Spc00693

CHARGEABLE GAINS – losses – whether made between connected persons on a sale immediately following a demerger to the shareholders of a listed company – yes by TCGA 1992 s 286(5)(b) – appeal dismissed

THE SPECIAL COMMISSIONERS

	KELLOGG BROWN & ROOT HOLDINGS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	DR JOHN F. AVERY JONES CBE 

Sitting in public in London on 11 June 2008

Julian Ghosh QC and James Henderson, counsel, instructed by Norton rose LLP, for the Appellant

Rupert Baldry, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	This is an appeal by Kellogg Brown & Root Holdings (UK) Limited against an amendment to its company tax return disallowing its claim to deduct a capital loss of £14,867,445 against chargeable gains in its accounting period ended 31 December 2000.  The Appellant was represented by Mr Julian Ghosh QC and Mr James Henderson, and the Respondent (“the Revenue”) by Mr Rupert Baldry.
2.	The issue in the appeal is whether the Appellant and Highlands Holdings (UK) Limited are connected persons with the result that the loss on the sale of shares by the Appellant to that company is not available against the Appellant’s gains generally.
3.	There was an agreed statement of facts as follows:
“The Parties to the arrangements
(1)	The Appellant is a UK incorporated and tax resident company.  It was incorporated on 11 December 1984 under company number 01870934.  Its registered office is at Hill Park Court, Springfield Drive, Leatherhead, Surrey KT22 7NL, England.  It was formerly known as Halliburton Holdings Limited. 
(2)	The Appellant was and had at the material time been a wholly-owned subsidiary of Halliburton Company, a US-based multinational company carrying on engineering and other operations worldwide.  Halliburton Company’s shares were at the material time listed on the New York Stock Exchange.  Halliburton Company was a Delaware corporation.
(3)	The Appellant was at the material time a holding company for a number of UK resident subsidiaries within the Halliburton Company group.  One of the divisions of the Halliburton Company group was an insurance division, and two of the subsidiaries of the Appellant were Highlands Insurance Company (UK) Limited (“HICUK”), an authorised insurance company established in the UK, and Highlands Underwriting Agents Limited (“HUAL”) - the “Highlands Companies”.  Both HICUK (incorporated on 18 November 1974) and HUAL (incorporated on 12 October 1971) are UK incorporated and tax resident companies.  Both companies now have a registered address of Bruton Court, Bruton Way, Gloucester GL1 1DA.
(4)	The Appellant was a direct wholly-owned subsidiary of Halliburton Holdings, Inc. (“HHI”), a company which had several different classes of stock held by Halliburton Company and certain of its subsidiaries which were parent companies of the different divisions within the Halliburton Company group (including Highlands Insurance Group, Inc., the parent company of the insurance division); the different classes of stock enabled distributions from the Appellant which were derived from subsidiaries of the Appellant to be streamed to the appropriate divisional parent company within the Halliburton Company group.
(5)	During 1995, Halliburton Company decided to spin off its global insurance division into a new company.  In the UK, the intention was that the shares in the Highland Companies would be transferred to a newly incorporated and UK tax resident company, Highlands Holdings (UK) Limited (“HHUKL”), which was to be a subsidiary of Highlands Insurance Group, Inc (“HIG”) the intended new US parent company of the insurance division.  HIG was a Delaware corporation.
The arrangements
(6)	The spin-off was governed by a distribution agreement (the “Distribution Agreement”) dated 10 October 1995 between Halliburton Company and HIG.  It is governed by Delaware law.  That agreement provided for the “Distribution” to take place on the “Distribution Date”.  In particular, the following provisions of the Distribution Agreement are relevant:
(a)	Section 3.07 (Transfer of U.K. Entity) which provided for a “Newco” (ie, HHUKL) to purchase the share capital of the Highlands Companies from the Appellant “immediately following the Distribution Date”.  The purchase price was to be provided by HIG subscribing for shares in HHUKL; an amount equal to the proceeds of sale of the Highlands Companies was to be applied by HHI in redemption of the Class E shares in HHI held by HIG.  Section 3.07 provided for that redemption to take place following the Distribution, and that HHI would receive the funds required for the redemption by way of a dividend paid by the Appellant.  
(b)	Section 4.01 (Conditions Precedent to the Distribution) which provided for Halliburton Company’s obligation to implement the Distribution to be subject to a number of conditions being satisfied.
