1978) 52 TC 281 at 296F-G where Lord Wilberforce said this:

"The capital gains tax is of comparatively recent origin. The legislation imposing it, mainly the Finance Act 1965, is necessarily complicated, and detailed provisions, as they affect this or any other case, must of course be looked at with care. But a guiding principle must underlie any interpretation of the Act, namely, that its purpose is to tax capital gains and to make allowance for capital losses, each of which ought to be arrived at upon normal business principles. No doubt anomalies may occur, but in straightforward situations, such as this, the courts should hesitate before accepting results which are paradoxical and contrary to business sense. To paraphrase a famous cliché, the capital gains tax is a tax upon gains: it is not a tax upon arithmetical differences."

23. Mr Venables submits that the fact that, on his construction of the definition of 'reorganisation', there can be a 'reorganisation' which is different from the kind of 'reorganisation' at which sections 127 and 128 are specifically directed, so as (for example) to include a case where an entire class of shares is cancelled, affords no reason for cutting down the clear words of the definition.
24. As to Dunstan, Mr Venables points out that in that case the issue was whether arrangements whereby a company increased its share capital constituted a 'reorganisation' for the purposes of the statutory antecedents of the provisions with which we are concerned, and that the resolution of that issue depended on whether, although the arrangements in question did not fall strictly within the wording of what is now s.126(2)(a), there was nevertheless a 'reorganisation' within the general meaning of that word. The High Court held that in order to constitute a 'reorganisation' the arrangements had to fall within the precise wording of the relevant provision. The Court of Appeal, allowing the taxpayer's appeal, held that an increase in share capital could be a 'reorganisation' notwithstanding that it did not fall within the precise wording of the relevant provision, provided that (as had happened in that case) the new shares were acquired by existing shareholders in their capacity as such and in proportion to their beneficial holdings. (The decision in relation to beneficial holdings was directed to the fact that one of the original shares was held by a third party as nominee for the taxpayer.) Mr Venables further points out that it was common ground in Dunstan that the same result could have been achieved by a rights issue, and that had that method been adopted there would have been a 'reorganisation' within the precise wording of the relevant provision. He accordingly submits that Dunstan affords no guidance on the question whether there was a 'reorganisation' in the instant case.
25. Mr Venables submits, in the alternative to his primary argument that the mere fact of the reduction is enough to enable him to succeed on Issue 1, that there was in any event a 'reorganisation' in the instant case since the effect of the cancellation of the preference shares was to alter the rights attaching to the ordinary shares (alternatively, to alter the rights attaching to the preference shares), so as to bring the case within s.126(2)(b). Hence on either basis Unilever's holding of ordinary shares became a 'new holding' notwithstanding that on a strict analysis the alteration of rights may not have involved any disposal of Unilever's 'original shares' (see Westcott at 594C per Buckley LJ).
26. Mr Venables submits that the fact that form of words which expresses the right may remain the same does not determine the question whether the substance of the right may have altered.
27. In support of his submissions as to alteration of rights, Mr Venables relies on the decision of Wilberforce J in Fitch Lovell Ltd v. I.R.C. [1962] 1 WLR 1325. In that case ordinary shares which initially had a substantial value had, by the date of their transfer by way of subsale, been rendered effectively worthless by the creation of preference shares with (as the Special Commissioners put it, in paragraph 41 of the Decision) "overwhelming rights". Mr Venables relies on Wilberforce J's rejection (at p.1343) of the taxpayer's "sophisticated argument", based on White v. Bristol Aeroplane, to the effect that the shares conferred the same rights after the creation of the preference shares as they had before. Wilberforce J concluded (at p.1344) that:

"…. an analysis of this transaction which seeks to produce the result that the property resold is the same property as that first sold, if it can be made at all, involves a degree of formalism which the law …. should not endorse."

