Three Glasgow shops assembled to form single retail unit for sale of bridal clothes–One owned by W, the other two by family holding company effectively controlled by him–Premises occupied as tenants at will by limited company controlled by W and, tribunal finds, trading in accordance with their memorandum and articles–Claim that occupying company traded as W’s implied agents rejected–Decision in Smith, Stone & Knight’s case examined at length and distinguished–Facts ‘entirely different’–No entitlement to claim for disturbance
The Dean of
Faculty and Mr John Murray QC (instructed by Drummond & Co WS, Edinburgh)
appeared for the claimants; Mr W D Cullen QC (instructed by the town clerk of
Glasgow) for the acquiring authority.
Giving their
decision, THE TRIBUNAL said: Following upon the Glasgow Inner Ring Road (West
Flank) Compulsory Purchase Order 1966 Glasgow Corporation took legal possession
on January 29 1968 of shopping premises at 53-61 St George’s Road, Glasgow.
This is agreed to be the valuation date for assessing compensation. These
premises had originally comprised three separate shops; but between 1952 and
1962 they had been assembled together to form a single retail shop for the sale
of bridal clothes under the name of ‘Claire,’ being the registered trading name
of M & L Campbell (Glasgow) Ltd. In 1968, however, the premises still
remained in separate ownership as follows: 53-55 St George’s Road were owned by
Solfred Holdings Ltd, the second claimants, and 57 and 59-61 by the first
claimant, Solomon Woolfson.
Mr Woolfson
owns 999 shares of the 1,000 issued shares of Campbell, the remaining share
being owned by his wife. Mr Woolfson also owns 20 and Mrs Woolfson 10 of the
issued shares in Solfred.
The present
claim is a joint one in the name of both claimants. It comprises in the first
place, a claim under ‘Rule (2)’ for a sum of £80,000 as compensation for the
loss of the actual premises; and secondly, a claim under ‘Rule (6)’ for the sum
of £93,665 in respect of disturbance
relevancy of the claim for disturbance is now challenged by Glasgow
Corporation.
Legal Basis of
Claim
The legal
basis of this claim is stated on record as follows:
‘They [the
subjects] were purchased by the respective claimants solely in order that they
might be occupied for the purpose of carrying on the business of the specialist
bridal house, for which purpose Campbell is the agent of the first claimant and
the sole business carried on there was that carried on by Campbell. Campbell
was a company formed to carry out trading activities of the first claimant and
Campbell was in effect the agent of the first claimant in carrying out said
activities at said premises.’
At the
preliminary legal debate on the relevancy plea it was further stated by counsel
for the claimants that their case was one of agency based on the decision of
Atkinson J (as he then was) in Smith, Stone & Knight Ltd v Birmingham
Corporation [1939] 4 All ER 116. The claimants’ pleadings were somewhat
lacking in specification, and seeing that in Smith (at p 121) it had
been observed by the learned judge that it was a question of fact and
circumstances in each case whether a controlled company was carrying on a
business as its own or as the claimant’s, the tribunal preferred to hear
evidence first before determining the relevancy issue.
We accordingly
allowed a preliminary proof restricted to the question of entitlement to claim
disturbance, and without hearing any evidence on quantum.
Now having
heard this evidence–involving an exhaustive scrutiny of the affairs of Mr
Woolfson and of the two companies, Campbell and Solfred, which he effectively
controlled–we find a situation markedly different from that which existed in
the case of Smith, Stone & Knight. Following a further legal debate
we have also had occasion to reconsider what was the real ratio decidendi
in that case, because the arguments submitted by the learned Dean of Faculty on
behalf of the claimants must depend at the end of the day upon the proper
construction of the judgment of Atkinson J in that case. This judgment had been
previously considered by the tribunal in the case of Lander Equipment Co
v Glasgow Corporation (1972) 25 P & CR 460, where it was
distinguished and not applied.