(c)	Section 1.01 and Annex A (Schedule of Defined Terms) defined the “Distribution Date” as follows:
“Distribution Date” shall mean the date determined by the Board of Directors of [Halliburton Company] on which the Distribution shall be effected; provided, however, that the Distribution Date shall not be earlier than the 20th calendar day following the date on which the Information Statement is first mailed or otherwise delivered to holders of Halliburton Common Stock”.
(d)	Section 2.02(b) provided that: Halliburton Company’s Board of Directors establish the Distribution Record Date and the Distribution Date before the effective date of the Registration Statement (as defined in Annex A).  The Registration Statement was filed with the United States Securities and Exchange Commission, and comprised information required on a Form 10 and an Information Statement.  The Information Statement was sent to all shareholders in Halliburton Company (as at the Distribution Record Date) on 5 January 1996 containing detailed information about the proposed Distribution and about HIG.
(e)	The “Distribution” is defined by reference to the Recitals, which provided that: 
“[Halliburton Company] owns of record and beneficially all the outstanding common stock, par value $1,000 per share, of [HIG] (the “Current Common Stock”) and proposes to distribute (the “Distribution”) all the Current Common Stock owned by it….to the holders of record of the common stock of [Halliburton Company] on the terms and subject to the conditions set forth herein”.
(f)	Section 4.02 (No Constraint) of the Distribution Agreement provided that: 
“Notwithstanding the provisions of Section 4.01 herein, the fulfilment or waiver of any or all of the conditions precedent to the Distribution set forth therein (a) shall not create any obligation on the part of Halliburton Company or any other party hereto to effect the Distribution, (b) shall not in any way limit Halliburton Company’s rights and power under Section 9.01 herein to terminate this Agreement and the process leading to the Distribution and to abandon the Distribution …”.
(7)	In connection with the Distribution, two (non-UK resident) investors (Insurance Partners, L.P. and Insurance Partners Offshore (Bermuda), L.P. (together the “Investors”)) otherwise unconnected with Halliburton Company, agreed to invest in HIG by subscribing for convertible subordinated debentures and purchasing warrants to purchase additional common stock.  An investment agreement (the “Investment Agreement”) dated 10 October 1995 between Halliburton Company, HIG and the two Investors provided for this.  This was amended by an amendatory agreement dated as of 10 November 1995.  The investment in HIG was to take place “subject to and immediately following the consummation of the Spin-Off Transaction” which was defined as the Distribution under the Distribution Agreement.
(8)	The Distribution Agreement contained a number of conditions precedent to the Distribution (Section 4.01 of the Distribution Agreement).  One of these conditions was that Halliburton Company had received from each of HIG and the Investors written confirmation that all the conditions precedent to the Investment Agreement, save for the Distribution itself, have been fulfilled or waived.  Once the Distribution had been effected, the Investment Agreement would become unconditional (Section 4.01(e) Distribution Agreement).
(9)	Section 3.07 of the Distribution Agreement was amended by an amendatory agreement dated as of 22 January 1996 between Halliburton Company and HIG (the “Amendatory Agreement”).  That Amendatory Agreement provides for section 3.07 of the Distribution Agreement to be replaced by a new section 3.07 which provided for the sale of the Highlands Companies pursuant to the conditional sale and purchase agreement to take place “Following the Distribution on the Distribution Date”.  
(10)	On 16 October 1995, HHUKL was incorporated under the name of Sochold Limited.  The share capital was increased to £10 million, the company’s name was changed to HHUKL, new directors were appointed and the shares were transferred from the subscriber to HIG.
(11)	On 19 December 1995:
(a)	HIG paid $10 million to HHI by way of a capital contribution;
(b)	HHI loaned $10 million to the Appellant; and
(c)	The Appellant subscribed for and purchased 6.4 million additional shares of HICUK for $10 million.
(12)	On 26 December 1995, the Halliburton Company Board of Directors declared (inter alia) 4 January 1996 to be the Distribution Record Date and 23 January 1996 to be the Distribution Date.
(13)	4 January 1996 was the Distribution Record Date.
(14)	The Appellant entered into a sale and purchase agreement with HHUKL (the “Sale Agreement”) dated 18 January 1996 providing for the Appellant to sell the entire issued share capital in the Highlands Companies to HHUKL.  The Sale Agreement is governed by English law.  By resolutions adopted by the Boards of Directors of the Appellant and HHUKL on 19 December 1995 and 18 January 1996 respectively, the Appellant and HHUKL were authorised to enter into and carry out the terms of the Sale Agreement.
