In the latest instalment of the Development Securities litigation, the Court of Appeal unanimously overturned the Upper Tribunal (UT) decision, reinstating that of the First-tier Tribunal (FTT). This is a difficult case, as not only has the decision been reversed twice but the three Court of Appeal judges themselves took three different views on the residence question. Nugee LJ agreed the UT got it wrong but clearly wanted to remit it to the FTT; David Richards LJ thought the FTT got it right; and Newey LJ ducked the question on procedural grounds. The Court of Appeal had been asked to rule only on the question whether the UT’s reasons given for its decision were valid and not whether or not the UT’s decision to overturn the FTT’s decision should be upheld on another basis.
This is the first Court of Appeal decision on corporate residence since 2006 but there has been no change of principle. Whatever the differing views on residence expressed in this case, it is clear that this is an extreme case which turns on its (extreme) facts and should be limited to similar scenarios. In practice, there should be no read-across to special purpose vehicles (SPVs) which enter into transactions which make commercial sense for them. The FTT was at pains to distinguish, for example, a finance SPV which is asked by its parent to enter into transactions which do make commercial sense for it, even where there is a strong expectation to do so.
What was the issue?
The case concerned a scheme to enable the Development Securities group to access enhanced latent capital losses. The scheme involved the incorporation of three Jersey companies (JerseyCos) as subsidiaries of Development Securities plc (DS plc) and the transfer of assets to them, for consideration substantially in excess of their market value, the funding for which was provided by DS plc. It was crucial to the success of the scheme that the JerseyCos were tax resident in Jersey at the time the assets were transferred to them.
The JerseyCos’ directors were DS plc’s UK resident company secretary and three Jersey resident individuals employed by a Jersey-based corporate services provider. Although the relevant board meetings took place in Jersey and were attended in person by the directors, the FTT held that the JerseyCos had been centrally managed and controlled from the UK throughout because they had not engaged with the substantive decision but had been instructed by DS plc to carry out the transactions.
The UT overturned the FTT’s decision and concluded central management and control was in Jersey. The UT took the view that the FTT’s conclusion was founded on the directors having “failed to decline to do something that was improper or inadvisable, in that they had entered into so-called uncommercial transactions”. The UT also thought the FTT had erred by confusing shareholder authorisation with instruction.
Court of Appeal decision
The three judges in the Court of Appeal were unanimous in overturning the UT decision on the basis that its criticism of the FTT decision had not been well-founded as it was based on a misunderstanding of the reasoning of the FTT. The UT was not right to conclude the FTT confused shareholder authorisation with instruction. The real reason for the FTT’s decision was its finding of fact that the JerseyCos’ directors had acted on what they perceived as an instruction from DS Plc and did not engage with the substantive decision and, thus, the central management and control of the JerseyCos was really in the UK throughout.
A useful reminder
The Court of Appeal provides a useful summary of key points to be drawn from the case law. As where a company resides is essentially a question of fact, it is important for a company to be able to provide adequate evidence of where central management and control is exercised.
The key finding of fact by the FTT in this case was that DS plc instructed the JerseyCos to enter the transactions and the directors followed that instruction, subject to checking it was lawful to do so and not therefore taking any actual decision themselves.