Agricultural holding — Partnership — Dissolution of partnership — Whether value of milk quota registered in the names of the partners should be taken into account in valuing the assets of the partnership
an agreement dated March 2 1983 the respondent, John Faulks, was granted an agricultural
tenancy commencing on March 25 1983 of Hills Farm, Colston Bassett,
Nottinghamshire — On February 9 1984 the respondent and his brother, Harry
Faulks, entered into a deed of partnership to carry on the business of farming
Hills Farm — By clause 13 of the partnership deed the partnership would
determine on the death of either partner — By clause 16 of the partnership deed
provision was made for an account of the assets of the partnership and for
these to be valued — By clause 18 of the partnership deed the respondent was
declared to stand possessed of the tenancy of Hills Farm in trust for the
partnership — In or about 1984 the partnership was allocated milk quota and the
names of the partners were entered on the register in respect of Hills Farm —
Harry Faulks died on June 12 1988 at which date the milk quota in respect of
which the partnership was registered was 426,640 litres — The appellant was
appointed executrix of Harry Faulks’ will — Pursuant to the terms of the
partnership deed, an arbitrator was appointed and, by an interim award dated
November 2 1990, he determined that the milk quota was not an asset of the
partnership and accordingly its value was not to be taken into account for the
purpose of valuing the assets of the partnership — The partnership said that
milk quota is not a right or interest in property separate from or capable of
being separated from the land in respect of which it is held and so is not
capable of being an asset — By way of an appeal under section 1 of the Arbitration
Act 1979 the appellant contended that the arbitrator had erred in law in
determining that the value of the milk quota was not an asset of the
partnership
Ernahrung und Forstwirtschaft [1991] 1 CMLR 328 the European Court of
Justice affirmed the principle that milk quota is attached to the land, while
recognising that the rules made under community legislation permit member
states to make provision for compensating the outgoing tenant of a holding for
loss of milk quota in cases where the strict application of that principle
would cause hardship — The concept of ‘quota leasing’ was authorised by Council
Regulation (EEC) No 2998/87 and introduced into England and Wales by regulation
6 of the Dairy Produce Quotas (Amendment) Regulations 1988 — Re-enacted by the
Dairy Produce Quotas Regulations 1989, a producer is permitted ‘to make a
temporary transfer within one region of part of the wholesale quota registered
as his to another producer for a period of one quota year’ — The transfer of
quota from one producer to another under these regulations, by which there are
reciprocal adjustments to their respected entries on the register, is properly
to be regarded not as the transfer of an asset by the transferor to the
transferee but rather as the transfer of a potential liability on the producer
to contribute to additional levy imposed on the wholesale purchaser from the
transferee of the quota to the transferor — The fact that the transfer of a
potential liability is likely to be matched by a payment to the person assuming
that liability may enable it to be said that the quota transferred has an
intrinsic economic value, but that does not of itself lead to the conclusion
that quota is an asset separate and distinct from the holding in relation to
which it was, or becomes, registered — In relation to milk quota, the true
position in England and Wales is that a producer does not require a licence to
produce milk and will not necessarily incur any liability as a consequence of
production, but it is in respect of his potential liability that he enjoys an
immunity from Formula B contribution by virtue of, and to the extent of, the
register entry of an amount of wholesale quota in his name — Accordingly, the
milk quota formerly registered in the name of the partnership could not
properly be regarded as property and as an asset of this partnership
The following
cases are referred to in this report.
Ambler v Bolton (1872) LR 14 Eq 427
Miles v Clarke [1953] 1 WLR 537; [1953] 1 All ER 779
Pawsey v Armstrong (1881) 18 Ch D 698
Smith v Mules (1851) 9 Hare 556
Wachauf v Bundesamt fur Ernahrung und Forstwirtschaft (Case 5/88)
[1991] 1 CMLR 328
This was an
appeal, pursuant to leave granted by Knox J on May 7 1991, from an interim
award of an arbitrator appointed to determine issues arising upon the
dissolution of a partnership between John and Harry Faulks upon the death of
Harry Faulks. The appellant was the executrix of the will of Harry Faulks
deceased; the respondent was John Faulks.
Peter
Cranfield (instructed by Roythorne & Co, of Spalding) appeared for the
appellant; Kim Lewison QC (instructed by Burges Salmon, of Bristol) represented
the respondent.
Giving
judgment, CHADWICK J said: Hills Farm, Colston Bassett, in the county of
Nottinghamshire, comprises some 170 acres of mixed grass and arable land. By an
agreement dated September 7 1925 the farm was let to George Faulks on a tenancy
from year to year commencing on March 25 1926. On his death the tenancy became
vested in his widow, Florence Maud Faulks. She farmed the land, with her two
sons, John Albert Faulks and Harry Alfred Faulks, under the firm name ‘F M
Faulks & Sons’. It is clear that by the time of her death on December 9
1982 a dairy enterprise had been established on the farm.
On the death
of Florence Maud Faulks it was agreed with the landlord that the elder son,
John, should succeed to the tenancy under the provisions of Part II of the
Agriculture (Miscellaneous Provisions) Act 1976. That agreement is recorded in
a memorandum dated March 2 1983. The new tenancy was to commence on March 25
1983 and, save as to rent, was to be on the same terms and conditions as in the
1925 tenancy. It was expressly provided in the memorandum of March 2 1983 that,
in the event of John’s death before March 25 1983, his brother Harry should
succeed to the tenancy of the farm as first successor under the Act. In the
events which happened John became tenant of the farm on March 25 1983 and the
tenancy has remained vested in him since that date.
On February 9
1984 the two brothers entered into a deed of partnership under which they
agreed that they would, with effect from May 31 1983, carry on the business of
farmers at Hills Farm under the existing firm name of ‘F M Faulks & Sons’.
The partnership deed required that each of the brothers should devote
substantially the whole of his time and attention to the partnership business
and it further provided, at clause 19, that Harry Faulks and his wife Pamela
should be entitled to occupy and reside in the farmhouse free of rent so long
as they wished during the continuance of the partnership. Clauses 12 to 15
contained provisions for the determination of the partnership. In particular,
clause 13 provided that the partnership should determine on the death or
bankruptcy of either partner. Clauses 16 to 18 are in these terms, so far as
material:
FINANCIAL
PROVISIONS ON TERMINATION
16. In the
event of either of the Partners ceasing to be a Partner by reason of his death
or his retirement or expulsion in accordance with the provisions of this Deed
the provisions contained in this clause shall have effect and so that reference
herein to ‘outgoing Partner’ shall be taken as references to the Partner so
ceasing to be a Partner and where appropriate shall include his personal
representative receiver or trustee in bankruptcy:
(a) An account shall forthwith be taken up to the
day upon which the outgoing partner ceases to be a partner and the assets of
the partnership shall be valued for the purposes of such account by agreement
between the partners or if the partners are unable to agree as to the value of
all or any specific assets such assets shall be valued by a qualified valuer
(acting as an expert) appointed by the Partners or failing agreement upon a
valuer then either party may request the President for the time being of the
Nottinghamshire branch of the Royal Institution of Chartered Surveyors to
appoint a valuer. The costs of any valuer appointed as aforesaid shall be
shared equally between the parties hereto unless such valuer shall otherwise
determine.