(15)	The Sale Agreement reads (as far as is relevant):
“2. Purpose of this Agreement and pre-Completion matters including conditions precedent
2.1 This is an agreement for the sale and purchase of the Sale Shares.
2.2 The obligations of the parties in relation to the sale and purchase of the Sale Shares under this Agreement are conditional on:
(a) 	the Distribution (as such term is defined in the Distribution Agreement) being effected pursuant to the Distribution Agreement; and
(b) 	the Department of Trade and Industry confirming on terms reasonably satisfactory to the Purchaser that it has no objection to the new Controllers (“Controller” having the definition ascribed to it in the Insurance Companies Act 1982 as amended) of HICUK, or all applicable waiting periods during which the Department of Trade and Industry could institute investigations or enquiries against HICUK or the Purchaser or any such Controller having expired.”
(16)	The Department of Trade and Industry confirmations that it had no objection to the new controllers (including HIG and the Investors) of HICUK were issued on 14 and 15 December 1995.  A “controller” for this purpose means a managing director, chief executive or other person in accordance with whose directions or instructions the directors of the company are accustomed to act.  In relation to a UK company it also includes a person who holds more than 10% of the shares in the company, is entitled to exercise 10% or more of the voting power or is able to exercise significant influence over the management of the company.  Person in this context can include a company.  As the Highlands Companies were to cease to be controlled by Halliburton Company, and instead to be controlled by HIG, it was necessary to obtain confirmation from the Department of Trade and Industry that there was no objection to this change in control.
(17)	On 22 January 1996, among other things:
(a)	Instructions in writing to Chemical Mellon Shareholder Services LLC (the “Distribution Agent” who was appointed by Halliburton Company in connection with the Distribution) to distribute in accordance with the Distribution Ratio (as defined in Annex A of the Distribution Agreement) to each holder of Halliburton Company common stock of record on the Distribution Record Date the number of shares of HIG common stock to which such holder is entitled were delivered by Halliburton Company to the Distribution Agent;
(b)	A letter from HIG was delivered to the Distribution Agent acknowledging that all the conditions (set out in clause 4.01 of the Distribution Agreement) to the completion of the Distribution Agreement had been satisfied;
(c)	HIG purchased from HHUKL for approximately $7.5 million in cash 4,870,000 shares in HHUKL.  The Appellant made a $7.5 million partial payment on its indebtedness to HHI; and
(d)	HHI redeemed its class E and class F shares of common stock held by HIG by payment of $7.5 million.
(18)	On 23 January 1996, among other things:
(a)	The bring down certificate dated 23 January 1996 was issued by the Secretary of State of the State of Delaware as to the due incorporation and existence of Halliburton Company; 
(b)	Officer’s Certificates were issued by Halliburton Company and HIG certifying to the Investors that the representations and warranties made by Halliburton Company as set out in the Investment Agreement were true and correct in all material respects and that Halliburton Company and HIG have complied in all material respects with the terms, covenants and conditions required by the Investment Agreement to be complied with;
(c)	The Secretary’s Certificate was issued by Halliburton Company in accordance with Section 9.01 and 9.02 (a), (c) and (g) of the Investment Agreement;
(d)	An Amendment and Acknowledgement was entered into between HIG, Halliburton Company and the Investors.  This confirmed that the documents making up conditions precedent 4.01 (a), (b), (c) and (d) to the Distribution Agreement were ratified and approved for the purposes of the Distribution Agreement;
(e)	The tax opinion from Vinson & Elkins LLP dated 23 January 1996 was delivered to Halliburton Company (condition precedent 4.01(h) Distribution Agreement);
(f)	Letters from HIG and the Investors to Halliburton Company were issued confirming that all of the conditions precedent to the Investment Agreement (with the exception of the Distribution) had been satisfied and that upon effectuation of the Distribution, the obligations of HIG and the Investors to consummate the transactions contemplated by the Investment Agreement will be unconditional (condition precedent 4.01(e) Distribution Agreement); and
(g)	The Secretary’s Certificate was issued by HIG in accordance with Section 9.01 and 9.02 (a), (b), (d), (e), (f) and (g) of the Investment Agreement.
(19)	The Distribution was effected on 23 January 1996 (pursuant to Section 2.02 of the Distribution Agreement).  Section 2.02(g) of the Distribution Agreement provided that the Distribution shall be effective as of 5:00 p.m. Houston time on the Distribution Date.  This was amended by an Amendment and Acknowledgement on 23 January 1996 between HIG, Highlands Company and the Investors so that the Distribution would be effective as of 8:30 a.m. Houston time on the Distribution Date.  A closing memorandum prepared by Vinson & Elkins LLP (the “Closing Memorandum”) sets out the steps taken in connection with the Distribution, sale of the Highlands Companies and the investment made by the Investors.  
