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Chief Adjudication Officer v. Knight [1997] UKSSCSC CIS_841_1994 (09 April 1997)

R(IS) 14/98

(Chief Adjudication Officer v. Knight)

Mr. J. M. Henty CIS/841/1994

CA (Butler-Sloss, Pill and Judge LJJ)

Capital - sleeping partner in family business - whether a "self-employed earner" such that business assets fell to be disregarded

The claimant was a widow of 85 or 86 years of age and permanently resident in a residential care home. She was a partner, with her son and his wife, in a farming business, the fixed assets of which included the farm land. She had ceased to be an active member of the partnership but remained entitled to a share in the profits, a proportion of the capital and was jointly and severally liable for partnership losses. The son kept her informed and kept her interest in the business alive, but he did not tell her things that would upset her and she gave him permission to do what he wanted in the business. The farm land itself was vested in the claimant and her son under a trust for sale, by virtue of an assent and a trust deed pre-dating the partnership deed. She claimed income support and an adjudication officer refused her claim on the basis that the farm land was in the joint names of the claimant and her son and by virtue of regulation 52 of the Income Support (General) Regulations 1987 she was deemed to be entitled to a half share in the open market value of that interest, which after appropriate deductions he found was £34,000, in excess of the capital limit of £8,000. The claimant appealed to a social security appeal tribunal, which allowed her appeal, accepting the claimant's argument that the claimant's interest in the farm land was an agricultural tenancy and as such a reversionary interest which fell to be disregarded under paragraph 5 of Schedule 10 to the Income Support (General) Regulations 1987.

The adjudication officer appealed to the Commissioner, who held that the tribunal was wrong to find an agricultural tenancy but that the farm land was a partnership asset and should be disregarded as a business asset under paragraph 6 of Schedule 10, finding the claimant to be engaged as a self-employed earner for the purposes of that paragraph. The Chief Adjudication Officer appealed to the Court of Appeal. The claimant issued a cross-notice of appeal accepting that there was not an agricultural tenancy but contending that there was a six month period of notice required in order to dissolve the partnership which created an obstruction to the claimant's rights as owner of the land and meant that they were reversionary interests only.

Held, unanimously allowing the Chief Adjudication Officer's appeal and dismissing the claimant's cross appeal, that:

to come within paragraph 6 of Schedule 10 the claimant must be or have been involved in the business in some practical sense as an earner in the business or be precluded from making any such contribution by reason of infirmity. The precise nature of the requisite involvement is not defined and in each case must be decided individually. However, the fact that the partnership agreement provides for some payment, irrespective of whether the recipient has been engaged or involved in a practical sense, is not of itself enough to show the appropriate level of involvement. A sleeping partner in a business managed and worked exclusively by others does not come within the description of an individual engaged in the business;

the commitment of the claimant's assets to the partnership, together with the risk of incurring liabilities, and her allowance from its profits did not constitute a sufficient positive involvement for the purpose of paragraph 6 of Schedule 10;

as a partner in the property the claimant was enjoying her rights of property in the farm and her rights were not deferred or limited by rights enjoyed by anyone else which could prevail over her rights. Her interest in the land was not an interest in reversion.

The Court remitted the case for a fresh valuation of the claimant's assets.

DECISION OF THE SOCIAL SECURITY COMMISSIONER

My decision is that while the actual decision of the SSAT was correct the reasons therefor were not. In that respect, the tribunal and I differ. I therefore uphold the actual decision vis that the claimant is entitled to income support from 23 June 1993 as her capital resources did not exceed the prescribed amount. The reason for this is not, in my decision, that the interest of the claimant in the farm land was a reversionary interest and thus to be disregarded under para. 5 of the 10th Schedule to the Income Support (General) Regulations 1987 ("the General Regulations") but is to be disregarded pursuant to the provisions of para. 6 vis that the farm property (including the farm land) were assets of a business owned in part by the claimant and for the purposes of which she was engaged as a self-employed earner. At this stage I should note by way of general background that since 1 July 1965 the claimant and her son ("the son") have carried on the business of farming in partnership and, since
1 July 1990, the partners have included the son's wife. I refer in greater detail to this aspect later on in this decision.

The case was argued by the AO on the basis of the ownership of the farm land. At all material times the land was held in the joint names of the claimant and the son and he argued that the matter was therefore to be determined by reference to regulation 52 of the General Regulations as interpreted by CAO v. Palfrey (CA). It seems to me that there may, however, be further partnership property which could be classified as the capital of the claimant but if, as I hold, regulation 6 applies to the land, it applies equally to that further partnership property. I have rejected the AO's argument based on regulation 52.

