Knitware v HM Inspector of Taxes [2003] UKSC SPC00367 (09 June 2003)

INCOME TAX  - transfer of business assets from partnership to limited company - stock, plant and machinery transferred at agreed values - whether balancing adjustment should be made in partnership accounts in respect of plant and machinery - whether partnership entitled to deduction for bad debts in respect of value of stock - whether partnership was paid by the company for the assets - yes - appeal dismissed - ICTA 1988 S 74(1)(j); CAA 1990 S 26(1)(a)

THE SPECIAL COMMISSIONERS

B N PARMAR, H B PARMAR, K B PARMAR AND Y B PARMAR
trading as
ACE KNITWEAR
Appellants

 - and -   	

KATE WOODS
(HM INSPECTOR OF TAXES)
Respondent

Special Commissioner : DR A N BRICE

Sitting in London on 26 and 28 March 2003 

Mr Vijay Saujani, of Messrs John Whitehouse & Co Chartered Accountants, for the Appellants

David Rees of Counsel, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2003

SECOND DECISION 

Background

1.	Mr B N Parmar, Mrs H B Parmar, Mr K B Parmar and Mr Y B Parmar, who traded in partnership as Ace Knitwear (the partnership), appealed against assessments for 1992-93, 1993-94 and 1994-95. 

2.	The appeal was first heard by the Special Commissioners on 14 August 2001 and the First Decision was released on 17 October 2001. It is reported at [2001] STC (SCD) 238. There were four issues in the appeal. The third issue concerned the partnership's income tax liability for 1994-95. On 31 December 1994 some business assets were transferred by the partnership to Ace Knitwear Limited (the company) and the partnership ceased to trade. The issue was whether, when the assets were transferred to the company, the partnership was entitled to a capital allowance adjustment in respect of the transfer of plant and machinery (under section 26 of the Capital Allowances Act 1990) and a deduction from profits for bad debts in respect of the transfer of stock (under the provisions of section 74(1)(j) of the Income and Corporation Taxes Act 1988). 

3.	At paragraphs 41 and 42 the First Decision summarised the arguments of the parties on the third issue and at paragraph 43 stated:

	"My difficulty in dealing with these arguments is that there was no evidence before me as to the arrangements made by the Appellants on the one hand and the company on the other about the transfer of the assets of the business on the discontinuance of the Appellants' trade. In particular, there was no evidence of a sale."

4.	The First Decision concluded that there was a disposal value for the purposes of capital allowances and that the bad debt provisions did not apply. As the First Decision also found against the Appellants on the other three issues, the appeal was dismissed.  

5.	The Appellants appealed to the High Court and the judgment of Lightman J was given on 30 May 2002 and is reported at [2002] STC 846. Three issues were raised in that appeal, two of which were dismissed. The third issue was whether it had been open to the Special Commissioner to hold that there was no evidence of a sale because the existence of that sale was a fact agreed, prior to the hearing, between the Inland Revenue and the Appellants. Lightman J held that the Special Commissioner had not been entitled to reach the conclusion that there had been no evidence of a sale, in contradiction of the agreed fact, unless notice had been given before or at the hearing of the intention so to find and an opportunity afforded to the parties to adduce evidence and present arguments. The third issue was then remitted by Lightman J to the Special Commissioners for re-determination. 

6	A preliminary hearing was held on 10 October 2002 in order to give directions about the re-determination of the third issue. Directions were then given that the re-hearing of the third issue should proceed by way of a complete re-hearing of both evidence and argument and that fresh evidence could be adduced at the resumed hearing. Directions were also given about the exchange before the resumed hearing of all evidence (documents and witness statements) and outline arguments. 

The issue for re-determination

7.	At the preliminary hearing the issue for re-determination was re-defined as:

	"Whether, when the Appellants sold their business to Ace Knitwear Limited, the price for the plant and machinery and the stock was paid; the Appellants argue that it was not and the Respondent argues that it was; the Respondent agrees that if the price was not paid then the price of the stock is deductible as a bad debt under section 74(1)(j) of the Income and Corporation Taxes Act 1988 and that the price of the plant and machinery will be allowed by concession under section 26(1)(a) of the Capital Allowances Act 1990."

