[2009] UKFTT 236 (TC)

TC00185
BAD DEBT RELIEF – due date for payment – was there a legally binding variation of a supply agreement? – no – was claim made within time? – no – appeal dismissed.

FIRST-TIER TRIBUNAL (TAX CHAMBER)

 
 	
					RESTEEL TRADING LTD	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Judge)

Sitting in public in Manchester on 21 July 2009

Nigel Gibbon, counsel, for the Appellant

Jonathan Cannan, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2009
DECISION

1.	The Appellant company appeals against a decision of the Commissioners to refuse a claim for bad debt relief in the sum of £44,355.23.
2.	The claim for bad debt relief was made on 12 March 2007 and the invoices making up the claim were dated 31 January 2003 and 6 march 2003 respectively.  The issue before the tribunal is to determine, in the light of the circumstances surrounding the invoices, the date when payment became due, thus enabling it to be determined whether the claim was made within the requisite time limit.  The tribunal heard oral evidence from Mr. Michael Moyles, managing director of the Appellant.  The Commissioners called no oral evidence.
The legislation
3.	Regulation 165A of the Value Added Tax Regulations 1995 states:
“(1) Subject to paragraph (3) below a claim shall be made within the period of 3 years and 6 months following the later of – 
(a)	the due date on which the consideration (or part) which has been written off as a bad debt becomes due and payable to or to the order of the person who made the relevant supply; and
(b)	the date of the supply
(2) A person who is entitled to a refund by virtue of section 36 of the Act, but has not made a claim within the period specified in paragraph (1) shall be regarded for the purposes of this Part as having ceased to be entitled to a refund accordingly.
(3) This regulation does not apply insofar as the date mentioned in sub-paragraph (a) or (b) of paragraph (1) above, which ever is the later, falls before 1st May 1997.”
The evidence
4.	Resteel Trading Ltd (“the Appellant”) and Sanchez (UK) Ltd (“Sanchez”) were both owned in equal shareholdings by a South African company, Murray & Roberts International Ltd (“M&R”) and Alfadl of the United Arab Emirates.  The two companies shared a common management and Mr. Moyles was managing director of both.  Sanchez was a manufacturing company making wire mesh for concrete reinforcement and the Appellant was set up in early 2002 with the express intention of supplying Sanchez with its steel requirements.  The two shareholders invested £500,000 in the Appellant, enabling it to purchase Sanchez’s entire stockholding.  The investment also enabled the most competitive supplies to be accessed for the benefit of Sanchez, something which Sanchez on its own had not been able to do.  The stock acquired by the Appellant from Sanchez remained on Sanchez’s premises but title to it had passed from Sanchez to the Appellant and it was clearly marked as belonging to the Appellant.
5.	The two companies, the Appellant and Sanchez, entered into a Supply Agreement on 9 April 2002.  The Agreement recited that the Appellant had been created to primarily act as a supply line for Sanchez in its raw material requirements and that the agreement would give Sanchez time to stabilise its profitability and cash flow.  The Agreement went on to provide for the purchase by the Appellant of Sanchez’s stock at a stipulated price, the stock to be retained in a virtual warehouse on Sanchez’s premises.  Sanchez would source its entire steel requirements from the Appellant who would exclusively supply Sanchez.  Clause 6 of the Agreement provided for payment in the following terms:
	“6. PAYMENT AND CREDIT TERMS
All supplies by Resteel to Sanchez will be on a 60 (SIXTY) day nett payment basis.  Resteel will close off its books on the last day of each month reflecting all purchases made during the course of that month.  Sanchez shall be obliged to pay its account with Resteel 60 (SIXTY) days after the date of the account rendered.”
Clause 8 provided that security for payment by Sanchez to the Appellant of all amounts due would be by way of cession by Sanchez of its raw materials, work in progress and finished goods.  Clause 12 provided that this Supply Agreement constituted the entire agreement between the parties and that no modification, amendment or consensual cancellation of the agreement should be made except in writing and signed by both parties.
6.	On 10 April 2002, Sanchez executed a Security Agreement restating that all raw materials and finished goods incorporating such raw materials would remain the property of the Appellant until paid for and providing that if any sums due from Sanchez to the Appellant should not be paid within 60 days after an account had been rendered in accordance with clause 6 of the Supply Agreement, the Appellant could at any time enter upon Sanchez’s premises and remove so much of the raw materials and finished goods remaining their property to the value of the unpaid account.
