A strange quirk of English common law allows a creditor to accept an asset of any value for a monetary debt. DAVID WHISCOMBE of Berg Kaprow Lewis illustrates how by means of a case study.
EBENEZER SCROOGE LOANED £50,000 to his nephew Fred in 1985 to help Fred establish a new business. The loan initially bore interest at a high (not to say usurious) rate, which was paid by Fred, claimed by him as an expense, and declared on Mr Scrooge's tax return.
A strange quirk of English common law allows a creditor to accept an asset of any value for a monetary debt. DAVID WHISCOMBE of Berg Kaprow Lewis illustrates how by means of a case study.
EBENEZER SCROOGE LOANED £50,000 to his nephew Fred in 1985 to help Fred establish a new business. The loan initially bore interest at a high (not to say usurious) rate, which was paid by Fred, claimed by him as an expense, and declared on Mr Scrooge's tax return.
Following nocturnal events that have never been properly explained, Mr Scrooge wrote to his adviser early in 1994 with a copy of a letter he had written to Fred informing him that he intended not only to waive future payment of interest but also to write off the loan and not to seek repayment of any of the capital. Sadly Mr Scrooge has now died (mourned by the many people who have benefited from his energetic charitable works over the past seven years or so), and the adviser is his executor.
Debt haunts the estate!
This scenario brings out the difficulties and conflicts of taking on executorships. The technical point is that the debt due to Mr Scrooge from his nephew remains in law an asset of his estate. It is not effective for the executor to write to a creditor, telling him that he is letting him off his debt. Since no consideration was given by Fred for the release of the debt, there is simply no valid contract to release the debt and the debt remains due. The executor must of course take this asset into account in calculating the inheritance tax payable on his late client's estate, even though as a result the estate may be able to establish a claim against the executor in his capacity as adviser to the deceased in respect of the additional inheritance tax in the estate.
Still alive
Two relatively recent cases will soon demonstrate that this old principle of English law is still very much alive.
The first was D and C Builders v Rees [1966] 2 QB 617 in which a firm of small builders wanted payment urgently for some work they had done. The amount due was £482 but the customers delayed payment and eventually offered to settle for £300. The builders, because they needed the money urgently, accepted the deal, but later sued for the balance. The Court of Appeal said that they were quite entitled to claim the rest of the debt because there was no consideration for the promise to accept part payment.
The second case involved the Inland Revenue! A company's managing director met with the Collector of Taxes and suggested paying off an arrears of tax at £1,000 per month. The Collector went away saying that he would let the company know if this offer was not acceptable. Nothing further was heard from the Revenue until a while later when a demand suddenly appeared for immediate payment of the full arrears. The Court of Appeal said that the company had no defence against the demand and the Revenue obtained a compulsory winding up order.
What could have been done?
There are at least three ways in which the debt to Scrooge could have been written off with full legal effect.
Deed of waiver
The first would have been for Ebenezer Scrooge to have waived the debt in the form of a deed. Even though done for no consideration, a promise which is in the form of a deed is legally enforceable and could be relied on by Fred. The debt would therefore no longer be an asset of Ebenezer's estate.
Repayment and gift
Second, and more simply, there could have been an exchange of cheques with suitable documentation. Provided the cheques cleared and Fred genuinely and actually repaid the loan, the fact that he might have done so with money provided by Uncle Ebenezer would not vitiate the repayment.
Barter
Third, and possibly the simplest of all, if Ebenezer had written to Fred offering to take some asset from Fred in full settlement of the debt and Fred had handed over the asset, the debt would in law have been settled. In principle any asset would do, regardless of the triviality of the value.
The original case of 1602, on which this whole principle is based, recognised that 'the gift of a horse, hawk or robe, etc. in satisfaction is good'. More colourfully 100 years ago, a judge said that a creditor 'might take a horse, or a canary, or a tom-tit if he chose but, by a most extraordinary peculiarity of English common law, he could not take 19s 6d in the pound'.
David Whiscombe is tax partner at Berg Kaprow Lewis and operates a consultancy service to other professional firms.
