TMI Blog1959 (11) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... ach of the African subsidiaries is incorporated in Kenya under the Kenya Companies Ordinance and has its registered office in Nairobi. The articles of association of each of them contains provisions placing the management and control of its business in the hands of its directors and providing that directors' meetings may be held anywhere outside the United Kingdom. In article 28 of the articles of association of Booth Co. (Africa) Ltd. it was provided that: Directors' meetings may be held anywhere outside the United Kingdom and clause 81 of Table A shall be construed accordingly. A similar provision was to be found in the articles of association of the other African subsidiaries. It was admitted on behalf of the appellant company that the African subsidiaries are resident in East Africa. Between 1948 and 1950 the African subsidiaries had been operating so unsuccessfully that, according to paragraph 5(2) of the case stated, in 1950 it was considered that the condition of the African subsidiaries was becoming so serious that it was unwise to allow them to be managed in Africa any longer, and that their management must be taken over by the directors of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (for example, where a parent company is the sole shareholder), not merely to a case where the subsidiary is obedient to the wishes of the parent company, but one where its board does not in any way exercise its functions. It is accepted that in the cases cited for the appellant company in the court below the possibility of the present situation was not contemplated, and one should not attach too much importance to the language used in them. But, then, in Union Corporation Ltd. v. Inland Revenue Commissioners [1952] 1 T.L.R. 651 (C.A.); [1952] 1 All E.R. 646; [1953] A.C. 482 (H.L.);. [1953] 2 W.L.R. 615; [1953]2 All E.R. 729, relied on by the respondent and by the Court of Appeal in this case, the Master of the Rolls was not contemplating such a case as the present when he spoke of power and authority , So in this respect, the same criticisms are equally valid against both the appellants and the respondent. The question of the residence of a company in such circumstances as the present is one of very wide import. The peculiar feature in the present case is that the boards of the African subsidiaries did not function at all at the material times even as a rubber stamp. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Land and Investment Co. Ltd. v. Todd [1929] A.C. 1, 10-12, 16, 20, 25 (H.L.); 44 T.L.R. 474 nothing was done in the United Kingdom but compliance with the bare minimum requirements of English company law. Viscount Sumner referred to the place where the company's business was directed, but the possibility of that direction being de facto in persons who were not de jure directors was not considered. In Union Corporation Ltd. v. Inland Revenue Commissioners [1953] A.C. 482 there was no evidence that the central management and control of the busineses of any of the companies concerned was exercised otherwise than in accordance with the constitution of that company. What was said in that case in the Court of Appeal [1952] 1 T.L.R. 651, 659, 663 in the passage relied on by the respondents was not directed to such a case as the present. The test laid down by Lord Loreburn emerges from the authorities supreme and authoritative. It may no longer be exclusive and there may be an alternative criterion, but it is unchallengeable that where one finds management and control of the company's business, there the company must be held to be resident. The fact that the persons who actuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he constitution of the particular subsidiary by the officers to whom the constitution entrusted it. Since by the constitutions of the subsidiaries, their memorandum and articles interpreted in the light of the law of Kenya, the relevant law here, the companies should have been managed outside the United Kingdom, the control and management are to be regarded as abiding outside the United Kingdom. When judges in the cases cited said that control and management are the test of residence for a company, they were not thinking of a case like the present where there is a conflict between the company's regulations and what has in fact been done. Such observations have no bearing on the present case. The respondent's submissions are well stated in the judgment of the Court of Appeal [1959] Ch. 315, 332, 333, 336-337, 337-338. 340; [1959] 2 W.L.R. 437; [1959] 1 All E.R. 591; [1961] 42 I.T.R. 332. It has been admitted that the companies are resident in East Africa. To succeed, the appellants must show a split in the supreme or directing authority. One must look only at the constitutional acts of the subsidiaries. They took great pains to show that they were not resident in the Unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase [1952] 1 T.L.R. 651, 663-664, which shows that the essential feature must be the directing authority within the constitution of the company. Here the African subsidiaries were not registered in the United Kingdom. Article 28 of the articles of Booth Co. (Africa) Ltd., which is reproduced in the articles of the other African subsidiaries, is important. The management and control, vested in the directors, cannot be exercised in London. Unless one finds part of the superior and directing authority of a company exercised in a particular country, its residence cannot be there. This company cannot show that part of its superior and directing authority was exercised in the United Kingdom, because the extraneous pressure of persons other than the duly appointed officers of the company cannot be taken into account. Decisions of the courts for the last 50 years have been given on the assumption that the respondent's contentions are right. If the appellant's contentions are right the whole thing is thrown into the melting-pot again. Alan Orr following. In the cases on which the appellant company relied the judges did not have such a case as the present in mind. Whatever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion which they thus state: We find 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, and we find that the real control and management was being exercised by the board of directors of Alfred Booth Co. Ltd. in London. This being their conclusion of fact, it is not surprising that as a matter of law