Enterprise Investment Scheme

Introduction

This Court of Appeal case examines if an informal issue of shares followed by a payment of cash represents a repayment of a debt or the direct allotment of shares in exchange for cash as required under the legislation for Enterprise Investment Scheme Relief.

In arriving at its decision, the Court of Appeal focused on the intentions of the parties involved rather than the actual form of the transaction.

The Facts

The Company was incorporated by Mr Blackburn and his wife in August 1998, with him and his wife as the directors and the owners of the two issued £1 shares. On various occasions over the next thirty months, Mr Blackburn injected nearly £1.2m into the Company. On all such occasions, a £1 share in the Company was issued to Mr Blackburn for each pound he paid to the Company. Sometimes, the Company's resolution to allot the shares occurred after he had paid either all or some of the money to the Company, and sometimes it occurred before. In all cases the allotment of shares was duly recorded in the Company's share register.

The conditions to the EIS relief state that an investor should subscribe wholly in cash for the shares and the investor cannot receive value from the company including the repayment of a debt in exchange for the investment.

Mr Blackburn applied for EIS relief in respect of his various share purchases in the Company. The Revenue refused to accept any of the claims, and Mr Blackburn appealed to the Special Commissioners.

The Issue

The Special Commissioners allowed the appeal on the occasions where the full or part payment of the investment was made following Mr Blackburn's application for the shares and the Company's resolution to allot them. The appeal was dismissed on the occasions where the payments were made in whole or in part before the application for the shares or the resolution to allot them. The Special Commissioner agreed with Revenue's argument that at the time of payment, the money on such occasions, cannot be said to have been for the shares as there was no application to, resolution by, or agreement with, the Company that shares would be allotted in return for the money. Therefore the money represented a loan from Mr Blackburn to the Company in the Special Commissioners view.

Mr Blackburn and the Company appealed to the High Court. The High Court allowed Mr Blackburn's appeal on the grounds that the advance should be characterised as a contribution to the capital of the Company and not as a loan and therefore the shares were subscribed for wholly in cash.

The Revenue in turn appealed against the High Court's decision to the Court of Appeal.

The Court of Appeal examined each payment in dispute to establish if an implied agreement or enforceable understanding existed between Mr Blackburn and the Company such that the funds contributed were in exchange for shares.

The Decision

The Court found that the last two payments made before the last two allotments of shares were part of a “consistent previous course of dealing” between Mr Blackburn and the Company. Further, it was clear from the correspondence with his accountant during that period that Mr Blackburn appreciated that it was necessary for his tax requirements that the Company should allot an equivalent number of shares to him in respect of any payments of cash. The evidence in the Court of Appeal view therefore demonstrated that the money represented payments into the capital account of the Company, and crucially, that it was also made conditional on shares being allotted.

However, the very first payment made by Mr Blackburn failed this test of implied agreement in the absence of evidence to show that he made the payment conditional on the allotment of shares.

The judgment is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1454.html.