(b) The remaining partner may purchase the share
of the outgoing partner in the partnership upon giving to the outgoing partner
notice in writing to that effect at any time within three months from his
ceasing to be a partner. Any such purchase shall take effect and relate back to
the date of termination of the partnership and the partner exercising such
option shall thereupon become exclusively liable for the partnership debts and
liabilities whether incurred or arising before or after such date.
(c) If the said option is not exercised within
the time aforesaid or if the remaining partner does not wish to exercise it the
partnership business shall be wound up in accordance with the provisions of the
Partnership Act 1890.
(d) The purchase money for the share of an
outgoing partner shall be the net value thereof as shown in the said account
after debiting any tax due from the partnership in respect of the outgoing
partner.
— Subparas (e)
to (k) are not material —
17. Upon
dissolution of the partnership in any event not otherwise herein provided for
the affairs thereof shall be wound up and the assets and liabilities dealt with
in manner provided by the Partnership Act 1890.
PROPERTIES
18. The
tenancy of the said property known as Hills Farm Colston Bassett being now
vested in the said John Albert Faulks he shall during the continuance of the
partnership stand possessed of the same in trust for the
and the partnership shall indemnify the said John Albert Faulks in respect of
all claims demands and liabilities arising in respect of such tenancy. Provided
that in the event of the said John Albert Faulks leaving the partnership for
any reason whatsoever he will if requested by the said Harry Alfred Faulks use
his best endeavours to procure that such tenancy shall be transferred to Harry
Alfred Faulks . . .
The
partnership deed continues at clause 24 with provision for arbitration in the
event, inter alia, of any dispute touching the rights and liabilities of
the partners and their representatives under the deed or otherwise in relation
to the partnership.
On March 31
1984, shortly after the execution of the partnership deed, the Council of the
European Communities adopted Council Regulation (EEC) No 856/84 for the
purposes of introducing for an initial period of five years an additional levy
(that is to say, a levy in addition to the uniform co-responsibility levy
already in force) on quantities of milk delivered by producers to purchasers in
excess of a predetermined reference quantity. On the same day, by Council Regulation
(EEC) No 857/84, general rules were adopted for the application of that
additional levy with effect from April 2 1984. More detailed rules were laid
down on May 16 1984 by Commission Regulation (EEC) No 1371/84. That community
legislation was expressed to be directly applicable in all member states. It
was implemented within the United Kingdom by the Dairy Produce Quotas
Regulations 1984 (SI 1047) which came into operation on July 24 1984. Those
regulations, as amended from time to time, were themselves replaced by the
Dairy Produce Quotas Regulations 1986 (SI 470).
It will be
necessary to examine the effect of the community legislation as implemented by
the United Kingdom regulations in force at the relevant time in some detail
later in this judgment; but, for present purposes, it is sufficient to indicate
that that legislation led to the allocation in England and Wales of wholesale
quota to each milk producer in respect of the holding which he farmed and the
establishment of a register for the purpose of recording and identifying each
producer, the amount of his quota and the relevant holding. ‘Quota’ for these
purposes means the quantity of dairy produce which may be delivered in a quota
year without the producer becoming liable to make a payment in respect of
additional levy.
In due course,
in or about 1984, the partnership was allocated quota under the 1984
regulations, and the names of the partners were entered on the register in
respect of the holding which comprised Hills Farm. The brothers continued to
farm in partnership at Hills Farm until the death of Harry Faulks on June 12
1988. At that date the quota in respect of which the partnership was registered
was 426,640 litres.
On the death
of Harry Faulks the partnership determined in accordance with clause 13 of the
partnership deed and the financial provisions contained in clause 16 took
effect. In particular, it became necessary to take an account between the
partners and to value the assets of the partnership for the purpose of that
account. John Faulks and his brother’s executrix were unable to agree whether
the tenancy of Hills Farm and the milk quota should be taken into the
partnership account as assets of the partnership and, if so, what value should
be ascribed to those assets. By an appointment in writing dated May 23 1990
these questions were referred to an arbitrator. In the light of the provisions
of clause 16(a) of the partnership deed, which refer questions of value to a
qualified valuer acting as an expert, the better view is, I think, that this
appointment was made pursuant to an ad hoc arbitration agreement and was
not a reference under clause 24 of the deed. But it has not been contended that
anything turns on this point.
On November 2
1990 the arbitrator made an interim award in the following terms:
(1) The tenancy of Hills Farm, Colston Bassett,
in the County of Nottingham (sic) held in the name of the Respondent is
not an asset of the partnership within clause 16 of the Deed of Partnership
dated 9 February 1984 and accordingly any value which the said tenancy may have
is not to be taken into account for the purposes of valuing the assets of the
partnership as at 12 June 1988 pursuant to clause 16 of the Deed of
Partnership;
(2) The milk quota which attaches to the land
comprised in the said tenancy is not an asset of the partnership within clause
16 of the Deed of Partnership and accordingly any value which such milk quota
may have is not to be taken into account for the purposes of valuing the assets
of the partnership as at 12 June 1988 pursuant to clause 16 of the said Deed of
Partnership . . .
In these
circumstances the question of what value should be ascribed to these assets did
not arise.
The arbitrator
gave a full statement of his reasons for the award. In short he held:
(i) that to treat the tenancy as partnership
property or as an asset of the partnership would be to disregard the express
limitation in clause 18 of the partnership deed that the tenancy is held on
trust for the partners only during the continuance of the partnership; and
(ii) that milk quota is not a right or interest in
property separate from, or capable of being separated from, the land in respect
of which it is held and so is not capable of being an asset within clause 16 of
the Partnership Deed.
By an originating
summons issued on December 10 1990 the executrix of Harry Faulks, being the
disappointed claimant in the arbitration, sought leave pursuant to section
1(3)(b) of the Arbitration Act 1979 to appeal to the High Court on the
questions of law arising under both paras (1) and (2) of the award. That
application was duly made to the Commercial Court pursuant to Ord 73, r6(1) of
the Rules of the Supreme Court 1991, but it was, in due course, transferred to
this division. On May 7 1991 Knox J gave leave to appeal but on condition that
the applicant did not seek to set aside para (1) of the award. Accordingly, the
matter comes before me on the basis that the arbitrator was correct in holding
that by virtue of the express limitation in clause 18 of the partnership deed
the tenancy of Hills Farm ceased to be an asset of the partnership on the death
of Harry Faulks on June 12 1988; and that thereafter the tenancy was held by
John Faulks in equity as well as at law. In these circumstances, the sole
question of law which I have to determine is whether the value of the milk
quota formerly registered in the names of the partners in respect of the land
comprised in the tenancy of Hills Farm now held by John Faulks should be taken
into account in valuing the assets of the partnership as at June 12 1988
pursuant to clause 16 of the partnership deed.
It is
necessary to keep in mind the context in which that question arises. The
primary requirement in clause 16(a) of the partnership deed is that an account
be taken up to the day on which the outgoing partner ceases to be a partner.