(20)	The Closing Memorandum records that the Distribution was effected at 8:30 a.m. Houston time on 23 January 1996 and that the common stock of HIG was distributed to the registered holders (as at the Distribution Record Date) of the Halliburton Company.  In accordance with the instructions given by Halliburton Company to the Agent on 22 January 1996, on 23 January 1996 the Agent caused the stock certificates evidencing the number of shares of Highlands common stock to be prepared and registered in the name of each stockholder in Halliburton (as at the Distribution Record Date) and caused such certificates to be posted to those stockholders.
(21)	The Closing Memorandum records that the closing of the sale of the Highlands Companies began at 8:45 a.m. Houston time on 23 January 1996 and that HHUKL transferred $7.5 million to the Appellant in consideration for the share certificates and duly executed stock transfer forms representing all of the issued shares in the Highlands Companies, pursuant to the Sale Agreement.
(22)	Halliburton Company was a publicly listed company whose shares were traded on a daily basis and whose shares were widely held; it only had one shareholder whose shareholding was at the relevant time in excess of 5%.  As at 31 December 1995, that shareholder and its affiliates owned 5.95% of the common stock of Halliburton Company and as at 31 December 1996, that shareholder and its affiliates owned 11.13% of the common stock of Halliburton Company.  The shareholders in Highlands Company on 4 January 1996 (the Distribution Record Date, being the date on which the holders common stock of Halliburton Company, who were entitled to participate in the Distribution, were ascertained) differed to those on 23 January 1996 (the Distribution Date).  The issued common stock at the relevant time was 125 million.  The total volume of stock publicly traded inclusive of the dates 4 January 1996 and 23 January 1996 was 20.4 million (ie, 16% of the issued share capital).  However, this figure does not include any changes in beneficial ownership of stock or any stock changes which were not publicly traded which took place between this time.  In addition, the Investors subscribed for $60 million worth of 10% convertible subordinated debentures with detachable common stock purchase warrants to purchase an aggregate number of shares in HIG which would entitle the Investors to acquire up to 43.7% of the shares in HIG.  The conversion right attaching to the debenture was exercisable from 23 January 1997 until 31 December 2005.  
The claim and the appeal process
(23)	The Appellant claimed to set off the capital loss arising on the sale of the Highlands Companies against chargeable gains of £14,867,445 in respect of the accounting period ended 31 December 2000.  The Respondent contends that the loss (the quantum of which has not been finally agreed) is not available for offset against such chargeable gains pursuant to section 18(3) Taxation of Chargeable Gains Act 1992.  
(24)	A Notice of Amendment to a company tax return was issued on 14 August 2007 and a notice of appeal against the amendment was lodged on 23 August 2007.  It has been agreed that the appeal should be brought before the Special Commissioners.”
4.	The essential facts are that (1) pursuant to the Distribution Agreement the Halliburton Company distributed to its shareholders the shares in HIG and (2) pursuant to the Sale Agreement HHL (a second-tier subsidiary of Halliburton Company) sold the shares in Highlands Companies to HHUKL (a first-tier subsidiary of HIG).  The Distribution Agreement was conditional, and the No Constraint clause (set out at paragraph 3(6)(f) above) provided that the satisfaction of the conditions did not create an obligation on Halliburton Company to effect the Distribution or limit that company’s rights to terminate the agreement and abandon the Distribution (section 9.01 provided that the Distribution Agreement could be terminated and the Distribution abandoned at any time prior to the Distribution Date by, and in the sole discretion of, the Board of Directors of Halliburton Company).  As set out in paragraph 3(15) above, the Sale Agreement was conditional on “the Distribution…being effected pursuant to the Distribution Agreement.”  The Distribution was effected at the latest by 8.30 am Houston time on 23 January 1996 (see paragraph 3(20) above), the stock certificates having been put in the United States mail addressed to the stockholders prior to 8.30 am on that day.
5.	The relevant statutory provisions of the Taxation of Chargeable Gains Act 1992 are as follows:
“18 Transactions between connected persons
(1) This section shall apply where a person acquires an asset and the person making the disposal is connected with him.