28. Mr Venables submits that the same considerations apply in the instant case, and the court should not adopt an unduly legalistic an approach in addressing the question whether there has been an alteration of the rights attaching to the ordinary shares. He submits that a conclusion that there was an alteration of rights in the instant case would not conflict with the actual decision in White v. Bristol Aeroplane. For good measure, however, he referred us to a number of company law textbooks where the decision in that case has been the subject of criticism.
29. Returning to the facts of the instant case, Mr Venables points to the practical and economic effects which the cancellation of the preference shares had on the ordinary shares, as set out in detail in the Decision (paragraphs 5, 6 and 10) and as referred to in the Judgment (paragraph 22). He submits that the cancellation of the preference shares altered the rights attaching to the ordinary shares in the following principal respects:

The right to participate in dividends was no longer subordinated to the prior entitlements of the holders of the two classes of preference shares.

The Preferential Dividend Reserve Fund became available to be distributed to the ordinary shareholders, whether as dividend or on a bonus issue or a reduction of capital.

The rights of the ordinary shareholders to repayment of capital on a winding-up were no longer subordinated to the rights of the preference shareholders in that respect.

The voting rights of the ordinary shareholders were no longer liable to be diluted by the votes of the holders of the preference shares.

The increase in the voting power of Unilever as the holder of all the ordinary shares from 62 per cent to 100 per cent enabled Unilever to alter BOCM's Articles of Association; to authorise the directors to exercise all BOCM's borrowing powers without the sanction of the preference shareholders; to consent to short notice of meetings; to procure the issue of fresh preference shares, ranking in priority to the ordinary shares; to ratify the actions of the board in circumstances where unanimity among the members was required; and to take advantage of the many fiscal provisions available only to groups of companies in which the parent owns more than 62 per cent of the share capital of its subsidiary.

30. Mr Venables also relies in this connection on a passage in the judgment of Farwell J in Borland's Trustee v. Steel Brothers & Co Ltd [1901] 1 Ch 279 at 288 where Farwell J described a share in a limited liability company as follows:

"A share is the interest of the shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with section 16 of the Companies Act 1862 [now section 14 of the Companies Act 1985]. The contract contained in the articles of association is one of the original incidents of the share. A share is …. an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount."

