O'Connell v Keleghan
| Jurisdiction | Ireland |
| Judge | Mr Justice Francis D Murphy |
| Judgment Date | 16 May 2001 |
| Neutral Citation | [2001] IESC 43 |
| Date | 16 May 2001 |
| Court | Supreme Court |
| Docket Number | [S.C. No. 123 of 2000] |
[2001] IESC 43
THE SUPREME COURT
Keane CJ
Murphy J
Murray J
Between:
AND
Citations
INCOME TAX ACT 1967 S428
CAPITAL GAINS TAX ACT 1975 SCHEDULE II PARA 4(1)
CAPITAL GAINS TAX ACT 1975 SCHEDULE II PARA 2(1)
CAPITAL GAINS TAX ACT 1975 SCHEDULE II PARA 2(2)
CAPITAL GAINS TAX ACT 1975 SCHEDULE II PARA 2(5)
CAPITAL GAINS TAX ACT 1975 S46(1)
CAPITAL GAINS TAX ACT 1975 S46(2)
CAPITAL GAINS TAX ACT 1975 SCHEDULE II PARA 3
INCOME TAX ACT 1967 S110
INCOME TAX ACT 1967 S110(1)(1)
SHILTON V WILMSHURST 1991 STC 88
PRITCHARD V ARUNDALE 1971 3 AER 1011
INCOME TAX ACT 1967 SCHEDULE E
EASTEND DWELLINGS COMPANY V FINSBURY BOROUGH COUNCIL 1952 AC 109
CIR V METROLANDS 54 TC 679
HOLT, RE 1953 1 WLR1488
MCSWEENEY V MOONEY 1997 3 IR 424
CLEVELEYS INVESTMENT TRUST COMPANY V CIR 47 TC 300
ABERDEEN CONSTRUCTION GROUP V CIR 52 TC 281
WT RAMSAY LTD V CIR 1981 54 TC 101
TAYLOR CLARKE INTERNATIONAL V LEWIS 1998 STC 1259
Synopsis
REVENUE
Capital gains tax
Chargeable gains - Nature of disposal - Whether redemption of loan note gave rise to chargeable gain - Whether loan note constituted debt on a security - Capital Gains Tax Act, 1975 section 46 (123/2000 - Supreme Court - 16/5/01) [2001] 2 IR 490
O'Connell (Inspector of Taxes) v Keleghan
REVENUE
Income tax
Whether inducement payment subject to income tax - Case stated - Income Tax Act, 1968 section 428 (123/2000 - Supreme Court - 16/5/01) [2001] 2 IR 490
O'Connell (Inspector of Taxes) v Keleghan
The respondent was the owner of a number of shares which he sold in 1990 in return for a loan note issue by the purchaser. The loan note was redeemed by the respondent for cash in 1993. A dispute arose as the proper amounts subject to income tax and capital gains tax. In the High Court McCracken J held no chargeable gain arose in respect of the loan note. On appeal Murphy J held that the issue relating to a liability to income tax must be remitted to the High Court for further consideration. The loan note could not be considered to be a debt on security and the appeal of the Inspector of Taxes in this regard was dismissed.
Mr Justice Francis D Murphy delivered the 16th day of May, 2001
The Case Stated under s.428 of the Income Tax Act, 1968, by John O'Callaghan and Ronan Kelly, the Appeal Commissioners, on the 29th day of September, 1999, for the opinion of the High Court sets out in detail the facts and findings in this matter and the issues which arise thereon. They may be summarised as follows.
A company called Gladebrook Limited held 49% of the share capital of Sugar Distributors (Holdings) Limited ("Holdings")which in turn held 100% of the share capital of Sugar Distributors Limited ("Distributors").
In 1990 the issued share capital in Gladebrook was £10,000 divided into 10,000 shares of £1 each which were held and registered in the name of five persons (hereinafter called the Vendors) of whom the above named Thomas Keleghan (Mr Keleghan) was one. Mr Keleghan was the registered owner of 2,151 of those shares. By an agreement in writing dated the 8th day of February, 1990, the Vendors agreed with Suicre Eireann (therein and hereinafter sometimes called "the Purchaser") for the sale to the Purchaser of the issued share capital in Gladebrook for the sum of £8,680,000 to be paid to the Vendors in the proportions set out in the third column of Schedule I to that agreement and on the express terms that:-
"The purchase consideration shall be satisfied by the issue by the Purchaser on completion of the Loan Notes to the Vendors."
The proportion of the purchase consideration to be paid to Mr Keleghan amounted to £1,867,068. The "loan notes" were defined as being the loan notes set out in Schedule VIII to the agreement.
