Secretary of State for Business Innovation and Skills (Petitioner) v PAG Management Services Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 09 August 2015 |
| Neutral Citation | [2015] EWHC 2404 (Ch) |
| Docket Number | Case No: 4339 OF 2013 |
| Court | Chancery Division |
| Date | 09 August 2015 |
[2015] EWHC 2404 (Ch)
Mr Justice Norris
VICE-CHANCELLOR OF THE COUNTY PALATINE OF LANCASTER
In the matter of PAG Management Services Limited
and
In The Matter Of The Insolvency Act
Case No: 4339 OF 2013
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Manchester District Registry
Strand, London, WC2A 2LL
Paul Chaisty QC and Lucy Wilson-Barnes (instructed by Wragge Lawrence Graham & Co) for the Petitioner
David Chivers QC and Jack Rivett (instructed by Irwin Mitchell) for the Respondent
Hearing dates: 10–12 and 16–17 March 2015
Section 45 of the Local Government Finance Act 1988 imposes a liability to pay business rates (called "a national non-domestic rate" and usually referred to as "NNDR") upon hereditaments if four conditions are satisfied. One of the conditions is that the hereditament must fall within a class prescribed by regulations. Regulation 3 of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386) prescribed all non-domestic hereditaments other than those exempted by Regulation 4. Regulation 4(k) of the 2008 Regulations exempted:-
"Any hereditament…whose owner is a company which is subject to a winding up order made under the Insolvency Act 1986 or which is being wound up voluntarily under that Act".
PAG Management Services Limited ("PAG Management") was incorporated on the 24 August 2011 to manage and coordinate a business rates mitigation scheme to exploit this exemption for the benefit both of associated companies in the group of which it forms part and also for third party clients.
The scheme operates in this way:-
a) PAG Management incorporates a special purpose vehicle ("the SPV"):
b) Contemporaneously PAG Management's client companies will grant leases to the SPV:
c) The leases are generally for a term of 3 years at a rent of £1 per annum (and containing obligations as to use and repair) but terminable on 7 days' notice:
d) Contemporaneously with the grant of the lease to the SPV the landlord waives the right to receive sums due under the lease:
e) Contemporaneously with the grant of the leases the SPV is placed in members' voluntary liquidation (a course that is possible because, by virtue of the landlords' waiver, the directors of the SPV can make a statutory declaration of solvency):
f) The SPV is now a company in members' voluntary winding up and is itself exempt from NNDR:
g) The landlord (PAG Management's client company) is not in occupation of the hereditament:
h) The members' voluntary liquidation proceeds slowly:
i) Under a fee agreement entered into between the Landlord and PAG Management the latter receives by way of fee a percentage (varying between 15% and 40%) of the NNDR saved at a result of the lease being in place:
j) Meanwhile the landlord refurbishes and/or markets the property and if a taker is found then the lease to the SPV is terminated and the new tenant takes occupation, no "empty rates" having been paid in the meanwhile.
The Secretary of State for Business Innovation and Skills ("the SoS") considers that it is expedient in the public interest that PAG Management should be wound up and on 13 December 2013 presented a Petition under section 124A of the Insolvency Act 1986 ("the 1986 Act") seeking that relief. The complaints of the SoS are (in summary):-
a) The leases granted by landlords to the SPVs are shams, for the SPV has neither the assets nor the financial and management structure to enable it to comply with any obligations, nor would the landlord accept anyone other than the SPV as a tenant on these terms, but in the event that a genuine trading tenant offered to take the premises would immediately extinguish the lease to the SPV and re-let on commercial terms;
b) The statutory declaration of solvency cannot properly be given, because the director of the SPV in truth is a pure figurehead without any real knowledge of the assets or liabilities of the SPV:
c) The scheme involves a breach of section 87(1) of the 1986 Act (which requires that the company shall from the commencement of the winding up cease to carry on its business except for the purposes of a beneficial winding up) whereas the SPV has had no business at all prior to the members' voluntary liquidation, and only commences business activities of any sort within the voluntary winding up;
d) The scheme involves a breach of sections 91 and 92 of the 1986 Act in that if a liquidator indicates an intention to disclaim the leases (because they are of no advantage to the SPV) then he is removed from office and no new liquidator is appointed so that the members' voluntary winding up becomes dormant;
e) The scheme involves an abuse of the insolvency legislation because the essential commercial object of the members' voluntary winding up is to continue it for as long as possible (whilst the landlord tries to find a genuine tenant for the premises on commercial terms, and whilst PAG Management draws its monthly fee calculated by reference to the NNDR saving):
f) The business of PAG Management is artificial and demonstrates a lack of commercial probity both as regards the elements of the scheme (artificial leases, use of directors without any meaningful executive function, abuse of the insolvency legislation by incorporating companies whose sole reason for existence is that they should be put into a lengthy members' voluntary winding up) and as regards the object of the scheme itself (which is the avoidance of NNDR).