8.	It was agreed that the company did not make a direct payment to the partnership for the transferred assets. The arguments of the parties raised three questions, namely:

(1)	was payment made because the value of the assets was placed to the credit of the directors' account with the company?; or

(2)	was payment made because the partners received personal payments from the company and the company discharged some of the liabilities of the partnership?; and

(3)	generally, do the facts point to the conclusion that, after the transfer, the partners did not see themselves as creditors of the company in respect of the transfer of the assets? 

The evidence

9.	At the resumed hearing oral evidence was given on behalf of the Appellants by Mr B N Parmar, Mrs Parmar and Mr K B Parmar. Oral evidence on behalf of the Appellants was also given by Mr Vijay Saujani (who represented the Appellants at the hearing). Mr Saujani exhibited two bundles of documents, one attached to his witness statement and the other consisting of copies of the bank statements of Ace Knitwear Limited. Oral evidence was given on behalf of the Respondent by Mr Geoffrey Marriott, an Inspector of Taxes who has been involved with the tax affairs of the partnership and the company since 2 December 1996. Mr Marriott exhibited a bundle of documents with his witness statement. In accordance with the directions given at the preliminary hearing the evidence in chief of all the witnesses was contained in written statements which had been exchanged prior to the hearing. 

The facts

10.	From the evidence before me I find the following facts.  

The partnership

11.	Mr B N Parmar and Mrs Parmar are the parents of Mr K B Parmar and Mr Y B Parmar. Mr Saujani has known the family for twenty years. He knows Mr B N Parmar and Mrs Parmar personally and is their financial adviser.   

12.	 In about 1978 Mrs Parmar and Mr Y B Parmar established a knitwear business and traded in partnership. Mrs Parmar was a machinist and made the garments. She did not take any part in the financial arrangements of the business. In about 1983 Mr B N Parmar and Mr K B Parmar joined the partnership. Thereafter the four Appellants traded in partnership and designed and made fashion knitwear. Each was entitled to 25% of the profits. Neither Mr B N Parmar nor Mrs Parmar took any interest in the financial arrangements, which were looked after by Mr K B Parmar. (Mr Y B Parmar concentrated on the production and staff side of the business.) There was a book-keeper who prepared the value added tax returns but Mr K B Parmar did most of the financial work. Mr Saujani prepared the annual accounts from information given to him by Mr K B Parmar and the book-keeper. 

13.	Towards the end of 1994 Mr B N Parmar and Mrs Parmar decided to retire from the business. The two sons wished to continue through the medium of the company. Neither Mr B N Parmar nor Mrs Parmar was involved with the decision about the transfer of the partnership assets to the company. Mr B N Parmar was ill at the time and Mrs Parmar just wanted to wash her hands of the business. The partnership ceased trading on 31 December 1994 and the company commenced trading on 1 January 1995.

The partnership balance sheet as at 31 December 1994

14.	A draft profit and loss account and a draft balance sheet for the partnership, for the year ending on 31 December 1994, were sent to the Inland Revenue on 26 September 1995 by Messrs John Whitehouse & Co, Mr Saujani's firm. The covering letter stated that the accounts were in draft as the firm was trying to obtain the plant and machinery valuations for the disposal to the company. The draft balance sheet showed:

FIXED ASSETS
Freehold site								£281,348
Fixtures and fittings							    11,969
Plant and Machinery							£175,948
Motor vehicles								£    8,040
									------------
									£477,305
CURRENT ASSETS
Stock at cost				£  23,224
Trade debtors and prepayments	£251,672
Cash in hand and at the bank		£115,505
							£390,201

CURRENT LIABILITIES		
Trade creditors				£318,295
Bank overdraft				£  17,423
Hire purchase creditors		£   71,271
Bank property loan			£ 131,288
							£538,277	(148,076)
									------------
									£329,229

15.	No closing capital accounts were produced for the partnership and it does not appear that there was any document which showed the division of the partnership assets when the partnership ceased trading. Final accounts for the partnership were dated 18 October 2001 (after the release of the First Decision of the Special Commissioners). 
								 
The company 

16.	The company commenced trading on 1 January 1995. It had already been incorporated on 16 November 1987. Its issued share capital was £2. The shares were owned by Mr K B Parmar and Mr Y B Parmar. At least from 1 January 1995 the directors of the company were Mr B N Parmar, Mr K B Parmar and Mr Y B Parmar. Mr B N Parmar did not hold any shares. The company secretary was Mr Y B Parmar. 