(2) Without prejudice to the generality of section 17(1) the person acquiring the asset and the person making the disposal shall be treated as parties to a transaction otherwise than by way of a bargain made at arm's length.
(3) Subject to subsection (4) below, if on the disposal a loss accrues to the person making the disposal, it shall not be deductible except from a chargeable gain accruing to him on some other disposal of an asset to the person acquiring the asset mentioned in subsection (1) above, being a disposal made at a time when they are connected persons.
28 Time of disposal and acquisition where asset disposed of under contract
(1) Subject to section 22(2), and subsection (2) below, where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred).
(2) If the contract is conditional (and in particular if it is conditional on the exercise of an option) the time at which the disposal and acquisition is made is the time when the condition is satisfied.
286 Connected persons: interpretation
(1) Any question whether a person is connected with another shall for the purposes of this Act be determined in accordance with the following subsections of this section (any provision that one person is connected with another being taken to mean that they are connected with one another).
…
(5) A company is connected with another company—
 (a) if the same person has control of both, or a person has control of one and persons connected with him, or he and persons connected with him, have control of the other, or
 (b) if a group of 2 or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom he is connected.
288 Interpretation
(1) In this Act, unless the context otherwise requires—…
“control” shall be construed in accordance with section 416 of the Taxes Act;…”.
Section 416 of the Taxes act TA 1988 provides:
“416 Meaning of “associated company” and “control”
(1) …
(2) For the purposes of this Part, a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire—
 (a) the greater part of the share capital or issued share capital of the company or of the voting power in the company; or
 (b) such part of the issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive the greater part of the amount so distributed; or
 (c) such rights as would, in the event of the winding-up of the company or in any other circumstances, entitle him to receive the greater part of the assets of the company which would then be available for distribution among the participators.
(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.
(4) For the purposes of subsection (2) above a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire.
(5) For the purposes of subsections (2) and (3) above, there shall be attributed to any person any rights or powers of a nominee for him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf.
(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies, or of any associate of his or of any two or more associates of his, including those attributed to a company or associate under subsection (5) above, but not those attributed to an associate under this subsection;…”
6.	Mr Ghosh and Mr Henderson, for the Appellant, contend in outline:
(1)	Section 28 determines that the disposal under the Sale Agreement took place when that agreement became unconditional, which was when the Distribution was effected at 8.30 am on 23 January 1996.  That is the time for determining whether the disposal is to a connected person (“where a person acquires an asset and the person making he disposal is connected with him”).  At that time the shares in HIG had been distributed to the shareholders of Halliburton Company and that company no longer had any interest in the shares of HIG.  
(2)	In reply to Mr Baldry’s contentions, the Sale Agreement cannot be read as if it were conditional on the Distribution Agreement becoming unconditional.  That is not what it said, and the No Constraint clause made it clear that there was no obligation on the Halliburton Company to make the Distribution on the satisfaction of the conditions.  The sequence of the transactions was made clear by the agreements, particularly the amended Section 3.07 of the Distribution Agreement.  Even if there was only a scintilla temporis between the Distibution and the sale of shares it is established that such arguments find little favour with the courts (see Lord Oliver in Abbey National Building Society v Cann [1991] 1 AC 56 at 92-93 and Lord Hoffmann in Ingram v IRC [1999] STC 37 at 44f).
(3)	The shareholders of Halliburton Company and HIG did not satisfy the condition for connection in s 286(5)(b) “if a group of 2 or more persons has control of each company” because they were not a group, and nor did they have control of either company within the meaning of s 416 of the Taxes Act 1988.  Group must be given an ordinary, sensible and realistic meaning, such as the Shorter Oxford English Dictionary definition: 
“2.  A number of people or things regarded as forming a unity or whole on the grounds of some mutual or common relation or purpose, or classed together because of a degree of similarity.”
This requires a degree of organisation between the person said to form a group over and above mere common ownership of shares, so that they could realistically act together if necessary.  Other connected persons rules, such as close relatives, trustees and the settlor, trustees and certain companies, partners, companies controlled by an individual, and persons acting together to secure control of a company, are more specific and they are all cases where it is realistically possible for the persons to act in concert.
