[1943] 2 All ER 200
A G Chamberlain v Commissioners of Inland Revenue; W E Chamberlain v Commissioners of Inland Revenue

HOUSE OF LORDS
VISCOUNT SIMON LC, LORD ATKIN, LORD THANKERTON, LORD MACMILLAN AND LORD ROMER

25, 26, 29, 30 MARCH, 9 JUNE 1943
Income Tax – Disposition in favour of wife and children – Formation of company – Settlement of sums invested by the trustees in the purchase of shares in the company – Property comprised in the settlement – “Arrangement” – Finance Act 1938 (c 46), ss 38(2), 41(4)(b).
The appellant formed an unlimited company called the Staffa Investment Co (hereinafter called Staffa) which was incorporated on 20 December 1935. The initial capital of the company consisted of £100,000, divided into 50,000 10s preference shares and 7,500 £10 ordinary shares. By a sale agreement of 23 December 1935, the appellant sold to Staffa 470 shares in Commercial Structures Ltd (hereinafter called Commercial) in consideration of 35,000 preference shares in Staffa (which at all times remained in his beneficial ownership and were never subject to any settlement) and £82,000 in cash which the appellant left on loan to the company without interest. The income of Staffa consisted only of the dividends received on the 470 shares in Commercial. On 10 March 1936, the appellant executed a settlement under which he paid to the trustees £35,000, which was forthwith invested by the trustees in 350 ordinary shares of Staffa, which were thereafter held upon the trusts of the settlement in favour of the appellant's wife and his 4 children. Subsequently, the appellant altered, by means of a special resolution, the capital structure of Staffa, whereby the 7,500 ordinary shares were divided into 350 “A” shares, being those held by the trustees of the settlement of 10 March 1936, 1,750 “B” shares, 1,750 “C” shares, 1,750 “D” shares, and 1,900 “E” shares. On 7 December 1936, the appellant executed four settlements in favour of his infant children. Since these settlements provided for the accumulation of the income until the children attained the age of 21 years, they were not affected by the Finance Act 1936, s 21. The trustees were the same persons as the trustees of the settlement of 10 March 1936. By each deed he settled £100 on trust for one of his 4 infant children, the sums to be invested as he should direct. The trustees invested each £100 respectively in the purchase of 10 of the “B,” “C,” “D,” and “E” ordinary shares of Staffa. Dividends were paid in respect of these shares and were utilised in purchasing additional “B,” “C,” “D” and “E” shares respectively. The appellant was assessed under the Finance Act 1938, s 38(2) to sur-tax for the year ending 1938 on the income of Staffa less the dividends paid on the 35,000 preference shares held by the appellant, the Crown contending that the formation and structure of Staffa together with the sale agreement of 23 December 1935, and the settlements of 10 March 1936 and 7 December 1936, constituted an arrangement and settlement within the Finance Act 1938, s 41(4)(b):—
Held – the formation and structure of Staffa together with the settlements and the sale agreement were not an arrangement within the Finance Act 1938, s 41(4)(b), because the property comprised in the settlements were the sums provided by the settlor and not the whole assets of Staffa.
Notes
The terms “settlement” and “arrangement” are very widely defined by the relevant provisions of the Finance Acts but, if the whole income of an investment company is to be charged as the income of the settlor, it must be shown that the whole assets of the company have been settled by the settlement, or settlements if there are more than one. The facts of cases of this nature are necessarily complex, but the point here is quite short. It is whether the transactions here in question are an “arrangement” within the Finance Act 1938, s 41(4)(b) such that the whole income of Staffa can be treated as the income of the settlor. Their Lordships all agree that the income of the company cannot be treated as the income of the settlor unless all its assets come within the settlement. In the present case there were 35,000 preference shares in Staffa which were at all times in the beneficial ownership of the settlor and were never subject to any settlement. This alone is
[1943] 2 All ER 200 at 201
sufficient to prevent the whole income of Staffa being treated as the income from a settlement, even if the word “settlement” be enlarged to the meaning of the word “arrangement” in the Finance Act 1938, s 41(4)(b). If it is to be held that the whole income of the company is the income of the settlor, then it must be shown that the whole income arises from property comprised in the settlement. The whole assets of Staffa were never included in these settlements and it is not possible to argue that the structure of the company and the sale agreement made the income of the company the income of the settlement, since, whatever “arrangement” was thus effected, there was always some income of the company which belonged absolutely to the appellant (the settlor) and was not comprised in the settlement.
