Neutral Citation Number: [2012] EWHC 3649 (Ch)
Case No: HC12C01369
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 21/12/2012

Before :

THE CHANCELLOR OF THE HIGH COURT
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Between :

	ARDAGH GROUP SA	Claimant	
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	PILLAR PROPERTY GROUP LIMITED	Defendant	

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Robert Miles QC and Ruth Jordan (instructed by SNR Denton UK LLP) for the Claimant
Robert Howe QC and Rupert Baldry QC (instructed by Jones Day LLP) for the Defendant

Hearing date: 4 December 2012
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Judgment

The Chancellor : 

Introduction

1.	The claimant, Ardagh Group SA (“Ardagh”) is and at all material times was a company formed and registered in Luxembourg.  It had one subsidiary a company incorporated in England called Yeoman Holdings Ltd (“Yeoman”).  Before 21st March 2000 Yeoman had incurred losses in a sum in excess of £97m allowable under s.8 Taxation of Chargeable Gains Act 1992 (“TCGA”) against any chargeable gains it might make.

2.	By an agreement (“the Sale Agreement”) dated 6th March 2001 and made between Ardagh (1) and the defendant Pillar Property Group Ltd (“Pillar”) (2) Ardagh (described as the vendor) sold the entire share capital in Yeoman to Pillar (described as the Purchaser) for £2.2m payable on completion and a contingent consideration calculated in accordance with clause 6.  The relevant provisions of the Sale Agreement are as follows:
“1. 
1.1…where the context so admits:-
(E) references to “the Purchaser” and the “Company” shall include their respective successors in title and permitted assigns and references to “the Purchaser’s Group” are references to the Purchaser and any holding company from time to time of the purchaser and any subsidiary from time to time of the Purchaser or any such holding company or any other company falling within the economic ownership of the Purchaser other than the Company;”
“6. Contingent Consideration
6.1 In addition to the Completion Consideration, the Purchaser shall pay to the Vendor an amount equal to nine per cent of the losses used by any member of the Purchaser’s Group or the Company by virtue of the effective off set against a taxable profit or gain, by such company of all or any part of: -
(A) allowable capital losses for tax purposes of the Company; or
(B) surplus management expenses of the Company”	
The rest of Clause 6 dealt with ancillary matters such as the time when the contingent consideration would be due by reference to assessments to corporation tax (clause 6.2), the date on which an assessment is to be regarded as final (clause 6.3) and the provision of relevant information by Pillar to Ardagh (clause 6.4).

3.	The Sale Agreement was duly completed on 23rd March 2001.  In its returns for the purposes of Corporation Tax for the accounting periods ended 31st March 2002, 2003 and 2005 Yeoman sought to set off part of its loss incurred prior to 21st March 2000 against profits transferred to Yeoman by other companies in the Pillar Group pursuant to Part VI Chapter I TCGA.  The entitlement of Yeoman to make any such set-off was first challenged by HMRC in February 2004.  Substantial correspondence ensued culminating in a closure notice deemed to have been given on 11th June 2009 refusing Yeoman the benefit of any of the set-offs claimed.  By then the Pillar Group, including Yeoman, had become part of the British Land Company Group.

4.	On 23rd June 2009 Yeoman appealed.  Its appeal was compromised by an agreement with HMRC concluded on 4th December 2009.  The memorandum of that agreement states:
“[Yeoman] – Agreement with HMRC
[Yeoman] losses claimed of £82m (tax at 30% of £24.6m) will be agreed only on the basis that:
•	Claimed use of Blaxmill 29 limited loss against gain on Chester of £47m is withdrawn in full,
•	A section 171A election is made for £40m of gains to transfer these gains into a company with no available losses so that a cash tax liability of £12m arises,
•	No further use of the remaining [Yeoman] losses of £15m
•	No further use of the remaining Blaxmill 29 limited loss of £50m.”
In consequence of that agreement HMRC then allowed set-offs of the accrued losses of Yeoman against profits of other companies in the Pillar Group transferred in to Yeoman for the years 2002, 2003 and 2005 in the aggregate amount of £82,155,987.