The requirement that the assets of the partnership are to be valued is for the
purposes of that account. The account is taken in order to establish the net
value of the share of the outgoing partner in the partnership — see clause
16(d) of the partnership deed — that being the amount which is to be paid to
him by the remaining partner if the remaining partner chooses to continue the
partnership business. If the remaining partner does not choose to continue the
partnership business, then the partnership must be wound up under the
Partnership Act 1890 — see clause 16(c) of the partnership deed. It is, I
think, correct to approach clause 16 of the partnership deed on the basis that
the partners are likely to have intended that the payment to be made to the
outgoing partner should be substantially the same whether or not the remaining
partner chooses to continue the business.
Section 39 of
the Partnership Act 1890 is in these terms (so far as material):
On the
dissolution of a partnership every partner is entitled, as against the other
partners in the firm, and all persons claiming through them in respect of their
interests as partners, to have the property of the partnership applied in
payment of the debts and liabilities of the firm, and to have the surplus
assets after such payment applied in payment of what is due to the partners
respectively after deducting what may be due from them as partners to the firm
. . .
Partnership
property in this context means:
All property
and rights and interests in property originally brought into the partnership
stock or acquired, whether by purchase or otherwise, on account of the firm, or
for the purposes and in the course of the partnership business . . .
See section 20(f)
of the 1890 Act.
Adopting the
approach which I have indicated, the ‘assets of the partnership’ which are to
be valued for the purposes of clause 16(a) of the partnership deed ought to be
the same as the property, rights and interests which comprise the partnership
property and which would have been available, in a dissolution under the Act,
to pay the debts and liabilities of the firm and as to the surplus for
distribution to the partners. One test, therefore, as it appears to me, is whether
the milk quota formerly registered in the name of the partnership would have
been available, in a dissolution under the Act, to meet the debts and
liabilities of the firm. If so, it should be taken into account in valuing the
assets of the partnership under clause 16(a). But it does not necessarily
follow that if the nature of milk quota is such that the milk quota formerly
registered in the name of the partnership could not have been realised by a
sale in the course of a dissolution under the
partnership under clause 16(a).
I was referred
in the course of argument to Smith v Mules (1851) 9 Hare 556 and Ambler
v Bolton (1872) LR 14 Eq 427. These cases illustrate that an asset which
is vested in the name of one of the partners, and which is not alienable by
him, may none the less be treated as a partnership asset if the partners so
intend; and, if so, the partner in whose name the asset is vested may be
charged with its value in the partnership accounts. The question in each case
is whether the partners did intend that that asset should be treated as
partnership property.
In the present
case it is impossible to attribute to the partners any specific intention in
relation to milk quota at the time that they made the partnership deed. The
concept had not then been introduced. The relevant question must be whether, at
the date when the partnership was allocated quota under the 1984 regulations
and the names of the partners were entered on the register in respect of the
holding which comprised Hills Farm, the quota was properly to be regarded as
property, or a right or interest in property, separate and distinct from the
holding. If not, it seems to me impossible to attribute to the partners any
intention other than that the quota should be treated in the same way as the
tenancy of the farm; that is to say that, upon the determination of the
partnership, it should be held with the tenancy under the provisions of clause
18 of the partnership deed. The intention under that clause was that, so far as
possible, the tenancy should be held by, or transferred to, the partner who was
remaining in the business.
In order to
answer that question it is necessary to examine the community legislation, as
implemented by the United Kingdom regulations, under which milk quota has been
introduced and by which it is now regulated. Council Regulation (EEC) No 856/84
introduces the additional levy payable by producers or purchasers of milk or
other milk products by inserting into Regulation (EEC) No 804/68 a new article
5(c). That article provides that the levy system shall be implemented in each
region of the territory of a member state in accordance with one of the
following formulae:
Formula A
— A levy shall
be payable by every milk producer on the quantities of milk and/or milk
equivalent which he has delivered to a purchaser and which for the twelve
months concerned exceed a reference quantity to be determined.
Formula B
— A levy shall
be payable by every purchaser of milk or other milk products on the quantities
of milk or milk equivalent which have been delivered to him by a producer and
which, during the twelve months concerned, exceed a reference quantity to be
determined.
— The
purchaser liable to the levy shall pass on the burden in the price paid to
those producers who have increased their deliveries, in proportion to their
contribution to the purchaser’s reference quantity being exceeded . . .
It can be seen
that under Formula A the levy is imposed directly on each milk producer and
becomes payable by each milk producer when he delivers milk in excess of his
own reference quantity, irrespective of the quantity delivered by other
producers in the same region. Under Formula B, on the other hand, levy is
imposed directly on the wholesale purchaser and becomes payable by the
purchaser only when the total quantity of milk delivered to the purchaser
exceeds the purchaser’s reference quantity. The United Kingdom has adopted
Formula B and, in the region constituted by England and Wales, at all material
times there has been, in effect, a single monopoly purchaser — namely the Milk
Marketing Board. The effect is that levy becomes payable in England and Wales
only if the total production of milk exceeds the purchaser’s reference quantity
for England and Wales; so that overproduction on the part of some producers may
be set against underproduction on the part of others. But, if levy does become
payable under Formula B, then it is passed on by the purchaser to those producers
who have overproduced.
It is implicit
in the direction under Formula B — that the burden suffered by the purchaser by
whom the levy is payable shall be passed on ‘to those producers who have
increased their deliveries, in proportion to their contribution to the
purchaser’s reference quantity being exceeded’ — that, under Formula B as well
as under Formula A, it will be necessary to determine a quota or quantity in
respect of each producer by reference to which an ‘increase’ can be identified
and a proportionate contribution can be ascertained.
Council
Regulation (EEC) No 857/84 was adopted for the purpose of setting out general
rules for the application of the additional levy introduced by the new article
5(c) of Regulation (EEC) No 804/68. Article 2 determines the reference
quantity. It is in these terms:
(1) The reference quantity referred to in Article
5c(1) of the previously mentioned Regulation [that is, 804/68] shall be equal
to the quantity of milk or milk equivalent delivered by the producer during the
1981 calendar year (Formula A), or to the quantity of milk or milk equivalent
purchased by a purchaser during the 1981 calendar year (Formula B), plus 1% . .
.
Article 9
provides for the collection of levy. In particular, in cases where Formula B is
applied, article 9(1)(b) requires that the levy shall be collected by a final
account calculated after the end of the 12-month period concerned, on the basis
of the actual excess during this same period beyond the purchaser’s annual
reference quantity. Article 10 is in these terms:
Where Formula
B is applied: . . .
2. After the
end of the twelve-month period concerned the purchaser shall, where
appropriate, on the basis of the final account referred to in Article 9(1)(b),
make the necessary adjustments on the basis of the milk or milk equivalent
quantity by which each of the producers has, for the relevant period, exceeded
an annual quantity corresponding to that taken for the purposes of establishing
the purchaser’s reference quantity . . .
Article 8
provides that, except as provided for in article 7(1), where Formula B is
applied, member states may take the necessary steps making it possible for
purchasers to manage the reference quantities allocated to them ‘including the
allocation and re-allocation of the quantities mentioned in Article 10 . . .’.
The ‘quantities mentioned in Article 10’ include a quantity to be established
in respect of each producer ‘corresponding to that taken for the purposes of
establishing the purchaser’s reference quantity’. This again gives recognition
to the need under Formula B as well as under Formula A to determine a quantity
or quota in respect of each producer.