For the Finance Act 1938, ss 38, 41, see Halsbury's Complete Statutes of England, Vol 31, pp 349, 354.
Case referred to
Inland Revenue Comrs v Morton [1941] SC 467.
Consolidated Appeals
Consolidated Appeals by the taxpayers from a decision of the Court of Appeal affirming the decision of Lawrence J. The facts are fully stated in the opinion of Lord Thankerton.


Cyril L King KC and Norman C Armitage for the appellants.
The Attorney-General (Rt Hon Sir Donald B Somervell KC), J H Stamp and Reginald P Hills for the respondents.
9 June 1943. The following opinions were delivered.

VISCOUNT SIMON LC
(read by Lord Thankerton). My lords, in these consolidated appeals I have had the advantage of perusing the opinion prepared by Lord Thankerton and, finding myself in agreement with his conclusions and with the reasoning upon which they are based, do not find it necessary to express my own view at length. I move that both appeals be allowed, with costs here and below.

LORD THANKERTON.
My Lords, these consolidated appeals relate to an additional assessment to sur-tax for the year ending 5 April 1938, made on the appellant in each case, the amount in each case being the sum of £11, 898. On the respective cases stated by the Special Commissioners, the assessments have been confirmed on appeal by Lawrence J, in the King's Bench Division, and by the Court of Appeal. It was agreed at the hearing before this House, that the circumstances were so identical that your Lordships' decision on the appeal of Augustus George Chamberlain would govern the decision of the appeal of Walter Ernest Chamberlain, and, accordingly, I will deal with the former appeal, and I will refer to Augustus George Chamberlain as the appellant.
The claim by the Crown is primarily based on the Finance Act 1938, s 38(2), along with the material provisions of s 41 of that Act, which provide as follows:—
'38—(2) If and so long as the terms of any settlement are such that—(a) any person has or may have power, whether immediately or in the future, and whether with or without the consent of any other person, to revoke or otherwise determine the settlement or any provision thereof; and (b) in the event of the exercise of the power, the settlor or the wife or husband of the settlor will or may become beneficially entitled to the whole or any part of the property then comprised in the settlement or of the income arising from the whole or any part of the property so comprised; any income arising under the settlement from the property comprised in the settlement in any year of assessment or from a corresponding part of that property, or a corresponding part of any such income, as the case may be, shall be treated as the income of the settlor for that year and not as the income of any other person.
'41—(4) For the purposes of this part of this Act … (b) the expression “settlement” includes any disposition, trust, covenant, agreement or arrangement, and the expression “settlor” in relation to a settlement means any person by whom the settlement was made; (c) a person shall be deemed to have made a settlement if he has made or entered into the settlement directly or indirectly, and in particular (but without prejudice to the generality of the foregoing words of this paragraph) if he has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement …'
While the facts are fully narrated in the case stated, it may be convenient to give a brief resume of them. The appellant and his brother carry on a successful business in the building trade through a company formed by them, called Commercial Structures Ltd. They desired to make some provision for their children, and, while they adopted similar measures to secure this end, I need only deal with the steps taken by the appellant.
[1943] 2 All ER 200 at 202
(i) In December 1935, the appellant caused Staffa Investment Trust, to which I will refer as “Staffa,” an unlimited company with a share capital, to be incorporated under the Companies Act 1929. The initial capital of Staffa was £100,000 divided into 50,000 preference shares of 10s each and 7,500 ordinary shares of £10 each. Three days later, by an agreement dated 23 December 1935, the appellant sold to Staffa for £100,000, 470 shares of £1 each in Commercial Structures Ltd, the price being satisfied as follows: as to £17,500 thereof, by the issue to the appellant of 35,000 preference shares of Staffa; as to £82,500, this sum was left on loan to Staffa free of interest.
