The Secretary of State for Business, Energy and Industrial Strategy v PAG Asset Preservation Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Floyd,Lord Justice Newey,Lady Justice Asplin |
| Judgment Date | 31 July 2020 |
| Neutral Citation | [2020] EWCA Civ 1017 |
| Date | 31 July 2020 |
| Docket Number | Case Nos: A2/2019/2882 and A2/2019/2884 |
| Court | Court of Appeal (Civil Division) |
[2020] EWCA Civ 1017
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
(Business and Property Courts) Manchester
His Honour Judge Davies
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Floyd
Lord Justice Newey
and
Lady Justice Asplin
Case Nos: A2/2019/2882 and A2/2019/2884
Mr Paul Chaisty QC and Ms Lucy Wilson-Barnes (instructed by Gowling WLG) for the Appellants
Mr David Chivers QC and Mr Nicholas Trompeter (instructed by Gorvins Solicitors) for the Respondents
Hearing date: 15 th July 2020
Approved Judgment
The issue raised by these appeals is whether companies operating a scheme to enable property owners to avoid liability for national non-domestic rates (“NNDR” or “business rates”) in respect of unoccupied commercial properties, in the form of what is referred to in the judgment below as “Scheme 3”, should be wound up on public interest grounds because it is said that their business model “lacks commercial probity in their operation of Scheme Three which misuses and/or abuses and/or subverts the insolvency legislation and process”.
HHJ Stephen Davies, sitting as a judge in the High Court, dismissed petitions presented by the Appellant, the Secretary of State for Business, Energy and Industrial Strategy (the “Secretary of State”) pursuant to section 124A, Insolvency Act 1986 and declined to wind up either PAG Asset Preservation Limited (“PAGAPL”) or MB Vacant Property Solutions Limited (“MBV”) (together referred to as the “Companies”). The judge's reasons are to be found in his judgment, the neutral citation of which is [2019] EWHC 2890 (Ch).
Scheme 3 is a variant upon two earlier schemes which are no longer in operation. Scheme 3's immediate predecessor is described in the judgment below as Scheme 2. The operator of Scheme 2 was PAG Management Services Limited (“PAG Management”). It was wound up on public interest grounds following a trial before Norris J: In re PAG Management Services Ltd [2015] BCC 720. Norris J decided that it was just and equitable to wind up PAG Management, because its business model demonstrated a lack of commercial probity as a result of a misuse of the insolvency legislation.
It is common ground that the Companies 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 the PAG Management case.
In essence, therefore, the issue before us is whether the variations made in Scheme 3 were sufficient to enable the judge to come to a different conclusion from that of Norris J in the PAG Management case. The issue is of some importance as Scheme 3 accounts for millions of pounds of business rates which would otherwise be due, and there are numerous other schemes available in the marketplace with similar features.
Relevant provisions and the basic mechanism adopted
PAGAPL was incorporated on 22 February 2016 and ran Scheme 3 from April 2016 until February 2017. MBV took over that business and continues to operate Scheme 3. PAGAPL is now effectively dormant.
As I have already mentioned, Scheme 3, and its predecessors, enables owners of premises to avoid paying business rates on empty commercial properties owned by them. A person is liable to pay a business rate in relation to an unoccupied hereditament in respect of a chargeable financial year, if the conditions in section 45(1) of the Local Government Finance Act 1988 (the “1988 Act”) are met. These include the condition that in respect of any day in that year, the person is the owner of the whole of the hereditament (section 45(1)(b)). Section 65(1) of the 1988 Act provides that the owner of a hereditament is the person entitled to possession of it. A further condition, contained in section 45(1)(d), is that the hereditament falls within a class prescribed by regulations. Regulation 3 of the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386) (the “2008 Regulations”) prescribed all non-domestic hereditaments other than those exempted by Regulation 4. Regulation 4(k) contains an exemption in respect of:-
“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.”
In outline, under both Scheme 2 and Scheme 3, business rates were avoided by the landlord leasing its empty commercial property to a special purpose vehicle company (“SPV”) incorporated or purchased, in the case of Scheme 3, by PAGAPL or MBV. The effect of the grant of a lease (“Scheme Lease”) is that the SPV becomes the owner of the hereditament for the purposes of section 45(1)(b), as a result of section 65 of the 1988 Act, and liable for business rates in relation to it. The SPV is then placed into members' voluntary liquidation (“MVL”) with the effect that it is relieved of liability to pay business rates as a result of regulation 4(k) of the 2008 Regulations. The MVL continues until the lease expires, by which time, if not before, the landlord may well have been able to find a new commercial tenant.
Mr Chaisty QC and Miss Lucy Wilson-Barnes, on behalf of the Secretary of State, contend, therefore, that both Scheme 2 and Scheme 3 are dependent upon the same elements and as a result, are both a misuse and subversion of the insolvency legislation. Those elements were referred to in the Petition and in the judgment below as “the Common Element” and are: the incorporation or acquisition of the SPV with the intention of being placed into MVL; the entry by the SPV into Scheme Leases with landlords for the sole purpose of being held by the SPV; and the SPV being placed into MVL so that the liability for business rates is avoided. They say that the additional features of Scheme 3 are entirely artificial and make no difference.
As the similarities and differences between Schemes 2 and 3 are at the heart of the appeals, it is necessary to consider them and the judge's approach to them, in some detail.
Scheme 2 and Norris J's approach
The judge adopted Norris J's summary of the operation of Scheme 2 at [42] of the judgment, as follows:
“…
(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 being paid in the meanwhile.”
Norris J did not accept many of the complaints put forward in relation to Scheme 2 including the complaint that the business of PAG Management “was artificial and demonstrated a lack of commercial probity as regards the object of the scheme itself being the avoidance of business rates”. However, Norris J did accept that “Scheme 2 subverted the purpose of liquidations and that [as] such demonstrated a lack of commercial probity such that it was just and equitable to wind up the Companies.” The judge set out Norris J's reasoning, as follows:
“46… .
“65. I find that the business of PAG Management necessarily involves (a) the creation by PAG Management of companies which exist for no purpose other than immediately going into liquidation; (b) the creation by PAG Management of assets for the sole purpose of their being held by those companies in liquidation (subject to the right of the freeholder to recover them if the freeholder can turn them to advantage); (c) the putting in place by PAG Management of arrangements which enable it to have effective control over the conduct of these liquidations as regards the maintenance in being of those assets; and (d) the exercise of that control to secure that the liquidations continue rather than proceed to a conclusion, the real objective being that each liquidation shall act as a shelter for the assets specifically created to be held by the company in order that PAG Management might earn fees in relation to those assets. In my judgment the purpose of liquidation is the collection, realisation (though not invariably) and distribution of assets in satisfaction of the claims of creditors and the entitlements of members. The adjustments made to third party rights...
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