‘Smith, Stone
& Knight’
An initial
difficulty about the Smith, Stone & Knight case is that the rubric
on p 116 of the report does not correctly summarise the facts as narrated in
the judgment. The facts as appearing from the judgment are that the claimants
Smith, Stone & Knight in January 1913 bought from a partnership carrying on
a waste business the premises belonging to the partnership and the business
being carried on therein as a going concern; and this business became vested in
and became the property of the claimants, who altered and enlarged the factory
and carried on the business. In March 1913 the claimants caused a new company,
the Birmingham Waste Co Ltd, to be incorporated. It had a subscribed capital of
£502, the claimants holding 497 shares. The claimants found all the money and
they had 497 shares registered in their own name, the other five shares being
registered one in the name of each of the five directors, who were also all
directors of the claimants, and held in trust for the claimants. At no time did
the board get any remuneration from the Birmingham Waste Co Ltd. There was no
agreement of any kind made between the Birmingham Waste Co Ltd and the
claimants and the business was never assigned to the new company and there was
no suggestion of anything being done to transfer the beneficial ownership of
the business to the new company. A manager was appointed but there was no
staff. The books and accounts were all kept by the claimants. The Waste company
had no books at all and the manager knew nothing at all about what was in the
books and had no access to them. There is no doubt that the claimants had
complete control of the operations of the Waste company. Then other businesses
were bought by the claimants, but they were not assigned to the Waste company.
Atkinson J
stated, regarding the new businesses, that the Waste company just carried them
on, but to be consistent with what he said elsewhere he must really mean that
the claimants carried them on. There was no tenancy agreement of any sort with
the company. They were just there in name. No rent was paid. Apart from the
name, it was really as if the manager was managing a department of the company.
Six months after the incorporation there was a report to the shareholders that
the business was under the supervision and control of the claimants and that
the profits would be credited to that company in the books, as is very often
done with departments. A proportion of the overheads was debited to the Waste
company and the rent of £90, which had been referred to in the first claim, was
a book entry, debiting the company with that sum. There was a question as to
why the company was ever formed. The Waste company never declared a dividend;
they never thought of such a thing, and their profit was in fact treated as the
claimants’ profit. Atkinson J also found [p 119] that ‘The new company
purported to carry on the Waste business in this sense, that their name was
placed up on the premises, and on the notepaper, invoices, etc. It was an
apparent carrying on by the Waste Company’; and he commented in regard to these
findings ‘I think that these two facts are of the greatest importance.’
In their
amended claim the claimants, Smith, Stone & Knight, described the premises
as nominally let to their subsidiary company the Birmingham Waste Co Ltd
carrying on the business for and on behalf of the claimants, who owned all the
capital of the subsidiary and took all the profits of the business. They
further stated that the subsidiary company occupied the premises and carried on
its trade as a separate department of and as agents for the claimants and that
the rent was arranged as an interdepartmental charge and was merely a
book-keeping entry.
It seems
evident from the foregoing that the true position was that the Birmingham Waste
Co Ltd after its formation never acquired the business of the former
partnership or of any other business with which its name may have been
subsequently associated and indeed never commenced trading at all. In short,
the Birmingham Waste Co Ltd, who were contended by the acquiring authority to
be the legal occupants as yearly tenants of the relevant premises, never in
fact traded therein. That is, in our view, a most important distinction from the
present case, in which there was the setting up of an independent business.
That being so, it can be well appreciated how Atkinson J felt himself able to
reach the conclusion that the business belonged to the claimants and that they
were the real occupiers of the premises. The learned judge concluded his
judgment by saying (at p 121):
‘I am
satisfied that the business belonged to the claimants; they were, in my view,
the real occupiers of the premises. If either physically or technically the
Waste company was in occupation, it was for the purposes of the service it was
rendering to the claimants, such occupation was necessary for that service, and
I think that those facts would make that occupation in law the occupation of
the claimants.’
The Real
Question
His decision,
therefore, appears to have been (a) that the claimants were in fact the real
occupiers carrying on business in the premises, or alternatively, if they were
not, then (b) they occupied on behalf of and as agents for the claimants. It
was suggested at one point in his argument by the learned Dean that in the Lander
decision the tribunal had not given
Stone & Knight case at p 121 for determination of the question: who is
really carrying on the business? We
consider, however, that the real question in a compensation case is: who is
occupying the premises? and that on the
facts initially found by Atkinson J, namely that there had been no transfer of
business to and therefore no business operations at all by the Waste company,
his views about the six points may on one view be regarded as obiter.