For the claimant, the case was argued on the basis that the partnership had an agricultural tenancy and therefore the interest of the claimant in the land was a reversionary interest and therefore to be disregarded under para. 5 of Schedule 10. This is the line which was taken by the tribunal. I also reject this argument.

The claimant has no other capital but that which is represented in the partnership accounts. I would note that at no time has it been suggested that regulation 51 (notional capital) or regulation 51A (diminishing notional capital) of the General Regulations have any relevance and, accordingly, I have left them out of my consideration.

This is an appeal by the AO with the leave of the chairman from the decision of the tribunal dated 19 September 1994. It seemed to me that the case raised difficult points of law and I caused the following directions to be raised:

"2. I would like in particular the following points to be covered.

(i) The land and buildings are included in the balance sheet as at
30 June 1992. Are they not therefore partnership assets? At the hearing I would like all the partnership accounts that are available.

(ii) Is not the capital asset of the claimant her share in the partnership assets as a whole?

(iii) If reg. 52 applies is that share one third of the capital assets of the partnership? Alternatively, could it be argued that regulation 52 does not apply and the share of the claimant is that to be found in the balance sheet?

(iv) Does para. 6 of Schedule 10 have any relevance? Does it apply to "a sleeping partner"?

(v) If it is correct that the capital asset of the claimant is her share in the partnership assets how is it to be valued having regard to clause 12(g) of the partnership agreement 15 November 1966, or is it to be predicated that the claimant would dissolve the partnership under clause 3. In that case how is clause 13 to be operated?

(vi) At what dates are the capital assets of the claimant to be valued from the date of her claim?

(vii) Are there any relevant Commissioners decisions as to the treatment of partnership assets for the purposes of income support?"

The hearing was held on 21 July 1995. It is unfortunate that there has been a delay. I had written the greater part of my decision shortly after the hearing but I felt compelled to allow the AO and also the claimant to comment on certain documents which came to light after the hearing. For some reason or other there seems to have been a misunderstanding as to who should answer those directions. Be that as it may, both have answered the further directions and so I can now continue with the matter.

At the hearing Mr. Prosser appeared on behalf of the Department, and Mr. Orchard, a partner in Messrs. Pardoes, appeared on behalf of the claimant. I am greatly indebted to them both and, with their assistance, I hope we have unravelled the story, so that the issues involved are now somewhat clearer than they had been before. At my request, Mr. Orchard made further searches and enquiries and has discovered a deed of 1 July 1965 ("The Deed of Family Arrangement") and an Assent under hand dated 2 July 1965. These were the documents which I felt should be submitted for comment before I could properly finish my decision.

I now turn to the history of the matter:

(i) The father, the claimant's husband, was the owner of the farm. (It may well be that there was some form of partnership with the claimant.) At all material times, it comprised of some 60 acres or thereabouts. The father and the claimant had three children namely the son, Mary ("the daughter") and Alan. Alan died, a minor, unmarried on 15 August 1954. The father had died intestate on
30 April 1949 and letters of administration to his estate were, on 11 October 1949, granted to the claimant and one James Lane out of the Principal Probate Registry. Under the tables of distribution then in force, the claimant became entitled to the statutory legacy of £1,000 and a life interest in one half of residue. Subject thereto, the estate became held upon trust for such of them the son and the daughter who should attain the age of 21 years and if more than one in equal shares absolutely. They respectively attained 21 on 25 April 1964 and 3 June 1957.

(ii) While the son wished to farm, the daughter did not and she was bought out. By the Deed of Family Arrangement (dated 1 July 1965, referred to above) she was paid out. Residue was valued at £11,290 net and in consideration of:

(i) £500 already paid;

(ii) the sum of £2, 500 paid on the execution of the Deed; and

(iii) the sum of £3,000 to be secured on a second mortgage on the farm land,

the daughter released the estate from any claim she might have, and, by clause 3, empowered the administrators to execute any necessary deeds as might be requisite to vest the legal estate in the farm land in the claimant and the son "but upon such footing as to the respective beneficial interests of [the claimant] and [the son] as [the claimant] and [the son] may desire."

(iii) The mortgage in favour of the daughter was duly executed and an undated copy may be found at T102.

(iv) By an Assent dated 2 July 1965 the administrators vested the legal estate in the farm land in the claimant and the son who declared that they held the same upon trust for sale and the net proceeds of sale and the net rents and profits until sale "upon the trust declared concerning the same in a Trust Instrument of even date herewith."