‘Producer’ is
defined in article 12(c) of Regulation (EEC) No 857/84. For present purposes
the expression means:
A natural or
legal person or group of natural or legal persons farming a holding located
within the geographical territory of the Community: — supplying the purchaser .
. .
And in this
context ‘holding’ means:
All the
production units operated by the producer and located within the geographical
territory of the Community . . .
‘Purchaser’ is
defined as:
An undertaking
or grouping which purchases milk or other milk products:
— to treat or
process them, or
— to sell
them to one or more undertakings treating or processing milk or other milk
products . . .
Article 7(1)
of Council Regulation (EEC) No 857/84, as originally adopted, was in these
terms:
(1) Where an undertaking is sold, leased or
transferred by inheritance, all or part of the corresponding reference quantity
shall be transferred to the purchaser, tenant or heir according to procedures
to be determined . . .
Detailed rules
for the purposes of applying that article were laid down by article 5 of
Commission Regulation (EEC) No 1371/84 in these terms (so far as material):
. . . the
following rules shall apply to the transfer of reference quantities granted to
producers and purchasers in application of Formulas A and B and of reference
quantities granted to producers selling for direct consumption:
1. Where an
entire holding is sold, leased or transferred by inheritance, the corresponding
reference quantity shall be transferred in full to the producer who takes over
the holding.
2. Where one
or several parts of a holding is sold, leased or transferred by inheritance,
the corresponding reference quantity shall be distributed among the producers
operating the holding in proportion to the areas used for milk production or
according to other objective criteria laid down by Member States . . .
3. The
provisions of subparagraphs 1 and 2 above shall also be applicable in other
cases of transfer which, under the various national rules, have comparable
legal effects as far as producers are concerned . . .
In the
circumstances that the concept of the ‘holding’ is linked directly to the
producer — see paras (c) and (d) of article 12 of Regulation (EEC) No 857/84,
which are set out above — and only indirectly to a purchaser (in that a
purchaser is an undertaking which purchases milk from a producer) the rules
laid down in article 5 of Regulation (EEC) No 1371/84 must be taken to apply
not only to the producer’s reference quantity determined under Formula A but
also to the ‘[producer’s] quantity corresponding to that taken for the purposes
of establishing the purchaser’s reference quantity’ referred to in article 10
of Regulation (EEC) No 857/84. So understood, it is clear that article 7 of
Regulation (EEC) No 857/84, as amplified by article 5 of Regulation (EEC) No
1371/84, is laying down the general principle that, in both Formula A and
Formula B cases, the quantity or quota determined in respect of each producer
will follow the land upon a transfer of all or part of the holding which is
farmed by that producer.
The community
legislation to which I have referred was implemented in the United Kingdom by
the Dairy Produce Quotas Regulations 1984 (SI 1984 No 1047). In those
regulations the expressions ‘holding’, ‘producer’ and ‘purchaser’ have the same
meanings as in article 12 of Regulation (EEC) No 857/84. ‘Purchaser quota’ is
defined as:
. . . the
quantity of dairy produce which may be delivered by wholesale delivery to a
purchaser, from holdings in a region, during a quota year without that
purchaser being liable to pay levy.
‘Formula B
contribution’ means the sums to be recovered under article 10 of Regulation
(EEC) No 857/84 by a purchaser from a producer in a region where Formula B is
implemented; and ‘wholesale quota’ is defined (so far as material) as:
(b) The quantity of dairy produce which may be delivered
by wholesale delivery to a purchaser . . . from a holding in a region in which
Formula B is implemented, in a quota year without the producer in occupation of
that holding being liable to pay Formula B contribution . . .
This
definition is consistent, and only consistent, with the view that under the
community legislation it is necessary, in Formula B cases as well as those
under Formula A, to determine a quantity or quota in respect of each producer
by reference to which his contribution to the purchaser’s liability to pay levy
under Formula B can be ascertained.
The Dairy
Produce Quotas Regulations 1984 were drawn on the basis that no decisions had
then been taken either as to the regions in which the United Kingdom was to be
divided for the purpose of Regulation (EEC) No 857/84 or whether, in respect of
any given region, Formula A or Formula B was to be adopted — see regulation
5(2) and (3). Schedule 2 to the regulations applied in respect of the
allocation, transfer and surrender of wholesale quota in any region — see
regulation 5(6). Para 14(1) of Schedule 2 required the minister to prepare in
respect of each producer a wholesale register entry setting out: (a) his name;
(b) his wholesale quota; (c) his cumulative quarterly wholesale quota; and (d)
identification of his holding. Para 15 required the minister to maintain that
register. Para 16 provided for the creation of a running regional wholesale
reserve and for the addition to that reserve of such quantities of wholesale
quota as might be surrendered to it by any producer on such terms as might be
agreed between the producer and the minister.
Part III of
Schedule 2 to the Dairy Produce Quotas Regulations 1984 contained provisions
applicable to the transfer of wholesale quota. These provisions are consistent,
and only consistent, with the principle that, upon the change in occupation of
a holding or part of a holding, the quota follows the land.
In the light
of the relevant community legislation and the United Kingdom regulations the
position which arose in England on the introduction in 1984 of the additional
levy on milk and milk products and the implementation by the United Kingdom of
Formula B in respect of a region constituted by England and Wales may be
summarised as follows:
(a) A milk producer is liable to pay Formula B
contribution in respect of the milk which he delivers to the Milk Marketing
Board if, but only if, two conditions are satisfied: namely (i) the total of
wholesale deliveries of milk to the board from holdings in England and Wales
exceeds the ‘purchaser quota’ which has been allocated to the board; and (ii)
the wholesale deliveries of milk to the board by that producer from his holding
exceeds his own ‘wholesale quota’.
(b) There is nothing in the community legislation
or in the United Kingdom regulations which prohibits the production or the
wholesale delivery of milk by a producer. Registration of wholesale quota in
the name of a producer confers on that producer immunity to the extent of his
quota from liability to pay Formula B contributions. Delivery of milk in excess
of his wholesale quota may, but not necessarily will, expose the producer to
liability to pay Formula B contributions.
(c) Wholesale quota may be surrendered to the
wholesale reserve, but, save to that extent, it cannot exist independently of a
producer and a holding, both of which must be identified in the register entry.
This conclusion necessarily follows from the terms in which ‘wholesale quota’,
‘producer’ and ‘holding’ are defined for the purposes of the United Kingdom
regulations.
(d) Upon a change in the occupation of all or a
material part of the producer’s holding, there will be a corresponding change
in the register entry relating to that holding. The change will reflect the
principle that quota follows the land. The register entry must be amended to
show the new occupier of the whole, or a part, of the holding as the person
entitled to the whole, or a corresponding part, of the quota.