31. Mr Venables submits that in the instant case the effect of the cancellation of the preference shares was to remove the holders of those shares (members of the public) from membership of the company, thereby fundamentally altering the relationship of mutual covenants between the members inter se. This, he submits, is reflected in the amendment to BOCM's Memorandum of Association by the deletion of paragraphs 6 and 7, which dealt with rights attached to the preference shares.
32. In the alternative, Mr Venables submits that the rights attaching to the preference shares have been altered in the most sweeping way possible, in that on the cancellation of the preference shares they were removed altogether.
33. As to Issues 2 to 4 inclusive, Mr Venables submits firstly that if we were to accept his submission that there is in the instant case a 'reorganisation' by reason of an alteration of the rights attaching to the ordinary shares, that would be determinative of these further issues in his favour. As to that he is plainly right. If there was a 'reorganisation' by virtue of such an alteration of rights, then (as the Revenue accepts) it must follow that there was a 'new holding' (the only candidate for that being the holding of ordinary shares), and it must also follow that paragraph 19(2) is not disapplied by paragraph 19(3) since the alteration of rights would be a difference between the 'new holding' and the 'original shares' which fell outside paragraph 19(3).
34. If, however, there was no 'reorganisation' by virtue of an alteration of rights, Mr Venables submits that the ordinary shares were at the very least 'concerned in' the 'reorganisation', relying once again on the various practical effects which the cancellation of the preference shares had on the rights of the ordinary shares, as listed above; and that, by the same token, the ordinary shares post-'reorganisation' resulted from the 'reorganisation'. He further submits that the ordinary shares post-'reorganisation' can properly be said to 'represent' the ordinary shares pre-'reorganisation', in just the same way as a litigant may be described as representing himself. As to Issue 4, he agrees with the judge that if there was a 'new holding' then it must follow that there must be a difference between the 'new holding' and the 'original shares' such as will take the case outside paragraph 19(3).
35. As to Issue 5 (which is the subject of the Revenue's Respondent's Notice), Mr Venables supports the indication which the judge gave as to the conclusion which he would have reached on this issue had he found that there was a 'new holding' (viz. that section 128(1) applied independently of section 38(1) so as to render the £6.9M payment a deductible expense: see paragraph 46 of the Judgment).
36. For the Revenue, Mr Warren submits that the purpose behind the relevant statutory provisions is to ensure (a) that no shareholder in a company is treated as having realised a chargeable gain or sustained an allowable loss in consequence of a reorganisation of the company's share capital, and (b) that on any subsequent disposal by the shareholder of the holding which resulted from the reorganisation (i.e. the 'new holding') the base cost of that holding for the purposes of ascertaining any chargeable gain or allowable loss on the disposal is to be treated as the historical cost of acquiring the holding as it stood immediately before the reorganisation (i.e. 'the original shares').
37. As to Issue 1, Mr Warren submits that the definition of 'reorganisation' in s.126(1) cannot operate so as to create a species of 'reorganisation' which does not fall within sections 127 and 128. To fall within those sections, he submits, there must be a 'new holding' as defined, which in turn means that the 'reorganisation' must involve either a disposal of the 'original shares' or (as he accepts) an alteration of rights (see s.126(2)(b) and Westcott at p.593H-594E per Buckley LJ).
38. He submits that where an entire class of share is cancelled there can be no 'new holding' in the hands of the holders of the 'original shares'. This, he submits, accords with the underlying policy of Chapter II as identified by Balcombe LJ in Dunstan, viz. that the provisions in question relate, at least primarily, to situations in which the shareholders in a company remain the same before and after the 'reorganisation'. It follows, he submits, that the mere fact that a reduction of capital has taken place does not answer the question whether the reduction constituted a 'reorganisation'.
39. In this connection he repeats the argument which found favour with the judge, to the effect that if the cancellation of the entire class of preference shares were held to be a 'reorganisation', any gains to the preference shareholders resulting from receipt of the cash payment of £6.9M would escape tax. He submits that since, in relation to the preference shares, there can be no 'new holding' in place of the 'original shares', section 128(3) (which deals with part disposals) would not apply to impose a charge on the cash received by the preference shareholders. This, he submits, would create what he describes as a huge loophole.
40. As to Mr Venables' submission that the receipt of the cash payment by the preference shareholders would be taxable under section 22, Mr Warren submits that since s.127 provides that there is no disposal of the 'original shares' s.22 will not apply.
41. As to alteration of rights, Mr Warren relies on the distinction drawn by Lord Evershed MR in White v. Bristol Aeroplane (referred to earlier) between an alteration of the rights attaching to shares and an alteration in the enjoyment of those rights. He submits that in the instant case the most that can be said is that the enjoyment of the rights attaching to the ordinary shares has been altered in that whereas pre-reduction the ordinary shares were subordinate to the preference shares, post-reduction they were not since there were no longer any preference shares. By contrast, he submits, the rights themselves remained unaltered since the ordinary shares continued to be subordinate to preference shares (if any). By the same token, he submits, the voting rights attaching to the ordinary shares were not altered by the removal of the votes of the preference shareholders.
42. As to Issue 2, Mr Warren submits that, assuming (contrary to his primary submission) that the reduction of capital was a 'reorganisation', the ordinary shares cannot be said to be 'concerned in' that 'reorganisation', any more than it could be said that the ordinary shares post-'reorganisation' 'represent' the ordinary shares pre-'reorganisation'. He stresses that the statutory requirement is that the shares themselves be 'concerned in the reorganisation', as distinct from the holder or holders of the shares. Hence the fact that Unilever was concerned in the (assumed) 'reorganisation' is nothing to the point.
43. As to the effects on the ordinary shares of the cancellation of the preference shares, Mr Warren submits that the mere fact that the enjoyment of the rights attaching to the ordinary shares may have altered by reason of the cancellation is not sufficient to warrant the conclusion that the ordinary shares were 'concerned in the (assumed) reorganisation'; there must, he submits, be an alteration in the rights themselves, and that did not occur.
44. As to Issue 3, Mr Warren submits, assuming that his submissions on both Issue 1 and Issue 2 are rejected, that it is implicit in Mr Venables' submission that the ordinary shares were 'concerned in the reorganisation' (i.e. in the reduction of capital) that they remained the same before and after the reduction. In such circumstances, he submits, it cannot sensibly be said that the ordinary shares post-reduction 'represent' the ordinary shares pre-reduction: they are the ordinary shares pre-reduction.
45. As to Issue 4, Mr Warren submits, assuming he has failed on each of the earlier issues, that there is no policy reason for displacing the straight-line method of apportionment where an asset which was held as at 6 April 1965 remains unaltered in the hands of the taxpayer, and hence where there is no reason to think that the 'new holding' will behave any differently from the 'original shares' so far as chargeable gains or allowable losses are concerned. It follows, he submits, that the special treatment accorded by paragraph 19(2) should only be applied if the 'reorganisation', vis a vis the particular taxpayer, is of a kind which is liable to produce something different in reality. Turning, then, to the wording of paragraph 19(3), Mr Warren submits that it is necessary to modify its literal meaning by including the words "(if it differs at all)" after the words "… differs only from the original shares". Such a construction would, he submits, give to paragraph 19(3) a meaning which accords with the policy which underlies it.
46. Finally, so far as Issues 1 to 4 are concerned, Mr Warren submits that if and in so far as the court may seek to bring into account overall considerations of fairness, it is material to note that the draftsman of Schedule 2 has included, in paragraph 17, a carefully drawn provision enabling a taxpayer, in certain well-defined circumstances, to opt out of the straight-line method of apportionment provided for by paragraph 16.
47. As to Issue 5, Mr Warren accepts (without conceding the point) that if we were to hold that there was a 'reorganisation' in the instant case by reason of an alteration in the rights attaching to the ordinary shares, it would be difficult to contend that the £6.9M payment was not made 'in consideration for' that alteration, and hence for the (assumed) 'new holding'. But if there were held to be a 'reorganisation' simply by reason of the fact that there was a reduction of capital, then he submits that there is no basis for saying that the payment was made 'in consideration for' the (assumed) 'new holding'.