(v) A copy of the Trust Instrument can be found at T27. Subject to satisfying the two mortgages outstanding the claimant and the son declared that (clause 4) they "shall hold the residue of the net proceeds of sale upon trust to divide the same in such proportions as shall correspond with our respective rights and interests."

(vi) On 15 November 1966 the claimant and the son entered into a Partnership Deed which can be found at T107/114. The partnership commenced as from
1 July 1965. The following clauses may be relevant but I do not think it is necessary to set them out in full here - 1, 3, 4, 7, 8, 13 and 14. I do however think it desirable to set out clauses 5 and 6 which deal with the capital of the partnership:

"5. The initial capital of the firm shall be the sum of £12,500 which shall be contributed by and credited in the books as belonging to them in the following proportions that is to say:

[The claimant] £7,500

[The son] £5,000

and such further capital as may by mutual consent be brought in by either partner and such additional capital (if any) shall be credited to the said books of the partners providing the same.

[The claimant] shall be entitled to and shall be credited each year with interest on capital of £6,000 so provided as in the aforementioned clause at a rate of 5% per annum before any division of the profits is made."

(vii) (a) On 18 October 1985 (T114) a Supplementary Deed was entered into which had the effect of treating the capital of the partnership as to 20% belonging to the claimant and as to the remaining 80% as belonging to the son, in lieu of the division expressed in the Partnership Deed to which I have referred above. The claimant however was still to be entitled to credit of interest at 5% on £6,000.

(b) On 26 June 1990 (T115/117) a further Supplementary Deed was entered into, which admitted the son's wife into partnership. The wife bought herself in with the sum of £6,000. The capital was treated as 20% belonging to the claimant and 40% each for the son and his wife. It was provided that the claimant then became entitled to income of £416 per annum in priority to the division of profits which should thereafter belong to the son and his wife in equal shares. This was in lieu of any previous income/share of profits to which before then the claimant may have been entitled.

(viii) In response to my directions, the partnership accounts for the years 1969, 1985, 1986, 1991, 1992, 1993, 1994 have been produced. The year's end for the partnership accounts was, in each case, 30 June. In all these accounts, the farm appears in the balance sheet under the heading of "Fixed Assets" initially valued at £14,000, in 1985 at £12,800, and revalued on 18 October 1985 at £150,000.

The claimant is now aged about 84 years. Since about 10 August 1990, she has been permanently resident in a residential care home in Bridgwater, receiving retirement pension and attendance allowance. On 23 June 1993, she made a claim for income support. By that time, she had ceased to be an active member of the partnership and, in his evidence to the tribunal, the son is said to have confirmed (T137) "that he kept her (the claimant) informed and kept her interest in the farming business alive, but he did not tell her things that would upset her. She gave him permission to do what he wanted in the business".

The claim to income support was refused by the AO on the basis that the farm was in her and the son's joint names and, accordingly, under regulation 52 of the General Regulations, she was deemed to be entitled to a half interest. Having made the appropriate deductions, on 23 May 1994 (T37/39) the district valuer valued the open market of the claimant's interest in the farm land at £34,000.

Now, before me pursuant to direction (i) Mr. Orchard argued that the farm land was not partnership property, and, bearing in mind that a mere contractual licence is normally sufficient to bring about an agricultural tenancy, there was an agricultural tenancy under the Act. The claimant's interest was therefore reversionary and was to be disregarded under para. 5 of Schedule 10. He referred me to certain passages from Lindley 6th Edition, and to Barton v. Morris [1985] 1 WLR 1257. In that case, the property in question was conveyed into the joint names of the defendant and the plaintiff's daughter as beneficial joint tenants. They started thereat the business of a guest house and the property was included in the partnership accounts for tax purposes. Had the property been a partnership asset, then the beneficial joint tenancy would have been severed and the property held as tenants in common in equity. The daughter died. Nicholls J (as he then was) held that the deceased's inclusion of the property in the partnership account for tax purposes was never intended to alter the existing arrangements. It seems to me that that is a completely different case. In this case there was no such agreement as there was in Barton v. Morris. The relevant express trust, which is quite different, is to be found in the Trust Instrument:

"The trustee shall hold the residue of the net proceeds of sale upon trust to divide the same in such proportions as shall correspond with our respective rights and interests."

Barton v. Morris seems to me to be a different case.

