Commissioner for Inland Revenue v Lever Bros and Another

• Jurisdiction: South Africa
• Judge: Watermeyer CJ, Schreiner JA and Davis AJA
• Judgment Date: 30 March 1946
• Citation: 1946 AD 441
• Hearing Date: 04 December 1945
• Court: Appellate Division

Watermeyer, C.J.:

This is an appeal on a case stated by the Special Income Tax Court under the provisions of sec. 81 of Act 31 of 1941 as amended by sec. 10 of Act 39 of 1945.

Lever Brothers and Unilever, Ltd., and Associated Enterprises, Ltd., are two English companies which were assessed for South African Income Tax for the years 1940 to 1942, in respect of money received by them from a third company, registered in South Africa under the name of Overseas Holdings, (Pty.), Ltd. (I shall refer to the first company as Levers and to the third as Overseas Holdings.)

The Special Court held that Levers and Associated Enterprises, Ltd., were not liable to pay income tax, because the source of their income was not located within the Union. This special case raises the question whether or not that decision was correct.

The facts stated in the special case relate only to Levers as it was agreed between the parties that the position of Associated Enterprises, Ltd., which is described as a subsidiary of Levers, was similar to that of Levers and a decision in the one case would settle the dispute arising in the other case. Levers is described in the stated case as a holding company and its issued capital is £60,000,000. At the time of the transactions which gave rise to this case it held shares in various trading companies in England and throughout the empire.

It did not carry on any business nor did it own any capital within the Union of South Africa unless a debt owed to it by Overseas Holdings can properly be described as capital which it owns within the Union. Lever Brothers and Unilever N.V. is another holding company registered in Holland. At the time of the transactions, to which I shall refer, it held shares in another group of associated trading companies which carried on business outside of the British Empire. These two holding companies are closely associated; the shareholders differ, but until the war the directors of the two companies were the same, and there was in existence an agreement between the companies for the equalisation of the dividends on and capital values of the ordinary shares in the two companies.

Watermeyer, C.J.

In both companies the right to nominate directors was vested in particular shares, and these shares were held or controlled by the English and Dutch companies, respectively.

Mavibel (Maatschappy voor Internationale Beleggingen N.V.) was a Dutch company; it is described as a subsidiary of Lever Brothers and Unilever N.V., and its registered office was at Rotterdam. The Whitehall Trust, Ltd. (which I shall refer to as the trustee), is an English company, which acts as trustee under certain agreements, which will be referred to presently; it holds shakes in a South African company (Internationale Maatschappy voor Handel en Nywerheid Beperk) on behalf of Associated Enterprises and oil behalf of Levers.

On 31st December, 1937, an agreement was entered into at Rotterdam between Levers, Mavibel and the trustee, which was subsequently amended by a further agreement entered into at Rotterdam on 5th April, 1939. These two agreements will be referred to as the trust agreements. They were somewhat involved but, reading the two together, their effect, so far as it is material for the purposes of this case, is as follows: Levers sold and transferred to Mavibel shares to the value of £4,968,483 9s. 4d. in various trading and manufacturing concerns carrying on business in different parts of the world and also ceded to them debts to the value of £6,924,505 17s. 1d. owed to Levers by two Dutch soap-making companies. In consideration of these transfers and cessions, Mavibel paid to Levers £892,989 6s. 5d. and became liable to them for a sum of £11,000,000 which Mavibel agreed to pay to Levers on or before 31st December, 1961. Until this amount was paid, Mavibel agreed to pay interest on the amount due at the rate of 3 per cent. per annum or at such high rate as from time to time might be agreed upon between the parties. By a subsequent agreement the rate was increased to 3½ per cent. per annum.

As security for the amount owing, Mavibel transferred to or deposited with the trustee shares, which were owned by Mavibel and valued at £2,282,865 11s. 2d., and in addition 340,000 shares in an American company known as Lever Brothers Company of Boston. These latter shares were valued at £9,589,719 14s. 10d. and were owned by a Dutch soap-making company which was known as N.V. Vereenigde Zeepfabrieken and was described in the special case as a subsidiary of Mavibel. The trustee undertook to hold

Watermeyer, C.J.

all these shares on behalf of Mavibel and of the Dutch company and these companies were entitled to draw the dividends on the shares. The trustee could not transfer or deal with the shares without the consent of Levers unless the principal debt had been fully paid. The agreements also contained certain provisions which gave Levers effective control over the shares in the event of the, occurrence in the future of certain possibilities.

