KING’S BENCH DIVISION

Smith, Stone and Knight Ltd v Lord Mayor, Aldermen and Citizens of the
City of Birmingham

See All England Reports version at [1939] 4 All E.R. 116

SUBJECT: Town and country planning

SOLICITORS: Nash Field & Co, agents for Reynolds & Co, Birmingham (for the
applicants); Sharpe Pritchard & Co, agents for Sir Frank Wiltshire, Town Clerk,
Birmingham (for the respondents).

JUDGE: Atkinson J
DATES: 4, 5, 19 OCTOBER 1939

19 October 1939. The following judgment was delivered.

ATKINSON J. This is a motion by a firm of Smith, Stone & Knight Ltd, whom I
shall call the company, to set aside an interim award on somewhat unusual grounds.
The company was the owner of a factory and a number of small houses in Moland
St, Birmingham. They were paper manufacturers and carried on their business on
some premises other than those in Moland St. The corporation of Birmingham
desired to purchase under their compulsory powers this factory, land and cottages
in Moland St, in order to build a technical college, and on 16 February 1935, they
served on the company a notice to treat. On 20 February the company lodged a
claim, and described themselves as of “84, Colmore Row, Birmingham, paper
makers, waste paper merchants and dealers.” They described the property, and
under heading 7, where they had to specify the names of occupiers and various
details, they said:

‘Factory and offices let to Birmingham Waste Co., Ltd., as yearly tenants at
£90 a year.’ [*118]

Then they gave particulars of their claim, the value of the land and premises,
compensation for removal £3,000, and disturbance-the disturbance was partly the
estimated additional cost of cartage of material to and from the new factory to
which they would have to go-and ended with these words:
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 ‘The claim under paragraph (B) [the second part of the claim for removal
and disturbance] is by the Birmingham Waste Co., Ltd., which is a
subsidiary of Smith, Stone & Knight, Ltd.’

On 29 April 1937, an amended claim was put in, and under the first particular they
added to their original description:

‘and which business embodies their subsidiary company, the Birmingham

Under heading 7, they said:

‘Factory and offices nominally let to the Birmingham Waste Co., Ltd.,
which said company is a subsidiary company of Smith, Stone & Knight,
Ltd., carrying on this business for and on behalf of Smith, Stone & Knight,
Ltd., which said company owns the whole of the capital and takes the
whole of the profits of the said subsidiary company. The subsidiary
company occupies the said premises and carries on its trade as a separate
department of and as agents for Smith, Stone & Knight, Ltd. The said rent
was and is arranged as an inter-departmental charge and is merely a book-
keeping entry.’

They added to that final note, or at any rate, in its final form it read:

‘These two items of damage will accrue to Smith, Stone & Knight, Ltd.,
who are the principals of the Birmingham Waste Co., Ltd. The said loss
will fall upon Smith, Stone & Knight, Ltd.’

The parties were unable to come to terms and finally the matter was referred to
arbitration. A preliminary point was at once raised, which was whether, as a matter
of law, the company could claim compensation for disturbance of the business
which was carried on on these premises, or whether, in law, that claim must be
made by the Waste company itself. In the latter event, the corporation would escape
paying compensation altogether, by virtue of Lands Clauses Consolidation Act
1845, s 121. That section enables purchasers to get rid of occupiers with no greater
interest than a tenancy not exceeding one year, because they can give them notice
and thereby terminate their tenancy, and escape paying anything to them.

The question has been put during the hearing in various ways. Was the loss which
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was incurred by the business which was being carried on on the premises the direct
loss of the claimants, or was it, as the corporation say, a loss which they suffered
merely in their capacity of shareholders in the Waste company? Again, to whom
did the business in truth belong? Again, was the Waste company merely the agent
of the claimants for the carrying on of the business? Were the claimants in fact
carrying on the business, albeit in the name of the Waste company? All these
questions were discussed during the argument.

The facts were these, and I do not think there was any dispute about them, except,
possibly, as to one of them. Before January 1913, the com-[*119]-pany had been
carrying on their business as manufacturers. In January 1913, a business was being
carried on on these premises by the Waste company (which was then not a limited
company, but a partnership) and the business which was being carried on was that
of dealers in waste. In that month the claimants bought from the Waste company
the premises and the business as a going concern, and there is no question about it
that this business became vested in and became the property of the claimants. They
altered and enlarged the factory and carried on the business. On 13 March, the
claimants caused this new company, the Birmingham Waste Co Ltd, to be
registered. It was a company with a subscribed capital of £502, the claimants
holding 497 shares. They found all the money, and they had 497 shares registered
in their own name, the other five being registered one in the name of each of the
five directors. There were five directors of the Waste company and they were all
directors of the claimants, and they all executed a declaration of trust for the share
which they held, stating they held them in trust for the claimants. At no time did the
board get any remuneration from the Waste company. The new company purported
to carry on the Waste business in this sense, that their name was placed upon the
premises, and on the note-paper, invoices, etc. It was an apparent carrying on by
the Waste company. I think that these two facts are of the greatest importance.
There was no agreement of any kind made between the two companies, and the
business was never assigned to the Waste company. There was no suggestion that
anything was done to transfer the beneficial ownership of it to the Waste company.
A manager was appointed, doubtless by the company, 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, it is found, know 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;
the Waste company just 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
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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 this rent, which has been referred to in the first claim of £90, was a book entry,
debiting the company with that sum. There was a question as to why the company
was ever formed. The functions of buying and sorting waste are different from the
function of manufacturing paper, and, according to the evidence which is part of
the case before me, it was thought better to have these different functions
performed in a [*120] different name. The arbitrator has said in his case and in his
affidavit that the reason was that the carrying on of this business would be
something outside the powers of the company. He is obviously wrong about that,
because the memorandum is wide enough to cover such a business, and is just as
wide as that of the Waste company. It is quite clear that there was no evidence to
support what he said, and I cannot think that I am bound by a finding which is
shown to be wrong by the material which the arbitrator himself brings before the
court.

