The Elusive Spirit of the Law: Formalism and the Struggle for Legal Control
formalist model of law, assuming a positivist image of how law ought to operate and a procedural rather than a substantive definition of justice. Resistance to broad catch-all substantive anti-avoidance laws and standards in financial reporting and taxation demonstrates very clearly the discourse of formalism at work. The outcome, in practice, has been compromise. In the Companies Act, the concept of 'dominant influence' has become less a matter of substance over form than of substance and form, restricted in application by specific legal criteria. Its scope has been restricted in both the Seventh Directive and the amended Companies Act 1985. Undertaking A shall not be regarded as having the right to exercise a dominant influence over undertaking B, unless there is a written control contract (authorised by the memorandum or articles and permitted by the law under which it is established) which confers a right to give directions with respect to the operating and financial policies of B, and which B's directors are obliged to comply with whether or not they are for the benefit of B.7' This definition represents a narrowing of the rule. An undertaking will not be regarded as having the right to exercise a dominant influence over another "'unless" it has a right to give directions' and 'the directions are such that the directors are obliged to comply.'72 A broader approach was taken in the definition of 'dominant influence' for the purposes of s 258(4)(a). The phrase 'actually exercises a dominant influence' was deliberately left undefined. Yet, it too was linked in closely with more specific criteria. If an undertaking A does not have a 'participating interest' in undertaking B, the issue of dominant influence does not arise.73 Although the definition in relation to 'participating interest' is very wide,74 it does dilute the substantive concepts of both 'actual dominant influence' and 'managed on a unified basis' and opens the way once again to rulebound avoidance. In both cases where dominant influence is used, therefore, the substantive concept has been narrowed down by associated rules. In professional regulation, the ASC succumbed to pressure for guidance on how a broad substantive standard should be applied, and produced application notes, to be regarded as standard practice, along with definitions of 'actual exercise of dominant influence' and 'managed on a unified basis.' Indeed, the DTI, while insisting on broad legal rules, had nonetheless assumed more detailed guidance would be added by the profession. The broad open rules were not expected to stand alone. In tax, too, there has been a narrowing of the new approach. After the Dawson decision, the Institute of Chartered Accountants of England and Wales (ICAEW) and the Revenue Law Committee met with the Inland Revenue to seek guidance on how the substantive doctrine would be applied. In a subsequent exchange of letters, the Revenue, while retaining the caveat that 'there may be individual cases where ... the Revenue would nonetheless feel obliged to follow the Ramsay and Dawson approach,' agreed particular areas where it would 'not as a rule seek to invoke' the new approach.75 The House of Lords has also retreated from the new approach in more recent cases, notably Craven v White. In short, there has already been a retreat from broad, open, flexible laws and 71 Companies Act 1985, Sched IOA, paras 4(1), 4(2). 72 L Soc ED 50, op cit p 6. 73 Companies Act 1985, s 258(4). 74 A participating interest is an interest held by an undertaking in the shares of another undertaking (including interests convertible into an interest in shares and options to acquire shares) which it holds on a long-term basis for the purpose of securing a contribution to its activities by the exercise of control or influence arising from or related to that interest. A holding of 20 per cent or more of shares is presumed to be a participating interest unless the contrary is shown. Companies Act 1985, s 260. 75 Letter from ICA, 8 July 1985; response from Inland Revenue, 20 September 1985.