The costs incurred in litigating a trade dispute are generally
allowable. The costs of litigating a private dispute are not. The
nature of any dispute is essentially a question of fact.
In the case of Hammond Engineering Co Ltd v CIR [1975]
50TC313, the company carried on the trade of light engineering.
Until October 1957 its chairman and managing director was Captain
Rubery, who commanded 51% of the votes. Rubery resigned as managing
director on 28 October 1937, when he was succeeded by his wife, and
died on 18 November 1957, leaving his wife as executrix and sole
legatee.
Mrs. Rubery had been under treatment for mental disorder for
some years and was incapable of managing the company. On 24 January
1958, before she had obtained probate of Rubery's will, she was
removed from the board and a number of unissued shares were
allotted in such a manner as to reduce the proportion of votes
commanded by the shares registered in Rubery's name and her own to
46%.
Mrs Rubery obtained probate in June 1958. In December 1960
she commenced an action against the company, the directors, the
secretary and certain shareholders (all but one of whom were
employees of the company) claiming, amongst other things,
declarations that the said allotment was void and that she was a
director of the company and damages.
In January 1961 she entered hospital suffering from a mental
disorder. In March 1961 the Court of Protection appointed a
receiver of her affairs, who in June 1961 obtained letters of
administration of Rubery's estate. The receiver had formerly been
accountant to the company; the managing director feared that he
might take steps to harm the company and did not want him on the
board as he was not a qualified engineer.
On 11th September 1961 the board resolved that the company
should indemnify all members of its staff who had been joined as
defendants in the action in respect of all costs, claims and
demands made against them. The action was settled in November 1965
on the terms that the shares controlled by the receiver should be
bought by the other shareholders, and under the indemnity the
company paid some £4,000 together with £2,000 costs
(including its own costs).
The Revenue refused the company’s error or mistake
claim. The company appealed the refusal, contending that:
The Special Commissioners, found that if the action had not been
defended the very existence of the company would have been
endangered together with the investments of its shareholders and
the livelihoods of its staff and employees. But that the nature of
the threat altered after the appointment of the receiver. The
Special Commissioners decided that the sum of £6,000 was not
laid out wholly and exclusively for the purposes of the company's
trade.
Templeman, J in the High Court decided that there was
evidence on which the Commissioners were entitled to arrive at
their decision. The facts as found by the Commissioners were
important. You should note in particular the weight given to the
Commissioners’ conclusions made having heard oral testimony
from the managing director.
For those who do not have ready access to tax case volumes,
the part of Templeman J’s judgement on which the above
guidance is based is set out below, 50TC320E to 320I:
On those facts, it was in my judgment open to
the Commissioners to conclude, after seeing the witnesses, that the
indemnities and the sum paid thereunder were granted and paid
exclusively for the purposes of the trade, or alternatively were
wholly or partly granted and paid for other purposes, such as the
securing of the positions of the shareholders and directors
personally. Mr. Bretten [counsel for the company]
argued pertinaciously that the Commissioners
did not make their findings clear and that they wrongly relied on
their own objective inference that the threat to the Company was
removed when the receiver was appointed. Mr. Bretten accused the
Commissioners of ignoring their own finding that the managing
director ‘feared that the receiver (who had formerly been the
accountant to the Company) might seek to become a director and take
steps to harm the Company, and he did not want the receiver on the
board as he was not a qualified engineer.’ The Commissioners
should have accepted. said Mr. Bretten, that the views expressed by
the managing director were the views of the board.
In my judgment the Commissioners were entitled
to take into consideration the position as it was after the
appointment of the receiver, and on seeing and hearing the managing
director to draw their own conclusions as to the purpose of the
indemnities. The evidence on which Mr. Bretten relies is consistent
with the view that the resolution was not passed and the
indemnities were not given exclusively for the purposes of the
Company or its trade. It was for the Commissioners to determine
whether the Company had made out its case and whether the money was
expended exclusively for the purposes of the trade.
Reading the Case as a whole, and bearing in
mind the criticisms made by Mr. Bretten, I have reached the
conclusion that there was evidence to support the findings of the
Commissioners and that the conclusion which they reached could have
been reached on that evidence by any reasonable body of
Commissioners.