Now it seems to me that the figures and the commonsense of the matter can only be explained on the basis that the farm land was, and still is, a partnership asset. In all the accounts it appears as a "fixed asset" in the balance sheet. Moreover, its book value is adjusted on two occasions. I have already set out clauses 5 and 6 of the Partnership Deed. Clause 5 provides that the capital shall be credited to the claimant as to £7,500 and to the son as to £5,000 and clause 6 provides that the claimant shall before any other distribution of profits be entitled to 5% of £6,000 annually.

I think that the key lies in the Second Schedule to the Deed of Family Assignment of 1 July 1965 whereby the daughter was bought out. In that schedule, residue is shown as being £11,290 i.e. £18,945 gross less the claimant's statutory legacy of £1,000 and the sum of £7,655 representing her share of capital in what was presumably a farming partnership carried on by her and her late husband. One half of £11,290 is (roughly) £5,500. We know the daughter was paid this: we know the son was credited with £5,000 in the partnership capital. Possibly he had had a similar advance of £500, as had his sister. That leaves nothing in residue, the income of half of which was due to the claimant. That I think is made up by giving her 5% annually on £6,000 to be paid out of the partnership profits in priority to any other distribution of profits. The claimant is credited with capital of £7,500 (£7,655) and the son with £5,000 (£5,500). These figures must of need be rounded off but it seems to me to be the likely explanation and it is only explicable on the basis that the farm land is and, at all material times, was partnership property, and so I hold. That disposes of any argument that there was a tenancy, quite apart from any difficulties afforded by Rye v. Rye [1962] AC 496. I am satisfied therefore that there was no tenancy in this case.

I now turn to para. 6 of Schedule 10 which provides that the following is to be disregarded:

"(1) The assets of any business owned in whole or in part by the claimant and for the purposes of which he is engaged as a self-employed earner or, if he has ceased to be so engaged, for such periods as may be reasonable in the circumstances to allow for disposal of any such assets."

The tribunal rejected an argument based on this paragraph. It is common ground that the claimant has not for some time taken any active role in the affairs of the partnership. Nevertheless, she remained a partner, entitled to a fixed share in the profits, entitled to 20% of the capital and, possibly more important, jointly and severally accountable for any losses the partnership might make. The fact that she might not be consulted does not mean to say that she cannot be consulted and I would think she had the right to be consulted if she so chose. The tribunal relied on CIS/184/1991 (as I understand it reported as R(IS) 13/93). Mr. Prosser on behalf of the Department accepted that if the claimant was a self-employed earner she was entitled to the disregard but submitted that she was not. He also referred me to R(S) 10/79 paras. 5/6 and CG/19/1994.

What I am concerned with is the statutory definition of "a self-employed earner" which by section 112(1) of the Contributions and Benefits Act 1992 has the definition assigned to it by section 2(1)(b) ibid as follows:

""Self-employed earner" means a person who is gainfully employed in Great Britain otherwise than in employed earner's employment ..."

I now turn to the authorities which have been cited to me and certain other authorities which might be relevant:

(i) CIS/184/1991 reported as R(IS) 13/93

That case did not concern the concept of a self-employed earner: it related to a company wholly owned by the claimant but, in which, she took little active part. However, the Commissioner expressed himself unconvinced that her activities were in fact de minimis (para. 6) but, by that expression, clearly regarded that, where a claimant's role was de minimis, he or she might not satisfy the relevant provision. The relevant provision is contained in regulation 51(5) of the General Regulations which runs as follows:

"(5) For so long as the claimant undertakes activities in the course of the business of the company, the amount which he is treated as possessing under paragraph (4) shall be disregarded."

That provision imports a quite different concept from that in this case and I can quite see that minimal activities in the course of the business of a wholly owned company might well not satisfy the test that "the claimant undertakes activities in the course of the business of the company". That case, is in my mind, therefore distinguishable.

(ii) R(S) 10/79

In this case, the claimant had been in partnership in a scrap metal business. However, his partner did all the work, the claimant provided the capital and the profits, of which there were in fact none, were to be divided equally. It was held that the participation in the business by the claimant was not "work" for the purposes of section 17(1), SSA 1975 (now section 57(1) of the 1992 Act). That section provides that it is a condition of entitlement to sickness benefit that the claimant is or is deemed in accordance with the regulations to be incapable of work by reason of some specific disease or bodily or mental disability. In para. 6 the Commissioner said:

"On the evidence I failed to see that the claimant was in fact working. As I see it he was a sleeping partner and such activity as he undertook in connection with the business was merely to ascertain the financial position obtaining from time to time and thereby to satisfy himself as to the state of his investment."

