THE HIGH COURT
REVENUE
		1997 No. 17 R.
BETWEEN
J J MOONEY, INSPECTOR OF TAXES
		APPELLANT
AND
NOEL MC SWEENEY
		RESPONDENT

Judgment of Mr. Justice Morris delivered on the 6th day of April, 1997.

	This matter comes before the Court by way of a case stated under Section 428 of the Income Tax Act, 1967, the matter having been heard and determined by His Honour Judge Sheridan on 4th May, 1995.  The learned Trial Judge stated a case dated 24th January, 1997 setting out in detail the facts, arguments and decision of the Court.
	The issue that comes before the Court can be identified and summarised in the following short form:-
	Section 46 of the Capital Gains Tax Act, 1975 provides that:-

	"Where a person incurs a debt to another....no chargeable gain shall accrue to that creditor....on a disposal of the debt".

	The reason for this provision is clear.  The debt can never increase in value though it may of course decrease.  The most that the creditor can expect is to be repaid.  So, no Capital Gains Tax is payable upon the repayment of the debt.
	In so far as losses are concerned, Section 12 of the Capital Gains Tax Act, 1975 is relevant and it provides:-

	"Except as otherwise expressly provided the amount of a loss accruing on a disposal of an asset shall be computed in the same way as the amount of a gain accruing on a disposal is computed".

	In the present case, the Respondent claims to have suffered an allowable loss and so the Court is required to consider the nature of the transaction upon which he suffered the loss so as to ascertain if the transaction is such as to take it outside the provisions of Section 46.  If the transaction was a simple debt, then since no Capital Gains Tax would have been payable on its repayment, no allowance can be claimed in respect of that loss arising from the transaction.  
	Section 4(12) of the Act provides that:-

	"If .... the Inspector is satisfied that the value of an asset has become negligible he may allow the claim and thereupon the Act shall have effect as if the claimant had sold and immediately re-acquired the asset for a consideration of the amount equal to the value specified in the claim".

	Section 46 provides that no Capital Gains Tax is payable on the repayment of a loan, however, a proviso in that Section states:-

	"This subjection shall not apply in the case of the debt on security (emphasis added) as defined in paragraph 3 of Schedule 2 (conversion of securities)".

	The effect of this proviso is that while subsection 1 of Section 45, provides that no chargeable gain shall accrue to the creditor on repayment of the loan, this provision shall not apply where there is a "debt on a security".
	Therefore, the question that the Court has to decide is whether, in the circumstances of the case, the loan which the Respondent paid was a "debt on a security" within the meaning of the 1975 Act.

	THE FACTS
	The facts are set out in the case stated and, summarised, are as follows:-
	N Limited commenced trading in 1975 and traded successfully until 1984 when financial problems arose.  Additional capital became a major requirement and various financial institutions were approached.  The Respondent, Mr. Noel McSweeney, was Managing Director and major Shareholder of the company.
	Negotiations with financial institutions resulted in agreements executed in April/May 1985 whereby the financial institutions subscribed £250,000 in consideration of 250,000 £1 Cumulative, Convertible,  Redeemable Shares with the right to convert the Preference Shares into Ordinary Shares at a predetermined price for Ordinary Shares.
	The above share subscription was subject to a contribution of £350,000 from the shareholders by way of cash loans with the right of conversion into Ordinary Shares at a predetermined price for each share.  The cash loans were not entitled to interest and repayment was subordinated to the redemption of the preference shares and various other creditors including bank debts.
	Special Resolutions were passed by M Limited on 1st April, 1985 to increase its share capital to provide for the issue of Cumulative, Convertible, Redeemable Preference Shares and to accommodate any later conversion of the shareholder's loan into Ordinary Share Capital.
	The Respondent advanced £140,000 by way of cash loan subject to the conversion rights.
	The instrument of loan was an instrument in writing which allowed the Respondent to convert the loan into Ordinary Shares.
	No conversion of the loan into shares ever happened.
	N Limited was put into Court liquidation and the Respondent, Noel McSweeney suffered a total loss of his loan of £140,000.
	The Respondent, Noel McSweeney made a chargeable gain on the sale of premises in the year 5th April, 1986 and claimed an allowable loss by reason of the loss on the £140,000 loan.  This was refused on the grounds that the loan was no more than a debt and did not qualify for relief.
	The learned Trial Judge held that an allowable loss was incurred for Capital Gains Tax.
	The question of what is meant by the words "a debt on security" has been considered by the Courts of England and Scotland in a number of cases [Cleveleys Investment Trust Company -v- CIR 1975 47 TC300, Aberdeen Construction Co. Limited -v- CIR 1978 52TC 281, WT Ramsay Limited -v- CIR 1981 54TC 101 and Taylor Clarke International Limited -v- Lewis (Inspector of Taxes) Simons Tax cases 1997 STC 499].  The headnote of the latter case states that this case is authority for the proposition that:-

	"A debt on a security had to (1) be capable of been assigned, (2) carry interest, (3) have a structure of permanence and (4) provide proprietary security".