The loan notes took the form of a certificate to which an identifying number was ascribed and a particular amount inserted. The Certificate stated that the documentation was:-
"Issued pursuant to a resolution of the Board of Directors of Suicre Eireann having its registered office at Stephen's Green, Dublin 2 passed on the day of February 1990."
It then provides space for the name and address of the holder of the note followed by a statement in the following terms:-
"This is to certify that the above named is/are the registered holder (S) of Irish pounds nominal amount of the loan notes of Suicre Eireann Cpt. The holders of the loan notes are entitled to the benefit of and are subject to the conditions hereinafter contained."
There is then provision for the certificate to be sealed by Suicre Eireann and dated. That is followed by the significant annotation:-
"No loan note or any part thereof is transferable or assignable by any note holder."
The financial provisions contained in the conditions on which the notes were issued are simple. First, there is provision for the payment of interest on notes not redeemed on or after the 31st of October, 1991, secondly, for interest at a rate equal to the Dublin Inter Bank Offered Rate for six months funds (DIBOR) and, thirdly, there is provision that the note holders may elect at any time to have loan notes redeemed in whole or in part by Suicre Eireann on 30 days notice: the earliest date for redemption being the 1st day of November, 1991 and the latest date for redemption the 31st October, 1997. All notes outstanding on the 31st October, 1997, must then be redeemed in full. The conditions provide in considerable detail for the issue - and where necessary the replacement - of certificates to the holders of the loan notes. There is also provision for the maintenance of a register of holders of the loan notes and the details to be kept in that register. There is provision for transmission of the loan notes on the death or bankruptcy of a note holder but the conditions repeat in clause 8 the express prohibition on transfer in the following terms:-
"Except in the case of the death of a note holder no loan note or any part thereof shall be transferable or assignable by any note holder."
Neither the certificate nor the conditions make any reference to conversion rights attaching to the loan notes. The share purchase agreement, however, expressly provides that in the event of a public floatation or a private placing of shares in the Purchaser the loan notes may be converted into ordinary shares of the Purchaser on the basis of £100 of note for every £100 of shares provided that the floatation or placing takes place after the 1st October, 1991, but on the basis that a discounted value will be attributed to the loan notes in the event of the floatation or placing occurring between the date of the share purchase agreement and the 1st October, 1991.
Superficially the loan notes and the conditions on which they were issued bear considerable similarity to debenture stock. The fact that the indebtedness secured by the loan notes is not charged on property of the Purchaser might be unusual in practice but unexceptional in principle. What is more surprising is the inclusion of the standard conditions dealing with the issue of certificates and the registration of owners, which are procedures ordinarily designed to facilitate marketability, coupled with an express prohibition on assignment and transfer. This apparent contradiction is not due to any error or oversight. I will return to this aspect of the matter later.
On the same date as the share purchase agreement, the 8th February 1990, Mr Keleghan executed a service agreement with the Purchaser as required by the provisions of the share purchase agreement. Under the service agreement Mr Keleghan was bound to serve the Purchaser for a term of 18 months expiring on the 30th day of June, 1991, and thereafter until termination by either party giving three months notice to the other of them. Whilst the agreement provided that Mr Keleghan "shall serve the company as sales director" at clause 2 (E) it was stated that:-
"In pursuance of his duties hereunder [Mr Keleghan shall] perform such services for subsidiary companies or any parent company and (without further remuneration unless otherwise agreed) accept and hold for the duration of this agreement such offices or appointments in such subsidiary companies as the general manager may from time to time reasonably require."
The service agreement does contain covenants in restraint of competition to which some importance was attached but those covenants do not differ significantly from those to which Mr Keleghan was committed under the share purchase agreement.
The final document to which reference must be made is the "side letter" also dated the 8th day of February, 1990, signed by Mr Keleghan. By that letter he expressly recognised that of the purchase price payable to him in respect of his share holding in Gladebrook £250,000 "was paid as an inducement for me to enter into the service contract (as defined in the share purchase agreement) and accordingly in the event of my not complying with the terms of the said service contract that portion of the £250,000 purchase consideration attributable to the sale of my shares in Gladebrook Limited will become repayable by me to Suicre Eireann Cpt."
Apparently the transfer of the shares in Gladebrook to the Purchaser was completed in February, 1990, and the loan notes issued to the Vendors on the same date. Mr Keleghan's loan note was ultimately redeemed for cash by the Purchaser in February, 1993. The Appeal Commissioners expressly found that Mr Keleghan never became an employee of the Purchaser. Before signing the service agreement he had been sales director of Distributors and he remained in that capacity until his retirement in June, 1991, when he attained the age of 65...
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