In these
circumstances, if the question posed in this appeal were to be answered on the
basis of the community legislation and the United Kingdom regulations as
adopted and made in 1984, I should have no doubt that the conclusion which the
arbitrator has reached was correct. Hills Farm was the relevant holding. For so
long as the partnership was in occupation of that holding the partners were —
together — the producer in relation to that holding and so were — together —
the persons who were potentially liable to pay Formula B contribution in
respect of the wholesale delivery of milk from that holding and the persons who
were able to, and did, benefit from the immunity from that liability which was
conferred by the registration of wholesale quota in their names. Upon the death
of Harry Faulks the equitable interest of the partnership under the trust of
the tenancy declared by clause 18 of the partnership deed — by virtue of which,
alone, the partnership was entitled to occupy Hills Farm — determined. John
Faulks became the sole occupier of the holding, having the whole legal and
beneficial interest in the tenancy, and so became the producer in relation to
that holding. He became the person who was potentially liable to pay Formula B
contribution in respect of the wholesale delivery of milk from that holding and
so the only person who could benefit from the immunity from that liability
conferred by the wholesale quota registered in respect of that holding.
Under the
United Kingdom regulations the minister was bound to give effect to the change
of occupation by amending the register entry. This was consistent with the
principle in article 7(1) of Regulation (EEC) No 857/84 as amplified by article
5 of Regulation (EEC) No 1371/84; treating the determination of a beneficial
interest under a trust as being one of those ‘other cases of transfer which,
under . . . national rules, have comparable legal effects as far as producers
are concerned’ to a transfer by inheritance — see, in particular, article 5(3)
of the Commission regulations. The answer to the question whether the milk quota
formerly registered in the name of the partnership could properly be regarded
as property or a right or interest in property, separate and distinct from the
holding, would be a clear negative. It is also clear that the milk quota would
not have been available in a dissolution under the 1890 Act to meet the debts
and liabilities of the partnership.
It was urged
upon me that, whatever had been the intention of those who adopted the
community legislation and made the United Kingdom regulations 1984, circumstances
had altered by 1988. It was said on behalf of the appellant that, by 1988, milk
quota had become recognised as an independent asset having an economic value. I
do not doubt that this perception of milk quota is widely held. Nevertheless, I
do not think it accords with the community legislation and the United Kingdom
regulations as they were at the death of Harry Faulks in June 1988. It is
necessary to trace the material developments.
Within a year
of the adoption by the Council of the European Communities of Regulation (EEC)
No 857/84 it was recognised that the application of article 7 of that
regulation might ‘in certain cases result in difficult situations at an
economic and social level’. In particular, it was thought appropriate by the
council
in order to
enable a lessee whose lease on a holding is due to expire to continue milk
producing elsewhere, that Member States be authorised to place at the disposal
of such lessee all or part of the reference quantity corresponding to the
holding which he is leaving.
To this end
article 7 was replaced. The new article was adopted on February 26 1985,
together with a number of other amendments, in Council Regulation (EEC) No
590/85. So far as material the new article 7 is in these terms:
(1) Where a holding is sold, leased or
transferred by inheritance, all or part of the corresponding reference quantity
shall be transferred to the purchaser, tenant or heir according to procedures
to be determined.
Where land is
transferred to the public authorities and/or for public use . . . Member States
may provide that all or part of the reference quantity corresponding to the
holding or to the part of the holding transferred shall be put at the disposal
of the departing producer if he intends to continue milk production . . .
I need not
read subparas (2) and (3); but subpara (4) is in these terms:
(4) In the case of rural leases due to expire,
where the lessee is not entitled to an extension of the lease on similar terms,
Member States may provide that all
subject of the lease shall be put at the disposal of the departing lessee if he
intends to continue milk production . . .
As I have
already indicated, detailed rules for the purposes of applying article 7(1) of
Regulation (EEC) No 857/84 had been set out in article 5 of Commission
Regulation (EEC) No 1371/84. By June 1988 that regulation had been amended on a
number of occasions. It was decided, in the interests of clarity, to
consolidate the rules. This was done by Commission Regulation (EEC) No 1546/88,
adopted on June 3 1988. The recitals to that regulation include the following:
Whereas
pursuant to the second subparagraph of paragraph 1 and paragraph 4 of Article 7
of Regulation (EEC) No 857/84 [meaning the new article introduced in 1985]
Member States may, where land is transferred to the public authorities or where
a non-renewable lease expires and cannot be extended on similar terms, provide that
all or part of the reference quantity corresponding to the holding or to the
part of the holding concerned is to be put at the disposal of the departing
producer; whereas that right constitutes a derogation from the principle laid
down in the first subparagraph of Article 7(1) whereby a reference quantity may
not be transferred without the land; whereas the said derogation was introduced
in order to overcome certain economic and social problems and allow producers
to continue milk production; whereas the extent of that derogation should
therefore be specified . . .
For this
purpose Regulation (EEC) No 1546/88 repealed Regulation (EEC) No 1371/84 and
replaced article 5 of that repealed regulation by a new article 7. Subparas
(1), (2) and (3) of article 7 of Regulation (EEC) No 1546/88 are in
substantially the same terms as those of article 5 of Regulation (EEC) No
1371/84. Article 7 subpara (4) of the new article is in these terms:
(4) In the event of the application of the second
subparagraph of Article 7(1) of Regulation (EEC) No 857/84, concerning the
transfer of land to the public authorities and/or for public use, and Article
7(4) of the said Regulation, concerning rural leases which are due to expire
and which cannot be extended on similar terms, all or part of the reference
quantity corresponding to the holding or to the part of the holding which is
the subject of the transfer or of the said lease shall be put at the disposal
of the producer concerned if he intends to continue milk production, provided
that the sum of the reference quantity thus made available to him and the
quantity corresponding to the holding which he takes over or on which he
continues milk production does not exceed the reference quantity which was
available to him before the land was transferred or before the lease expired.
The new
article 7(4) of Regulation (EEC) No 857/84 is permissive. It allows provision
to be made for the benefit of outgoing tenants who intend to continue in milk
production. It was adopted for the purpose of relieving the hardship which
would otherwise flow from the application of the principle in the first subpara
of article 7(1). That this is so is recognised by the recital in Commission
Regulation (EEC) No 1546/88, which I have set out above. The introduction of
the new article 7(4) in the commission regulation is expressed in that recital
to be for the purpose, inter alia, of specifying, or defining, the
extent of the derogation from that principle. The principle itself — namely
that the reference quantity or quota corresponding to a producer’s holding
follows the land — is affirmed.
Provision for
the benefit of outgoing tenants in the United Kingdom was made by section 13 of
and Schedule 1 to the Agriculture Act 1986. But that provision does not take
the form of an allocation to the outgoing tenant of any part of the quota held
in respect of the land formerly subject to his tenancy. Rather, the tenant is
entitled, by way of compensation, to a payment from his landlord. The amount of
the payment is equal to the value of so much of the relevant quota (defined in
para 1(2) of Schedule 1) as is apportioned, or attributable, to the tenant
under the complex provisions in the Schedule. But the apportionment or
attribution is for the purpose of measuring the compensatory payment and not
for the purpose of any transfer of quota. There is no doubt that, as counsel
for the appellant contended, analysis of the provisions in Schedule 1 to the
Agriculture Act 1986 must lead to the conclusion that Parliament has recognised
that milk quota can be valued — see, in particular, para 9 of that Schedule —
but these provisions do not, in my view, lead to the conclusion that quota is
an asset which is capable of being enjoyed, or transferred, independently of
the land in respect of which it is registered.