7.	In practice, the Agreement worked in this way.  Sanchez pursued its core manufacturing activity, drawing on such supplies of the Appellant’s steel stock as was required, this steel being incorporated into Sanchez’s production process.  At the end of each month, the amount of stock used would be calculated and an invoice prepared and rendered for the exact amount.  The two invoices which are the subject of this appeal - numbered S13, dated 31 January 2003 and S14, dated 6 March 2003 – are for the stock extracted in January and February respectively.  S13 was in an invoice total of £205,732.98 including a VAT element of £30,641.08.  S14 was in an invoice total of £282,587.50 with a VAT element of £42,087.50.  Neither invoice was ever paid.  The amounts of the invoices were included in the ledgers of both companies as an outstanding debt from Sanchez to the Appellant.  Sanchez eventually went into administration on 13 February 2004
8.	Mr. Moyles told the tribunal that despite all that had been done to assist Sanchez, it was clear by the end of 2002 that Sanchez was already experiencing profitability and cash flow problems.  In December 2002 a meeting took place in London at which Mr. Moyles represented Alfadl and Mr. Joe Kenny represented M&R.  As representatives of the two shareholders, they agreed at the meeting in principle that something had to be done to assist Sanchez.  In Mr. Moyles’s words a “fundamental” agreement was reached that Sanchez would be offered support to the limit of the £500,000 but at that stage there were no discussions as to how this would be achieved.  Between March and June 2003, several meetings took place between Mr. Moyles and Mr. Kenny where the details were discussed and a plan drawn up.  Sanchez’s position was precarious and it was the wish of both shareholders that the company should be supported.  If either shareholder had pushed for payment of these two invoices, Sanchez would have become insolvent.  It was thus agreed that payment of the invoices would be “deferred” thereby giving Sanchez a financial lifeline to continue to trade and to source steel supplies from someone other than the Appellant.  There were no discussions as to the duration of the deferral and no agreed deferral term.  Mr. Moyles said that he had initially hoped that it would only be for a month of two but it rapidly became apparent that this was not realistic and in effect the deferral became open-ended.  Mr. Moyles could not remember precisely when, between March and June, the agreement was reached but being aware of the importance of documenting key decisions, he recorded the deferral agreement in an email to Mr. Kenny dated 30 June 2003 in the following terms.
	“Ongoing Deferred Payment Terms for Sanchez (UK)
As a result of our discussions, ongoing deferred payment terms have been granted Sanchez (UK) Ltd to assist them to trade out of their loss-making predicament.  The invoices in question relate to S13 and S14 totalling £488,320.48.
No further supplies will be made until Sanchez reduce their indebtedness to Resteel.”
This was not, stressed Mr. Moyles, the date of the agreement but was merely committing to writing something already previously agreed.
9.	For the purposes of this appeal, a further email was sent from Mr. Kenny to Mr. Moyles dated 19 May 2008 in the following terms:
“Notwithstanding that there was subsequently a dispute between the respective shareholders regarding the duration of the deferral period in respect of the payment of Invoice Nos. S13 and S14 by Sanchez (UK) Ltd to Resteel Trading, we confirm that the deferral of payment was mutually agreed in respect of the said invoices to afford Sanchez (UK) Ltd an opportunity to trade out of its loss-making predicament and the consequent precarious cash flow problems it was experiencing at the time.”
The dispute referred to in the second email arose, the tribunal was told, after 30 June 2003 and arose out of a difference of opinion between the shareholders as to the length of the deferral.  M&R wished to put a finite time on it but Mr. Moyles wished it to remain open-ended for as long as it took for Sanchez to trade out of trouble.  
10.	In cross-examination, Mr. Moyles accepted that in light of clause 12 of the Supply Agreement, the agreement reached between himself and Mr. Kenny should have been incorporated in a signed document but, he said, as is often the case in small companies with mutual shareholders, many verbal decisions are taken which are never committed to writing.  Mr Moyles agreed with Mr. Cannan that throughout, the Appellant would have had the right to force payment but the company was in effect “letting things lie”.  Mr. Moyles also accepted that the Appellant could, at any time, have relied on the retention of title clause and could at least have recovered unused raw materials but, stressed Mr. Moyles, this would never have been in anyone’s interests.  The Appellant proved in the liquidation of Sanchez and was the recipient of two interim and one final dividend.  It was Mr. Moyles’s contention that he was unable to put in a claim for bad debt relief until the dividend was paid as only then could he calculate the amount of the debt.
Submissions