(ii) The next step was the execution of a deed of settlement, dated 10 March 1936, under which the appellant paid to trustees £3,500, which was forthwith invested by the trustees in 350 ordinary shares of £10 each of Staffa, and was to be held on the trusts set out in the deed in favour of the appellant's wife and 4 children. It is agreed that the terms of this settlement are such that, under the Finance Act 1938, s 38(2), any income arising under the said settlement from property comprised therein must be treated as the income of the appellant.
(iii) The enactment of the Finance Act 1936, s 21, admittedly caused a reconsideration of the position by the appellant and the consequent measures taken in this step and the next one. The appellant was in voting control of Staffa, and possessed wide powers as governing director under art 40 of Staffa's articles of association. At an extraordinary general meeting of Staffa on 3 December 1936, art 3 of the articles of association was altered so as to divide the 7,500 ordinary shares into: 350 “A” ordinary shares of £10 each (being those held by the trustees of the settlement of March 1936); 1,750 “B” ordinary shares of £10 each; 1,750 “C” ordinary shares of £10 each; 1,750 “D” ordinary shares of £10 each; and 1,900 “E” ordinary shares of £10 each. The voting rights were not altered, and each class was entitled only to such dividend (if any) as the company should in general meeting determine.
(iv) On 7 December 1936, the appellant executed 4 deeds of settlement, under which he paid four sums of £100 each to the trustees under each deed respectively to be invested as the appellant should direct and to be held by them on trust for each of the appellant's 4 children, all of whom were then infants. These settlements are irrevocable. The 4 sums of £100 were invested respectively by the trustees in the purchase respectively of 10 “B,” “C,” “D” and “E” £10 ordinary shares of Staffa. In March 1937, the trustees of each of the 4 settlements invested the amount of dividends received by them in the acquisition of 1,025 £10 shares of the same class respectively as the 10 shares already held by them.
The assessment under challenge was based upon the view that the said settlements of 10 March 1936, and 7 December 1936, together with the incorporation and structure of Staffa constitute an arrangement amounting to a “settlement” within the Finance Act 1938, s 41(4)(b), and that the appellant is the settlor.
The assessment was arrived at as follows: in the year ending 5 April 1938, Staffa paid to each of the trustees of the 4 settlements of 7 December 1936, dividends in respect of their holdings, amounting in each case to £2,932, 10s gross, which absorbed £11,730 of the income of Staffa for that year. No dividends have ever been paid in respect of the “A” ordinary shares, held by the trustees of the settlement of 10 March 1936. Staffa had also paid to the appellant dividends on his preference shares amounting to £875. The actual income of Staffa for that year was £12,773, and the balance of £11,898 remaining after deduction of the preference dividends paid to the appellant, has been treated as the income of the appellant under the Finance Act 1938, s 38(2), and the additional assessment under appeal has been made on the appellant in respect thereof.
The Attorney-General maintained—as, indeed, had been held by the commissioners and both courts below—that, in this case, the “income arising under the settlement” within the meaning of s 38, was the income of the company, and that “the property comprised in the settlement” was the property held by the company, and he agreed that, if his contention was wrong, the assessment could not stand, and it follows that it would be unnecessary, in that view, to deal with any of the other contentions in the case. In my opinion, this contention is wrong, for reasons which can be stated very shortly.
I may premise that, in seeking the due application of the Finance Act 1938,
[1943] 2 All ER 200 at 203
s 38, each case is apt to depend on its own facts, and other cases are not likely to be of material assistance. Further, it seems to me that, while the word “settlement” is defined in the widest terms, the more crucial point is likely to be the determination of what the “property comprised in the settlement” consists of in the particular case. The present case affords, in my opinion, a good illustration of this point, and the question may be thus stated. Did the property comprised in the settlement consist of the whole assets of Staffa, or is the property comprised in the settlement to be found separately comprised in each of the 5 deeds of settlement, the formation of Staffa being part of the arrangement conceived by the appellant, whereby a convenient and profitable investment was made available for the moneys respectively settled under the 5 deeds of settlement?