5.	Ardagh then claimed from Pillar by way of contingent consideration payable under clause 6 of the Sale Agreement the sum of £7,394,038 being equal to 9% of that aggregate amount.   Pillar declined to pay it contending that the terms of clause 6.1 had not been satisfied.  These proceedings were instituted by a claim form issued by Ardagh on 29th March 2012.   Pleadings closed on 18th June 2012 and on 26th June 2012 Ardagh issued an application for summary judgment on the whole of its claim under CPR Rule 24.2(a)(ii) on the ground that Pillar has no real prospect of succeeding in its defence and there is no other compelling reason why the claim should be disposed of at a trial.  The evidence consists of two witness statements of Mr Rosenheim, a partner in SNR Denton the solicitors for Ardagh, and one of Mr Charles Middleton, a senior corporate tax executive in the tax department of British Land Company.  Each of them exhibited relevant documents.  There was no cross examination of either of them.

TCGA
Part VI
Chapter I

6.	It is necessary to set out the underlying tax regime before considering the proper construction of the Sale Agreement.  In its original form the provisions of s.171 in Chapter I enabled one company in a group to transfer an asset to another company in the group on terms that neither a gain nor a loss would accrue to the disposer.  If the company owning the asset wished to transfer it to a person outside the group s.171A enabled him to do so on the basis that the gain accrued to another group company.  By these means gains might be transferred from the company in the group to which the gain had accrued to another group company which had the benefit of realised or accrued losses.  In each case either both companies had to be resident in the UK at the time of the disposal or the asset was a chargeable asset of each of them, see s.170.  There was then and is now no provision enabling allowable losses to be transferred by one group company to another.

7.	The effect of the original provisions of Chapter I were restricted by the insertion of Schedule 7A into the 1992 Act by s.88 and Schedule 8 Finance Act 1993.  The effect of that schedule was to preclude losses accruing to a company before it became a member of a group of companies (pre-entry losses) being deducted from gains accruing to a group company or arising otherwise than on the realisation of, principally, pre-entry assets of the company to which the loss accrued.   If the provisions of the original Chapter did not apply because, as in this case, the holding company was resident outside the UK, the amendment did not make it applicable.

8.	Finance Act 2000 s.102 and Schedule 29 made substantial amendments to Chapter I as amended by the Finance Act 1993 with effect from 1st April 2000.  The principal effect of them was to remove the requirements in ss.171 and 171A that the relevant companies should be resident in the UK.  The effect of the amendment was to make Yeoman a member of a group of companies thereby enabling it, subject to the provisions of paragraph 7 of Schedule 29, to take the benefit of ss.171 and 171A.  That paragraph amended Schedule 7A in respect of any accounting period ending on or after 21st March 2000.  Paragraph 7(9) of Schedule 29 to the Finance Act 2000 provides:
“Where– 
(a) immediately before the time when the main amendments have effect in relation to a company in accordance with sub-paragraph (6), the company was not a member of a group of companies for the purposes of section 170 of the Taxation of Chargeable Gains Act 1992 (as it stood before the main amendments), and 
(b) immediately after that time, the company is a member of a group of companies for the purposes of that section (as amended by the main amendments), 
Schedule 7A to that Act shall not have effect in relation to any losses accruing to the company before that time or any chargeable assets (within the meaning of paragraph 1(3A) of that Schedule) held by it immediately before that time.”

9.	It is clear from that paragraph that though the consequence of the amendments made by Schedule 29 to Chapter I and Schedule 7A was to make Yeoman into a group company the restriction on the use of pre-entry gains imposed by Schedule 7A did not apply to the assets of Yeoman in relation to their use within the group of which it was to be treated as a member, i.e. as a subsidiary of Ardagh SA.   There was an issue between Pillar and HMRC as to whether the effect of paragraph 7(9) also freed Yeoman from any restriction on the use of pre-entry gains in the Pillar Group on or after 23rd March 2001 when it became a member of the Pillar Group.