However that may be, the cases from which the six points were derived are all
cases where a third party was pleading against the company or its shareholders
or owners that the company was just a mask for the true principal or operator.
This is an understandable legal position for a third party to adopt vis-a-vis
a company; but, in the absence of a situation of principal and agent, for a
court of law to entertain a plea of that kind from a company itself or from its
shareholders or owners would in the ordinary way be a legal novelty, for such a
proposition would seem to represent a fundamental attack upon the basic
principles of incorporation of a limited company, namely that a company’s
memorandum of association binds the company in its relations with third
parties; that it contains the fundamental conditions upon which alone a company
is allowed to be incorporated; that these conditions are introduced for the
benefit of the creditors and the outside public as well as the shareholders
(Bowen LJ in Guinness v Land Corporation of Ireland Ltd (1882) 22
Ch D 349 at 381); and that anyone, whether a shareholder or an outsider, who
has dealings with a registered company must be taken to have notice of the
memorandum. Smith, Stone & Knight was, however, an exceptional
case–in this sense, that ‘Birmingham Waste Co Ltd’ was really just a name under
which the claimants traded in the same way as Campbell in the present case
traded under the trade name of ‘Claire.’
It had been registered but nothing more. It had never commenced trading
as a limited company. As Atkinson J himself put it at p 121:
‘Indeed, if
ever one company can be said to be the agent or employee or tool or simulacrum
of another, I think the Waste company was in this case a legal entity, because
that is all it was. There was nothing to prevent the claimants at any moment
saying: ‘We will carry on this business in our own name.’ They had but to paint out the Waste company’s
name on the premises, change their business paper and form, and the thing would
have been done. I am satisfied that the business belonged to the claimants:
they were, in my view, the real occupiers of the premises.’
It is against
that background and in that context that Atkinson J quoted the following
passage from Lord Sterndale (Inland Revenue Commissioners v Sansom
[1921] 2 KB 492 at 503):
‘There may,
as has been said by Lord Cozens-Hardy MR, be a position such that although
there is a legal entity within the principle of Salomon v Salomon
& Co Ltd [1897] AC 22 that legal entity may be acting as the agent of
an individual and may really be doing his business and not its own at all.
Apart from the technical question of agency it is difficult to see how that
could be, but it is conceivable. Therefore the mere fact that the case is one
which falls within Salomon v Salomon & Co is not of itself
conclusive.’
Mask, Facade
or ‘Alter Ego’
He then
proceeded to examine how, apart from the question of agency, this unlikely but
conceivable situation might arise. All the cases referred to are instances of
attacks on the use of the company as a mask for tax evasion, illegal trading
and the like, and there is nothing in any of the cases referred to which would
justify the idea that a limited company, whenever it suits its convenience or
purposes, can itself plead that it is just a mask or facade or the alter ego
of its incorporators, shareholders or owners. This aspect of the matter is
dealt with by Danckwerts LJ in his judgment in Tunstall v Steigmann
[1962] 2 QB 593 at 607:
‘It has also
been urged that the court has not hesitated to have regard to the position of
persons who control a company or its shares in other cases. . . . But when the
careful analysis of Lord Parker of Waddington in the Daimler case [Daimler
Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd (1916)
2 AC 307 at 337, 338] is read, it is, I think, apparent that the personality of
those in control of the company was only to be regarded as material in special
circumstances, such as a state of war, and only as indicating the nature of the
company without really departing from the principle that a limited company
incorporated under the Companies Act is a distinct legal entity, differing from
the individuals who hold the shares in the company or control it through the
mechanism of the Companies Acts.’
In the same
case Ormerod LJ in his opinion at p 600 stated the importance of adhering to
the basic principles of incorporation as interpreted in Salomon (supra)
and further observed at p 602:
‘. . . It is
true to say that any departure [by the courts], if indeed any of the instances
given can be treated as a departure, has been made to deal with special
circumstances when a limited company might well be a facade concealing the real
facts.’
Having
reconsidered the latter part of Atkinson J’s opinion in Smith, Stone &
Knight, where at p 121 he apparently entertains the conception of a limited
company itself pleading that it is the alter ego of another person by
the application of the six points, or questions, we are uncertain as to where
the satisfaction of some or all of these points is supposed to lead in law or
how their satisfaction could lead to implied agency in respect of the company’s
whole business activities. We appreciate, of course, that a particular business
activity may be contractually carried out by a company on behalf of another as
principal.