It was further
argued on behalf of the appellant that, whatever view I might form of the
effect of the community legislation, the relevant provisions had been
considered by the Court of Justice for the European Communities and that the
conclusions of that court were binding on me. The case to which I was referred,
Wachauf v Bundesamt fur Ernahrung und Forstwirtschaft (Case 5/88)
[1991] 1 CMLR 328, was decided by the European Court (Third Chamber) on July 13
1989, on a reference from Germany by the Administrative Court at Frankfurt. The
questions referred to the European Court were these:
(1) Is an agricultural production unit having
neither dairy cattle nor facilities (such as milking parlours) capable of being
used exclusively for milk production a holding within the meaning of Article
12(d) of Council Regulation 857/84 of 31 March 1984?
(2) Is the surrender of leased property upon the
expiry of the lease a case having ‘comparable legal effects’ within the meaning
of Article 5(3) of Commission Regulation 1371/84 of 15 May 1984, if the leased
property is an agricultural holding without dairy cattle and without any
facilities capable of being used only for milk production (for example, milking
parlours), and where the lease provided for no obligation on the part of the
lessee to engage in milk production?
Both questions
were answered in the affirmative. Those are not questions which arise in the
appeal before me. But there are observations in the judgment of the European
Court and, more particularly, in the opinion of the Advocate-General on which
the appellant relies.
The context in
which the questions referred to the European Court in Wachauf had arisen
was a dispute between a tenant farmer and the German authorities regarding the
farmer’s participation in a scheme granting compensation for the definitive
discontinuance of milk production (‘an outgoers scheme’). Article 4(1) of
Regulation (EEC) No 857/84 had empowered member states, with a view to the
restructuring of milk production, to grant compensation to producers
undertaking to discontinue milk production definitively. The German authorities
had adopted a scheme (‘the German outgoers scheme’) for this purpose. Under
that scheme, a claimant who was the tenant of a holding within the meaning of
article 12(d) of Regulation (EEC) No 857/84, was required not only to undertake
to discontinue production but also to submit written consent from his landlord.
The claimant,
Hubert Wachauf, was tenant of a farm which had not previously been, but which
had become under his occupation, a dairy farm. In due course the claimant had
been allocated a reference quantity or milk quota. His tenancy expired and he
vacated the farm. He applied for compensation under the German outgoers scheme
as a producer who was discontinuing milk production. The landlord refused
consent on the grounds that compensation under the scheme would result in the
loss to the farm of the quota which had been allocated. The German court was
uncertain whether the farm, as leased by the claimant, was a ‘holding’ within
the meaning of article 12(d) — hence the first question. That court had also
taken the view that the surrender, on the expiry of the lease, of a farm which,
as leased, was not a milk-producing holding, could not be regarded as a case
comparable to the grant of a lease of a milk-producing holding to which quota
already attached so as to fall within article 5(3) of Regulation (EEC) No
1371/84 — hence the second question.
The
Advocate-General advised that both questions be answered in the affirmative. He
then went on to discuss what he described as ‘the underlying question’. He put
that question in these terms, at [1991] 1 CMLR 328 at p 340:
The National
Court takes the view that, if the questions referred for a preliminary ruling
are answered in the affirmative, then an issue arises as to the compatibility
with constitutional guarantees of equality and of respect for private property
of the rule requiring the landlord’s consent to a tenant’s participation in the
German outgoers’ scheme and the rule that, on expiry of the tenancy, the quota
reverts with the land to the landlord. The National Court’s concern with
constitutional guarantees appears to stem from its conviction that there may be
cases in which it is the tenant, rather than the landlord, who through his
efforts has attracted a quota to the holding, and that in such cases it would
be inequitable if the landlord could, without more, veto the tenant’s
participation in an outgoers’ scheme and if the landlord, on the expiry of the
tenancy, were to obtain all the benefit of the quota to the exclusion of the
tenant . . .
The
Advocate-General then considered the two principles — non-discrimination and
respect of private property — and, in relation to the latter, came to this
conclusion at p 342:
That analysis
[in Haur und Land Rheinlandpfalz [1980] 3 CMLR 42] can be applied, in my
view, to the intangible asset constituted by a milk quota, which can properly
be regarded as having an independent economic value; and in accordance with
that analysis, I would suggest that there may well be cases where the permanent
loss to the tenant of the use and value of the quota on expiry of a tenancy can
be viewed as a measure of expropriation.
In their
written observations in this case, both the Commission and the
than an instrument of market management and cannot be considered as a kind of
intangible asset in which property rights can arise. In my view, while this might
correspond with the intention of the Community legislation, it does not reflect
economic reality. If one considers the nature of the quota from the point of
view of the producer, then it is plain that what the quota amounts to is a form
of licence to produce a given quantity of a commodity (milk) at a more or less
guaranteed price without incurring a penalty (the additional levy). In a market
which has been effectively ossified by the introduction of quotas, such a
‘licence’ is bound to acquire an economic value. This value will primarily
translate into higher rental and capital values for dairy holdings. But that a
quota can also have an intrinsic value is shown by the practice of ‘quota
leasing’, ie the temporary transfer without land of unused quota from one
producer to another, a practice authorised by Article 5c(1a) of Regulation
804/68, as amended by Council Regulation 2998/87. It is also indicated, though
more indirectly, by Article 7(4) of Regulation 857/84, which can be seen as
designed to protect the tenant’s interest in the economic value represented by
the quota.
Community
legislation has not resolved the issue of ownership of quota, possibly because
it was not considered desirable to admit — for fear of creating a market in
quota — that quota could be owned at all. The issue is not an easy one. On the
one hand, the fact that the transfer rules in principle require the quota to
follow the land suggests that these attach to the land and therefore be
regarded as the property of the landowner. On the other hand, the existence of
Article 7(4) of Regulation 857/84 and the recent authorisation of ‘quota
leasing’ indicate that attachment to the land is not absolute. Moreover the
quotas are allocated to a person, the individual producer, who may of course be
a tenant, on the basis of his production in a given reference year, rather than
to a holding. These considerations, in my view, suggest that it is possible for
either a landlord or a tenant to have a proprietary interest in a quota.
It will be
clear, from earlier passages in this judgment, that I think that there is no
true dichotomy, as the Advocate-General appears to suggest, between the
allocation of quota to a person and allocation to a holding. Reference
quantity, or quota, is allocated to a producer who must, reasonably, be a
person or group of persons farming a holding — see article 12(c) and (d) of
Regulation (EEC) No 857/84. Further, under the United Kingdom regulations, a
wholesale register entry must, necessarily, identify both the producer and the
holding — see para 14(1) in Schedule 2 to the Dairy Produce Quotas Regulations
1984 and its successor, regulation 30(2) of the Dairy Produce Quotas
Regulations 1986. Further, I do not think it is correct to describe quota as ‘a
form of licence to produce a given quantity of a commodity (milk)’. The true
position, at least in England and Wales, is that a producer does not require a
licence to produce milk and will not necessarily incur any liability as a
consequence of production. It is in respect of his potential liability that he
enjoys an immunity from Formula B contribution by virtue of, and to the extent
of, the register entry of an amount of wholesale quota in his name.
Nevertheless, the appellant is entitled to point to the Advocate-General’s view
that, as a matter of economic reality, milk quota is to be regarded as an
intangible asset having an intrinsic value.
