BIM56870 - Financial traders - instruments and shares: case law and companies

Lewis Emanuel & Son Ltd v White [1965] 42TC369

In this case, discussed at BIM56850, Pennycuick J considered the position of a company engaged in an activity of buying and selling shares:

‘… a corporation must act within the limitations of its memorandum of association…where a transaction can be brought within the scope of an authorised object - e.g. investment or dealing - one would not readily treat the transaction as having been carried out … in pursuit of an unauthorised object e.g. gambling. In other words, one expects a trading company’s activities, apart from capital investment, to be by way of trade.’

Cooper v C & J Clark Ltd [1982] 54TC670

In this case, Nourse J examined the judgment in theLewis Emanuel case and extracted the following principles to consider in deciding whether a company’s activities of buying and selling shares amounted to a trade or not:

• marketable securities, being income producing assets usually capable of increasing in value, are at first glance purchased and sold by way of investment and not by way of trade;
• a series of purchases and sales may sometimes, if carried out pursuant to a deliberate and organised scheme of profit-making, amount to a trade;
• it is easier to characterise a series of purchases and sales as a trade in a case where they are made by a trading entity as opposed to an individual;
• in a case of a trading entity that characterisation is more easily made where the purchases are substantial in relation to its other activities, all the more so where they are of frequent occurrence and extend over a long period of time;
• it is sometimes helpful to ask whether a series of sales and purchases is speculative or not, but it is not decisive because according to the circumstances either a trade or a course of investment may be speculative.

In this case, the company placed some surplus funds with a firm of merchant bankers which were invested in short-term gilts from April 1976. The choice of securities was left to the bank, although the company could order them to sell any stocks they disapproved of. A limit on losses of 10% of the funds invested was placed. The final gilts were sold in December 1976. No extra staff were taken on and no separate trading account was set up.

The Commissioners found that the company was trading. Nourse J expressed some reservation about whether he would have agreed with this, citing the small number of transactions, the nine-month period over which the activity was carried out and the insignificance of the purchases and sales compared with the other activities of the company.

Nevertheless he came ‘to the conclusion that this case falls just within the “no-man’s land”, on the ground that it was indeed open to the Commissioners to take the view’ that they did and he declined to interfere with the Commissioners’ decision.

Recent developments

Since the Lewis Emanuel case was heard, company law has been amended. S39 Companies Act 2006 now says:

‘The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.’

Furthermore, there is judicial approval for the right of a company to engage in speculative transactions. In Hazell v Hammersmith & Fulham London Borough Council [1991] 2WLR372 at page 372, Lord Templeman said:

‘There are many trading and currency and commercial swap transactions which eliminate or reduce speculation. Individual trading corporations and others may speculate as much as they please or consider prudent.’

Although it is unlikely that a company would ever enter into a gambling transaction, there is no reason why its activities could not include speculative transactions which, while not being investments, might also not amount to trading.