Again, that case was dealing with a quite different statutory provision. Doubtless, in this case, it might be said that the claimant was not in fact "working", but that, however, is not the same as saying she was not gainfully employed. I do not therefore think that that case materially assists me in the determination of this case.

(iii) On p. 82 of the 4th Edition of Ogus, Barendt and Wikeley I found a reference to R(U) 22/64 in a passage where the learned editors were discussing what was meant by "gainfully employed." That case again concerned a different statutory provision namely regulation 6(1)(h) of the Unemployment and Sickness Benefit Regulations 1948, which raised the question as to whether the claimant was following an occupation. The claimant was a ship's purser and entered into a formal contract of partnership with his wife for the purposes of running a hotel business. He ceased to be employed as a purser and claimed benefit. During the period of his claim he maintained he undertook only negligible duties in connection with the business. I appreciate that that case concerned a different statutory provision and it is distinguishable on that ground alone but, in deciding this case, I found the analysis given by the Commissioner in paragraph 4 illuminating:

"4. The first question is whether during the period in question or any part of it the claimant was carrying on any occupation. If he was, then prima facie he was not unemployed. The claimant explained that the partnership agreement was drawn up "because it was required by the Income Tax Authorities". That may be. But the position is that throughout the period in question, ex facie of a form or deed to which the claimant was a party, he was an equal partner in a partnership established for the purpose of carrying on the business of hoteliers at specified premises, having certain rights and responsibilities in that connection. Admittedly the agreement did not require him to devote more time to the affairs of the partnership than he could afford to do without interfering with his duties as a ship's purser; but at the time we are concerned with he had no duties as a ship's purser. Even if it be accepted that in fact it took very little part in the conduct of the business, he was, in law and in fact, a partner with the rights and responsibilities of a partner and entitled by virtue of the agreement to an equal share in the profits of the business. I was referred to decisions R(G) 14/56, R(G) 1/60 and R(U) 16/61, and in the light of these decisions I consider it impossible to escape the conclusion that throughout the period in question the claimant was carrying on an occupation, namely that of hotelier (in partnership)."

(iv) R(U) 1/57

This again concerned regulation 6(1)(h) of the 1948 Regulations. The claimant possessed a grocer's business which was carried on exclusively by his wife in one shop. He played little or no part in the business and it was held that he was not following the occupation of a grocer. In para. 12 the Commissioner said:

"12. In the present case, it seems to me that the extent of the personal activity of the claimant in the business was so slight as to be negligible. It was his wife who was in effect carrying on the business. I do not think, therefore, in the light of the consideration set out above, that the claimant can be said to have been following the occupation of grocer and provision merchant."

I can see the sense of this decision but I have difficulty in reconciling it with R(U) 22/64. But, as I have been at pains to point out, it concerned a quite different statutory provision and both this case and R(U) 22/64 are distinguishable on that ground alone.

(v) Finally I come to CG/19/1994 a case to which Mr. Prosser very properly referred me, although it does not assist his cause. In that case the following facts were found:

"(i) [The claimant] has been in receipt of invalid care allowance from 21 April 1988.

(ii) On 1 July 1990 [the claimant] was placed on her husband's business accounts as a partner in that business.

(iii) [The claimant] had never played any part in her husband's business and this continued to be the case.

(iv) There were not two separate incomes from the business before or after 1990. There continued to be one income derived from the business, the only difference was that for tax purposes [the husband and the claimant] were able to claim two sets of tax allowances because [the claimant] was named as a separate partner from
July 1990 onwards."

The Commissioner referred to certain cases where it had been suggested that only trivial amounts of work would not count as being in a gainful occupation, but those cases like the cases I have referred to concern this different statutory provision. In the case the Commissioner, rightly in my view, determined the question solely on whether the claimant was gainfully employed. He concluded that she was. I need not consider that case at length and I follow the same reasoning vis that the central issue before me is whether the claimant was gainfully employed. She was an original partner, she remains a partner. She was entitled to a sum of 4% on £6,000 out of the profits before any other distribution and, thereafter, presumably to 75 100/25ths of the remaining profits. Later, she became entitled to income of £416 in priority. At all material times, she was jointly and severally liable for the debts of the partnership. In my view, although she was only a sleeping partner, she was and still is nevertheless gainfully employed for the purposes of paragraph 6 and so I hold. It may be different if the partnership had been a sham or an arrangement in fact falling short, in law, of a proper partnership, but I am satisfied that at all material times the partnership in this case was in law a proper partnership. Accordingly, in my judgment para. 6(1) of Schedule 10 of the General Regulations applies. Any share, therefore, of the claimant and the partnership assets, which includes among other things the farm land, is to be disregarded. The appeal is therefore dismissed.

