Buchanan Ltd and Another v McVey

• Jurisdiction: Ireland
• Judgment Date: 01 January 1956
• Date: 01 January 1956
• Docket Number: [1947 No. 357 P.]
• Court: Supreme Court

[THE HIGH COURT OF JUSTICE OF EIRE AND ON APPEAL THEREFROM TO THE SUPREME COURT.] NOTE PETER BUCHANAN LD. AND MACHARG v. MCVEY. 1950 July 21. 1951 June 19. Kingsmill Moore J. Maguire C.J., Murnaghan and O'Byrne JJ.

Conflict of Laws - Revenue laws - Whether enforceable in another State - Indirect enforcement - One man company - Liability in Scotland to excess profits tax - Removal of assets to Ireland - Whether honest for purpose of Scottish company law - Irish court entitled to take cognizance of fraudulent purpose against Scottish Revenue - Action by Scottish liquidator in Eire to recover assets - Attempt to enforce Scottish Revenue laws - Irish court's refusal to lend its hand for this purpose.

1950. July 21. KINGSMILL MOORE J. Peter Buchanan Ld. was incorporated under the Companies Act, 1929, on October 30, 1930, as a private company having its registered office in Scotland, and with a share capital of £100, divided into 100 shares of £1 each. The main object was to carry on the business of wine and spirit merchants, brokers and agents. Though the company was very closely associated with two other companies, Henry Simpson & Co. Ld. and James McVey Ld., both of which were almost completely controlled by the defendant, the defendant was not an original shareholder. In 1937, however, he acquired 96 out of the original 100 shares, and on November 25, 1940, he became the owner of three more. The remaining share was transferred on September 22, 1942, to Miss Farquharson, the confidential cashier and bookkeeper of the company, and she held it as trustee for the defendant, who thus became the beneficial owner of all the shares in the company. Miss Farquharson was also appointed a director, along with the defendant, and thenceforward she and the defendant were sole directors and sole shareholders in the company. She was, in theory, independent, but, having no beneficial interest and being for practical purposes the paid servant of the defendant, she was in no position to exercise an independent judgment or in any way to oppose his designs and, indeed, seems to have conceived it to be her duty to follow his suggestions in all matters of policy, and to see to the proper executing of that policy in questions of detail.

Initially, the company operated in a very small way. Profit and loss accounts were made up to March 31 of each year, and, for the four years 1937–40 inclusive, these accounts showed losses of £1,206, £176, £30 and £29. The next three years showed profits of £999, £3,145 and £1,221, but in 1944 there was again a loss of £1,707.

Behind the screen of the books the company was well on the way to making enormous profits. The minutes of an extraordinary meeting of October 3, 1940, record that: “As the directors were of opinion that in the present state of the whiskey market larger funds could be profitably employed, they desired power to borrow up to £20,000 for this purpose,” and that the power was given to them. The authorized sum was actually exceeded, for the balance sheet for 1942 shows that by March 21 of that year the company had borrowed from the defendant the sum of £37,851, an excess which was subsequently approved and ratified at an extraordinary general meeting on March 6, 1944.

The borrowed money was used to buy whiskey and so to increase the company's bonded stocks. The value of whiskey was soaring. While in the balance sheet of March 31, 1944, the stocks are shown at £19,834, “as valued by the managing director” (a sum which presumably corresponds to their cost price), the evidence established that those same stocks were then worth well over £300,000.

Some time before this the defendant had disposed of his interests in Henry Simpson & Co. Ld. and James McVey Ld. on very advantageous terms. The exact mechanics of this transaction have not been disclosed, but apparently all the facts were put before the Revenue, and the defendant was assured (as was the fact) that the deal did not then attract any liability for excess profits tax. But subsequently, by the provisions of the Finance Act, 1943, the transactions were made retroactively liable to pay this tax, and in July, 1944, the defendant found himself assessed in two sums, £112,388 and £42,800, making in all a total of £155,188. On December 29 of that year the Lord Advocate, acting for and on behalf of the Commissioners of Inland Revenue, issued a summons against the defendant for that amount, a procedure which by Scots law rendered the property of the defendant liable to “arrestment,” which I gather to be a power akin to sequestration.