In particular, it was provided that if Mavibel failed to perform any of the obligations imposed upon it by the agreements, then the trustee was to hold the shares on behalf of Levers, the debt, would be cancelled and any difference between the amount of the debt and the value of the shares would be adjusted by a money payment. This provision, as well as those which are referred to below, were agreed to by the Dutch company which owned the shares in the American company. Another notable provision was as follows:

"In the event of any war rebellion civil commotion or political or constitutional disturbance or change affecting England the Netherlands or any country in which any of the Companies or Corporate Bodies whose capitals comprise any of the Shares are domiciled or any law being passed or any act being done as a result of which the property in the Shares or any benefits directly or indirectly receivable therefrom would but for the provisions of this Clause pass to any Government or to any third party or the rights of Levers or Mavibel under this Trust Instrument or the beneficial interest of Mavibel in the Sold Shares or the beneficial ownership of the Pledged Shares in the opinion of Levers and Mavibel or failing their agreeing in the opinion of the Trustee (whose decision in this respect shall be final and conclusive,) being for any reason in jeopardy or likely to be jeopardised (all or any of which events are hereinafter referred to as "the emergency") then and in any such case (but only if Levers shall so direct) the Shares or such of them as Levers shall direct shall be held by the Trustee in trust for Levers and the portion of the amount owing on the security of this Trust Instrument represented by the then value of the said Shares (such value to be ascertained in accordance with the provisions set out in the Second Schedule hereto) shall be cancelled

PROVIDED ALWAYS that:-

(1) In the event of the value of the Shares so to be held in trust for Levers being in excess of the amount then owing on the security of this Trust Instrument then any such excess shall be a debt due by Levers to Mavibel and shall be paid to Mavibel or the Trustee for Mavibel's account but the existence of any such debt shall not affect Levers' title to the Shares. The amount so paid or payable plus the amount of the loan so cancelled is hereinafter referred to as "the purchase price". Any payments due to be made by Levers under this sub-clause shall carry interest at the rate of 4 per cent. per annum."

Watermeyer, C.J.

Another provision dealt with depreciation in the value of the shares held by the trustee. If that event occurred, then Levers could direct the trustee to call upon Mavibel to reduce its indebtedness or furnish additional security and if it failed to do so then the shares were to be held by the trustee in trust for Levers. Another provision dealt with equalisation of profits between Levers and Lever Brothers and Unilever N.V. It was as follows:

"If at any time when the Shares or any of them are held in Trust for Levers under the provisions of this clause the current profits of Lever Brothers and Unilever N.V. (hereinafter called "the Dutch Company") as defined in Clause I of the Agreement for Distribution of Profits and Assets made between the Dutch Company and Levers on the 31st day of December 1937 shall be insufficient to provide in full the dividends (and arrears if any) on the Preference Shares of the Dutch Company in respect of any financial period or if there be no current profits of the Dutch Company Levers shall to the extent of all profits available for distribution by way of dividend for the financial period in respect of the Shares or any of them as aforesaid less an amount equal to interest at the rate ruling or at the last rate ruling hereunder calculated on the purchase price be under obligation to make good any losses incurred by the Dutch Company during the same financial period and to make up the current profits of the Dutch Company to the amount of the dividends (and arrears if any) on its Preference Shares. Any contributions so falling to be made by Levers shall be paid by Levers to Mavibel for the account of the Dutch Company. Conversely if in any financial period by reason of the said profits being less than the amount of the said interest the current profits of Levers should be insufficient to provide in full the dividends (and arrears if any) on its Preference Shares in respect of the same financial period or there should be no current profits of Levers then Mavibel shall to the extent of the amount by which the said interest would have exceeded the said profits be under obligation to make good any losses incurred by Levers during that period and to make up the current profits of Levers to the amount of the dividends (and arrears if any on the Preference Shares of Levers."

On 15th March, 1939, on the...