17.	The stock, motor vehicles, plant and machinery and fixtures and fittings were transferred by the partnership to the company at the balance sheet values. (Some of the plant and machinery consisted of knitting machines. Later it was discovered that two of the machines did not belong to the partnership and so the amount of £175,948 was  reduced by £32,698 to £143,250). 

18.	No formal invoices were issued by the partnership, and no direct payment was made by the company to the partnership, for the assets transferred. A directors' account with the company was opened and that account was credited with the amounts of the transferred assets. A copy of the directors' account with the company was prepared by Mr Saujani in December 1998 and read:

	Opening balance
			Stock t/over					£  23,224
			Assets t/over
				M/v [motor vehicles]			£    8,040
				P/m [plant and machinery]		£175,948
				F/F [fixtures and fittings]		£  11,969

19.	Thus, the value of the assets transferred to the company in total was £219,181. When the value of the plant and machinery was reduced by £32,698 the total value transferred became £186,483.   

Assets not taken over by the company

20.	The company did not take over all the assets of the partnership. For example, it did not take over the trading premises, which were owned by the partners, and it did not take over the credit balance in the business premium bank account. 

21.	The draft partnership balance sheet as at 31 December 1994 showed the trading premises as an asset of the partnership valued at £281,348 but subject to a bank loan of £131,288. The premises were not transferred to the company. The company was given a ten year lease of the trading premises at a rent of £25,000 per annum. No rent was shown as paid by the company in its audited accounts for the year ending on 31 December 1995 but a payment of £25,000 was shown as paid by the company in the draft accounts for each of the years ending on 31 December 1996 and 1997. Part of the premises were let to an unconnected third party who paid rent to the partners. The partners also owned other properties which were let and in respect of which the partners received rents. 

22.	The partnership had at least two bank accounts, one of which was a current account 30561266 and one a business premium account 70781436. At the end of 1994 the former had a nil balance (after a transfer to the business premium account) and the latter had a balance of £114,696.89 (which was almost the same amount as the cash in hand and at the bank of £115,505 as shown on the draft partnership closing balance sheet). The company did not immediately open a bank account and the current bank account of the partnership was used by the company. The balance on the business premium account was not transferred to the partnership. Payments out of the current account were made by the company from 1 January onwards but these were balanced by transfers from the business premium account until 13 January 1995 when three credits (two of which were not identified) totalling £63,121 were placed in the current account. After 1 January 1995 receipts which were owed to the partnership were paid into the current account (which was being operated by the company), as well as receipts owed to the company, and debts owed by the partnership and the expenses of the company (including wages of about £15,500 per month) were paid out of the current account.  On 13 March 1995 a bank account for the company was opened with a receipt of £24,424.77 transferred from the current account. On 15 March there were two transfers from the new company account to the current account amounting to £15,000.13. Before that transfer the current account was overdrawn by the same amount; after that transfer, the current account was brought into balance and it was then closed.  Thus the company did not take over the bank overdraft as shown on the partnership's draft balance sheet but neither did it take over the cash in hand and at the bank as that amount was in the business premium account which did not pass to the company.

23. 	Mr Saujani quantified the amounts advanced by the partnership to the company (being receipts due to the partnership which had been paid into the bank account after 1 January 1995 together with the company expenses paid out of that account) at £72,396. However, in considering this amount it is also necessary to take into account that the company paid the trade creditors of the partnership after the transfer; the company paid the hire purchase debts of the partnership; and the company also made personal payments to or for the partners.

Liabilities taken over by the company

24.	After the transfer no payment was made by the partnership to any of its trade creditors. These were paid by the company who also took over the trade debtors. Taking the figures for trade creditors (£318,295) and trade debtors (£251,672) from the draft balance sheet of the partnership as at 31 December 1994 there was a balance of trade creditors of £66,623. 

25.	After the transfer the hire purchase liabilities of the partnership were met by the company. Before the transfer the partnership had paid seven standing orders to hire purchase companies in respect of knitting machines supplied to the partnership. The partnership balance sheet as at 31 December 1994 showed that the amount then owed to hire purchase companies was £71,271. Immediately after the transfer the hire purchase payments were made out of the current account and after 15 March 1995 the payments were made out of the company bank account. As at 31 December 1995 the audited accounts of the company showed that £3,800 remained owing to hire purchase creditors. This indicates that the company had paid £67,471 to the hire purchase creditors and that it had undertaken the whole of the outstanding liability.  