Company’s
Express Purpose
As already
mentioned the facts revealed in the present case are entirely different from
those in Smith, Stone & Knight. Campbell was incorporated in 1950 at
the instigation of Mr Woolfson for the express purpose of trading as a bridal
house, first in the Gallowgate district of Glasgow, and later at other premises
(including St George’s Road) which were subsequently acquired. The company’s
memorandum of association states that its objects are to carry on in the United
Kingdom and elsewhere inter alia the business of costumiers, gown and
mantle merchants, dressmakers, milliners, etc. Another object is to distribute
among the members any property of the company in specie or in kind. As already
mentioned Campbell traded under the name of Claire and the application for this
trade name was made in the name of Campbell.
Far from there
being no transfer of business, there was in contrast, therefore, to the
situation in Smith, Stone & Knight an actual setting-up of Campbell
in the business of running a bridal house which continued to be run in the name
of Claire up to the date of compulsory acquisition. The company, however, was
certainly effectively controlled by Mr Woolfson who, as above mentioned, held
999 of its issued shares while his wife held the remaining share–all the shares
in Solfred being also owned by Mr and Mrs Woolfson. Mr Woolfson did not run a
bridal business before the company was promoted. He was a clothing
manufacturer’s agent who desired to move into the retail trade. One of the
purposes of setting up a limited liability company was to conceal his own entry
into the retail trade. Another purpose was to protect one of the company’s
first directors Mr Eva Stein, and his wife (the other director) should the
company have failed in the initial stages. When the business of the company was
under way the first directors, Mrs Eva Stein and Mrs Woolfson, resigned on
February 21 1951 and Mr Woolfson was appointed sole director.
‘Rent’
Payments
The main
ground on which Atkinson J decided the case of Smith, Stone & Knight
therefore does not apply. There was a setting-up in business and, it appears to
us, an actual occupation of the relevant premises by Campbell trading under the
name of Claire. They paid rent to Mr Woolfson for 59 and 61 St George’s Road
until 1963; and from 1962 until 1968 to Solfred in respect of 53-55. These
payments were described as mere book entries made for accounting reasons on the
advice of Mr Woolfson’s accountant. They did not indeed correspond with market
rents, but they nevertheless were debits made in the company’s accounts in the
name of rent and in respect of Campbell’s occupation. Campbell was also entered
as occupant in the valuation roll and Schedule A property tax returns, before
this tax was abolished.
We understood
the learned Dean of Faculty on behalf of the claimants to concede that no claim
for disturbance could have been advanced on behalf of Mr Woolfson if the
premises had been compulsorily acquired at the outset. It was contended,
however, that over the intervening years the situation had gradually changed, so
that by 1968, at least, Mr Woolfson had to all intents and purposes become
Campbell and all the advantages of the original act of incorporation had
disappeared.
The claimants’
main case was apparently rested on the part of Atkinson J’s opinion involving his
six points or questions for determining who was really carrying on the
business–all with a view to establishing implied agency in respect of
Campbell’s whole business activities.
It was
contended on behalf of Mr Woolfson that all but the first of these six points
had been satisfied. The first point, which had not, was whether the profits of
the subsidiary company were treated as the profits of the claimant. In the
present case it is clear from Campbell’s accounts, which were produced, that
they were not; and furthermore that he was remunerated as a director and that
he paid tax on such remuneration under Schedule E–while Campbell’s own profits
were taxed under Schedule D. The second point is, whether the persons
conducting the business were appointed by the first claimant. The tribunal
would agree that upon the evidence they were. The third point is whether the
claimant was the head and the brain of the trading venture. We are inclined to
the view that by 1968 the artistic direction of the business was in the hands
of Mrs Woolfson, who attended shows and bought all the bridal clothes. Mr
Woolfson was more concerned with the financial side and management of the
company’s affairs. The fourth point is whether the claimant governed the
venture, decided what should be done and what capital should be embarked on the
venture. We agree that, on the evidence, this point was satisfied by Mr
Woolfson. The fifth point is whether the company made the profits by the
claimant’s skill and direction. As with the third point we are of opinion that
part of the skill and direction must be ascribed to his wife. The sixth point
is whether the claimant was in effectual and constant control. Upon the
evidence we consider that he was.