Mr. Orchard made certain alternative submissions to me:

(i) He submitted that no court would order a sale of the farm land without the son's consent having regard to the underlying intention vis that the farm should provide a job for the son and referred me to re Buchanan-Wollaston's Conveyance [1939] Ch 738. The market value was therefore, at the highest, only slight.

(ii) He also made a submission that a reasonable period that the claimant might have to dispose of her interest, if she had ceased to be a self-employed earner would only end with the death of the son in the claimant's lifetime. He submitted that the general equitable principles overrode the partnership agreement and the partnership could not be dissolved. Subject thereto he thought a period of three years reasonable.

(iii) Reference was also made to CAO v. Palfrey.

Having reached the conclusion I have, I do not think it would serve any useful purpose were I to consider these alternative submissions and, in not doing so, I hope I will not be accused of any discourtesy to Mr. Orchard.

My decision is therefore set out in paragraph 1 above. The appeal is dismissed.

Date: 20 November 1995 (signed) Mr. J. M. Henty

Commissioner

The Chief Adjudication Officer appealed to the Court of Appeal. The decision of the Court of Appeal follows.

DECISION OF THE COURT OF APPEAL

Mr. J. R. McManus (instructed by Mr. P. K. J. Thompson, Department of Social Security, London, WC2A 2LS) appeared on behalf of the Appellant

Mr. John Virgo (instructed by Messrs. Pardoes, Somerset, TA6 3DG) appeared on behalf of the Respondent.

LORD JUSTICE BUTLER-SLOSS: I will ask Judge LJ to give the first judgment.

LORD JUSTICE JUDGE: This is an appeal from the decision of the social security Commissioner Mr. J. M. Henty Esq., dated 20 November 1995, dismissing the appeal by the Chief Adjudication Officer against the decision of the social security appeal tribunal that Kathleen Knight was entitled to income support from
23 June 1993.

Mrs. Knight is an elderly widow, 85 or 86 years old. Since August 1990 she has been a permanent resident in a residential care home in Bridgwater. She is in receipt of her retirement pension and attendance allowance. On 23 June 1993 she claimed income support and the question in this appeal is whether she is entitled to receive it. Mr. Knight, Mrs. Knight's husband, owned Saltmoor Farm, Burrowbridge. He died intestate in 1949. They had three children, one of whom died while still a minor and unmarried. Under distribution tables then in force Mrs. Knight was entitled to a statutory legacy and a life interest in one half of the residue of her husband's estate. In due course when the surviving children grew up they entered into a deed of family arrangement in 1965 by which the daughter's interest in the farm was bought out by her brother Gordon. The appropriate trust instrument recited that he and Kathleen Knight should:

"... hold the residue of the net proceeds of sale upon trust to divide the same into such proportions as correspond with our respective rights and interests."

Without explaining the detail leading to it, Mrs. Knight and her son entered into a partnership, the terms of which were contained in a deed of partnership executed by them on 15 November 1966. This recited that they:

"became and will remain partners in the business of farmers from and including the first day of July 1965

...

The lands specified in the schedule hereto [that is the Saltmoor Farm] which are held by the Partners as tenants in common shall be occupied and used by the Partnership during the subsistence of the Partnership for the sole purposes of the said Partnership."

The partnership arrangements were supplemented and modified from time to time to admit the wife of Gordon Knight into the partnership and to modify the way in which the capital of the partnership should be treated. In October 1985 it was provided that:

"... the capital of the Partnership shall be treated as having been contributed by and shall be credited in the books [of the Partnership] as belonging to the Partners in the following proportions that [is] to say:

The said Kathleen Hannah Knight twenty per cent

The said Gordon Richard John Knight [eighty] per cent."

In June 1990, following the execution of a further deed, Mrs. Kathleen Knight's entitlement continued to be 20 per cent while the remaining 80 per cent was divided equally between Gordon Knight and his wife.

By June 1993, in addition to her entitlement to 20 per cent of the capital assets of the partnership, Mrs. Knight was receiving an income of £416 annually as a priority payment before any other division of the partnership profits, which were divided in equal shares between Gordon Knight and his wife. The farmland itself was treated throughout as a fixed asset of the partnership. By reference to the trust deed in 1965 and the further documentary modifications and the absence of any formalities which coincided with the creation or the possible creation of an agricultural tenancy the Commissioner rejected the argument that the partnership enjoyed either an agricultural tenancy of the land which constituted the partnership property or indeed any other form of tenancy or licence.