Personal payments made by the company, and received by the company, for the partners

26.	After the transfer the company made a number of payments to or for the personal benefit of the partners. Mr Marriott had prepared an analysis of the payments out of the company bank account, for or on behalf of the directors and Mrs Parmar, for the year ending on 31 December 1995. His analysis totalled £246,144.48. It included the two payments amounting to £15,0001.13 made on 14 and 15 March by the company to close the partnership current account. It was agreed at the hearing that these payments should be deducted. That leaves a total of £231,143.35.  

27.	In December 1998 Mr Saujani prepared a schedule of personal payments made by the company on behalf of the directors in the year ending 31 December 1995. His total was  £211,428.79. The schedule included the following amounts as well as others:

YB, KB, HB, B N Parmar					£15,709.70
B N Parmar 							£57,640.34
Yorkshire Limited shares (10 x £1,584)			£15,840.00
Ace Knitwear Partnership					£15,001.13
Personal Tax and NI						£10,282.77

28.	The shares were purchased for each of the four Appellants and the wife of one of the sons. The payment of £15,001.13 to Ace Knitwear Partnership was the balancing amount needed to close the partnership current bank account. There were also payments for school fees for the children of Mr K B Parmar. At the hearing Mr Saujani produced another schedule of personal payments to or for the directors which totalled £96,469.06 This omitted all the above payments except for the tax and national insurance contributions. I found Mr Saujani's explanations of the changes to be unconvincing (other than for the figure of £15,001.13) and so prefer his first schedule with the deduction of  £15,001.13.  

29.	Mr Saujani had also prepared a schedule of personal payments received by the company but which should have been paid to the directors. This totalled £128,458.62. Some of these payments were rents received from properties owned by the directors; some were loans from the directors to the company; and some were dividends payable to the partners.

30.	On the basis of Mr Saujani's 1998 schedules, and deducting the £15,001,13, it follows that the net amount of £67,969.04 was paid by the company for the personal benefit of the partners in 1995.  

31.	In addition, the company also paid some of the tax liabilities of the partners amounting to £38,031.91. Not all of these were mentioned in Mr Saujani's schedule. These liabilities included £23,517.77 in respect of the income tax liabilities of the partnership for 1994-95, about half that sum being paid in February 1995 and half in August 1995. They also included some capital gains tax liabilities of Mr K B Parmar and Mr Y B Parmar, and property tax assessments on Mr B Parmar. Thus payments of tax for the partners, after deducting the amount of  £10,282.77 allowed by Mr Saujani in his schedule, was £27,749.14. If this amount is added to Mr Saujani's schedule of personal payments made of £196,427.66, the result is £224,176.80 which is almost the same as Mr Marriott's schedule (£231,143.35). This is another reason for preferring the version of Mr Saujani's schedule prepared in December 1998.  

Movements on the directors' account

32.	The personal payments made by the company for the partners, and the receipts by the company of personal money belonging to the directors, should be reflected in the directors' account with the company. The audited accounts for the company for the year ending on 31 December 1995 were sent on 29 November 1996 by Messrs John Whitehouse & Co to the Inland Revenue. These had been signed by Messrs John Whitehouse & Co as auditors and by a director on 26 June 1996. The Notes to the accounts indicated that the amount on the directors' current account was £208,608 and that hire purchase creditors were £3,800. Mr Saujani sent a statement on 1 December 1998 which analysed the amount in the directors' account as:

		Opening balance
			Stock t/over					£  23,224
			Assets t/over
				M/v [motor vehicles]			£    8,040
				P/m [plant and machinery]		£175,948
				F/F [fixtures and fittings]		£  11,969
				Other assets debtors and receipts	£  72,396
									£291,577

		Receipts for the year 31/12/95				£128,458.62

		Payments for the year 21/12/95			£211,428.79

		Balance						£208,608.83							 
33.	Thus on these figures, leaving aside the opening balance, the movement in the year 1995 was that the company's debt to the directors decreased by £82,970.  This amount is the same as the balance from Mr Saujani's schedule of personal payments of £67,969 and the adjustment of £15,001.13 which totals £82,970. However, in addition there are the extra tax payments of £23,517.77.  

34.	Draft accounts for the company for the year ending on 31 December 1996 were dated 29 July 1997 but not signed. These showed that the balance on the directors' account was £105,557 and also showed the amount of £208,608 as the balance for 1995. That means that in 1996 the company's debt to the directors decreased by a further £103,051. 