The application for summary judgment

10.	It is not in dispute that the principles to be applied in determining whether or not to give summary judgment in favour of a claimant were accurately summarised by Popplewell J in FG Wilson (Engineering) Limited v John Holt & Company (Liverpool) Limited [2012] EWHC 2477 (Comm) at [20]:
“(1) The court must consider whether the defendant has a “realistic” as opposed to a “fanciful” prospect of success: Swain v Hillman [2001] 2 All ER 91.
(2) A “realistic” defence is one that carries some degree of conviction. This means a defence that is more than merely arguable: ED & F Man Liquid Products v Patel [2003] EWCA Civ 472 at [8].
(3) In reaching its conclusion the court must not conduct a “mini-trial”: Swain v Hillman.
(4) This does not mean that the court must take at face value and without analysis everything that a defendant says in his statements before the court. In some cases it may be clear that there is no real substance in factual assertions made, particularly if contradicted by contemporaneous documents: ED & F Man Liquid Products v Patel at [10].
(5) However, in reaching its conclusion the court must take into account not only the evidence actually placed before it on the application for summary judgment, but also the evidence that can reasonably be expected to be available at trial: Royal Brompton Hospital NHS Trust v Hammond (No 5) [2001] EWCA Civ 550 .
(6) Although a case may turn out at trial not to be really complicated, it does not follow that it should be decided without the fuller investigation into the facts at trial than is possible or permissible on summary judgment. Thus the court should hesitate about making a final decision without a trial, even where there is no obvious conflict of fact at the time of the application, where reasonable grounds exist for believing that a fuller investigation into the facts of the case would add to or alter the evidence available to a trial judge and so affect the outcome of the case: Doncaster Pharmaceuticals Group Ltd v Bolton Pharmaceutical Co 100 Ltd [2007] FSR 63.
(7) On the other hand it is not uncommon for an application under Part 24 to give rise to a short point of law or construction and, if the court is satisfied that it has before it all the evidence necessary for the proper determination of the question and that the parties have had an adequate opportunity to address it in argument, it should grasp the nettle and decide it. The reason is quite simple: if the respondent's case is bad in law, he will in truth have no real prospect of succeeding on his claim or successfully defending the claim against him, as the case may be. Similarly, if the applicant's case is bad in law, the sooner that is determined, the better. If it is possible to show by evidence that although material in the form of documents or oral evidence that would put the documents in another light is not currently before the court, such material is likely to exist and can be expected to be available at trial, it would be wrong to give summary judgment because there would be a real, as opposed to a fanciful, prospect of success. However, it is not enough simply to argue that the case should be allowed to go to trial because something may turn up which would have a bearing on the question of construction: ICI Chemicals & Polymers Ltd v TTE Training Ltd [2007] EWCA Civ 725 .”

11.	Ardagh contends that this application is one to which the proposition set out in paragraph (7) of the quotation cited in the previous paragraph applies.  It contends that it’s application raises a short point of construction on the true meaning and effect of clause 6.1 of the Sale Agreement in respect of which there is before me on this application all the evidence required for a final conclusion.  In the submission of counsel for Ardagh the accrued losses of Yeoman were both allowable and the subject of an effective set-off because they were both allowed by HMRC and set-off against the equivalent gains of other companies in the Pillar group.  Counsel for Pillar does not dispute that the application raises a short point of construction on the meaning and effect of clause 6.1 but submits that I should conclude that its resolution does not entitle Ardagh to the judgment it seeks.

12.	There is no dispute either as to the principles of construction which I should apply.  They have been developed in a number of recent cases of the highest authority, in particular Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 869, 912-913; BCCI V Ali [2002] 1 AC 251, [8]; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Pink Floyd Music Ltd v EMI [2010] EWCA Civ 1429 and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900.  I intend no disrespect to the authors of the other passages usually quoted if I refer only to the dictum of Lord Bingham of Cornhill in BCCI v Ali [8] where he said:
“In construing this provision, as any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the court does not of course inquire into the parties' subjective states of mind but makes an objective judgment based on the materials already identified. The general principles summarised by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913 apply in a case such as this.”

