Sempra Metals Ltd. V. Commissioners Of Inland Revenue Notes

Sempra Metal Ltd. v. Commissioners of Inland Revenue

Facts

This case is about companies which, because they had to pay part of their mainstream corporation tax prematurely, suffered a timing disadvantage which conferred a corresponding timing advantage on the Revenue. We now know that the absence of the power to make group income elections in the case of these companies which resulted in the premature payment of corporation tax was contrary to article 52 of the EC Treaty (now article 43) which guarantees freedom of establishment: Metallgesellschaft Ltd v Inland Revenue Commissioners [2001] Ch 620. Community law requires that the companies must be provided with a remedy in domestic law which will enable them to recover a sum equal to the interest which would have been generated by the advance payments from the date of the payment of the ACT until the date on which the MCT became chargeable.

In the concluding sentence of para 96 the Court recalled that, in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, “including ancillary questions such as the payment of interest”.

Issue

Is award for restitution of the value of money that is measured by compound interest?

Holding

Lord Hope

Common law Right; not equitable

In Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 372G-373B Lord Goff of Chieveley referred to the development of a coherent law of restitution, a doctrine first recognised by this House in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, 577-578. He said there was a general right of recovery of money paid under a mistake and that it was founded upon the principle of unjust enrichment… At p 379H he said that, subject to any applicable defences, the payer was "entitled" to recover the money paid under a mistake. Throughout his speech he was addressing a common law remedy, not one that was available in equity. I think that it can now be taken as settled that, under the Kleinwort Benson principle, a cause of action at common law is available for money paid under a mistake of law: Deutsche Morgan Grenfell Group plc v IRC[2007] 1 AC 558, para 62. I also think that the time has come to recognise that the court has jurisdiction at common law to award compound interest where the claimant seeks a restitutionary remedy for the time value of money paid under a mistake.

Recognition that the court has jurisdiction to award compound interest at common law is a short, but logical, step in the further development of the restitutionary remedy. It follows from the fact that the right to recover money paid under a mistake is available at common law. To treat the choice of remedy in unjust enrichment as discretionary would, in my opinion, be inconsistent with the common law right that gives rise to it.

Not necessary to have identity of gain and loss

The question then is whether the claimant in unjust enrichment must nevertheless have suffered a loss corresponding to the defendant's enrichment. InUnjust Enrichment2nd ed, pp 167-168, Professor Birks said that there was no need for this to be the measure of the enrichment:

"By insisting, artificially but firmly, on an enlargement of the everyday sense of 'restitution' we avoid being accidentally trapped by the choice of a word into believing that the answer must be yes. If 'restitution' meant 'giving back', no other answer would be possible. The larger meaning leaves the matter open. An alternative strategy to the same effect would be to switch from 'restitution' to 'disgorgement', which has no restrictive overtone."

I would apply the reasoning in these passages to the claim for interest in this case. A remedy in unjust enrichment is not claim of damages. Nor is it a contractual remedy, so there is no need to search for an express or an implied term as the basis for recovery.

The essence of the claim is that the Revenue was unjustly enriched because Sempra paid the tax when it did in the mistaken belief that it was obliged to do so when in fact it was being levied prematurely. So the Revenue must give back to Sempra the whole of the benefit of the enrichment which it obtained. The process is one of subtraction, not compensation.

Disgorgement Distinguished from Restitution

But Professor Birk's use of the word "disgorgement" is controversial, and it is misleading when applied to the facts of this case. Steven Elliott makes this point when he says, in the context of the equitable jurisdiction, that disgorgement interest is calculated to strip profits the fiduciary has made through the use of trust property: "Rethinking Interest on Withheld and Misapplied Trust Money" [2001] 65 Conv 313, 316. Mr Rabinowitz QC said that Sempra was seeking restitution, not disgorgement. Disgorgement would be appropriate if the claimant was seeking to recover the actual profits that the defendant had made as a result of the enrichment. But Sempra does not ask for an account of profits, nor does it invite the court to look at the use, if any, to which the money was actually put by the Revenue. Furthermore it is accepted that the claim is personal, not a proprietary one. But, as in cases of property other than money where the claim includes restitution for the value of the use of the asset that was transferred, subtraction of the enrichment from the defendant includes more than the return of the money that was transferred at its nominal or face value. That value, in this case, has already been accounted for. The subject matter of Sempra's claim is the time value of the enrichment. This is the amount that has to be assessed.

Compound Interest: Commercial Realities

But money has a value, and in my opinion the measure of the right to subtraction of the enrichment that resulted from its receipt does not depend on proof by Sempra of what the Revenue actually did with it. It was the opportunity to turn the money to account during the period of the enrichment...

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