UK: England and Wales: accounting practice and company law - the tail wagging the dog?

In February 2008, Peter Smith J. held that there were circumstances where money advanced to a company, prior to a resolution or agreement to allot shares, could be regarded as a contribution to the capital of the company (see Blackburn v HMRC [2008] EWHC 266 (Ch)). In late December, a unanimous Court of Appeal endorsed this approach, relying on Kellar v Stanley Williams (Turks and Caicos Islands) [2000] UKPC 4: see Revenue and Customs v Alan Blackburn Sports Ltd & Anor [2008] EWCA Civ 1454.
 

The case concerned a taxpayer's entitlement to Enterprise Investment Scheme relief under the Taxation of Chargeable Gains Act (1992). However, it is of wider interest because of Lord Neuberger's comments on the significance of accounting practice in determining whether money received by a company could be regarded as a contribution to share capital (Lord Neuberger delivered the only reasoned opinion; Sedley and Wilson LJJ concurred).  His Lordship observed (at paras. [29] - [30]):

It was suggested that a limited company cannot effectively accept capital contributions other than in the form of loan capital or share capital. Even if that suggestion was, in general, correct, I cannot accept that it would extend so as to prevent a company from accepting and holding money on the basis that it is bound (or at least entitled) as against the payer, to allot shares to him in return for the payment (with the possibility of having to repay the money if the shares are not then allotted).

In any event, I severely doubt that there is any reason in terms of principle, authority or practice for accepting that suggestion. In practical terms, I find it impossible to see, for instance, why a company should not be able to treat a gift as a contribution to its capital. As to authority, far from there being any case which confirms the suggestion, the Privy Council in Kellar [2000] 2 BCLC 390, 395e-f indicated precisely the opposite. Lord Mackay of Clashfern, giving the judgment of the Committee (which included Lord Browne-Wilkinson and Lord Millett) said that "there was nothing in the law of the Turks and Caicos Islands or in the company law of England" which prevented giving effect to an agreement between "the shareholders of a company … to increase its capital without a formal allocation of shares". In such an event, he said, such capital would "become like share premium part of the owner's equity". So far as principle is concerned, I do not see why the fact that accountancy convention may make it difficult to decide how to record a particular type of payment in the Company's accounts means that, as a matter of law, the payment cannot be characterised as being of that type. While accountancy convention has an important part to play in some areas of tax law and company law, this would, I think, be a case of the tail wagging the dog".

Notes:

[1] A summary of the decision has been produced by Maitland Chambers: see here. A report has also been published in The Times: see here (this report will be available for a limited period of time).

[2] For information about the current operation of EIS relief, see here. 

[3] Lord Neuberger is a Law Lord but during 2008 he sat in the Court of Appeal in several cases including Underwood v HM Revenue & Customs [2008] EWCA Civ 1423, Symbian Ltd v Comptroller General of Patents [2008] EWCA Civ 1066 and Foxtons Ltd v Pelkey Bicknell & Anor [2008] EWCA Civ 419.