The European
Court did not, I think, find it necessary to endorse the Advocate-General’s
view. The effect of article 7 of Regulation (EEC) No 857/84 is considered at
para 13 of the judgment of that court. The conclusion at [1991] 1 CMLR 328 at p
347 in the report is that:
It is
apparent from the provisions quoted, considered as a whole, that the Community
legislature intended that at the end of the lease the reference quantity should
in principle return to the lessor who retakes possession of the holding,
subject, however, to the Member State’s power to allocate all or part of the
reference quantity to the departing lessee . . .
As I have
already indicated, that power has not been exercised by the United Kingdom
Government. The outgoing tenant in England and Wales is compensated by a
payment of money, not by the allocation of quota.
The European
Court in the Wachauf case accepted at para 19 of its judgment:
. . . that
Community rules which, upon the expiry of the lease, had the effect of
depriving the lessee, without compensation, of the fruits of his labour and of
his investments in the tenanted holding would be incompatible with the requirements
of the protection of fundamental rights in the Community legal order . . .
But it reached
the conclusion at para 22 that:
The Community
regulations in question accordingly leave the competent national authorities a
sufficiently wide margin of appreciation to enable them to apply those rules in
a manner consistent with the requirements of the protection of fundamental
rights either by giving the lessee the opportunity of keeping all or part of
the reference quantity if he intends to continue milk production, or by
compensating him if he undertakes to abandon such production definitively.
In my view,
the effect of the judgment of the European Court is to affirm the principle
that quota is attached to the land, while recognising that the rules made under
the community legislation permit member states to make provision for
compensating the outgoing tenant in cases where the strict application of that
principle would cause hardship. I do not find anything in that judgment which
lends support to the Advocate-General’s view that quota can properly be
regarded as an intangible asset, distinct from the holding to which it relates.
The provisions
comparable to the German outgoers scheme which were current in England and
Wales on June 12 1988 (when the partnership determined) are found in the Milk
(Cessation of Production) (England and Wales) Scheme 1987 — a scheme made under
the Milk (Cessation of Production) Act 1985. I can find nothing in the Act or
in the scheme which supports the contention that milk quota is to be regarded
as an intangible asset in which distinct property rights — that is to say,
distinct from rights in respect of the holding to which the quota relates — can
arise. Indeed, given the observations which the United Kingdom Government put
before the European Court in the Wachauf case — see [1991] 1 CMLR 328 at
p 342 — it would be surprising if there were support for that contention in the
domestic scheme. The position under the scheme is that, on a transfer of milk
quota to the reserve by a tenant in occupation of a holding, the compensatory
payment may be apportioned between landlord and tenant under the provisions of
regulations 12 and 13. There is nothing in the scheme which entitles the tenant
who has gone out of occupation and so ceased milk production to claim
compensation from his landlord. That right is conferred by the Agriculture Act
1986, to which I have already referred.
Counsel for
the appellant directed me to the definition of ‘milk quota’ in section 1(8) of
the 1985 Act; that is to say:
‘milk quota’
means —
. . .
(b) in the case of a person registered in the
wholesale register maintained under [the 1984] Regulations, a wholesale quota
registered as his in that register . . .
There are
similar expressions of a proprietary nature in the scheme — see in regulation
3(2):
. . . an
applicant’s quota shall be the amount of quota to which he is entitled at the
date of the application . . .
And in
regulation 4(1):
. . . any
person who is or has been a registered milk producer and who — (a) undertakes .
. . to surrender all his milk quota to the reserve . . .
In my view,
given the terms in which ‘wholesale quota’ is defined by the Dairy Produce
Quotas Regulations 1984 and the requirement in those regulations (and in the
1986 regulations) that a wholesale register entry must identify not only the
producer but also his holding, these expressions do not indicate any departure
from the principle that milk quota attaches to land. They are, I think, no more
than a convenient way of referring to the quota shown in the register entry to
which the applicant for compensation is named as the producer.
The concept of
‘quota leasing’ to which the Advocate-General refers in the Wachauf case
was authorised by Council Regulation (EEC) No 2998/87. It was introduced in
England and Wales with effect from March 31 1988 by regulation 6 of the Dairy
Produce Quotas (Amendment) Regulations 1988 (SI 1988 No 534). That regulation,
now re-enacted as regulation 15 of the Dairy Produce Quotas Regulations 1989
(SI 1989 No 380), permits a producer ‘to make a temporary transfer within one
region of part of the wholesale quota registered as his to another producer for
a period of one quota year’. The transferor will retain the untransferred part
of his wholesale quota and so will remain on the register in respect of his
holding. The transferee must be a producer within article 12(c) of Regulation
(EEC) No 857/84; that is to say, he must be a person farming a holding within
the same region and so a person who is already the subject of a register entry.
In these circumstances, the effect of the ‘temporary transfer’ is that, in
respect of a given quota year, the wholesale quota in respect of which the
transferor is registered is diminished, and the quota in respect of which the
transferee is registered is increased, by a corresponding amount.
year’s Formula B contribution is increased, and the transferee’s potential
liability is diminished, by the amount of the transfer.
This does not
lead to the conclusion that what has been transferred under a regulation 6
transfer is an asset or some form of property right. It must be kept in mind
that liability to formula B contribution is a liability on the producer to
contribute to additional levy imposed on the wholesale purchaser. It is
analogous to the liability of one of several co-sureties (each in respect of
part of a debt) to contribute a limited proportion of the debt owed by the
principal debtor to the creditor. An agreement between two co-sureties and the
creditor that the proportions in respect of which the sureties shall be liable
to contribute shall be varied — so that the potential liability of one is
increased and the potential liability of the other correspondingly diminished —
would not, on an ordinary use of language, be regarded as a transfer of an
asset or property right by the one surety to the other. Rather, it is the
transfer of a potential liability from the latter to the former. In the same
way, as it seems to me, the transfer of quota from one producer to another —
effected, as it must be, by reciprocal adjustment to their respective entries
on the register — is properly to be regarded not as the transfer of an asset by
the transferor to the transferee but rather as the transfer of a potential
liability from the transferee of the quota to the transferor. The fact that the
transfer of a potential liability is likely to be matched by a payment to the
person assuming that liability may enable it to be said that the quota
transferred has an intrinsic economic value, but that does not of itself lead
to the conclusion that quota is an asset separate and distinct from the holding
in relation to which it was, or becomes, registered.
Counsel for
the appellant also placed reliance on the way in which milk quota has been
treated for the purpose of the taxation of capital gains; and, in particular,
on the provision, introduced by section 12 of the Finance Act 1988, in relation
to roll-over relief under the Capital Gains Tax Act 1979. In summary, the
position is:
(a) Tax is charged in accordance with the 1979
Act in respect of capital gains accruing to a person on the disposal of assets
— see section 1(1) of that Act.
(b) Chapter 1 of Part II of the Act (sections 19
to 27) contains detailed provisions for identifying what shall be regarded for
the purposes of the Act as a disposal of assets; in particular, section 20(1)
provides that there is a disposal of assets by their owner where any capital
sum is derived from assets notwithstanding that no asset is acquired by the
person paying the capital sum.
(c) Section 115 of the Act provides, in effect,
that roll-over relief shall be available where the consideration which a person
carrying on a trade obtains for the disposal of assets used for the purposes of
the trade is applied by him in acquiring other assets which, on acquisition,
are taken into use for the purposes of the trade, and both the old assets and
the new assets are within the classes listed in section 118.