they concluded that these companies were resident in London. For it has been trite law for two generations or more that a limited company resides for purposes of income tax where its real business is carried on, and that its real business is carried on where the central management and control actually abides. This test has not only been reasserted and applied over and over again in judicial decisions; it has now also received legislative recognition, see section 468(7) of the Income Tax Act, 1952. It cannot be questioned by your Lordships. The familiar words that I have cited come from Lord Loreburn's speech in De Beers Consolidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Crown must have far-reaching and probably deplorable consequences for the Revenue. For the contention of learned counsel for the Crown which has so far found favour with the courts is no less than this, that if by the constitution of the company, that is by its memorandum and articles of association, interpreted in the light of the relevant law, that is, in this case the law of Kenya, the management of the company's business is contemplated as being exercised and ought therefore to be exercised in Kenya or at any rate outside the United Kingdom, then for the purpose of British income tax law the facts are to be disregarded, and the control and management which as a fact are found to abide in the United Kingdom are to be regarded as abiding outside it. There is no doubt, I think, that the management of the African subsidiaries, which were incorporated in Kenya under the Kenya Companies Ordinance and registered in Nairobi, was placed in the hands of its directors and that their articles of association expressly provided that directors' meetings might be held anywhere outside the United Kingdom. Nor can there be any doubt--for this is the unchallengeable finding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness is managed in Kenya. Yet it is the place of central management, which, however much or little weight ought to be given to other factors, essentially determines its residence. I come, therefore, to the conclusion, though truly no precedent can be found for such a case, that it is the actual place of management, not that place in which it ought to be managed, which fixes the residence of a company. If it were not so, the result to the Revenue would be serious enough. In how many cases would a limited company register in a foreign country, prescribe by its articles that its business should be carried on by its directors meeting in that country, and then claim that its residence was in that country though every act of importance was directed from the United Kingdom? In my opinion, Wynn-Parry J. and the Court of Appeal have adopted a wrong test in this admittedly difficult case. I would allow this appeal and restore the determination of the commissioners. The respondent must pay the appellants' costs here and below. My Lords, since writing this opinion, I have been privileged to read the opinion which my noble and learned friend, Lord Radcliffe, will deliver, and I wis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on has arisen whether the subsidiaries are entitled to be regarded as resident in the United Kingdom during the years 1952 and 1953, with the consequence that each of them would fall within the description of a company resident in the United Kingdom and carrying on a trade wholly or partly in the United Kingdom for the purposes of section 20 of the Finance Act, 1953. If they do, then the appellant company, which is also an Alfred Booth Co. Ltd. subsidiary, can treat certain payments which it made to them in those years as subvention payments under the section and, accordingly, can deduct them from its assessments under Case(1) of Schedule D for the years 1953-54 and 1954-55. The appellant has throughout the case admitted that the three African subsidiaries were at all material times resident in East Africa. This is spoken of as an admission, though it seems to me that it might just as well be described as a claim. The grounds upon which this to admission was founded are not before us. I do not know whether they were supposed to be the fact of incorporation in Kenya, or the adoption of articles of association under the Kenya Companies Ordinance of 1933, or the residence in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Beers judgment', followed as it is by a number of other judgments of the highest authority which have accepted the same principle, must be treated to- day as if the test which it laid down was as precise and as unequivocal as a positive statutory injunction. That means that there is no escape from Lord Loreburn's words Ibid. 458: ........a company resides for purposes of income tax where its real business is carried on......I regard that as the true rule, and the real business is carried on where the central management and control actually abides. I do not know of any other test which has either been substituted for that of central management and control, or has been defined with sufficient precision to be regarded as an acceptable alternative to it. To me, at any rate, it seems impossible to read Lord Loreburn's words without seeing that he regarded the formula he was propounding as constituting the test of residence. If the conditions he postulated were present, there was residence: if they were not, other conditions did not suffice to make up residence. And so, I think, his meaning was universally understood, not least in judgments of this House (see Americ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s House in 1925 in the Swedish Central Railway Co. case [1925] A.C. 495. To all appearances that laid down the proposition that, although there was a residence in Sweden by virtue of central control and management being exercised there, there was at the same time residence in England by virtue of incorporation here and the performance here of administrative duties such as exercising the custody of the company's seal and registration of transfers. The novel idea thus appeared that there were some circumstances that could establish residence for a company, even though its central management and control were being concurrently exercised elsewhere. Unfortunately it is impossible to discover from the decision what exactly those circumstances are, because, as so often arises under income tax procedure when judgment is given on cases stated by commissioners, the conclusion of the House involved nothing more