(4)	Nor, even if the shareholders constituted a group, did they have control of the Appellant and HHUKL within s 416 because they had no interest in the share capital of those subsidiaries or rights entitling them to participate in their assets on a winding-up.  They were not able to exercise direct or indirect control over the affairs of those companies.  Persons who did not individually have control can only have control “together” within s 416(3) if there is some agreement or arrangement for them to aggregate their votes so that they can collectively exercise indirect control over the company’s affairs.  Sections 416(2) and (3) look at the real-world situation and are not deeming provisions (as Lord Hoffmann said in R v IRC ex p. Newfields Developments Ltd [73 TC 532, 555 at [10] “It will be seen that… this definition starts in subs (2) with a definition of control which reflects its meaning in ordinary speech…”).  Section 416(6) contains attribution provisions that can be applied only to a single person who alone (or together with his associates) has control of that company.  It uses “person” in the singular in contrast to the reference to persons in subs (3).  Even person includes persons the shareholders of Halliburton Company and HIG did not have control of the Appellant and HHUKL for the reasons above.
7.	Mr Baldry, for the Revenue, contends in outline:
(1)	The Appellant and HIG were connected when the Distribution Agreement and the Sale Agreement were made.  The purpose of the connected persons rules is the presumption that connected persons may not make a bargain at arm’s length.  That should be tested at the time of making the agreement when the price was fixed even though the agreement was conditional.  Section 28 determines only when the disposal takes place; s 18 is concerned with a wholly different issue, that of the relationship between the parties to the agreement.  Lord Hoffmann said in Jerome v Kelly [2004] STC 887 at [11]: “[s 28] was intended to deal only with the question of fixing the time of disposal and not with the substantive liability to tax.”
(2)	If that is wrong, once the Distribution Agreement had effectively become unconditional the condition in the Sale agreement was satisfied.  Even if that is wrong the Distribution was effected at the same time and as part of the same overall commercial transaction as the sale.  It is not appropriate to artificially dissect transactions separated by a scintilla of time.
(3)	In relation to connection by s 286(5)(b), the only connection necessary for there to be a group is the ownership of shares in the same company.  If some other connection were necessary the draftsman would have defined it expressly.  Such an interpretation is in accordance with the scheme of the legislation, that two companies owned to a significant extent by the same people should be treated as connected because the relationship gives rise to potential for avoidance by creating artificial losses.
(4)	In relation to control there is no suggestion that the common group of shareholders did not own more than 50% of the share capital of both Halliburton Company and HIG.  The group should be treated as being the person for s 416 by virtue of s 416(3) and also constitutes the group having control for s 286.  The common group of shareholders either had indirect control of HHUKL and the Appellant, or the rights of Halliburton Company and HIG to control their subsidiaries can be attributed to the common group of shareholders by s 416(6).
(5)	One should look at the circumstances both before and after the disposal to determine whether there was a connection at the time of disposal.  In relation to whether parties were acting together to secure or exercise control ins 286(7) the Special Commissioner said in Foulser v MacDougall [2005] STC (SCD) 374 at [12]:
“Mr Brennan [for the Revenue] contends that, while agreeing that the matter is to be examined at the time of the disposal, one can determine whether parties are acting together to secure or exercise control only by looking at the whole circumstances, including what happened before and after the disposal, in so far as they help to determine the situation at the time of the disposal.  Again I agree with Mr Brennan.”  
Here all decisions had already been made by Halliburton Corporation and control had already been exercised by that company in relation to the disposal.  Accordingly Halliburton Company was in control of HHUKL in relation to the purchase of shares at the time of the disposal.
Reasons for the decision
8.	Mr Baldry’s first contention is that the rules for the time of the disposal in s 28 do not apply to s 18 on the basis that the Sale Agreement was made while the parties were connected persons and the mischief dealt with by the connected person provisions is that they may not have made a bargain at arm’s length.  I can see the sense of this, but that is not what s 18 says.  Section 18 applies “where a person acquires an asset and the person making the disposal is connected with him.”  Both disposal and the definition of connected persons must be applied at the same time (“is connected”).  Section 28 specifies the time of disposal and it would be odd if the time at which the persons were connected had to be determined at a different time without the section making this clear.  Indeed s 18(3) contains an express reference to a gain made on subsequent disposal of an asset at a time when the parties are connected persons:
“….a chargeable gain accruing to him on some other disposal of an asset to the person acquiring the asset mentioned in subsection (1) above, being a disposal made at a time when they are connected persons.”