(d) Section 118 of the Act, as originally
enacted, listed three classes of assets — namely class 1, assets within Heads A
and B; class 2, ships, aircraft and hovercraft; and class 3, goodwill. Head A
of class 1 included any land occupied (as well as used) only for the purpose of
the trade.
(e) Section 112 of the Finance Act 1988 added two
additional classes to the original three: class 2A, satellites, space stations
and spacecraft; and class 4, which was in these terms:
Milk quotas
(that is, rights to sell dairy produce without being liable to pay milk levy or
to deliver dairy produce without being liable to pay a contribution to milk
levy) and potato quotas (that is, rights to produce potatoes without being
liable to pay more than the ordinary contribution to the Potato Marketing
Board’s fund . . .)
It appears
from an Inland Revenue press release dated October 29 1987 (reported in [1987] Simon’s
Tax Intelligence at p 806) that the relief afforded by section 112 of the
Act was introduced with effect from that date on the basis that ‘the land
itself already qualifies for roll-over relief but under present rules the quota
— the right to produce milk or potatoes without incurring a levy — does not
qualify’.
In the
ordinary transaction of a transfer on sale of the whole of the land comprised
in a holding in respect of which there is a register entry of an amount of
wholesale milk quota, there will necessarily be an amendment to the register
entry into the name of the transferee. This will follow from the provisions in Part
III of Schedule 2 to the Dairy Produce Quotas Regulations 1984 and
(subsequently) regulation 8 of the Dairy Produce Quotas Regulations 1986 (as
originally made and as subsequently amended by regulation 5 of the Dairy
Produce Quotas (Amendment) Regulations 1988). I find it difficult to understand
how, in such a case, it could have been argued that the consideration for the
disposal of the land — for the purposes of roll-over relief under section 115
of the 1979 Act — did not include any element of that consideration
attributable to the milk quota in respect of which the transferee would become
registered as a consequence of the transaction.
If the
understanding of the law which gave rise to the comment in the Revenue’s press
release of October 29 1987, which I have set out above, was to the contrary,
then I think that understanding may have been based on a false appreciation of
the true position. Further, I would have thought that the surrender of milk
quota to the reserve could well have been regarded as a partial disposal of the
land — by virtue of section 20(1) of the 1979 Act — and so qualified for
roll-over relief under Head A of class 1. These are not questions which I need
to decide. There can be no doubt that it was thought by those responsible for
the press release dated October 29 1987 and for the relief subsequently enacted
that there were circumstances in which a producer might receive a capital sum
in respect of milk quota which would not qualify for roll-over relief under the
1979 Act in its original form.
The question
for me is whether the inclusion of milk quota within the classes of assets in
section 118 of the 1979 Act requires me to alter my view — formed on the basis
of an analysis of the community legislation and the United Kingdom regulations
— that the milk quota formerly registered in the name of the partnership could
not properly be regarded as property, or a right or interest in property,
separate and distinct from the holding in respect of which it was registered;
and that it would not have been available in a dissolution under the 1890 Act
to meet the debts and liabilities of the partnership. In my judgment, it does
not. I do not think that it could be right to allow a relieving section in a
taxing statute to override what I regard as the clear effect of the primary
legislation. I find some comfort in the fact that, whatever may have been the
views of those responsible for its treatment under the capital gains tax
legislation, the concept of milk quota as an asset independent of the holding
to which it related was expressly refuted by the United Kingdom Government in
its submissions to the European Court: see the Wachauf case [1991] 1
CMLR 328 at p 342.
It follows,
therefore, that I do not find anything in the developments which have taken
place since the introduction of milk quota in 1984 which causes me to alter the
view which I have already expressed — namely that the milk quota formerly
registered in the name of the partnership should not be taken into account as
an asset of the partnership for the purposes of valuing the assets as at June
12 1988 pursuant to clause 16 of the partnership deed. Accordingly, I dismiss
this appeal.
There are two
further points which I should mention. First, although it may seem harsh that
those entitled to the estate of Harry Alfred Faulks will be deprived of a share
in what may well be a substantial part of the economic value of the dairy
business which he carried on in partnership with his brother, this is a
necessary consequence of the bargain which the brothers made in relation to the
tenancy of the farm. It is clear from the provisions of clause 18 of the
partnership deed (including, in particular, the proviso to that clause) that
the brothers intended that the survivor — or, in the case of a dissolution inter
vivos, the continuing partner — should succeed to the tenancy.
If John Faulks
had predeceased his brother Harry, it is likely that effect would have been
given to this intention by the provisions of Part II of the Agriculture
(Miscellaneous Provisions) Act 1976. But if John had decided to determine the
partnership, say, by notice under clause 12 of the partnership deed during his
brother’s lifetime, the succession could not have been guaranteed. The landlord
might have refused consent to the assignment of the tenancy to Harry which is
contemplated by the proviso to clause 18. The tenancy would have remained
vested in John, who would have been entitled to continue farming the holding as
a dairy enterprise and to be registered in respect of the milk quota by virtue
of regulation 8 of the Dairy Produce Quotas Regulations 1986. But Harry would
have been entitled, as the remaining or continuing partner, to take all the
partnership assets and farm elsewhere. In that situation it would have been
bizarre to value the milk quota as an asset of the partnership for the purposes
of setting the price which Harry was to pay for John’s
Second, in
dismissing this appeal, I am not to be taken as having decided that there are
no circumstances, either in this or in a similar case, in which some adjustment
may need to be made in taking the accounts of a farming partnership to reflect
the fact that the land which, ex hypothesi, the partnership has ceased
to occupy may have acquired an enhanced value as a result of a dairy enterprise
which the partnership has carried on. I was referred, in the course of
argument, to Pawsey v Armstrong (1881) 18 ChD 698 and Miles v
Clarke [1953] 1 WLR 537. The principle in those cases appears to me to
be this: that where partnership money has been expended in maintaining or
enhancing the value of land which is the exclusive property of one partner,
then in taking partnership accounts on a dissolution it may be fair and right
to make some allowance to the partnership against that partner for the money
which has been so expended or, perhaps, for a portion of the enhanced value. In
making such an allowance the court does not, I think, treat the land or
anything on it as an asset of the partnership which is to be valued as such;
rather, it adjusts the accounts between the partners by debiting the account of
the partner who benefited from the expenditure in order to do what is just and
equitable. It is not difficult to imagine circumstances in which that principle
might apply in relation to milk quota formerly registered in the name of a
partnership — for example, where the dairy enterprise was commenced by, or was
wholly attributable to, the efforts of the partnership (cf the Wachauf
case) or where (in so far as that is possible) some part of the quota had been
acquired by the partnership on the back of a transfer of a limited interest in
land (as to which see, generally, para 8.4, ‘Transfer of Quota’, in Essential
Law for Landowners and Farmers (3rd ed, 1990) by Gregory and Sydenham).
There is nothing in the facts which I have seen which suggests that the
principle applies in the present case and the question is not one which I can
properly decide on this appeal.
Appeal
dismissed with costs. Certificate issued under section 1(7) of the Arbitration
Act 1979. Leave to appeal refused.