Retroactive legislation, such as was brought about by the Finance Act, 1943, has recently come in for a great deal of criticism from sober thinkers on the ground that it is ethically and politically immoral. The defendant was emphatically of this opinion, though indignation, more than the niceties of political ethics, seems to have been his motive force. To find himself liable to pay £155,000, exactable by pains and penalties, in respect of operations which he had been assured were tax-free, called forth the resources of his ingenuity. If the Revenue were bent on taking from him sums to which, as he felt somewhat strongly, they had no moral claim, he on his part determined to do all that in him lay to defeat their devices, now and for the future. He evolved a plan both swift and simple. He would secretly dispose of all the valuable whiskey stocks scraped together with his private assets to safe hands in Ireland, and in due time follow his money to this jurisdiction from where, he was advised, he might safely snap his fingers in the face of a disgruntled Scottish Revenue.

I am satisfied that the general nature of the scheme was mentioned on more than one occasion to Miss Farquharson, and that she expressed no dissent, but gave her agreement — possibly a tacit agreement — to the project. I do not think that all the details of this contemplated transaction were told to her, and I do not think that those details were fully worked out at the initial stages but rather took shape to meet the necessities as they arose. When these necessities did arise Miss Farquharson co-operated actively, and I think that she must be taken to have agreed to both the general plan and its method of working, though I also think that the agreement was given because she thought that, she having no real interest in the company, it was no business of hers to disagree with the man who owned it. She has said that she knew that it was in her power to dissent, and in this I believe her. But she held the view that dissent would be vaguely improper.

The first active steps to carry out the plan were taken on March 6, 1944, by which date, although the assessments had not been made, the defendant knew of his prospective liability. An extraordinary general meeting was held, which ratified the past borrowing in excess of the then limit of £20,000, and authorized the director to borrow for the purpose of the company's business further sums not exceeding £300,000 at any one time. The company's bank account was transferred from the Clydesdale Bank to the North of Scotland Bank Ld., and by March 9 the Glasgow manager of that bank was able to advise the defendant that his directors had sanctioned advances to Peter Buchanan Ld. on current account to the amount of £204,000 against whiskey warrants to be given to the bank of stocks belonging to the company and valued at approximately £340,000 and a personal guarantee from the defendant to repay the amount. The defendant was to insure the stocks against fire and war risks at their market value, and to be responsible for all charges for rent and warehousing.

The suggested transactions were authorized at a meeting of Mr. McVey and Miss Farquharson held on March 18, 1944, and recorded as an extraordinary general meeting.

In pursuance of this arrangement whiskey warrants were signed in favour of the bank for all the company's stocks, the effect being to put the bank in a position to sell the whiskey under its own name, and from this time forward all sales were so effected even when the loan had been completely discharged and the company's account was in credit. The procedure had two advantages. It gave the bank complete security, and it enabled the sales to be carried through in a way which would not attract the attention of the Revenue to the suggestive realization by the company of all its liquid assets. For even greater security, on March 18 the defendant executed a chattel mortgage of the whiskey already transferred, and of any whiskey to be transferred in the future, to secure repayment of the existing or any future indebtedness of the company to the bank; undertook to maintain the transferred whiskey at such an amount as would show, at current market prices, a margin of 40 per cent. in value over any indebtedness to the bank; and authorized the bank, if such margin was not maintained or if the moneys due were not repaid on demand, to realize the whiskey and pay itself off.

Matters were now completely in train. The bank was secure. The defendant could draw on it immediately for over £200,000 and put this sum to his credit in Ireland. The stocks could be rapidly realized.

On April 5 the defendant, as director, drew a cheque for £200,000 payable to the National Provincial Bank Ld., lodged the cheque in person in the London office, and arranged that the amount be placed by the bank to a credit in the Munster & Leinster Bank Ld., Dublin. Miss Farquharson saw the cheque being drawn, but did not at first know the name of the payee, and so did not enter the cheque in the cash book till she ascertained the full details at the end of the month.

Another cheque, dated July 15, for the sum of £5,250 payable to the defendant, was drawn by him and by him presented at the Bath Street branch of the North of Scotland Bank Ld., and by his orders this amount was also transferred to credit in the Munster & Leinster Bank Ld...