13.	Counsel for Pillar drew my attention to the application of that principle in the case of Chartbrook Ltd v Persimmon Homes Ltd as demonstrating the extent to which the processes of construction may alter the layout and literal meaning of the provision in question.  In that case the relevant provision was the definition of ‘the Additional Residential Payment’.  The definition was:
“"Additional Residential Payment" means 23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives.”
In his judgment in the Court of Appeal, Rimer LJ noted that [184]:
“Persimmon asks for the definition to be read as if it were drafted thus: 
"[ARP]" means the amount (if any) by which 23.4% of the price achieved for each Residential Unit is in excess of the [MGRUV] less the [C&I].”
He considered that [186] there was no basis for rewriting the agreement to that extent.  Tuckey LJ agreed with Rimer LJ. He considered that:
“193. The words used to define ARP are entirely clear. Persimmon's construction requires the definition to be re-written, not only as Rimer LJ has shown, but also to deal with the striking anomaly about the impact of C+I which he illustrates in para 185 above. So the clause would now have to be read as if it had been drafted: 
ARP means the amount (if any) by which 23.4% of the price achieved for each Residential Unit less the [C+I] is in excess of the [MGRUV] less the [C+I].
194. Short of a good claim for rectification I do not think it is possible to make such radical changes to the clear words used in the agreement by invoking the forces of commercial good sense and hints from other parts of the agreement that Chartbrook would not inevitably have been entitled to ARP. They simply are not up to the major interpretive task for which Persimmon invokes them.” 

14.	The House of Lords disagreed with both of them.  Lord Hoffmann, with whom the other members of the Appellate Committee agreed, noted [15] that it requires a strong case to persuade a court that something has gone wrong with the language used even in a formal document.  He concluded [16], as had Lawrence Collins LJ in the Court of Appeal, that to interpret the definition in accordance with ordinary rules of syntax made no commercial sense.  After referring to various authorities he said [25]:
“What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.”

Further Facts

15.	Before I seek to apply those principles I should refer to some further facts.  In February 2001 KPMG, which had been concerned with the tax affairs of Ardagh for some years, sent to a director of Pillar, Mr Humphrey Price, a background note on Yeoman.  The opening paragraph stated:
“[Yeoman] is a UK company with a realised capital loss.  We believe that this loss is unaffected by the pre-entry rules due to the provisions of para 7(9) Sch 29 FA 2000. The purpose of the information contained within the following files is to aid a prospective purchaser in their decision making process.”
By a letter dated 20th February 2001 Pillar engaged KMPG to report on Yeoman.  On 5th March 2001 KPMG submitted a draft report.

16.	The draft report of KPMG contained in paragraph 2 an executive summary.  The summary recorded:
•	“[Yeoman] has realised capital losses of between approximately £97m and £112m.
•	Following the acquisition of [Yeoman] Pillar could elect under s.171A Taxation of Chargeable Gains Act 1992 such that gains realised would be deemed to arise in [Yeoman] and covered by capital losses.
•	This is possible by virtue of the manner in which Finance Act 2000 has been worded. Very broadly this states that where a company was not part of a group prior to 21st March 2000 and becomes part of a group by virtue of the changes in the Finance Act then the anti-avoidance legislation preventing the buying in of capital losses does not apply.
•	This proposal is not without some uncertainty.  The main areas of risk which are detailed in this report are:...”
The executive summary then refers to two areas of risk irrelevant to this application; the third is:
“Applicability or otherwise of the pre-entry loss legislation [the nature of which is then described].”

17.	In paragraph 3.2.2.3 that risk is spelled out in greater detail so as to include the risk that HMRC might contend that the effect of paragraph 7(9) Schedule 29 to the Finance Act 2000 was limited to allowing pre-entry losses only on the occasion of joining a group in consequence of the amendments made by that Act to the provisions of Schedule 7A and not on the occasion of a subsequent sale into another group.  As to that risk KMPG wrote in the draft report:
“In our view, ... the legislation did give effect to the apparent intention, but it gave effect to it in such a way as to allow further effects which probably were not intended.  However it is not possible to say precisely what was intended from the legislative context, and it would be quite difficult to identify what provision should have been made as the legislation in this area is complex.”