My Lords, I am of opinion that the latter alternative provides the correct view of the arrangement made by the appellant with a view to making provision for his children. While the formation of Staffa provided an available investment for the sums settled under the 5 deeds of settlement, under which the children's provisions were actually constituted, the continuance of such investment was not essential to the continuance of the trusts under the deeds of settlement. In other words, the sums settled under these deeds were the funds provided for the purpose of the settlement within the meaning of s 41(4)(c). Staffa, though controlled by the appellant, did not, in my opinion, hold its assets as part of the provisions settled on the children. I am of opinion that the whole assets of Staffa did not constitute the property comprised in the settlement, and that the assessment cannot stand.
Lord Atkin desires me to express his concurrence with this opinion.

LORD MACMILLAN
(read by Lord Thankerton). My Lords, an additional assessment to sur-tax was made on the appellant A G Chamberlain for the year ending 5 April 1938, in the sum of £11,898. This sum represented the whole actual income for the year of assessment of a company known as the Staffa Investment Co, less a sum of £875 received by the appellant by way of dividend on preference shares which he held in the company. The material facts in the case of W E Chamberlain, whose appeal has been consolidated with that of his brother, the other appellant, are admitted to be such that the two appeals must stand or fall together. I shall confine my attention to the case of A G Chamberlain to whom I shall refer throughout as the appellant.
The assessment on the appellant was based upon the Finance Act 1938, s 38, one of the 4 sections composing Pt IV of that Act, which bears the heading “Income Tax (Settlements).” This legislation forms part of a code of increasing complexity, beginning with the Finance Act 1922, s 20, designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in the disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers over or interests in the property or its income. The legislature's counter was to declare that the income of which the taxpayer had thus sought to disembarrass himself should notwithstanding be treated as still his income and taxed in his hands accordingly.
In order that the income of the Staffa Investment Co may, under the Finance Act 1938, s 38(2), be treated as the income of the appellant, that income must be shown to be income arising under a settlement made by the appellant from property comprised in the settlement; it must further be shown that the settlement or some provision thereof is revocable or otherwise determinable, and that, if such revocation or determination should be effected, the appellant or his wife would become beneficially entitled to the whole or part of the settled property or to the whole or part of the income of the settled property. The term “settlement” includes any disposition, trust, covenant, agreement or arrangement (s 41(4)(b) and has thus a wider meaning than in the vocabulary of the strict conveyancer.
The first, and, indeed, the decisive question in the case is whether the appellant made a settlement comprising the whole assets of the Staffa Investment Co.
What he did was as follows. He was the owner of 470 £1 shares in a successful building company known as Commercial Structures Ltd. Being minded to
[1943] 2 All ER 200 at 204
make a provision for his wife and 4 children, he formed an unlimited company which he named the Staffa Investment Co, with an initial capital of £100,000 divided into 50,000 preference shares of 10s each and 7,500 ordinary shares of £10 each. The company was incorporated on 20 December 1935. On 23 December 1935, the appellant by a sale agreement of that date sold to the company his 470 shares in Commercial Structures Ltd, the price being satisfied by the issue to him of 35,000 preference shares of the company and as to the balance of £ 82,500 in cash, which the appellant left on loan to the company without interest. The 470 shares in Commercial Structures Ltd, were the only assets of the Staffa Investment Co, and its income consisted solely of the dividends received on these shares. The constitution of the company was so framed as to give the appellant complete control over it.
