In Farnborough Airport Properties Company and another v HMRC [2019] EWCA Civ 118 (8 February 2019), the Court of Appeal found that the appointment of a receiver had the effect of degrouping a company for group relief purposes.
The appellants (referred to collectively as ‘Farnborough’) were each at least 75% subsidiaries of Kelucia (‘KL’), as was Piccadilly Hotels 2 (‘PH2L’). HMRC had disallowed Farnborough’s claims for group relief of over £10.5m under CTA 2010 s 154 in relation to losses surrendered by PH2L, on the ground that PH2L had ceased to be a member of the same group of companies as Farnborough as a result of the appointment of receivers over PH2L. The issue was therefore whether the appointment of the receivers had the effect of degrouping PH2L and Farnborough.
The Court of Appeal began with the ‘central issue’; whether the appointment of the receiver had resulted in the loss of shareholder control over PH2L.
It observed that the final limb of CTA 2012 s 1124(2) (which refers to control over the way the affairs of the company are conducted) was of crucial importance; ‘by choosing to incorporate this definition for the purposes of s 154, Parliament must be taken to have intended this separate requirement to be replicated for the purposes of Effect 2’. In the view of the court, the definition of ‘control’ for the purpose of s 154 is therefore concerned with the power of a person to secure that the affairs of the company are conducted in accordance with that person’s wishes.
Distinguishing from Pilkington [1982] 1 WLR 136, the court noted that in the present case, ‘the functions of PH2L's board were superseded when the receivers were appointed, and the shareholders could no longer intervene to have the company run in accordance with their wishes. The company was now being run for the primary benefit of the secured creditors, and the shareholders could do nothing to prevent this. Thus, although the constitutional framework of shareholder control remained in place, it had no substance while the receivership continued.’
Finally, the FTT found that the appointment of the receivers, and their subsequent conduct of the receivership in accordance with the debenture, constituted ‘arrangements’ for the purposes of s 154. The court noted that the concept of ‘arrangements’ involves an element of ‘deliberate planning to bring about a particular state of affairs’ and that requirement was satisfied. The receivers were appointed pursuant to the contractual provisions of the debenture freely agreed between the directors of PH2L and the bank.
Why it matters: Lord Justice Henderson admitted: ‘I have not found this an easy question, and I see considerable attraction in some of the appellants’ submissions.’ The appellants’ key submission was that Kelucia continued to have indirect shareholder control. However, in the court’s view, this was not sufficient. Control of the company’s business was what mattered.
In Farnborough Airport Properties Company and another v HMRC [2019] EWCA Civ 118 (8 February 2019), the Court of Appeal found that the appointment of a receiver had the effect of degrouping a company for group relief purposes.
The appellants (referred to collectively as ‘Farnborough’) were each at least 75% subsidiaries of Kelucia (‘KL’), as was Piccadilly Hotels 2 (‘PH2L’). HMRC had disallowed Farnborough’s claims for group relief of over £10.5m under CTA 2010 s 154 in relation to losses surrendered by PH2L, on the ground that PH2L had ceased to be a member of the same group of companies as Farnborough as a result of the appointment of receivers over PH2L. The issue was therefore whether the appointment of the receivers had the effect of degrouping PH2L and Farnborough.
The Court of Appeal began with the ‘central issue’; whether the appointment of the receiver had resulted in the loss of shareholder control over PH2L.
It observed that the final limb of CTA 2012 s 1124(2) (which refers to control over the way the affairs of the company are conducted) was of crucial importance; ‘by choosing to incorporate this definition for the purposes of s 154, Parliament must be taken to have intended this separate requirement to be replicated for the purposes of Effect 2’. In the view of the court, the definition of ‘control’ for the purpose of s 154 is therefore concerned with the power of a person to secure that the affairs of the company are conducted in accordance with that person’s wishes.
Distinguishing from Pilkington [1982] 1 WLR 136, the court noted that in the present case, ‘the functions of PH2L's board were superseded when the receivers were appointed, and the shareholders could no longer intervene to have the company run in accordance with their wishes. The company was now being run for the primary benefit of the secured creditors, and the shareholders could do nothing to prevent this. Thus, although the constitutional framework of shareholder control remained in place, it had no substance while the receivership continued.’
Finally, the FTT found that the appointment of the receivers, and their subsequent conduct of the receivership in accordance with the debenture, constituted ‘arrangements’ for the purposes of s 154. The court noted that the concept of ‘arrangements’ involves an element of ‘deliberate planning to bring about a particular state of affairs’ and that requirement was satisfied. The receivers were appointed pursuant to the contractual provisions of the debenture freely agreed between the directors of PH2L and the bank.
Why it matters: Lord Justice Henderson admitted: ‘I have not found this an easy question, and I see considerable attraction in some of the appellants’ submissions.’ The appellants’ key submission was that Kelucia continued to have indirect shareholder control. However, in the court’s view, this was not sufficient. Control of the company’s business was what mattered.