To summarise
the position we conclude from the evidence that the first claimant has
satisfied three out of the six points deduced by Atkinson J from certain
revenue cases as important for deciding the question of who was really carrying
on the business. But we consider that none of these points were satisfied on
the part of Solfred, the second claimant. In the end of the day we understood
that the claim for disturbance on the part of Solfred was not really pressed.
Solfred were merely a family holding company owning part of the heritage and
designed for passing on shares within the family.
We were
referred to the tax cases relied on by Atkinson J, certain war emergency
legislation cases and other cases of a similar type. We have already expressed
our doubts as to the relevancy of the tax cases and we do not find these cases
of much assistance in determining the question now before this tribunal as to
who occupied and carried on business in the premises at St George’s Road,
Glasgow, in 1968. In the present case the claimants’ attitude is not adopted
for taxation purposes. It was, however, contended by the Dean of Faculty that
Mr Woolfson’s own involvement in putting money into the business and in
arranging or guaranteeing personal loans would in practice have involved his
own bankruptcy were the company to go into liquidation. It certainly appears
that he was fully involved financially. Nevertheless the legal position in the
event of the liquidation of Campbell would have been that Mr Woolfson would be
entitled to rank in his capacity as lender along with other company creditors.
‘Tunstall’
Case Considered
Apart from
revenue cases and war emergency legislation cases dealing with enemy alien
companies, we were referred to one case which could be regarded as in point,
viz: Tunstall v Steigmann (supra). It perhaps provides the
closest analogy to a disturbance claim, owing to its connection with the
occupation of premises. The issue in Tunstall was whether a landlord
could resume possession of premises from her tenant on one of the grounds
contained in section 30 of the Landlord and Tenant Act 1954, namely that ‘on
the termination of the current tenancy the landlord intends to occupy the
holding for the purposes, or partly for the purposes, of a business to be
carried on by him therein.’ It was
agreed between parties that the business was to be carried on not by the
landlord herself but by a limited company formed by her in which she held all
the shares except for two which were held by her nominees. She therefore had
effective control. It was held, however, by the Court of Appeal (overturning
the decision of the county court judge) that as the company was a separate
legal entity, it could not be said to be the landlord’s intention to carry on
the business herself; and accordingly she could not oppose the granting of a
new lease.
In the course
of his opinion already referred to above Ormerod LJ said (at p 600):
‘It may be
that she will derive a profit or otherwise from the business as she has done in
the past. But the fact remains that she has disposed of her business to a
limited company. It is the limited company which will carry on the business in
the future, and if she acts as the manager of the business, it is for and on
behalf of the limited company.’
Far from
supporting the claimant’s disturbance claim Tunstall is, therefore, in
our view against it. It is also to be observed that the Court of Appeal in that
case were not referred by the parties to the decision in Smith, Stone &
Knight, so one does not have the benefit of their views upon its soundness.
‘A Very Exceptional
Case’
We consider
that Smith, Stone & Knight was a very exceptional case in which it
was held that as the business was never transferred to the Birmingham Waste Co
Ltd, the claimants remained the real occupiers of the relevant premises
carrying on business therein and therefore entitled to claim for disturbance.
The case is of more doubtful authority for the alternative proposition (as
implied in the rubric, but not clearly in the decision itself) that where a
separate company occupies premises and carries on its own business, in
certain circumstances it can be proved by another person to have been doing so
and so occupying the premises not on its own behalf but on behalf of that other
person. There is a noticeable absence of reference to the case in company law
textbooks except on p 11 of the 15th edition of Topham’s Company Law
(where the reference does not appear to be quite in point).