On 10 March 1936, the appellant executed a deed of settlement under which he paid to himself, his brother and his solicitor a sum of £3,500 to be held on trusts set out in the deed for the benefit of his wife and children. It was the intention of the appellant that the trust fund should be invested in the purchase of ordinary shares of the Staffa Investment Co, and this was effected by the acquisition of 350 ordinary shares of the company. It was conceded that this deed of 10 March 1936, constituted a settlement within the meaning of s 38 of the 1938 Act and that any income arising from the property comprised therein, namely, the 350 ordinary shares of the Staffa Investment Co, was liable to be treated for tax purposes as the income of the appellant. In view of the passing of the Finance Act 1936, s 21, the appellant by means of a special resolution effected an alteration in the capital arrangements of the Staffa Investment Co, whereby the 7,500 ordinary £10 shares were divided into 350 “A” shares, being those held by the trustees of the settlement of 10 March 1936, 1,750 “B” shares, 1,750 “C” shares, 1,750 “D” shares, and 1,900 “E” shares. Each of these classes of ordinary shares was entitled only to such dividend, if any, as the company might declare. The appellant then proceeded to execute 4 deeds of settlement, all dated 7 December 1936, each in favour of the same trustees as those appointed by the settlement of 10 March 1936. By these 4 deeds he settled 4 sums of £100 each to be invested by the trustees as he should direct and to be held on trust for each respectively of the appellant's 4 children, who were then all infants. These settlements were irrevocable and provided for the accumulation of the income until the children attained 21 years of age, with protective trusts to operate thereafter during their lives. The trustees of these settlements invested the settled sums of £100 in the purchase respectively of 10 of the “B” 10 of the “C,” 10 of the “D” and 10 of the “E” ordinary £10 shares of the Staffa Investment Co Dividends were paid to the trustees of each settlement in March 1937, and the trustees utilised the proceeds to apply for 1,025 additional “B,” “C,” “D” and “E” shares respectively. Further dividends were paid on the “B,” “C,” “D” and “E” shares in 1938. No dividends were ever paid in respect of the shares held under the settlement of 10 March 1936.
The contention of the Crown, which was upheld by the Special Commissioners and has been affirmed by Lawrence J, and the Court of Appeal, is that the formation and structure of the Staffa Investment Co, together with the sale agreement of 23 December 1935, the settlement of 10 March 1936, and the 4 settlements of 7 December 1936, “constitute an arrangement and a settlement within the Finance Act, 1938, s. 41(4)(b).” Lawrence J, in affirming the decision of the Special Commissioners, did not deliver a reasoned opinion as it was admitted before him that the case was governed by the decision of the first division of the Court of Session in the Scottish case of the Comrs of Inland Revenue v Morton.
I find myself unable to agree with the Crown's contention. I accept the view that the statutory expansion of the term “settlement,” which includes an “arrangement,” justifies and, indeed, requires a broad application of s 38 of the 1938 Act, but a settlement or arrangement to come within the statute must still be of the type which the language of the section contemplates. I agree with Lord Moncrieff that the settlement or arrangement must be one whereby the settlor charges certain property of his with rights in favour of others (Comrs of Inland Revenue v Morton, at p 480). It must comprise certain property which is the subject of the settlement; it must confer the income of the comprised property on others, for it is the income so given to others that is to be treated as, nevertheless, the income of the settlor. There can be no question
[1943] 2 All ER 200 at 205
that the deeds of 10 March 1936, and 7 December 1936, were settlements. Each of them settled a sum of money provided by the settlor and provided for the application of the income for the benefit of third parties, although the 4 settlements of 7 December 1936, because of their irrevocability do not fall within s 38. But none of these settlements comprised any property of the Staffa Investment Co. The trust funds were invested in shares of that company, which is quite a different matter. In point of fact, the whole assets of the company have never been settled at all so as to dedicate the whole of its income to any trust purposes.