CONCLUSIONS

48. In order to succeed, Unilever must bring itself within paragraph 19(2). To do that, it must establish that its holding of ordinary shares following the cancellation of the preference shares constituted a 'new holding' for the purposes of Chapter II of Part IV of the 1992 Act.
49. A 'new holding' (as defined in s.126(1)(b)) can only arise 'as a result of [a] reorganisation'. The definition of 'reorganisation' in s.126(1) is expressed to be '[f]or the purposes of this section and sections 127 to 131'. It must follow, in my judgment, that there is no scope for a 'reorganisation' of a kind which falls outside the scope of those sections.
50. Ss.127 to 131 are all concerned with the tax treatment of a 'new holding', the crucial section for present purposes being s.127. The purposes of s.127 are, as Buckley LJ said in Westcott at p.594A-C, referring to its statutory predecessor (paragraph 4(2) of Schedule 7 to the Finance Act 1965):

"…. (1) to ensure that no shareholder of the company shall be treated as having realised a chargeable gain or sustained an allowable loss in consequence of the reorganisation or reduction of capital, and (2) to ensure that on any subsequent disposal by any shareholder of the company of any part of the 'new holding', the cost to him of the shares so disposed of shall, for capital gains tax purposes, be treated as having been the historical cost to him of acquiring the 'original shares' represented by the shares disposed of."

51. Buckley LJ continued (at p.594C):

"When shares in a company's capital are cancelled, or the rights attached to them are modified, no disposal of an asset can, in my view, accurately be said to take place. Nor, in my judgment, can it accurately be asserted that any asset is disposed of when a company allots and issues a share in its share capital, or varies the rights attached to any of its shares. …. Moreover, para 4(2) requires any element of acquisition to be disregarded. I am consequently a little shy of using the term 'no-disposal fiction', although it is perhaps a convenient label to affix to part of the provisions of para 4(2)."