35.	A set of draft accounts for the year ending on 31 December 1997 were prepared and sent to the Inland Revenue. It showed the amount on the directors account at 1996 as £105,557 and for 1997 as £108,608. This indicates that in 1997 the company's debt to the directors increased slightly.

36.	No final version of the accounts for the years 1996 and 1997 has ever been prepared.

March 1997 - sale to Quorsign

37.	On a date between 31 October 1995 and 31 December 1995 Mr B N Parmar resigned as a director of the company. In late 1996 the company was in difficulties and required further capital. In about March 1997 the company sold the majority of its plant and machinery to Quorsign Limited for £110,000. The plant and machinery were professionally valued for this purpose. Quorsign was a company controlled by Mr B N Parmar. The machinery was then hired back to the company at a rent of £10,000 per year.  

May 1998 - the liquidation

38.	On 21 May 1998 the company went into voluntary liquidation and was wound up with debts of about £440,000. The liquidator was Mr C J W Hill of Messrs Ernst & Young. He wrote to all creditors on 26 May 1998 to say that a meeting of creditors had been held on 21 May 1998 chaired by Mr K B Parmar. The draft accounts for 1997 showed a loss of £241,081 and at a meeting of the shareholders earlier that day he (Mr Hill) had been appointed liquidator. Mr Hill attached to his letter a copy of an estimated statement of affairs as at 21 May 1998 which showed that unsecured creditors amounted to £405,940 of which trade creditors amounted to £359,525. Also attached to the letter was a list of the trade creditors based on information in the company's records or as provided by creditors. The list did not include any of the four Appellants or the partnership. In the liquidation neither the partnership nor the individual partners made any claim in respect of amounts owing for the assets they had transferred to the company. 

39.	At about the time of the liquidation amended versions of the company accounts for the years ending on 31 December 1995 and 1996 were prepared. The amended version of the accounts for the year ending on 31 December 1995 were sent by John Whitehouse & Co to the Inland Revenue on 22 July 1998. These showed an unexplained adjustment to the directors' account of £41,167.83 which gave a balance of £167,441. The amended version still bore the same date as the audited version (26 June 1966) but was not signed. The amended version of the draft accounts for the year ending on 31 December 1996 (undated but sent to the Inland Revenue by the liquidator in June 1998) showed the balance on the directors' account as £557 (a reduction from the previous version by £105,000). In the same accounts the amount owed to trade creditors was increased by £105,000. Mr Saujani explained that the later draft was meant to represent the fact that some of the amount shown as a credit on the directors' account belonged to Mr B N Parmar and Mrs Parmar. However, in the revised draft of the 1996 accounts, the comparative figure for 1995 remained at £208,608. Although the 1996 draft accounts had been amended by reducing the balance on the directors' account, the draft accounts for 1997 showed the balance for 1996 as £105,557 and the balance for 1997 as £108,808.

The income tax discussions

40.	On 11 September 1997 there was a meeting between Mr Marriott, Mr Saujani Mr B N Parmar and Mr K B Parmar. The meeting had been convened because the tax affairs of the partnership were seriously in arrears. The notes of the meeting recorded that the partners had received £280,000 for the plant and machinery and were asked to supply relevant documentation. There was a wide ranging discussion of the Appellants' tax affairs. Correspondence followed and a further meeting was held on 15 May 1998 at which it was reported that a liquidator had been appointed on 7 May 1998. 

41.	In July 1998 Messrs John Whitehouse & Co sent to the Inland Revenue the partnership accounts for 1991. (This letter contained the amended figure for plant and machinery of £143,250 for the balance sheet as at 31 December 1994). The Inland Revenue replied on 6 August 1998 to say that they understood that the amounts of the assets transferred from the partnership to the company represented the consideration paid to the partners for the assets presumably by way of a loan account credit with the company and asked for confirmation. On 1 December 1998 Messrs John Whitehouse & Co sent to the Inland Revenue a number of schedules, which included the schedules of personal payments made on behalf of the directors, and of personal receipts for the directors, in the year ending on 31 December 1995 and the calculations about the directors' account.  Further meetings were held on 1 December 1998, 18 January 1999 and 8 February 1999. 

Reasons for decision

42.	Before considering the questions raised by the arguments of the parties it is necessary to consider the quality of the evidence, especially as the issue for re-determination is primarily an issue of fact. 