At the end of each year the accounts were made up by the company, and if the
accounts showed a profit, the claimants allocated the profit to the different mills
belonging to the company, exhausting the paper profit in that way and making the
profit part of the company’s own profit, because allocating this profit to their
different departments or different mills would have the effect of increasing their
own profit by a precisely similar sum. 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.

Those being the facts, the corporation rest their contention on Salomon’s case, and
their argument is that the Waste company was a distinct legal entity. It was in
occupation of the premises, the business was being carried on in its name and the
claimants’ only interest in law was that of holders of the shares. It is well settled
that the mere fact that a man holds all the shares in a company does not make the
business carried on by that company his business, nor does it make the company
his agents for the carrying on of the business. That proposition is just as true if the
shareholder is itself a limited company. It is also well settled that there may be such
an arrangement between the shareholders and a company as will constitute the
company the shareholders’ agent for the purpose of carrying on the business and
make the business the business of the shareholders. In Gramophone & Typewriter
Ltd v Stanley Cozens-Hardy MR, said, at pp 95, 96:

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 ‘The fact that an individual by himself or his nominees holds practically all
the shares in a company may give him the control of the company in the
sense that it may enable him by exercising his voting powers to turn out the
directors and to enforce his own views as to policy, but it does not in any
way diminish the rights or powers of the directors, or make the property or
assets of the company his, as distinct from the corporation’s. Nor does it
make any difference if he acquires not practically the whole, but absolutely
the whole, of the shares. The business of the company does not thereby
become his business. He is still entitled to receive dividends on his shares,
but no more. I do not doubt that a person in that position may cause such an
arrangement to be entered into between himself and the company as will
suffice to constitute the company his agent for the purpose of carrying on
the business, and thereupon the business will become, for all taxing
purposes, his business. Whether this consequence follows is in each case a
matter of fact. In the present case I am unable to discover anything in
addition to the holding of the shares which in any way supports this
conclusion.’

Then Fletcher Moulton LJ, said the same thing on pp 100 and 101. Then in Inland
Revenue Comrs v Sansom Lord Sterndale said, at p 503:

‘There may, as has been said by Lord Cozens-Hardy, M.R., be a position

It seems therefore to be a question of fact in each case, and those cases indicate that
the question is whether the subsidiary was carrying on the business as the
company’s business or as its own. I have looked at a number of cases-they are all
revenue cases-to see what the courts regarded as of importance for determining that
question. There is San Paulo Brazilian Ry Co v Carter, Apthorpe v Peter
Schoenhofen Brewery Co Ltd, p 41; Frank Jones Brewing Co v Apthorpe, St Louis
Breweries v Apthorpe, and I find six points which were deemed relevant for the
determination of the question: Who was really carrying on the business? In all the
cases, the question was whether the company, an English company here, could be
taxed in respect of all the profits made by some other company, a subsidiary
company, being carried on elsewhere. The first point was: Were the profits treated
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as the profits of the company?-when I say “the company” I mean the parent
company-secondly, were the person conducting the business appointed by the
parent company? Thirdly was the company the head and the brain of the trading
venture? Fourthly, did the company govern the adventure, decide what should be
done and what capital should be embarked on the venture? Fifthly, did the
company make the profits by its skill and direction? Sixthly, was the company in
effectual and constant control? Now if the judgments; in those cases are analysed, it
will be found that all those matters were deemed relevant for consideration in
determining the main question, and it seems to me that every one of those questions
must be answered in favour of the claimants. 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. 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. An analogous position would be where servants occupy cottages or
rooms for the purposes of their business, and it is well settled that if they have to
occupy those premises for the purposes of the business, their occupation is the
occupation of their principal. I have no doubt the business was the company’s
business [*122] and was being carried on under their direction, and I answer the
question in favour of the claimants.

Award set aside with costs of this motion.

Compare: Woolfson v. Strathclyde Regional Council, 1978 S.L.T. 159 (H.L.(Sc.)).