52. I respectfully agree with that analysis. It follows, in my judgment, that a 'new holding' can only 'result' from a 'reorganisation' where the arrangements under consideration would, but for s.127, involve a element of disposal or acquisition; or, in circumstances where there is more than one class of share, where the arrangements involve an alteration of the rights attaching to shares of any class (see s.126(2)(b)). As I see it, nothing short of that will do. Support for this conclusion is in my judgment also to be found in the terms of paragraph 19(3), which disapplies paragraph 19(2) where the only difference between the 'original shares' and the 'new holding' is in the number of shares, and in the requirement of s.126(1)(b) that a 'new holding' must, 'as a result of the reorganisation', 'represent the original shares'. See also the words 'shall be treated as the same asset acquired as the original shares were acquired ' in s.127. If the 'original shares' and the 'new holding' were the same asset, such treatment would not be necessary.
53. It follows that in my judgment a reduction of capital which does not meet either of those requirements cannot constitute a 'reorganisation', notwithstanding the inclusion of a reduction of capital in the definition of 'reorganisation' in s.126(1); and, for the same reasons, that a reduction of capital which is not a 'reorganisation' cannot 'result' in a 'new holding'. Equally, there will in such circumstances be no 'original shares', since absent a 'reorganisation' the shares in question cannot be 'concerned in' a 'reorganisation' (see s.126(1)(a)).
54. Turning to the facts of the instant case, in my judgment it is quite impossible to say that the cancellation of the preference shares involved any disposition or acquisition of the ordinary shares by Unilever such as could, but for s.127, have given rise to a chargeable gain or an allowable loss. It follows that, in my judgment, there was no 'reorganisation' in the instant case unless the effect of the cancellation of the preference shares was to alter the rights attaching either to the ordinary shares or to the preference shares. I accordingly turn to that question.
55. I can reject straightaway Mr Venables alternative submission that the cancellation of the preference shares effected an alteration to the rights attaching to those shares. In my judgment it would be an abuse of language to describe the cancellation of a share as altering the rights attaching to it.
56. So far as the rights attending to the ordinary shares are concerned, whereas in a typical case one would expect the issue to be whether the rights in question have been cut down (see, e.g., Re Mackenzie & Co Ltd [1916] 2 Ch 450 and Greenhalgh v. Arderne Cinemas Ltd [1946] 1 All ER 512, both of which authorities were discussed at some length by Lord Evershed MR in White v. Bristol Aeroplane), in the instant case the contention is that they have been enhanced by the cancellation of the preference shares. Nevertheless the same test must apply whether the suggested alteration takes the form of a restriction or an enhancement.
57. In White v. Bristol Aeroplane, it was common ground that the rights in question had not been 'varied', within the meaning of the relevant Article: the issue was whether they had been 'affected'. Lord Evershed was satisfied that a right could be 'affected' without being 'varied' (see p.77 above the first break). However, on the facts of the case he concluded that the rights in question had not themselves been 'affected'; merely the enjoyment of the rights. The question here, however, is whether the rights in question have been altered (i.e.'varied'). Hence the decision in White is not in point; nor, in my judgment, is Lord Evershed's distinction between the right itself and the enjoyment of the right. As I construe the words 'the rights attached to any class of share are altered' in s.126(2)(b), they can only refer to an alteration in the rights themselves, as opposed to an alteration in their commercial significance.
58. The decisions in Mackenzie and Greenhalgh are, however, of assistance on the question of an alteration of rights. In Mackenzie, the preference shareholders were entitled to a cumulative preferential dividend on the nominal amount of the preference share capital for the time being paid up. The ordinary shareholders resolved (as they were entitled to do under the company's Articles) to reduce the company's share capital by means of a rateable reduction of the ordinary share capital and the preference share capital. This inevitably had a substantial effect on the dividend rights of the preference shareholders. The issue in the case was whether the dividend right of the preference shareholders overrode the right of the ordinary shareholders to reduce the company's share capital. Astbury J held that it did not, pointing out that the only dividend right of the preference shareholders was to a dividend based on the nominal amount of the preference share capital from time to time. The decision accordingly turned on the true construction of the relevant Articles. But the important point for present purposes is that it was not suggested in that case that the reduction of capital had altered the preference shareholders' dividend right in any way.
59. In Greenhalgh, the company had two classes of issued ordinary shares, 10s shares and 2s shares. Both classes of share had voting rights. The plaintiff held some shares in each class, which gave him voting control of the company. The company in general meeting resolved, pursuant to a power in that behalf in the Articles, to subdivide the 10s shares into 2s shares, with each sub-divided share having voting rights. The effect of that was to remove the plaintiff's voting control. The plaintiff complained that the resolution for subdivision varied the voting rights attached to original 2s shares, and that under the Articles the consent of the holders of those shares was required to that variation. The Court of Appeal (Lord Greene MR, Morton and Somervell LJJ) held that the resolution for the subdivision of the 10s shares had not had the effect of altering the voting rights of the original 2s shares, since the only relevant right attached to the original 2s shares was the right to have one vote per share pari passu with the other ordinary shares of the company for the time being issued, and that right remained.
60. In the course of his judgment, Lord Greene MR said this (at p.516C):

