McSweeney v Mooney

• Jurisdiction: Ireland
• Judge: Mr. Justice Morris
• Judgment Date: 06 April 1997
• Neutral Citation: [1997] IEHC 59
• Court: High Court
• Docket Number: [1997 No. 17R],No. 17 R./1997
• Date: 06 April 1997

[1997] IEHC 59

THE HIGH COURT

No. 17 R./1997

MOONEY, INSPECTOR OF TAXES v. MCSWEENEY

REVENUE

BETWEEN

J J MOONEY, INSPECTOR OF TAXES

APPELLANT

AND

NOEL MC SWEENEY

RESPONDENT

Citations:

INCOME TAX ACT 1967 S428

CAPITAL GAINS TAX ACT 1975 S46

CAPITAL GAINS TAX ACT 1975 S12

CAPITAL GAINS TAX ACT 1975 S4(12)

CLEVELEYS INVESTMENT TRUST CO V CIR 1975 47 TC 300

ABERDEEN CONSTRUCTION CO LTD V CIR 1978 52 TC 281

WT RAMSAY LTD V CIR 1981 54 TC 101

TAYLOR CLARKE INTERNATIONAL LTD V LEWIS (INSPECTOR OF TAXES) 1997 STC 499

CAPITAL GAINS TAX ACT 1975 S46(1)

Synopsis:

Revenue

Case stated; company liquidation; whether loan respondent paid was a "debt on security" as debt on security an allowable loss; characteristics which identify a loan on security and differentiates it from a mere loan. Held: loan was a debt on a security; allowable loss for CGT (High Court: Morris J. 06/04/97)

Inspector of Taxes v McSweeney - [1997] 3 IR 424 - [1997] 2 ILRM 429

1 Judgment of Mr. Justice Morris delivered on the 6th day of April, 1997.

2 This matter comes before the Court by way of a case stated under Section 428 of the Income Tax Act, 1967, the matter having been heard and determined by His Honour Judge Sheridan on 4th May, 1995. The learned Trial Judge stated a case dated 24th January, 1997 setting out in detail the facts, arguments and decision of the Court.

3 The issue that comes before the Court can be identified and summarised in the following short form:-

4 Section 46 of the Capital Gains Tax Act, 1975provides that:-

"Where a person incurs a debt to another....no chargeable gain shall accrue to that creditor....on a disposal of the debt".

5 The reason for this provision is clear. The debt can never increase in value though it may of course decrease. The most that the creditor can expect is to be repaid. So, no Capital Gains Tax is payable upon the repayment of the debt.

6 In so far as losses are concerned, Section 12 of the Capital Gains Tax Act, 1975is relevant and it provides:-

"Except as otherwise expressly provided the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain accruing on a disposal is computed".

7 In the present case, the Respondent claims to have suffered an allowable loss and so the Court is required to consider the nature of the transaction upon which he suffered the loss so as to ascertain if the transaction is such as to take it outside the provisions of Section 46. If the transaction was a simple debt, then since no Capital Gains Tax would have been payable on its repayment, no allowance can be claimed in respect of that loss arising from the transaction.

8 Section 4(12) of the Act provides that:-

"If.... the Inspector is satisfied that the value of an asset has become negligible he may allow the claim and thereupon the Act shall have effect as if the claimant had sold and immediately re-acquired the asset for a consideration of the amount equal to the value specified in the claim".

9 Section 46 provides that no Capital Gains Tax is payable on the repayment of a loan, however, a proviso in that Section states:-

"This subjection shall not apply in the case of the debt on security (emphasis added) as defined in paragraph 3 of Schedule 2 (conversion of securities)".

10 The effect of this proviso is that while subsection 1 of Section 45, provides that no chargeable gain shall accrue to the creditor on repayment of the loan, this provision shall not apply where there is a "debt on a security".

11 Therefore, the question that the Court has to decide is whether, in the circumstances of the case, the loan which the Respondent paid was a "debt on a security" within the meaning of the 1975 Act.

THE FACTS

12 The facts are set out in the case stated and, summarised, are as follows:-

13 N Limited commenced trading in 1975 and traded successfully until 1984 when financial problems arose. Additional capital became a major requirement and various financial institutions were approached. The Respondent, Mr. Noel McSweeney, was Managing Director and major Shareholder of the company.

14 Negotiations with financial institutions resulted in agreements executed in April/May 1985 whereby the financial institutions subscribed £250,000 in consideration of 250,000 £1 Cumulative, Convertible, Redeemable Shares with the right to convert the Preference Shares into Ordinary Shares at a predetermined price for Ordinary Shares.

15 The above share subscription was subject to a contribution of £350,000 from the shareholders by way of cash loans with the right of conversion into Ordinary Shares at a predetermined price for each share. The cash loans were not entitled to interest and repayment was subordinated to the redemption of the preference shares and various other creditors including bank debts.

16 Special Resolutions were passed by M Limited on 1st April, 1985 to increase its share capital to provide for the issue of Cumulative, Convertible, Redeemable Preference Shares and to accommodate any later conversion of the shareholder's loan into Ordinary Share Capital.

17 The Respondent advanced £140,000 by way of cash loan subject to the conversion rights.

18 The instrument of loan was an instrument in writing which allowed the Respondent to convert the loan into Ordinary Shares.

19 No conversion of the loan into shares ever happened.

20 N Limited was put into Court liquidation and the Respondent, Noel McSweeney suffered a total loss of his loan of £140,000.

21 The Respondent, Noel McSweeney made a chargeable gain on the sale...