Having considered the Judgment of Robert Walker J. I am not satisfied that the case is authority for this proposition.  If it is, then I respectively disagree with it.  In the earlier cases, it is clear that a number of eminent members of the English and Scottish Bench have found difficulty in defining and identifying the nature of a "debt on security".  All have agreed, however, that it does not mean simply "a debt which is secured" or, put another way, it is not the opposite to an unsecured debt.  I am in agreement with this view.  I agree with Lord Cameron when he said in Cleveleys Investment Trust Company -v- CIR at p.318:-

	"Whatever else it may mean, the phrase 'the debt on a security' is not a synonym for a secured debt".

	In WT Ramsay Limited -v- CIR, Lord Wilberforce referred at p.329 of the report to debts on a security as "debts with added characteristics such as may enable them to be realised or dealt with at a profit" or again that it has "such characteristics as enable it to be dealt in and, if necessary, converted into shares or other securities".  
	In my view, these are the elements which identify a debt on a security.  This, seems to me, to be no more than common sense.  The pure loan is exempt from Capital Gains Tax because it can never exceed in value.  With the additional rights to convert it into stock, a debt on a security may appreciate in value and can be marketed at a profit.  This is a clear distinction between the two.  
	I am of the view that the four characteristics of a Loan on Security proposed to be identified in Taylors case arise only because in separate cases transactions have been disallowed as "Loans on Security" for these stated reasons, however, I do not believe that these reasons of necessity identify what is and what is not a Loan on Security.  The essence of a Loan on Security must be whether the additional "Bundle of Rights" acquired with the granting of the loan, to use Lord Wilberforce's phrase, enhances the loan so as to make it marketable and potentially more valuable than the value of the repaid loan upon repayment.  This potential increase in value must not be illusory or theoretical.  It must be realistic at the time when the loan and the rights are acquired by the lender.
	I am in no doubt that these elements can be identified in the present transaction.  Had he chosen to do so, the Respondent could have offered this loan complete with its rights and entitlements on the market.  While I appreciate that the company was at the relevant time allying and that it might have been difficult to find a buyer it was, nevertheless, possible that a buyer would be found and would be prepared to offer a cash value for the loan which was enhanced by the Respondent's right to shares.  Given the number of financial institutions which were prepared to participate in the funding of this project and were prepared to accept it as a realistic business proposition, it seems to me to be probable that this transaction was marketable.  I do not consider that it is relevant that a purchaser might have difficulty in finding a purchaser, because this difficulty might arise by reason of local or transient commercial considerations.  Providing that the transaction contained the characteristics which would, in the ordinary course of commerce, render it marketable then, in my view, it meets the criteria.
	An argument has been advanced to me by Ms. Clohessy for the Applicant that all that the Respondent ever had at any given time was either the right to repayment of his loan or in the alternative shares.  In otherwords, these two entitlements did not and could not co-exist.  If he exercised the right to acquire the shares then the loan no longer existed.  Unless he exercised the right, all he had was the loan.  Accordingly, she submits that he either had the loan or the shares and never both.  That being so, it is submitted that he had no more than a debt, since he didn't exercise the right, which falls within the provisions of Section 46.1 of the Act.
	I do not agree with this submission.  To my mind, prior to the liquidation, the Respondent had available to him the option of remaining a creditor of the company or converting the loan into shares.  This right, while it existed, potentially commanded a market price over above the mere value of the loan on repayment and it is this element which differentiates it from the mere loan.
	I do not accept that a difficulty in finding a potential purchaser on the market is an element to be considered in determining if this is a debt on a security.  This difficulty may arise from a variety of different circumstances which should not be allowed to trespass upon the validity of the characteristics which identify a loan on security and differentiates it from a mere loan.  
	Accordingly, I am satisfied that the provision of Section 46(1) of the Capital Gains Tax Act, 1975 are relevant in the circumstances of this case.  I find that the loan in this case was a debt on a security and I am satisfied that the learned Trial Judge was correct in the conclusion which he reached and I accordingly answer the question posed in the affirmative.