positive than that the commissioners who had heard the case had facts before them upon which it was open to them in law to find that there was English residence. Conversely, when the case of Egyptian Delta Land and Investment Co. Ltd. v. Todd [1929] A.C. 1 reached this House in 192 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to be understood that the Swedish Central Railway Company's business and administration were of such a nature that what managing and controlling had to be done were in fact done as much on English as on Swedish soil. He regarded the key of the earlier decision as being contained in the words of Lord Cave [1925] A.C. 495, 501: The central management and control of a company may be divided, and it may 'keep house and do business' in more than one place; and, if so, it may have more than one residence. On this basis the 1925 decision of the House is no more than a decision on that special class of case, such as I have already noticed with reference to the Union Corporation [1952] 1 T.L.R. 651; (H.L.) [1953] A.C. 482, where the facts themselves are genuinely such as not to admit of a finding that central management and control are exercised in or from any one country. There will then be only one category of exception from the principle of the De Beers case [1906] A.C. 455 and not an undefined second class. My Lords, what I have been saying about this question of double residence has no direct relevance to what has to be decided in the present appeal. I thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on where control and management abide must be treated as one of fact or actuality , and here control and management in London remain a fact, despite the failure to adapt the companies' articles to the occasion. The articles prescribe what ought to be done, but they cannot create an actual state of control and management in Africa which does not exist in fact. In litigation inter partes this sort of situation may perhaps be brought about by the operation of the law of estoppel, but here I see no ground for saying, nor has it been argued, that there is any estoppel either by words or conduct which binds the appellants in the face of the Revenue. Ought we, then, to adopt this principle that evidence of what has happened in fact must be excluded by a rule of law if what has been done is inconsistent with the regulations of a company? In my opinion, it would be wrong to do so. I cannot see how the corollary of such a principle could fail to be that, if you cannot look beyond what the regulations of the company provide for, it is only those regulations which need to be or indeed can be referred to when a question of residence arises. Companies could be equipped with the most comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of candour and responsibility that is shown by the individual taxpayer and his professional advisers. I would allow the appeal. My noble and learned friend, LORD GODDARD, asks me to say that he concurs in this opinion. LORD COHEN. My Lords, the short point for your decision is whether three companies incorporated in Kenya, all wholly-owned subsidiaries of an English company, Alfred Booth Co. Ltd. (which I shall hereafter call the parent company ), were at the relevant periods resident in the United Kingdom within the meaning of subsection (9) of section 20 of the Finance Act, 1953. If they were so resident in the United Kingdom, but not otherwise, the appellant company, also a wholly-owned subsidiary of the parent company, was entitled in computing its profits for the years 1953-54 and 1954-55 to deduct certain payments (in the section called subvention payments ) made by it to the African subsidiaries in the years 1952 and 1953. It has been throughout common ground between the parties that the African subsidiaries were at all material times resident in East Africa, but the appellant company contends that they were also resident in the United Kingdom. The admiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so framed that it should have been impossible for the control and management, vested as it was in the respective boards of directors, to be exercised in London. Thus, in article 28 of the articles of association of Booth Co. (Africa) Ltd., it was provided that: Directors' meetings may be held anywhere outside the United Kingdom and clause 81 of Table A shall be construed accordingly. A similar provision is to be found in the articles of association of each of the other African subsidiaries. Mr. Borneman argued, and his argument found favour with both Wynn-Parry J. and the Court of Appeal, that the observations of Lord Loreburn and of other judges in decided cases as to the acts or other elements which may determine the residence of a limited company must have envisaged such acts or other elements as being regular and not irregular, constitutionally lawful and not unlawful. Accordingly, both courts below held that since the acts of the parent company on which the Special Commissioners relied constituted a usurpation of the directing power of the African subsidiaries, such acts could not warrant the attribution to the African subsidiaries of a second residence in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing his argument to this logical conclusion. Mr. Borneman suggested, that unless the application of Lord Loreburn's principle was made in accordance with the Court of Appeal's interpretation of it in the present case, the consequences would be disastrous and companies could vary their liability by moving control to and fro. My Lords, so they could, even on the Court of Appeal's view, if they amended the relevant articles (not a very difficult process in the case of a 100 per cent. subsidiary). Moreover, the adoption of the interpretation of the law laid down by the Court of Appeal could lead to the strange consequences which I have already indicated. My Lords, I do not think that adherence to the test laid down by Lord Loreburn and to the application thereof which, as I think, has hitherto been adopted--namely, that the question where the central control actually abides is a question of fact for the decision of the cornmissioners--will lead to any disastrous consequences. The facts of the case before your Lordships are most unusual. It is surely exceptional for a parent company to usurp the control; it usually operates through the boards of the subsidiary companie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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