But it is said that the “formation and structure” of the company was just a part of an “arrangement” which must be looked at as a whole and which, when so looked at, is seen to be a settlement of the company's whole assets, namely, the 470 shares of Commercial Structures Ltd, which originally belonged to the appellant. I am prepared to agree that the creation of the Staffa Investment Co and its very special constitution were essential steps towards the effecting of the appellant's object. So no doubt was the sale to the company of his 470 shares in Commercial Structures Ltd. But that sale was for consideration in money or money's worth, and resulted inter alia in the appellant receiving 35,000 preference shares of the Staffa Investment Co for himself, the income of which he has himself enjoyed. How can it be said that the whole assets of the Staffa Investment Co have been comprised in a settlement by the appellant when he himself retains a substantial interest in the company which has never been the subject of a settlement at all? The most attractive way of presenting the Crown case is to characterise the whole transaction as a single scheme which begins with 470 shares in Commercial Structures Ltd, in the hands of the appellant as his personal property and after much manoeuvring ends with the income from these shares no longer payable to himself but settled in favour of third parties. He who wishes the end wishes the means. This, however, is not, in my opinion, an accurate legal presentation of the matter, which requires a much closer analysis. I have already pointed out that the appellant has never settled the whole of the shares in the Staffa Investment Co. And further shares might still be issued. It is, I think, fallacious to confuse the steps taken by the appellant with a view to effecting a settlement or arrangement with the settlement or arrangement itself. When the appellant created the Staffa Investment Co, and sold to it his 470 shares in Commercial Structures Ltd, he made no settlement or arrangement such as the statute contemplates. In point of fact, he never settled any shares of the Staffa Investment Co. What he did was to settle certain sums of money, with the intention, which he was in a position to carry out, that these sums should be invested in shares of the Staffa Investment Co. It was not until he granted the trust deeds that he entered the legal stage of settlement. All that he did previously was preparatory to making settlements. No settlement or arrangement of the nature of a settlement existed when the company was registered and the appellant sold to it his shares in Commercial Structures Ltd. As I have said, what the appellant settled was money. That money was invested, as it was intended to be, in shares of the Staffa Investment Co, but I see nothing to prevent the trustees under the trust deeds from selling their shares in the company and investing the proceeds in other securities. Could it then be said that the whole assets of the Staffa Investment Co were “settled”?
It is essential to the Crown's case that it should make out that the whole assets of the Staffa Investment Co are comprised in a “settlement” or “arrangement” made by the appellant within the meaning of the statute. In my opinion, the Crown has failed to establish this.
It is unnecessary for me, having regard to the view which I have just expressed, to proceed to consider the further questions debated as to whether any “provision” of the “settlement” was determinable and whether the result of such determination would be to the benefit of the appellant or his wife. But I may say that I find it difficult to characterise the redemption by the Staffa Investment Co of the shares held under the trust deeds or the winding up of the company as a determination of a “provision of the settlement.” The trustees would continue to hold and administer the redemption moneys or the sums received on a winding up. Moreover, if it could be said that, in the event of redemption or winding up the appellant's wife might become beneficially entitled to at least part of the property comprised in the “settlement,” then it would
[1943] 2 All ER 200 at 206
appear that the Crown could only attribute to the appellant a “corresponding part” of the income of the property and not, as they have done, the whole income of the property said to be comprised in the settlement.
I am, accordingly, of opinion that these appeals should succeed. The legislature must try again, unless by legislation since 1938 it has already defeated such ingenuity as the appellants have displayed.

LORD ROMER.
My Lords, the assessment of which the appellant, Augustus George Chamberlain (hereinafter called the appellant), complains in this case was made in the circumstances that are set out in para 10 of the case stated for the opinion of the court. The paragraph runs substantially as follows:
'The actual income of Staffa for the year ending April 5, 1938, was £12,773. £875 was paid by Staffa to the appellant in dividends on his 35,000 preference shares. £11,898, the balance of the £12,773, has been treated as the income of the appellant under the provisions of the Finance Act, 1938, s. 38(2), and the additional assessment under appeal has been made upon the appellant in respect thereof. This assessment was based upon the view that the settlements of Mar. 10, 1936, and Dec. 7, 1936, together with the incorporation and structure of Staffa constitute an arrangement amounting to a “settlement” within the Finance Act, 1938, s. 41(4)(b), and that the appellant is the settlor.'
The omission from this paragraph of all reference to the sale agreement of 23 December 1935, was probably an oversight. For the decision of the Special Commissioners, which has been upheld by the Court of Appeal, is set forth in para 14 of the case and was in these terms:
'Having considered the evidence and arguments adduced before us, we held that:—(A) the formation and structure of Staffa together with the settlements of Mar. 10, 1936, and Dec. 7, 1936, and the sale agreement of Dec. 23, 1935, constitute an arrangement and a settlement within the Finance Act, 1938, s. 41(4)(b); (B) the income of Staffa was rightly treated as the income of the appellant by virtue of the Finance Act, 1938, s. 38(2).'