By the time the claim was made for income support Mrs. Knight was no longer an active member of the partnership. In his evidence her son explained that he kept her informed and kept her interest in the farming business alive, but he did not tell her things that would upset her. She gave him permission to do what he wanted in the business.

The Commissioner found that Mrs. Knight was a sleeping partner in a partnership which was a genuine rather than a sham partnership, and that in law she remained jointly and severally liable for any partnership debts.

When the District Valuer was appointed to assess the interests of Mrs. Knight as at 23 June 1993, the date when the application for income support was made, he concluded that a half share in the proceeds of sale of the equity of redemption of Saltmoor Farm should be assessed at £34,000 and the open market value of the entire freehold interest at £160,000. It is however accepted that if this appeal is successful the value of Mrs. Knight's assets in the partnership should be reassessed.

Income support is a means tested benefit and for this purpose an applicant's means includes any capital assets. Section 134(1) of the Social Security Contributions and Benefits Act 1992 provides:

"No person shall be entitled to an income-related benefit if his capital or a prescribed part of it exceeds the prescribed amount",

which in June 1993 was £8,000. The calculation of capital assets for the purposes of the 1992 Act is found in regulation 46 and Schedule 10 of the Income Support (General) Regulations 1987 (the 1987 Regulations). Regulation 46(2) of the 1987 Regulations provides:

"There shall be disregarded from the calculation of a claimant's capital ... any capital ... specified in Schedule 10."

Schedule 10 provides that the calculation of the applicant's assets should disregard a number of specific items including any reversionary interest, paragraph 5, and, crucially to the present appeal, by paragraph 6, extends the exclusion to:

"(1) The assets of any business owned in whole or in part by the claimant and for the purposes of which he is engaged as a self-employed earner or, if he has ceased to be so engaged, for such period as may be reasonable in the circumstances to allow for disposal of any such asset.

(2) The assets of any business owned in whole or in part by the claimant where-

(a) he is not engaged as a self-employed earner in that business by reason of some disease or bodily or mental disablement; but

(b) he intends to become engaged (or, as the case may be, reengaged) as a self-employed earner in that business as soon as he recovers or is able to become engaged, or re-engaged, in that business;

for a period of 26 weeks from the date on which the claim for income support is made, or is treated as made, or, if it is unreasonable to expect him to become engaged or re-engaged in that business within that period, for such longer period as is reasonable in the circumstances to enable him to become so engaged or re-engaged."

For completeness, regulation 49 provides for the method of calculation of capital and, finally, regulation 52 deals with the way in which a claim should be treated where a claimant or one or more persons are beneficially entitled in possession to any capital asset.

The Commissioner concluded that Mrs. Knight's shares in the partnership assets should be disregarded on the basis that they fell within the excluding provisions of paragraph 6 of Schedule 10 on the basis that she was a former self-employed earner within this paragraph, or gainfully self-employed within the definition in section 112(1) of the 1992 Act.

Mr. Virgo, on behalf of Mrs. Knight, contends that this conclusion was correct in law. In summary he submitted that Mrs. Knight was engaged in the business of the partnership with an undetermined contractual obligation to contribute to any liabilities and, if there were any, to participate in profits. He drew attention to the decision of this court in Benninga (Mitcham) Ltd. V. Bijstra [1946] 1 KB 58 and to the observations in that case about the meaning and effect of the words "engaged in whole time employment" in the Rent and Mortgage Interest Restrictions Amendment Act 1933. However, after due consideration, Mr. Virgo accepted that this decision did not in fact advance his argument.

On behalf of the appellant Mr. McManus submitted that the Commissioner wrongly construed paragraph 6 of Schedule 10 by including in it individuals who had an economic interest in the assets of a partnership business but took no active steps in it. As the Commissioner found, Mrs. Knight was at most a sleeping partner. She was not, according to Mr. McManus, and could not be regarded as engaged in the business as a self-employed earner.