43.	Mr B N Parmar has not been well and I formed the view that this may have affected his memory because there were a number of matters which he could not recall. Mrs Parmar does not speak or read English. Her witness statement stated that she had been helped by Mr Saujani with the figure work. At the hearing she did not bring an interpreter with her. Accordingly, with the consent of Mr Rees, I asked her son, Mr K B Parmar, to act as her interpreter. Mrs Parmar said that she had discussed her witness statement with Mr Saujani who had then drafted it and her daughter-in-law had read it to her and that she understood it. However, Mrs Parmar admitted that she was not interested in the financial arrangements of the business and knew very little about such arrangements. In considering what weight to give to the evidence of Mr B N Parmar and Mrs Parmar I bear these factors in mind.  

44.	As far as the documentary evidence is concerned the main difficulty is to decide which of many versions of the accounts and schedules are reliable. Here I have followed the principle that documents as closely contemporaneous as possible with the occurrence of the relevant events are usually to be preferred. Accordingly, I have preferred the draft partnership accounts for the year ending on 31 December 1994 as prepared in September 1995 to the version prepared in 2001 (after the first hearing of the appeal). I have preferred the audited accounts of the company for the year ending on 31 December 1995, as signed on 26 June 1996, to the draft accounts sent on 22 July 1998 (prepared when the company was in liquidation). And I have preferred the draft of the accounts for 1996 dated 29 July 1997 to the subsequent version prepared in 1998 when the company was in liquidation. As far as Mr Saujani's schedules of the personal amounts paid by the company for the directors, and received by the company for the directors, in 1995 are concerned, I have preferred the schedules Mr Saujani produced in 1998 to the revised schedules he produced for the purpose of the hearing. One reason for this preference is because Mr Saujani's 1998 schedules give a result which is close to Mr Marriott's analysis.    

45.	Finally, in considering the oral evidence of Mr Saujani I bear in mind that he accepted himself that some of the accounts he had prepared contained errors. 

46.	With those conclusions on the weight of the evidence I turn to consider each of the questions raised by the arguments of the parties. 

(1)	Did the credit to the directors' account constitute payment?

47.	The first question is whether payment was made because the value of the assets was placed to the credit of the directors' account with the company.

48.	For the Appellants Mr Saujani argued that when the partnership assets were transferred to the company they were not been paid for and the amount due was still outstanding. He argued that the only relationship between the partnership and the company was that of sale and purchase and there never had been a relationship of lender and borrower. For the Inland Revenue Mr Rees argued that all the partners had agreed that the amount of the value of the assets should be credited to the directors' account with the company. Thereafter the company owed the money to the directors and not to the partnership. He cited Coren v Keithley [1972] 1 WLR 1556 at 1558c and 1560b.

49.	In answering this question it is necessary to decide what was the intention of the partnership on the one hand and the company on the other when the assets were transferred on 31 December 1994. The evidence of the witnesses made it very clear that both the partnership and the company were primarily family organisations. This was not the case of a transfer at arm's length - three of the partners became directors of the company. This factor explains the degree of informality surrounding the arrangements. No transfer document was prepared; no invoice was issued for the assets transferred; the partnership current account at the bank was used by the company for about ten weeks; the company paid no rent to the partnership during its first year of trading; and the company took over the trade debtors and creditors of the partnership. However, for the purposes of this appeal it is necessary to consider the partnership and the company as separate entities. 

50.	Also, in my view it is not appropriate to treat each individual partner as being entitled to a quarter share of the price of the transferred assets. There was no evidence about the way in which the partners shared capital but they shared profits as to 25% each. However, that means that each is entitled to a quarter share of any overall profit (or loss) but not a quarter share in each payment received. So the question is not whether each individual partner was paid for his or her share of the transferred assets but whether the partnership as an entity was so paid. It is the partnership accounts which are at issue in this appeal. 

51.	Turning to the evidence of the intentions of the partnership, I formed the view that Mr B N Parmar had little accurate recollection of the events surrounding the transfer of the assets from the partnership to the company. His evidence was that he gave the money to his sons and never got a penny. He did not look at the paperwork and did not know how it worked out. Mrs Parmar knew that the partnership assets and debts were to be transferred to the company and that the assets to be transferred included some knitting machines in respect of which money was owed to hire purchase companies. However, in her view, "there was hardly anything there". Although Mrs Parmar did not speak English she communicated very eloquently with her hands. On more than one occasion she made a clear sign that she had just wanted to wash her hands of the business. Mr K B Parmar did not disagree with the suggestion of Mr Rees that everyone knew that it had been agreed that the assets should be transferred to the company and paid for by way of credit to the directors' account with the company. He also confirmed the view that the whole arrangement had been within the family.