The strange thing about all this is that, although we are told what it is that, in the opinion of the commissioners and the Court of Appeal, constitutes the “settlement,” we are not told of what the property comprised in the alleged settlement consists. It is true that the additional assessment upon the appellant can only be justified if the whole of the assets of Staffa that produced its income for the year ending 5 April 1938, can be regarded as constituting the settled property. But the only income earning property owned by Staffa in that year was the block of shares in Commercial Structures Ltd, sold to them by the appellant in December 1935; and whether the settled property is to be treated as consisting of those shares alone or is to be treated as comprising the whole of Staffa's assets for the time being is a question to which I can find no certain answer either in the case or in the judgment of the Court of Appeal. I am inclined to think, however, that the court was in favour of the latter of the two alternatives. For in delivering the judgment of the court, Du Parcq LJ, when contemplating the possibility of a winding up of Staffa at a time when the only ordinary shares outstanding were the shares comprised in the deed of settlement of 10 March 1936, said that in that event all the assets of the company, after providing for the par value of the appellant's preference shares, would go to the trustees of that settlement and that, in that way, the appellant's wife “might become beneficially entitled at least to part of the property then comprised in the settlement.” But it is conceivable, and, indeed, probable, that the assets of Staffa distributed on a winding up among the holders of ordinary shares would not include any of the 470 shares in Commercial Structures, but the proceeds of their sale which by that time would have ceased to be traceable. And there I am content to leave it. For even if the various ingredients mentioned in para 14 of the case can properly be regarded as forming one compound settlement, as to which I shall have something to say later on, the property that is the subject-matter of the settlement is, in my opinion, neither the 470 shares in Commercial Structures nor the whole assets for the time being of Staffa. If a man enters into a contract to buy 1,000 shares in a company with a view to settling 500 of them on his daughter and does so settle the 500 shares by deed, it may well be that, consistently with the Finance Act 1938, s 41(4)(b), the settlement can be described as consisting of the contract and the deed
[1943] 2 All ER 200 at 207
together. But the property comprised in the settlement is the 500 shares settled by the deed and not the whole of the 1,000 shares. The mere fact that the contract to buy 1,000 shares was a part of the arrangement for settling 500 of them is no conceivable justification for saying that the property comprised in the settlement included the other 500, even though the settlement be regarded as consisting of the whole arrangement. And yet that in substance is what has been said by the Special Commissioners and the Court of Appeal in the present case.
Turning again to the facts of the present case, it may be observed that, although in the memorandum of association of Staffa its objects are set out in no less than 24 clauses covering nearly every form of human activity, the acquisition of shares in Commercial Structures is nowhere mentioned. It may further be observed that the deed of settlement of 10 March 1936, is a settlement of £3,500 cash and contains no reference to the acquisition by the trustees of any shares in Staffa. It would almost seem that the appellant wished it to appear that there was no connection between Commercial Structures, Staffa, and the settlement of the £3,500. It is, nevertheless, quite plain, and it is now admitted by the appellant, that the connection between the three was very close and that the forming of Staffa, the sale to it of the 470 shares in Commercial Structures, and the application of the £3,500 in subscribing for 350 ordinary shares in Staffa were all so many steps taken or caused to be taken by the appellant for the purpose of making some provision for his children out of the interest that he possessed in Commercial Structures, while retaining control over both that company and over Staffa. But the forming of Staffa and the sale to it of the appellant's 470 shares in Commercial Structures were capable of serving and may well have been intended to serve in the future other purposes as well. If, for instance, the appellant had in his mind the possibility at a later date of issuing and settling on his brothers and sisters further shares in Staffa whether preference or ordinary, the forming of Staffa and the sale to it of the 470 shares would have been steps taken to effect this purpose also, and could be treated as forming part of such subsequent settlement. Although, therefore, it may be possible to say, in view of the Finance Act 1938, s 41(4)(b), that on 10 March 1936, there came into existence a compound settlement in the form of an arrangement consisting of the forming of Staffa, the agreement for the sale to it of the 470 shares in Commercial Structures, the trust deed of that date and the subscription by the trustees of 350 ordinary shares, the property comprised in that settlement consisted of nothing but the last mentioned shares. It did not and could not consist of the whole of the assets of Staffa or even the 470 shares in Commercial Structures that Staffa held, any more than a subsequent settlement such as I have mentioned would or could have done. The appellant had an interest in all such assets as the holder of preference shares, and the holders of any subsequently issued preference shares and of all ordinary shares whenever they might have been issued would also be interested in such assets regardless of the date of their issue and of the date of any settlement of which they might be the subject-matter.