11.	It was Mr. Gibbon’s contention that there had been a legally-binding variation of the Supply Agreement negotiated by Mr. Moyles and Mr. Kenny and evidenced by the memo of 30 June 2003.  The variation had been to allow an indeterminate deferral of payment.  Payment, submitted Mr. Gibbon, only became due when the debt crystallised when Sanchez went into liquidation.  Had payment been due under the terms of the Supply Agreement, it would have meant that Sanchez would have been trading while insolvent, something Mr. Moyles would not have contemplated.  Mr. Gibbon accepted that there had been a later dispute between the shareholders but contended that this was irrelevant to the original agreement to vary, which had always centred around an open-ended deferral.  Accepting the clause 12 formalities had not been complied with, it was Mr. Gibbon’s contention that there had still been a legally-binding variation as the parties had by their conduct de facto varied the agreement.  Either party could have pleaded that the payment terms had been breached but neither did.  The Appellant did not enforce its security which it could have done had payment been due.  Other formalities had not been complied with but such formalities were often over-ridden when companies are in common ownership and management, such as the Appellant and Sanchez.  The effect of the variation, contended Mr. Gibbon, was that payment became due on an unspecified date subsequent to the 60 day period but that that unspecified date crystallised on the date that Sanchez went into administration.  That was the date when the debt became due, the date of crystallisation.
12.	It was the Commissioners’ contention that there had been no legally-binding variation to the Supply Agreement, under clause 6 of which the due date for payment of the invoices fell 60 days from their respective dates.  What happened thereafter was that the Appellant granted Sanchez indulgence.  It gave Sanchez time to pay for an unspecified and totally uncertain period.  Mr. Cannan highlighted the lack of necessary formalities which there would and should have been had there been a contractual variation.  The Appellant would have had to have given Sanchez notice on its administration that the deferral period had ended and that payment had become due.  Clause 12 had not been complied with.
13.	If the tribunal were to find that there had been a variation, the question of the timing of that variation would have arisen and both counsel made further submissions on this question.  In view of the findings of the tribunal, this does not arise and I have therefore not set out the further submissions.
Conclusions
14.	I should say at the outset that I found Mr. Moyles to be an impressive and straightforward witness.  He gave his evidence in a measured and thoughtful way and when Mr. Moyles described the events that took place I totally accept that that description was honest and accurate.  When I find against the Appellant, this is not because I disbelieve what Mr. Moyles said but because I interpret the events differently.
15.	The question for the tribunal is to determine the date on which payment of these two invoices became due and payable.  Clause 6 of the Supply Agreement is perfectly clear.  If there was no variation of the agreement, payment was due 60 days thereafter.  Clause 12 of the Agreement is equally clear.  That Agreement constituted the entire agreement between the parties and there could be no amendment to it other than in writing and signed by the parties.  There was no such deed or document.
16.	I accept that discussions took place between Mr. Moyles and Mr. Kenny as to how Sanchez’s trading position could be rescued and safeguarded.  I also accept that from these discussions, an agreement was reached that payment would be “deferred”.  This agreement can be interpreted in two ways.  Mr. Gibbon interprets it as a legally-binding variation of the Supply Agreement.  Alternatively, it could have been merely an indulgence on the part of the Appellant, granting Sanchez further time to make payment.  I believe that it is the latter which is the proper interpretation.  There is the absence of any compliance with clause 12, which I have referred to above, but this was also the tenor of Mr. Moyles’s evidence.  Mr. Moyles himself referred to the fact that the Appellant would not “push for payment”.  He accepted Mr. Cannan’s suggestion that the Appellant was “happy to let things lie”; most importantly he also accepted that the Appellant could at any time have relied on its retention of title clause and could have recovered raw materials to which it still held title.  This implies that certainly within Mr. Moyles’s mind, those remedies were still open to the Appellant despite the open-ended deferral.  Such remedies would not have been available had payment not become due.
17.	The lack of any degree of certainty is also not consistent with a legally-binding variation.  Mr Moyles and Mr. Kenny did not initially discuss how long the extension would be for.  Mr. Moyles tells us that he hoped it would only be for a month or two but it later became open-ended.  I would have expected any binding contractual variation to be certain in its term.
18.	I do not pass any comment on Mr. Gibbon’s contention that Mr. Moyles would not have allowed the Appellant to trade whilst insolvent.  That may be so but the issue was not raised by Mr. Moyles during the course of his evidence.  I do not know whether he ever gave any thought to the question.
19.	For all these reasons I find that what was agreed between Mr. Moyles and Mr. Kenny was that the Appellant would not push for payment or enforce the payment which had legally become due to the company under the terms of the Supply Agreement.  There was in my view no binding variation of the agreement.  Payment of each of the invoices fell due, under clause 6 of the Agreement, 60 days after the invoice date and it must follow from this that the claim for bad debt relief was made out of time.
20.	The appeal is therefore dismissed.  The Commissioners made no application for costs and I therefore make no order.
MAN/2008/0673

LADY MITTING
JUDGE
Release Date: 9 September 2009