It would be impossible to say there that s 28 did not determine the time of both the disposal and the connection, which helps to show that other timing references in the section are determined by s 28.  Section 28 was an addition made in 1971 and so Parliament knew when it was added that existing references to the time of disposal and connection at that time would be governed by it.  I consider that Mr Baldry has taken Lord Hoffmann’s quotation from Jerome v Kelly (see paragraph 7(1) above) out of context.  Lord Hoffmann goes on to say that “It [s 28] does not deem the contract to have been the disposal as the 1962 Act had done,” meaning that there needs to be a disposal (causing a substantive liability to tax) before s 28 fixes the time of disposal as the time of the contract.  Accordingly I agree with Mr Ghosh that s 28 determines both the time of disposal and the time when there is a connection.
9.	Mr Baldry’s second contention is that even if s 28 does determine the time of connection, the Sale Agreement became unconditional when the conditions in the Distribution Agreement were satisfied.  Mr Ghosh has two answers to this.  First, the Sale Agreement expressly states that it is conditional on the Distribution being effected and so this contention involves rewriting the Sale Agreement.  Secondly, the parties to the Sale Agreement would have been aware of the No Constraint clause, providing that the Halliburton Company was not under an obligation to make the Distribution when the conditions of the Distribution Agreement were satisfied, and the provision that the Board could at its discretion terminate the Distribution Agreement and abandon the Distribution.  I agree with Mr Ghosh and find that there was no obligation on Halliburton Company to make the Distribution before they actually did so.  It made commercial sense for the Sale Agreement to be conditional on the Distribution being effected.  Otherwise it would be possible that the Sale Agreement took effect but the Distribution did not.  The Distribution Agreement specifically provided in Section 3.07 (substituted by the Amendatory Agreement of 22 January 1996 that:
“Following the Distribution on the Distribution Date, [HHUKL] shall purchase all the issued and outstanding capital stock in [HICUK] and [HUAL] for $7.5m (US Dollars) pursuant to the terms of a conditional sale and purchase agreement.”
The parties have made it clear that the intended the Distribution to take effect before the sale of shares.  Reading the reference to the Distribution being effected to mean the Distribution Agreement becoming unconditional would be contrary to the expressed intention of the parties. 
10.	Mr Baldry’s third contention is that even if the Sale Agreement is construed in accordance with its terms the Distribution and the sale of the shares in HICUK took effect at the same time as part of the same overall commercial transaction, and one should not artificially dissect those transactions separated only a scintilla of time.  I do not agree.  The parties chose to make the share sale take effect after the Distribution so that the share sale was to a company owned by Halliburton Company’s shareholders rather than a group company.  I see no reason to say that transactions took effect at the same time when the parties have been careful to specify that they took place in a certain order.
11.	Mr Baldry’s final contention is that the similarity in the identity of the public shareholders of Halliburton Company and of HIG following the Distribution create the necessary connection within s 286(5)(b) because:
“…a group of 2 or more persons has control of each company, and the groups either consist of the same persons or…”.
12.	The relevant parts of s 416 are:
“(2)  …a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs, and in particular, but without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire—
 (a) the greater part of the share capital….
(3) Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.
…
(6) For the purposes of subsections (2) and (3) above, there may also be attributed to any person all the rights and powers of any company of which he has, or he and associates of his have, control or any two or more such companies…”.
Section 416(2) applies where one person has control by, for example having the greater part of the share capital, and by subs (3) where two or more persons together have the greater part of the share capital they are taken to have control.  Are such persons “a group of 2 or more persons [which] has control of each company?  
13.	Mr Ghosh objects first, that the shareholders are not a group (undefined) of two or more persons because group implies some common purpose such as the Shorter Oxford English Dictionary definition of group:
“2.  A number of people or things regarded as forming a unity or whole on the grounds of some mutual or common relation or purpose, or classed together because of a degree of similarity.”
Further that the individual shareholders may have quite different purposes and will not even know each other, to which Mr Baldry replies that they have a sufficient common purpose in being shareholders in (before the Distribution) one company.  Mr Ghosh contends secondly, that for s 416(3) the shareholders do not together satisfy any of the conditions in subs (2) because this implies that there is an agreement or arrangement for them to aggregate their votes to exercise control over the company’s affairs.
14.	Mr Ghosh contends thirdly, that even if the shareholders in Halliburton Company and HIG are such a group having control of the Halliburton Company and HIG they did not have control of HHL (a second-tier subsidiary of Halliburton Company) and HHUKL (a first-tier subsidiary of HIG) within s 416(2) because they did not have direct or indirect control over the affairs of the Appellant and HHUKL.  Mr Baldry contends that either the shareholders have indirect control of those companies or control by virtue of the attribution in s 416(6).  Mr Ghosh contends that person in s 416(6) is singular in contrast to the reference in subs (3) to persons.  And even if it does include persons they do not together have control even with their associates because fellow shareholders are not associates as defined in s 417(3).