18.	The Sale Agreement was then signed by the parties; but it was conditional on Pillar not being advised by 14th March 2001 that the Budget Statement of the Chancellor of the Exchequer contained any statement or proposal which resulted in the basis for Pillar entering into the Sale Agreement being materially adversely affected.  On 13th March 2001 KPMG wrote to Pillar confirming that:
“nothing in last week’s budget announcements, press releases, or other technical material would appear to change the law such that Pillar, following its acquisition of [Yeoman]  would be unable to access its brought forward capital losses.”
As I have indicated the Sale Agreement was completed on or about 23rd March 2001.

19.	In a letter from the Inspector of Taxes dated 24th June 2004 he accepted that as at 28th February 2000 Yeoman had capital losses available to be carried forward of £112,070,832.  But the Inspector went on to contend that paragraph 7(9) did not apply on a subsequent sale of Yeoman to the Pillar Group.  That has remained the position of HMRC ever since.   In July 2005 Pillar, and therefore Yeoman, became members of the British Land Company Group.  Blaxmill 29 Ltd and Chester referred to in the memorandum of the agreement with HMRC concluded on 4th December 2009 were respectively a company in or a property owned by the British Land Company Group, rather than the Pillar Group.

The submissions of the parties and my conclusion

20.	The submissions of counsel for the parties identified the proper construction of the phrases in clause 6.1 “effective off set” and “allowable capital losses” as determining whether the contingent consideration is now due in the amount claimed by Ardagh.  For Ardagh counsel submitted that as HMRC had subsequently accepted that the losses of Yeoman were capital losses capable of being carried forward and had allowed them to be off set they must, by definition, have been allowable within the meaning of that word in paragraph (A) of clause 6.1.  He accepted that whether there had been any “effective off set” was a different question, but contended that the answer was provided by the compromise agreement between Pillar and HMRC.  That agreement showed an effective off set, the tax affairs of other group companies being separate and, in this context, irrelevant matters.  He submitted that had the parties intended the contingent consideration to depend on some overall net benefit to the acquiring group the Sale Agreement would have contained valuation provisions of some complexity and, probably, an arbitration clause.

21.	Counsel for Ardagh also relied on the provisions of s.54 Taxes Management Act 1970.  That section provides:
“Subject to the provisions of this section, where a person gives notice of appeal and, before the appeal is determined by the [tribunal], the inspector or other proper officer of the Crown and the appellant come to an agreement, whether in writing or otherwise, that the assessment or decision under appeal should be treated as upheld without variation, or as varied in a particular manner or as discharged or cancelled, the like consequences shall ensue for all purposes as would have ensued if, at the time when the agreement was come to, the [tribunal] had determined the appeal and had upheld the assessment or decision without variation, had varied it in that manner or had discharged or cancelled it, as the case may be.” 

22.	Counsel submitted that the effect of the compromise agreement between HMRC and Pillar reached on 4th December 2009 and recorded in the agreement quoted in paragraph 4 above is that the off set there recorded has the force and effect of the Tribunal upholding the claim of Pillar to be entitled to off set the Yeoman losses to the extent therein recorded.  He contended that that conclusion is binding on Pillar and Ardagh is entitled to take advantage of it.  He submits that it is not necessary for me to determine the ambit and effect of paragraph 7(9) Schedule 29 Finance Act 2000 and that I should not do so in the absence of HMRC.

23.	These submissions are challenged by counsel for Pillar.  He submits that the argument of counsel for Ardagh is ‘literalist’ and gives no meaning to the word “effective”.  He points out that the words “off set” themselves connote a net position. He suggests that the concept of ‘use’ of loss and the reference to the user being the Purchaser’s Group defined as including any holding or subsidiary company for the time being of Pillar indicate the field within which the net off set is to be found.