In mentioning the elements that conceivably constituted the settlement that came into existence on 10 March 1936, I have omitted one that was included by the Special Commissioners. It is the “structure” of Staffa, which means, no doubt, the character and constitution of the company as disclosed by its memorandum and articles of association. But I must confess that, with all respect to the commissioners, it passes my comprehension how the structure of a company can form part of a settlement. That the constitution and character of Staffa have a very direct and important bearing upon the nature of the subject-matter of the settlement of 10 March 1936, is, of course, quite true. For in order to ascertain what is sometimes called the “bundle of rights” represented by a share in Staffa, recourse must be had to the memorandum and articles of association of that company. But its constitution and character can no more form part of the settlement itself than can the constitution and character of the settlor.
My Lords, I have not so far made any reference to the deeds of settlement of 7 December 1936. And for this reason. After the execution of the deed of settlement of 10 March 1936, and the investment of the £3,500 in taking up shares in Staffa, a settlement had been finally made, and one of the purposes, possibly
[1943] 2 All ER 200 at 208
the main purpose, for which Staffa had been formed and the 470 shares in Commercial Structures had been transferred to it had been fully accomplished. I can find nothing that even remotely suggests that at that time it was in the contemplation of the appellant to settle further Staffa shares upon his children; and had it not been for the Finance Act 1936, I do not suppose that any such further settlement would in fact have taken place. But s 21 of that Act put the appellant in danger of having all the income arising under the settlement of 10 March 1936, treated as his income for the purposes of sur-tax, and it was only after he had considered the provisions of that section that he took the further steps that resulted in the execution of the four deeds of settlement of 7 December 1936, and the acquistion by the trustees of those settlements of the “B,” “C,” “D” and “E” ordinary shares now held by them. I may observe in passing that these shares could not have been issued at all had the property comprised in the March settlement been all the assets of Staffa or even the 470 shares in Commercial Structures. But I have already given my reasons for thinking that the property comprised in the March settlement consisted merely of the 350 shares now known as the “A” shares in which the £3,500 had been invested, and for the same reasons I am satisfied that the property comprised in the December settlements consisted of nothing but “B,” “C,” “D” and “E” shares respectively. In order to bring about these last-mentioned settlements the appellant no doubt utilised 2 of the steps he had taken to bring about the March settlement, namely, the forming of Staffa and the agreement of 23 December 1935. These 2 steps will, therefore, be ingredients that are common to the arrangements that respectively constitute the March and December settlements. The settlements are, nevertheless, quite distinct from one another and cannot properly be regarded as forming one comprehensive settlement. But, after all, the crucial question arising in the case is not whether there is I settlement or 5 settlements, but whether the property settled can be said to consist of either the total assets of Staffa or, alternatively, the 470 shares in Commercial Structures. As I am satisfied that this question must be answered in the negative, I would allow the appeal of the appellants Augustus George Chamberlain with whose case alone I have so far dealt. It necessarily follows that, in my opinion, the appeal of his brother Walter Ernest Chamberlain should also be allowed.
Appeals allowed with costs.
Solicitors: R C Bartlett & Co (for the appellants); Solicitor of Inland Revenue (for the respondents).
C St J Nicholson Esq Barrister.