52.	I therefore find that it was the intention of the partnership and the company that the assets the subject of this appeal should be transferred to the company on the basis that the company would owe the directors and not the partnership. I have already found as a fact that a directors' account with the company was opened and immediately credited with the values of the transferred assets as they appeared in the partnership's closing balance sheet. It seems to me that that supports the conclusion that, as from 1 January 1995, the company owed the price of the transferred assets to the three directors. If the amount was owed to the directors then it could not also be owed to the partnership. 

53.	Coren v Keithley concerned a sale of property where the sale price was £3,750 of which the vendor lent the purchaser £2,250. The vendor was assessed to capital gains tax on the gain on the sale based on the consideration of £3,750 but argued that the consideration was payable by instalments. Ungoed-Thomas J held that the sale had been completed for the consideration of £3,750 when the relationship of vendor and purchaser had been replaced by that of lender and borrower. The assessment was correct. At 1560b he referred to authorities which established the principle that, if two cross-demands for money immediately payable are set off against each other without the formality of handing the money over and handing it back again, the set off would amount to payment.  

54.	Applying that principle to the facts of the present appeal I conclude that when the partnership agreed to transfer the assets to the company on the basis that the company would owe the price to the directors, the relationship of vendor and purchaser which had existed between the partnership and the company was immediately replaced by the relationship of lender and borrower which henceforth existed between the directors and the company. There was no need for the company to hand the money to the partnership, for the partnership to hand it to the three directors, and for the three directors to hand it back to the company; the arrangements entered into amounted to payment by the company to the partnership.   

55.	My conclusion on the first question is that payment was made because, by the agreement of all, the value of the assets was placed to the credit of the directors' account with the company. That conclusion is sufficient to dismiss the appeal but as arguments were put on the other questions I briefly consider them.  

(2)	Did the partnership receive other payments from the company?

56.	The second question is whether payment was made because the partners received other payments from the company and the company discharged some of the liabilities of the partnership.

57.	For the Appellants Mr Saujani argued that after 1 January 1995 the debtors of the partnership had been used to pay the creditors of the partnership until the partnership bank account had been closed in March 1995. He argued that the payments made out of the company for Mrs Parmar did not amount to what she was due. After 1 January 1996 neither Mr B N Parmar nor Mrs Parmar were directors of the company. The balance in the directors account was an error. He put in a schedule which dealt separately with Mr Y B Parmar and Mr K B Parmar on the one hand and Mr B N Parmar and Mrs Parmar on the other. This was a recently produced schedule.

58.	For the Inland Revenue Mr Rees argued that the company had taken over some of the partnership's liabilities and those amounts together with the sums paid by the company for the benefit of all four partners, and debited to the directors' account, satisfied the sale price of the business assets transferred; the directors' account was in fact a family account from which all the family benefited. Net payments in 1995 from the directors' account amounted to £82,970 and in 1996 to £103,051 or £203,051 depending on which set of accounts was being referred to. These amounts amply covered the value of the assets transferred. He cited Clayton's Case (1816) 1 Mer 572 for the principle that, in the case of a current account, the first item on the debit side was discharged or reduced by the first item on the credit side. 

59.	I first consider the evidence about these payments, Mrs Parmar gave evidence that she knew that the company had paid tax bills and purchased shares for her. Mr K B Parmar agreed that all the partners had received money out of the company because the partnership's trade creditors of £318,295 had been paid by the company in the course of its business. I accept this evidence. 

60.	The facts as found support the conclusion that the company made payments for or on behalf of the partnership. The company took over the trade debts of the partnership with a net liability of £66,623. It took over the hire purchase debts of the partnership valued at £71,271 and paid the amount of £67,471 in 1995. Both these amounts were paid for the partnership and therefore benefited all four partners. On the basis of Mr Saujani's 1998 schedules the company made personal payments of £67,969.04 for the partners in excess of what it received for them. These payments were made not just for the three directors but also for Mrs Parmar (for example the purchase of the shares). The company also paid additional tax bills for the partners and the partnership of £27,749.14. Again, some of these tax bills were for the partnership and so the payment benefited all four partners. These four amounts total £229,812.18 which is in excess of the agreed values for the transferred assets of £186,483. 

