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When is it just and equitable to wind up a company? Reuben Comiskey, barrister at 11 Stone Buildings, explores the recent case of Secretary of State for Business Innovation and Skills v PAG and explains that it suggests certain schemes ought to be wound up in the public interest.
Secretary of State for Business Innovation and Skills v PAG Management Services Ltd  EWHC 2404 (Ch),  All ER (D) 74 (Aug)
The Secretary of State presented a petition, under section 124A of the Insolvency Act 1986 (IA 1986), seeking an order that the respondent company be wound up on the basis that it would be expedient in the public interest. The Chancery Division, in allowing the application, held that misuse of insolvency legislation by the respondent's scheme demonstrated a lack of commercial probity, such that it was just and equitable to wind up the company.
Under the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008, SI 2008/386, the occupier of business property is exempted from paying business rates on that property if it is in liquidation, either compulsory or voluntary.
Recently, a series of businesses have attempted to take advantage of this exemption to save landlords business rates on commercial properties while they are unoccupied. The method adopted by PAG Management Services Ltd is typical of these schemes. It involved the following steps:
PAG received a fee for this service of between 15% and 40% of the business rates saved.
The Secretary of State petitioned to wind up PAG in the public interest and presented a petition pursuant to IA 1986, s 124A.
The Secretary of State's primary complaints against PAG were as follows:
Norris J wound up PAG, but only the fifth and sixth grounds mentioned above.
As to the first ground, he held that the leases were not shams. He drew a distinction between a transaction that was artificial - as these leases obviously were - but still intended to take effect, and a sham transaction that was not intended to be effective at all. The leases clearly were intended to be effective, as the scheme would not have worked otherwise.
In relation to the second ground, this was irrelevant. The only people who were affected by the declaration of solvency were the SPV's creditors, and there were none. The third ground was not made out either, since the SPVs were not carrying on business before the liquidation, and so had nothing to cease.
The fourth ground was decided on the facts - there had been a delay in the appointment of replacement liquidators, but on the evidence, this may have been the result of Insolvency Service advice (through a 'Dear IP' letter).
The fifth and sixth grounds were taken together. The judge held that the promotion of a scheme to avoid business rates was not, of itself, sufficient reason to wind up PAG.
However, he went on to hold that the purpose of liquidation was 'the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlements of members'. The SPVs, on the other hand, used liquidation in order to act as shelters for assets and in so doing subverted the purpose of the insolvency legislation.
There are numerous examples of schemes similar to that operated by PAG, and recently there have been several instances where these schemes have been wound up on the petition of the Secretary of State. However, this is the first time that such a case has come before a High Court judge. To that extent, therefore, this judgment should be helpful since it determines the question of whether schemes such as this ought to be wound up in the public interest.
The judgment is also helpful in other ways, particularly in relation to the grounds on which the Secretary of State did not succeed. In particular, it is confirmed that mere artificiality does not engage the public interest test. Neither does tax avoidance as a matter of necessity - though the judge was clearly impressed with the evidence as to the unsatisfactory nature of the business rates regime.
Therefore, the simple use of liquidation—however artificial—as a tax mitigation scheme seems unlikely to fall on the wrong side of the line. What seems clear, however, is that if a scheme necessarily involves failing to progress that liquidation, then it is likely to constitute an abuse of the insolvency legislation.
Interviewed by Ioan Marc Jones.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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