Although the attention of the Commissioner was drawn to a number of decisions by different Commissioners, none of them were concerned with the 1987 Regulations. It was agreed by Counsel that they provide no assistance in the resolution of this issue, which depends on the correct analysis and construction of paragraph 6 of Schedule 10 of the regulations read as a whole. Read in this way, it is clear that the mere fact of ownership of the whole or part of a business is insufficient to lead to the exclusion of such assets from the relevant calculation. In my judgment, precisely the same principle applies when a partner has committed some or all of his or her assets to a partnership business and would be at risk of losing them and incurring liabilities if the partnership were to fail. As the express language underlines, to come within this paragraph the claimant must go further and in addition be or have been involved or engaged in the business in some practical sense as an earner in the business or be precluded from making any such contribution by infirmity. If it were otherwise, it is difficult to see any practical purpose in the concessions provided in paragraph 6(2)(a) which, together with the second half of paragraph 6(1), serve to underline the distinction between the commitment of assets to the business and engagement in it as an earner. The precise nature of the requisite involvement is not defined and each case must be decided individually. However, the fact that the partnership agreement provides for some payment, irrespective of whether the recipient has been engaged or involved in a practical sense, is not of itself enough to show the appropriate level of involvement. Such arrangements for payment may be a reward for a positive contribution to the earnings of the business but equally may be an allowance for the partner's financial commitment to it.

In my judgment, a sleeping partner in a business managed and worked exclusively by others does not come within the description of an individual engaged in the business. The commitment of Mrs. Knight's assets to the partnership, together with the risks of incurring liabilities, and her allowance from its profits does not constitute a sufficient positive involvement for the purpose of paragraph 6 of Schedule 10. Accordingly, in my judgment, this basis for excluding Mrs. Knight's partnership assets from the calculation of the relevant capital is not sustained.

By a cross-notice, Mr. Virgo argued that Mrs. Knight's share in the partnership fell within the exclusionary provisions of Schedule 2 as a reversionary interest within paragraph 5. This question was successfully canvassed before the tribunal on the basis that the partnership enjoyed an interest in the land in the guise of a tenancy, and then unsuccessfully argued before the Commissioner on the basis that there was an agricultural tenancy from the partners created for the benefit of the partnership. Mr. Virgo's submission before this court was based on a fresh contention. He accepted that the partnership did not enjoy any agricultural or other tenancy or licence. The farm was owned by the partners in accordance with the relevant deeds and the partnership could be dissolved at any time by any partner subject to a six month period of notice. Mr. Virgo argued that this period of delay between any notice of dissolution and the dissolution itself created by the partnership agreement erected an obstruction to Mrs. Knight's rights as the owner of the land and this meant that they were reversionary interests only. Although this point had not been previously argued, we decided to consider whether it had any possible validity. In support of his argument Mr. Virgo drew attention to the unreported decision of this court in The Chief Adjudication Officer and The Secretary of State for Social Security v. Dowell & Ors, on 8 February 1995 [R(IS) 26/95]. There the court was considering the meaning of reversionary interest in paragraph 5. In his judgment Nourse LJ said:

"... I am in full agreement with the commissioners in McDonnell that there are no grounds for attributing a special or restricted meaning to the expression 'reversionary interest' in paragraph 5 of Schedule 10 to the General Regulations."

Hobhouse LJ regarded the point as a short point of statutory construction. He said:

"The language is plain: 'Any reversionary interest'... It has not been argued by either side before us that importance should be attached to the use of the word 'interest' as opposed to the phrase 'estate or interest'. The argument has focused upon the word 'reversionary'. Once one treats the word interest as wide enough to embrace an estate in land, the archetypical example of a reversionary interest or estate is that of a free-holder in reversion. In the context of this legislation which places an emphasis on the possession of the capital asset, a tenancy is again one of the clearest examples where the possession of the asset has for the duration of the term been transferred to another. The hallmark of a tenancy is that the tenant has been granted the exclusive possession of the demised property."

The subsequent amendment of the legislation and in particular paragraph 5 of Schedule 10, with effect from 2 October 1995, is not for present purposes relevant. The problem for Mr. Virgo is simple and, in my judgment, insuperable. As the facts demonstrate, as a partner Mrs. Knight is enjoying her rights of property in the farm and her rights are not deferred or limited by rights enjoyed by anyone else which can prevail against her rights. Her interest in the land is not an interest in reversion. Accordingly, in my judgment, this submission also fails.

In view of these conclusions, this appeal should be allowed and the case should be remitted for a fresh valuation to be made of Mrs. Knight's assets for the purpose of the proper assessment of her claim for income support.

LORD JUSTICE PILL: I agree.

LORD JUSTICE BUTLER-SLOSS: I also agree.

Order: Appeal allowed; claim for income support remitted for the purpose of a fresh valuation of her capital assets to the social security appeal tribunal; no order for costs, save legal aid taxation of the Respondent's costs; application for leave to appeal to the House of Lords refused.