61.	The fact that the company made personal payments for the partners of £67,969 and £27,749 (totalling £95,718) is supported by the movements on the directors' account. It is difficult to be precise about these movements because of the differing versions of the accounts and, for the purposes of this appeal, I have not relied upon the movements on the directors' account except as confirming that net payments were made by the company for the directors.. It is accepted that Mrs Parmar was never a director of the company, and that Mr Parmar was a director only in 1995, but the fact remains that the company made payments which benefited all the partners. 

62.	Before leaving this question I consider Mr Saujani's arguments. The evidence of Mr K B Parmar was clear and was that the company took over the trade debts of the partnership. I have assumed in favour of the Appellants that it also took over the trade creditors. As mentioned above, I do not consider it appropriate to look at the receipts of the partners individually; the real question is whether the partnership as an entity was paid. 

63.	I conclude that payment was made because the partners received other payments from the company and the company discharged some of the liabilities of the partnership.

(3)	What conclusion should be drawn from all the facts?

64.	The third question which arises from the arguments of the parties is whether, in general, the facts point to the conclusion that, after the transfer, the partners did not see themselves as the creditors of the company in respect of the transfer of the assets.

65.	For the Appellants Mr Saujani argued that the parents would not have taken their sons to court as they were their sons. He argued that the reason why the partners had not claimed in the liquidation was that there was no purpose in doing so. For the Inland Revenue Mr Rees argued that the subsequent facts did not support the view that there was still an outstanding debt to the partnership because the plant and machinery had been sold in 1997 to Quorsign and because neither the partnership nor the individual partners had told the liquidator in 1998 that they were creditors of the company.

66.	I first consider the evidence on this question. The evidence of Mr B N Parmar on this matter appeared to be directed to the amount of £110,000 which was the price he paid (through Quorsign) for the plant and machinery in 1997; no doubt he had not been paid his rent and wanted that money back. Mrs Parmar gave evidence that she was entitled to be paid 25% of the total amount due to the partnership for the assets taken over by the company but had not been paid anything. She said that when the company was liquidated she had asked Mr Saujani for her money but did not know she should inform the liquidator. Mr Saujani gave evidence, which I accept that he did not tell the liquidator that Mr B N Parmar and Mrs Parmar were creditors of the company. Mr K B Parmar said that he had told the liquidator that he and his parents were creditors of the company but the liquidator had said that his report was only provisional and that it should go forward to see how the creditors would judge it. 

67.	In evaluating the weight to give to this evidence I bear in mind that Mr K B Parmar chaired the creditors meeting on 21 May 1998 and would have been aware of the documents sent by the liquidator. It is true that the statement of affairs at that time was estimated. However, the list of trade creditors was based upon information contained in the company records or as provided by creditors. It is here relevant that none of the accounts of the company showed the partners or the partnership as a creditor. The draft accounts provided to the liquidator would have informed him of the directors' account but Mr Saujani's evidence was clear that he did not tell the liquidator that Mr B N Parmar and Mrs Parmar were creditors of the company. I also accept the argument of Mr Rees that the sale of the plant and machinery to Mr B N Parmar through Quorsign in 1997 was inconsistent with the view that there was still an outstanding debt by the company to the partnership for the price of the transferred assets. 

68.	In my view all the facts point to the conclusion that, after the transfer of the assets, neither the individual partners nor the partnership saw themselves as creditors of the company. The directors were creditors but in their capacity as directors.   

Decision

69.	My answers to the questions raised by the arguments of the parties are:

 (1)	that payment was made because the value of the assets was placed to the credit of the directors' account with the company; that conclusion is sufficient to decide the appeal but as arguments were put on the other questions I briefly express views which are:

(2)	that payment was made because the partnership received personal payments from the company and the company discharged some of the liabilities of the partnership; and

(3)	generally, that all the facts point to the conclusion that, after the transfer, the partners did not see themselves as creditors of the company in respect of the transfer of the assets. 

66.	Thus the decision on the issue for re-determination is that, when the Appellants sold their business to Ace Knitwear Limited, the price for the plant and machinery and the stock was paid. 

67.	The appeal is, therefore, dismissed. 

DR NUALA BRICE

SPECIAL COMMISSIONER

RELEASE DATE:

SC/3130/2000
03.06.03