15.	The issue is whether the shareholders in Halliburton Company and HIG are “a group of 2 or more persons [which] has control of each company” for s 286 and “two or more persons [who] together satisfy any of the conditions of subsection (2) above” for s 416.  The opening part of s 416 is oddly worded: “a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, direct or indirect control over the company’s affairs.”  Shareholders in a UK company (and in the absence of evidence I have to assume that it is the same for a Delaware company) can never excise control over the company’s affairs in the sense of the business of the company; the most they can do is to remove the directors.  The affairs of the company cannot therefore refer to the business of the company, as Morritt LJ said in Steele v EVC International NV [1996] STC 785 at 794, and must mean control at general meetings of the company.  In any case s 416(2) goes on to say that, without prejudice to the generality of those preceding words, a person shall be taken to have control of a company “if he possesses or is entitled to acquire—(a)  the greater part of the share capital…”.  Therefore one person having the greater part of the share capital of a company has control over the company.  
16.	By s 416(3) “Where two or more persons together satisfy any of the conditions of subsection (2) above, they shall be taken to have control of the company.”  I do not read “together” as imposing any additional requirement that there is an agreement between them so that they can collectively exercise control before one can aggregate their votes; it is the natural word to use to total their rights, here their shareholdings.  That seems to have been accepted in Steele v EVC International NV at 795b; the point that was common ground, that coincidence of voting the same way at general meetings was insufficient, relates to whether they were acting together to exercise or secure control within s 286(7), which is not in issue here.  Therefore two or more persons together (ie in total) having the greater part of the share capital of a company have control over the company.  It is not necessary to ask whether they exercise, or are able to exercise, control over the company’s affairs.  And by s 416(6) one can attribute to those two or more persons (I cannot see how the reference to person can be restricted to the singular person when applying subs (6) to subs (3)) all the rights and powers of any company of which they have control.  That means that one can attribute to them the parent company’s right to control its subsidiaries.  Therefore the shareholders holding the greater part of the share capital of Halliburton Company control the Appellant, its 100% sub-subsidiary; and the shareholders holding the greater part of the share capital of HIG control HHUKL, its 100% subsidiary.
17.	By s 286(5) “A company is connected with another company—(b) if a group of 2 or more persons has control of each company, and the groups…consist of the same persons….”  Again I do not read the reference to group as importing any additional requirement of commonality of purpose.  It is the natural word to denote a collection of people who here have a common relation, rather than purpose, of being shareholders in a company in accordance with the dictionary definition.  Mr Gosh makes the powerful point that many large public companies might be connected on this basis on account of large shareholdings by pension funds and institutional investors, which Parliament cannot have intended.  While I see the force of this, large shareholders have to identify themselves so that one should be able to determine whether this is the case, and I suspect that it is unlikely that one would find a common collection of shareholders holding the greater part of the share capital of two otherwise unrelated companies.  Here there is no problem in applying the rule because on the Distribution the shareholders are identical except for changes in the shareholders between 4 and 23 January 1996.
18.	On 23 January 1996 the shareholders of Halliburton Company and of HIG (who are the shareholders of Halliburton Company as at 4 January 1996) are not identical since there have been changes of 16% in between the two dates and may be other dealings outside the stock exchange.  But I infer, and find as a fact, that one could identify a collection of shareholders who owned the greater part of the share capital of both companies on 23 January 1996.  
19.	It follows that the collection (or “group”) of shareholders holding the greater part of the share capital of Halliburton Company and of HIG are a group of persons consisting of the same persons having control of each company, and by s 416(6) also having control of the Appellant and of HHUKL.  Therefore the Appellant and HHUKL are connected with each other.
20.	I need not deal with Mr Baldry’s contention in relation to looking at the circumstances before and after the disposal as in my decision in Foulser in relation to whether parties were acting together to secure or exercise control (s 186(7)), except to say that it is in the nature of acting together to exercise control that one has to look at the position over time.  In any case that provision is not relied on by the Revenue here.
21.	Accordingly my decision is that the Appellant was connected with HHUKL at the time of the share sale by virtue of s 286(5)(b) with the result that the capital loss of £14,867,445 is not available against other chargeable gains of the Appellant, and I dismiss the appeal.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 18 June 2008

SC 3209/07

Authority referred to in skeletons and not referred to in the decision:
Harrison v Nairn Williamson [1987] STC 67