The appointment of a receiver over the property and business of a company prevented that company surrendering losses by way of group relief to other companies formerly within a group with it.
The Court of Appeal has confirmed that the existence of a receivership broke the necessary group relationship so as to prevent the surrender of group relief between otherwise related companies: Farnborough Airport Properties Company v HMRC  EWCA 118. The appointment of receivers over the property and business of a company was sufficient, for the purposes of CTA 2010 s.154, to give rise to arrangements pursuant to which the shareholder no longer had control over the company in receivership. As such, that company could no longer surrender losses to other companies within the group to which it was previously a member.
The Court rejected the contention that the provisions of s.154 should be given a restricted interpretation, limited to anti-avoidance arrangements or to situations involving arrangements for the transfer of the relevant company outside the group.
Farnborough Airport Properties Company and a sister company (together Farnborough) and Piccadilly Hotels 2 Limited (PH2L) were, prior to 27 June 2011, 75% subsidiaries of a company called Kelucia Limited (Kelucia). Farnborough claimed group relief in relation to losses surrendered to by PH2L, in respect of PH2L’s accounting periods ending on 31 January 2012 and 2013.
On 27 June 2011, PH2L was placed into receivership by Bank of Scotland, in exercise of its rights as Security Trustee under a Deed of Debenture. Under the terms of the Debenture, the receivership extended to the entire property and undertaking of PH2L and the receivers were granted very extensive (but standard) powers, including power to carry on the business of the company as they thought fit.
In this situation, HMRC denied the claim for group relief on the basis that arrangements existed (within the meaning of CTA 2010 s.154) under which the receivers now controlled PH2L, such that the claim for group relief by Farnborough was no longer permissible. Both the FTT and UT accepted HMRC arguments. The taxpayer appealed.
Decision of the Court of Appeal: control
CTA 2010 s.154 denies group relief where there are arrangements in place under which, broadly, a person has control of either the surrendering company but not of the claimant company (or vice versa). For these purposes, “arrangements” are defined very broadly and “control” is defined as the power of a person to secure either:
- by means of the holding of shares or the possession of voting power, or
- as a result of any powers conferred by the articles or other document
that the affairs of a company are conducted in accordance with that person’s wishes.
The Court of Appeal dealt first with the question whether the appointment of the receivers on 27 June 2011 had the result that Kelucia’s shareholder control of PH2L came to an end. The taxpayer argued that Kelucia continued to have shareholder control of PH2L after 26 June 2011, just as it had before. The shareholding structure remained the same, and the shareholder rights of Kelucia. The only things that did change related to the conduct of PH2L’s business. Before the appointment of the receivers, PH2L’s articles of association provided that “the business of the Company shall be managed by the Directors who may exercise all the powers of the Company.” The effect of the receivership was to vest these managerial powers in the receivers, but only for the proper purposes of the receivership and while it remained in force. The duties of the receivers were to realise the secured property and business assets to the extent necessary to discharge the secured debt and to repay the secured lenders, with any remaining funds being returned to the company. But none of this had any effect on the constitutional rights of PH2L’s shareholders.
Whilst not finding the question easy, Henderson LJ (giving the leading judgment) decided the point in favour of HMRC. In particular, the judge noted that s.154 only applies when the two companies are 75% subsidiaries. It was clear the requirement of “control” in s.154 must have been intended by Parliament to go further. In this case, 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.
Therefore, the judge concluded that the effect of the appointment of the receivers was to deprive Kelucia of shareholder control of PH2L, such that the requirements of s.154 were satisfied.
Decision of the Court of Appeal: arrangements
For HMRC to succeed, it was also necessary that the loss of control should be due to “arrangements”, bearing in mind “arrangements” within the meaning of s.154 are widely defined as meaning “arrangements of any kind (whether or not in writing)”. The taxpayer argued that “arrangements”, construed purposively in this context, meant “arrangements” which passed the benefits of control to an unrelated company outside the group. In contrast, the appointment of the receivers did not disturb the economic group and did not give rise to the kind of arrangements which Parliament intended to render ineffective for group relief purposes.
On this question, the court was clear 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. Whilst the motivation behind the enactment of s.154 may have been anti-avoidance, the legislation itself was not confined to anti-avoidance situations and was not exclusively concerned with the transfer of a group member outside its original group. There was nothing in s.154 to suggest that “arrangements” should be given a restricted interpretation.
It is important to recognise that the legal effect of any particular receivership or similar must be analysed carefully to determine its impact on group relief. For example, unlike an insolvency, the appointment of a receiver may merely be a temporary security enforcement mechanism and does not inevitably result in the demise of the company.
Nevertheless, the decision to apply what were originally conceived as anti-avoidance provisions to a non-avoidance situation is disappointing, if not particularly surprising given the broad language of the section concerned.
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