In the present
case, unlike Smith, Stone & Knight, the limited company not only
occupied the premises in question but actually carried on therein the very
business which they were incorporated to undertake. To say that in so trading
in accordance with their memorandum and articles of association they were doing
so as implied agents for Mr Woolfson who was their principal is, in our view,
to deny the legal effects of their incorporation and to undermine the basic
principles of the company code. It will be remembered that in Salomon a
solvent business had been sold to a limited company of which the vendor held
all but six of its 20,007 issued shares. The company’s creditors claimed that
the vendor was obliged to indemnify the company against their claims. But the
House of Lords held that the company was not a mere ‘alias’ or agent of the
vendor. Lord Halsbury LC said (at p 31):
‘Either the
limited company was a legal entity or it was not. If it was, the business
belonged to it and not to Mr Salomon. If it was not, there was no person and no
thing to be an agent at all; and it is impossible to say at the same time that
there is a company and there is not.’
In the result
we are regrettably unable to hold that either Mr Woolfson or Solfred (the
family holding company) were the real occupiers carrying on business at St
George’s Road. The only occupier entitled to a statutory claim for disturbance,
if any, was Campbell trading under the name of Claire. It is unfortunate that
as Campbell never occupied under a formal lease it was, when displaced in 1968,
merely a tenant at will who, if entitled to anything at all, was entitled to
claim for disturbance in respect of its unexpired term–see section 114 of the
Lands Clauses (Scotland) Act 1845. In these circumstances a large claim for
disturbance had simply disappeared due to the legal arrangements which Mr
Woolfson himself chose to make in 1950; nor can he now avail himself of the new
statutory remedy of a disturbance payment first introduced by the Land
Compensation (Scotland) Act 1973 in order to remedy what has been a notorious
defect in compensation law. This legislation is not retrospective.
Draft Leases
Not Executed
In conclusion,
however, it must be mentioned that Mr Woolfson was not entirely unaware of the
commercial risks involved in not ensuring that Campbell occupied the premises
at St George’s Road on a long lease. In 1964 his legal adviser became aware of
the likelihood of a compulsory purchase order and had arranged for draft leases
to be prepared for signature. In the end of the day, however, these leases were
not executed because of opposition both from Mr Woolfson and his accountant and
also because of a telephone conversation between the accountant and the local
district valuer, who has since died. We were informed by the accountant that in
the course of this conversation he had theoretically posed the question now in
issue and he claimed that the district valuer had then stated as his personal
view that formal long leases were unnecessary to found a claim for disturbance.
This somewhat curious chapter of evidence was introduced by the claimants
apparently to demonstrate Mr Woolfson’s complete command of the whole legal
situation. We are inclined to the view, however, that it rather underlines his
recognition of separate legal entities who might be made into landlords and
tenants, so confirming the situation of Campbell as tenant at will in 1968 when
in fact no formal leases existed. (It should be added that counsel for the
acquiring authority maintained that, in any event, these long leases, even if
executed, would have been ineffective when devised solely to create a
disturbance claim–see the provisions of paragraph 7 of the Second Schedule to
the Acquisition of Land (Authorisation Procedure) (Scotland) Act 1947.)
The tribunal
were reluctant to listen to evidence regarding negotiations with the present
district valuer, for such evidence undermines the confidentiality upon which
all such negotiations should be freely conducted. However, parties were agreed
among themselves to inform the tribunal that ‘in 1971 the district valuer was
then prepared to recommend, without prejudice, terms of settlement of a claim
for compensation by the claimants upon the basis that they had an interest as
both owners and occupiers of the premises at St George’s Road, Glasgow.’ This recommendation was subsequently
withdrawn following several recent Lands Tribunal decisions holding that
claimants in similar circumstances are not entitled to claim for disturbance.
These cases are: Lander Equipment Co v Glasgow Corporation (1972)
25 P & CR 460, Melias Ltd v Manchester Corporation (1972) 23
P & CR 380; 222 EG 303, and Taylor v Greater London Council
(1973) 25 P & CR 451; 226 EG 123.
In the light
of these negotiations with the district valuer and the more recent introduction
of disturbance payments (which cannot here apply) the corporation may now be
prepared to give favourable consideration to any application for a
discretionary payment under section 38 of the Land Compensation (Scotland) Act
1963.
This tribunal,
however, can only adjudicate upon a statutory claim for disturbance. For the
reasons already given we have to hold that no such claim is now open to either
claimant.
We therefore
sustain plea-in-law 4 for the acquiring authority and repel plea-in-law 2 for
the claimants.
With parties’
consent we meantime reserve all question of expenses.