There was a large measure of agreement about the principles to be adopted in the exercise of this jurisdiction. The principles I shall apply are these:-
a) Even if the SoS thinks it expedient in the public interest to wind up a company, the Court still has a discretion whether or not to make an order.
b) Before making an order the Court must be satisfied that it is just and equitable to wind the company up.
c) The burden of proof lies on the SoS to persuade the Court (having proved matters of fact to the requisite civil standard) that it is just and equitable to wind the company up.
d) The Court must balance competing reasons why the company should be wound up and why it should not be wound up upon a consideration of the totality of the evidence (per Nicholls LJ in Re Walter L Jacob & Co Limited [1989] BCLC 345 at 353 b-d).
e) As a result of undertaking that exercise the Court must be able to identify for itself the aspects of the public interest which would be promoted by making a winding up order in the particular case ( ibid at p353f);
f) It is not necessary for the business of the company to involve illegality. As Millett LJ said in Re Senator Hanseatische [1997] 1 WLR 515 at 522h:-
"On the contrary the phrases used (namely "expedient in the pubic interest" and "just and equitable") to my mind indicate that Parliament did not intend to impose such a restriction but instead simply decided to leave to the Secretary of State to form a view as to what was expedient in the public interest and the court then to decide on the material before it whether the justice and equity of the case dictated that the company concerned should be wound up".
g) Where the business of the company does not involve the commission of illegal acts or breaches of regulatory requirements the company may nonetheless be wound up if its business is "inherently objectionable" because its activities are contrary to a clearly identified public interest. So in Abacrombie & Co Limited [2008] EWHC 2520 (Ch) the company operated a debtor advisory service. David Richards J explained:-
"The purpose of the company's business as it related to clients with equity in their residential property was, prior to the client's bankruptcy, to sell the equity to the client's spouse or partner at as low a price as possible and to use the proceeds to fund the company's charges which were both excessive and unjustifiably charged to the debtor client. The effect, as the company…well appreciated, was to deprive the debtor's estate of any substantial return or value from the debtor's beneficial interest which was likely to have been the only asset of any substance. The effect was detrimental to creditors and undermined the proper administration of the bankruptcy of the debtor" (see paragraph [60]).
He had earlier at paragraph [15] held:-
"The arrangements, as operated by the company, in my judgment, subverted the proper functioning of the law and procedures of bankruptcy".
h) Such conduct is sometimes described as disclosing "a lack of commercial probity", and whilst this frequently might involve preying on the public and inducing individual members of the public to participate in transactions which are without benefit to them, it can also involve prejudice to the public generally (for example by casting burdens on the general body of tax payers). An illustration of this may be found in SoS for Business Innovation and Skills v PGMRS Limited [2010] EWHC 2864 (Ch) in which four companies traded at theexpense of HMRC (by not paying either VAT or PAYE) until such time as they were insolvent, conduct that the judge held represented a lack of commercial probity.
i) However in making the judgment whether a business is inherently objectionable "the court has to be careful of being priggish" (see Re Force Sun Limited [2002] EWHC 443 (Ch) at paragraph [26], a point which Mr Chivers QC reinforced with a submission that this was a court of law and not a court of morals. If this is simply a submission that I am bound to decide the case according to law and by reference to principle and precedent I unhesitatingly accept the submission. If this is a submission that the law in this area is devoid of moral content, then I disagree. Concepts such as "inherent objectionability" or "want of commercial probity" are...
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