"Looking at the position of the original 2s ordinary shares, one asks oneself: What are the rights in respect of voting attached to that class within the meaning of Art 3 of Table A which are to be unalterable save with the necessary consents of the holders? The only right of voting which is attached in terms to the shares of that class is the right to have one vote per share pari passu with the other ordinary shares of the company for the time being issued. That right has not been taken away. Of course, if it had been attempted to reduce that voting right, e.g. by providing or attempting to provide that there should be one vote for every five of such shares, that would have been an interference with the voting rights attached to that class of shares. But nothing of the kind has been done; the right to have one vote per share is left undisturbed."

61. Later in his judgment, Lord Greene said this (at p.516H):

"It was conceded by counsel for the [plaintiff] appellant that if the company had created a number of new ordinary shares of 2s each and had issued them, each share carrying one vote, that would not have been an interference with the rights of the original 2s shares. Had that been done, of course, it would have been just as possible to swamp the appellant's voting rights as it has turned out to be by the passing of these resolutions. I do not find anything in the answers of counsel which satisfactorily explains why it would be an interference with the 2s shares in the one case and not in the other case, because if the 2s shares had the right to prevent the voting equilibrium being upset in the way in which it has been upset, I cannot see why they could not object to the creation of new shares which would have the same result."

62. Lord Greene concluded his judgment by saying (at p.518A):

"As a matter of law, I am quite unable to hold that, as a result of the transaction, the rights are varied; they remain what they always were – a right to have one vote per share pari passu with the ordinary shares for the time being issued which include the new 2s ordinary shares resulting from the subdivision."

63. Morton LJ and Somervell LJJ agreed, Morton LJ saying (at p518D):

"To my mind it is impossible to say that that voting right has been varied by the resolution [for subdivision]."

64. By parity of reasoning, as it seems to me, the rights of the BOCM ordinary shares cannot be said to have been enhanced by the cancellation of the preference shares, any more than they could be said to be cut down in the event that the ordinary shareholders were at some time in the future to create a new class of preference shares ranking in priority to the ordinary shares.
65. Nor, in my judgment, does the judgment of Wilberforce J in Fitch Lovell provide support for Unilever's submission that the cancellation of the preference shares effected an alteration of the rights attaching to the ordinary shares within the meaning of s.126(2)(b).
66. In Fitch Lovell, there was an agreement for the sale of the ordinary shares in I.B.S. to Fitch Lovell, at a price of 30s 4d each. Forms of transfer were signed by the transferors, the name of the transferee being left blank. Fitch Lovell then agreed to sell the shares on to a third party by way of subsale, it being a condition of the subsale that the value of the shares be reduced from their current value of 30s 4d each to a value of 1d each. The day after the agreement for subsale was concluded, I.B.S. created a new class of preference share which conferred a right to a fixed preferential dividend of £2M per year and to a payment of £3M out of the assets on a winding up. The effect of that, as was intended, was to render the ordinary shares in I.B.S. worthless. The transaction was then completed by the ultimate transferee executing a document stating that it was the transferee of the shares. The Revenue assessed the transfers signed by the original vendors to ad valorem stamp duty on the consideration of 30s 4d paid on the sale to Fitch Lovell. Fitch Lovell appealed against the assessment, contending that the signed transfers were not conveyances on sale for the purposes of the Stamp Act 1891 ("the 1891 Act") since they had never been completed; and that by virtue of section 58(4) of the 1891 Act stamp duty was chargeable only on the document executed by the ultimate transferee, and was to be calculated on the consideration of 1d per share moving from the ultimate transferee to Fitch Lovell.
67. Wilberforce J held that the transfers were conveyances on sale, it being sufficient for a document to amount to a conveyance on sale if it was the instrument chosen by the parties to complete the sale in such a way as to show that they did not intend any other document to be executed. That was enough to dispose of the appeal, but Wilberforce J went on to consider whether, assuming his conclusion was wrong, the case fell within section 58(4) of the 1891 Act.
68. Section 58(4) of the 1891 Act provided as follows:

"Where a person having contracted for the purchase of any property, but not having obtained a conveyance thereof, contracts to sell the same to any other person, and the property is in consequence conveyed immediately to the sub-purchaser, the conveyance is to be charged with ad valorem duty in respect of the consideration moving from the sub-purchaser."

69. Wilberforce J (at p.1342) identified the intention of section 58(4) to be:

".... that there should be identity between the property conveyed on the main sale and that which is passed on by the sub-sale ..."

70. He accordingly addressed the question whether that requirement was met on the facts of the case. Referring to White v. Bristol Aeroplane, he observed (at p.1343) that if one were to approach the matter in the way in which the Court of Appeal had approached it in that case, the correct question to ask would be:

".... whether the chose in action, which an ordinary share is, conferred the same rights after the sale to Fitch Lovell but before the sub-sale, as it did on the sub-sale [the ultimate transferee]."

71. As to that, he concluded (also at p.1343) that:

"[l]ooked at purely technically ... it seems to me that there is much to be said for the proposition that the chose in action was not the same before and after these irrevocable transactions. A potential displacement of rights, as to which the shareholder in question held the master key, had been replaced by an actual irreversible and total loss of rights."

72. However, he then went on to, as he put it, look at the matter more fully:

".... in the light of the evident purpose of section 58(4), which is to give a concession as regards stamp duty where property passes unaltered."

73. He concluded that, looked at in that way, the transaction was not one to which section 58(4) applied.
74. For present purposes, the focus is on that part of Wilberforce J's judgment in which he addressed the question at issue by reference to the decision in White v. Bristol Aeroplane. Unilever relies in particular on his observation (admittedly obiter) that "there is much to be said for the proposition that the chose in action was not the same before and after these irrevocable transactions". In my judgment, however, the instant case cannot be compared with a case in which a "potential displacement of rights" has been replaced by "an actual irreversible and total loss of rights": i.e. where rights have been removed altogether, with no means of restoring them. Indeed, I find it hard to see how a comparable situation could ever arise in a case where, as here, the contention is that not that the rights in question have been reduced, but that they have been enhanced. If such cases can exist, the instant case is not among them, in my judgment. There was, after all, nothing irrevocable in the cancellation of the preference shares; it remained within the power of the ordinary shareholders to create a new class of preference shares in the future, should they see fit to do so. In any event, the question in the instant case is as to the true meaning and effect of the words of s.126(2)(b), construed in the context of the other provisions of the 1992 Act to which I have referred.
75. Nor can I accept Mr Venables' submission that the removal of the preference shareholders as members of the company altered the rights attached to the ordinary shares by materially altering the relationship of 'mutual covenants' referred to by Farwell J in Borland's Trustee. In my judgment the expression 'rights attached to shares' in s.126(2)(b) refers to the rights incident to a share, viewed as a transferable item of property. In the context of a publicly quoted company, it seems to me quite unreal to read that expression as referring to, or as in any way embracing, the relationship between the members of the company for the time being, inter se.
76. I therefore conclude that there was in the instant case no alteration of the rights attaching to the ordinary shares within the meaning of s.126(2)(b).
77. It follows, for reasons given earlier, that there was in the instant case no 'reorganisation' and no 'new holding', and that paragraph 19(2) accordingly has no application. This conclusion also disposes of Issue 5, since s.128(1) applies only to 'consideration for [a] new holding', and there is no 'new holding' here.
78. I would accordingly dismiss this appeal.

Lord Justice Clarke :

79. I agree.

Lord Justice Auld :

80. I also agree.