A former director of Gladebrook, the company which sold its 49 per cent holding in Sugar Distributors (Holdings) for £8.6 million (€10.9 million) to Siuicre Eireann 10 years ago, does not have to pay capital gains tax on the £1.86 million he received from the sale of his Gladebrook shares, the High Court decided yesterday.

Mr Justice McCracken upheld the decision of the Appeal Commissioners, who found in favour of former Gladebrook director, Mr Thomas Keleghan, of Kincora Grove, Clontarf, Dublin.

An inspector of taxes had not accepted the Appeal Commissioners' findings.

Mr Keleghan was one of five shareholders in Gladebrook. He, along with Mr Charles M. Lyons of Woodside, Oak Park, Carlow, and Mr Charles P. Garavan, Curragrean, Oranmore, Co Galway, each held 2,151 shares.

The other shareholders were Mr Michael Tully of Cluain Mhuire, Oak Park, Carlow, with 1,122 shares and a Jersey Island company, Talmino, with 2,425 shares.

An earlier court hearing was told Talmino was owned by the former managing director of Siuicre Eireann, Mr Christopher Comerford.

The £8.6 million for the Gladebrook shares was issued in the form of "loan notes" by Siuicre Eireann to the Gladebrook directors.

Mr Keleghan redeemed his "loan note" for £1,867,068 and claimed it was not subject to capital gains tax. He signed a "service agreement" with Siuicre Eireann in 1990 but never became an employee of that company. He remained as sales director of Sugar Distributors (which had been owned by Sugar Distributors (Holdings) Ltd) until his retirement in 1991.

The Revenue authorities claimed the exchange of Mr Keleghan's shares in Gladebrook for a loan note had been a "paper for paper" transaction. No cash was involved but under the Capital Gains Tax Act 1975 tax had been deferred until the paper was later disposed of for cash.

The Revenue also argued that £250,000 of the share sale to Mr Keleghan was liable for income tax. A "side letter" from Siuicre Eireann clearly stated the £250,000 was to be regarded as an inducement for entering into the service contract.

Yesterday, Mr Justice McCracken held that on the facts before the court the loan note could not be considered to be a debt on a security within the meaning of the 1975 Act (Section 46) and therefore no chargeable gain accrued.

He held that the decisions of the Appeals Commissioners regarding the income tax and CGT issues were correct.

As for CGT issues on the loan note, Mr Justice McCracken said the loan note was not marketable. The conditions of issue provide that neither the note nor any part of it shall be transferable or assignable.

Accordingly if marketability was an essential element of a debt on a security, then this loan note could not come within the definition and it was a simple promise to repay a debt, which could not constitute a chargeable gain.