24.	Counsel for Pillar contends that given that construction of “effective off set” then it is necessary to conduct an investigation and valuation of all the consequences of the agreement between HMRC and Pillar arrived at on 4th December 2009.  Such an exercise necessitates an investigation wholly unsuited to the procedure for a summary judgment and a good deal of evidence additional to that now before me.  He contends that s.54 Taxes Management Act 1970 is of no assistance on the interpretation of clause 6.1 of the Sale Agreement.  He also contends that the losses accrued to Yeoman were not “allowable” because Schedule 29 para 7 precluded their use against profits in the Pillar or British Land Groups, the terms of paragraph 7(9) notwithstanding.

25.	In his reply counsel for Ardagh suggested that the starting point must be the words used by the parties in the agreement and not the commercial effect of their rival submissions after the event.  He categorised the description of his submissions as ‘literalist’ as a ‘neo-insult’ devoid of legal justification.  He contended that an ‘effective off set’ looks to its immediate effect not to group consequences.  In relation to the phrase ‘allowable losses’ he reiterated his submission that the description referred to the quality of the loss not the ability to set it off.

26.	I can express my conclusions relatively shortly.  First, I do not accept that s.54 Taxes Management Act 1970 is of any assistance in the correct construction of clause 6.1 of the Sale Agreement made eight years before.  In any event, its only binding effect is as between HMRC and Pillar.  Even if Ardagh could take advantage of it, all it does is to repeat in different circumstances what the compromise agreement made on 4th December 2009 already provides.  Second, I am reluctant to determine the scope of paragraph 7(9) Scheduled 29 Finance Act 2000 in the absence of HMRC if it is unnecessary to do so.  As its potential relevance is to the meaning of ‘allowable’ in paragraph (A) of clause 6.1 I will consider first the proper construction of the phrase ‘effective off set’.

27.	The requirement for an effective off set is additional to the need for the losses to be allowable because if they are not allowable the question of an off set cannot arise.  It is plain from the further facts to which I have referred that the parties had the provisions of ss.171 and 171A TCGA well in mind.   In accordance with them the losses in Yeoman could only be off set against actual or deemed gains of Yeoman.  There were no actual gains so the off set could only arise from gains accruing to other companies in the group being imputed to Yeoman by the processes for which ss.171 and 171A provided.  Those processes required the concurrence and participation of the company entitled to the actual or unrealised gain, see s.171A(2).  It follows that the losses of Yeoman could only be “used” by another company in the group to which the relevant gains had accrued.   Such use necessitates joining in the election for which s.171A(2) provides.

28.	Clause 6.1 makes it clear that the use by such a company requires more than joining in the necessary election because it also requires an ‘effective off set’. I agree with counsel for Pillar that the argument of Ardagh gives no meaning to the word ‘effective’.  The use of the loss limited to joining in the election by a company with an eligible gain and, presumably, making the requisite claim to HMRC for the off set of one against the other may or may not be ‘effective’.  It is clear that the inclusion of that word is intended by the parties to add an additional requirement.

29.	In its context the additional ingredient must be commercial or financial value.  The whole object of the clause is to ensure that Ardagh gets paid for the actual value of the asset of Yeoman consisting of its allowable losses payable as and when realised.  The agreement between Pillar and HMRC made on 4th December 2009 cannot be read as an unconditional agreement for the off set, pound for pound, of the losses of Yeoman against the gains of any group company.  It was a single indivisible agreement.  No doubt if the parties had foreseen all the possible consequences of clause 6.1 they might have added some valuation and arbitration machinery; but its absence is not sufficient to justify a different conclusion on the proper construction of clause 6.1.

30.	In those circumstances I am unable to conclude on this application that there has been an effective off set of all or any part of the loss of £82,155,987 so as to be able to identify the contingent consideration to be the sum of £7,394,038 for which I am now asked to give judgment in favour of Ardagh.  There may or may not have been, but that can only be determined at a full trial.  In these circumstances it is not necessary to consider whether or not the word “allowable” included a requirement that the deductibility of the loss should not be precluded by being a pre-entry loss.

31.	I would only add that this conclusion is not reached by considering the commerciality of the deal the parties made without regard to the words they used to express it.  On the contrary, the conclusion arises from considering all the words used in the context in which they were used and having regard to the background known to both parties.  For these reasons I dismiss this application.