- Court of Appeal (Civil Division)
- 31 July 2020
- Floyd, Newey and Asplin LJJ
- [2020] EWCA Civ 1017
- [2020] PLSCS 149
Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Ltd and related appeal – Company – Winding up – Public interest – Respondent companies operating business rates avoidance scheme – Appellant secretary of state petitioning to wind up companies – High Court dismissing petitions – Appellant appealing – Whether scheme subverting purpose of insolvency legislation – Appeals dismissed
The two respondent companies operated a scheme to enable property owners to avoid liability for business rates in respect of unoccupied commercial properties (scheme 3). The scheme involved leasing the property to a special purpose vehicle company (SPV) which was then placed into members’ voluntary liquidation (MVL). The effect of the lease was that the SPV became the owner of the property in place of the landlords for the purpose of liability for business rates. The effect of the MVL was that the SPV was relieved of liability to pay business rates, by virtue of the exemption from such liability for companies being wound up, whether compulsorily or voluntarily.
The appellant secretary of state presented petitions pursuant to section 124A of the Insolvency Act 1986 to wind up both the respondents on public interest grounds because it was said that their business model lacked commercial probity in their operation of scheme 3 which misused and/or abused and/or subverted the insolvency legislation and process. The High Court dismissed both petitions and declined to wind up the respondents: [2019] EWHC 2890 (Ch). The appellant appealed.
Scheme 3 was a variant of two earlier schemes which were no longer in operation. Scheme 3’s immediate predecessor was scheme 2. The company operating that scheme was wound up on public interest grounds. The judge decided that it was just and equitable to wind up the company because its business model demonstrated a lack of commercial probity as a result of a misuse of the insolvency legislation: Secretary of State for Business Innovation and Skills v PAG Management Services Ltd [2015] EWHC 2404 (Ch); [2015] PLSCS 252; [2015] BCC 720. It was common ground that the respondents were incorporated and their business models, which took the form of scheme 3, were specifically designed to seek to overcome the issues identified in relation to scheme 2 in that case.
The appellant appealed contending that, since scheme 3 and scheme 2 were dependent on the same elements, both were a misuse and subversion of the insolvency legislation and the additional features of scheme 3 were entirely artificial and made no difference.
Held: The appeals were dismissed.
(1) In essence, the issue before the court was whether the variations made in scheme 3 were sufficient to enable the judge to come to a different conclusion from that in the PAG Management case. The issue was of some importance as scheme 3 accounted for millions of pounds of business rates which would otherwise be due, and there were numerous other schemes available in the marketplace with similar features. It was important to bear in mind that, although the opinion of the secretary of state, that it was expedient in the public interest that a company should be wound up, was the prerequisite to the presentation of a petition, it was for the court to carry out a balancing exercise based upon all the circumstances and all the evidence before it. It had to weigh the factors which pointed to a conclusion that it would be just and equitable to wind up the company against those which pointed away from it. In order to carry out the balancing exercise, where the petition was based upon the public interest the court had to be able to identify for itself the aspects of public interest which, in the view of the court, would be promoted by making a winding-up order in the particular case: Re Walter L Jacob & Co [1989] BCLC 345 followed.
(2) Under scheme 3, a scheme lease was for a fixed duration of three years, although it was determinable at any time on service of written notice on the SPV to enable the landlord to lease the premises to a commercial tenant if one became available. However, the right to determine the scheme lease was conditional upon the payment of a determination premium. The judge was right to consider that the existence of the determination premium and its effects created a substantial and significant difference between the schemes 2 and 3 and entitled him to conclude that in the case, there was no subversion of the insolvency legislation. The determination premiums were legally effective terms of legally effective leases which the respective landlords expected to pay and did pay to the relevant SPV if they wished to determine the lease, notwithstanding that they were reimbursed for the most part, either under the fee agreements or otherwise. Once it was accepted that the determination premium was genuine and not a sham, it could not be undermined by the motive behind its creation.
(3) The judge was entitled to distinguish the present case from the facts which were under consideration in the PAG Management case and to decide as he did. The only purpose of the liquidation in that case was to shelter the leases. That was not the case in scheme 3. The determination premium was a genuine contingent asset which the liquidators were entitled and obliged to wait to collect in, the liquidation was not artificially prolonged and the liquidators collected and realised assets which they distributed to members. Accordingly, there was no abuse or subversion of the insolvency provisions. Furthermore, when determining whether it was just and equitable to wind up a company under section 124A, the court was required to identify for itself the aspects of the public interest which would be promoted by making a winding up order. In this case, however, there was no challenge to the judge’s finding that there was no evidence of harm to the public. The appellant was unable to identify any class of the public who were or might be harmed. Therefore, an essential element was missing. In any event, the judge was entitled to exercise his discretion in the way he did. Having evaluated all the evidence and balanced all of the relevant factors, he concluded that even if it there had been a misuse of the insolvency process, it was not sufficient to warrant winding up under section 124A. He was entitled to come to that conclusion.
Paul Chaisty QC and Lucy Wilson-Barnes (instructed by Gowling WLG (UK) LLP) appeared for the appellant; David Chivers QC and Nicholas Trompeter (instructed by Gorvins Solicitors, of Stockport) appeared for respondents.
Eileen O’Grady, barrister
