Section 45 of the Local Government Finance Act 1988 imposed a national non-domestic business rate (“NNDR”) upon hereditaments if 4 conditions are satisfied. For a start the hereditament must fall within a class prescribed by regulations. Regulation 3 of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (“2008 Regulations”) prescribed all non-domestic hereditaments apart from 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”.
In the High Court case of Secretary of State for Business Innovation And Skills v PAG Management Services Ltd  PAG Management Services Limited (“PAG Management”) was incorporated to manage and coordinate a NNDR mitigation scheme to exploit this exemption for the benefit of associated companies in its Group and third party clients.
The scheme operated as follows:
1 PAG Management incorporated a special purpose vehicle (“SPV”);
2 PAG Management’s client companies immediately granted leases of the vacant properties to the SPV;
3 The leases were outside the business tenancy protection given by the Landlord and Tenant Act 1954. There was no premium. Usually they were for a 3 year term at a rent of £1 per annum terminable on 7 days’ notice. A director of one of the major scheme users, recognised this was “unfeasibly short” for a business tenant in actual occupation;
4 At the same time as the leases were granted the landlord waived the right to receive sums under the leases;
5 At the same time as the leases were granted the SPVs were placed in members’ voluntary liquidation. This was possible because the landlords’ waiver enabled the directors of the SPVs to make a statutory declaration of solvency;
6 The SPVs were now exempt from NNDR as companies in members’ voluntary winding up;
7 In each case PAG Management’s client company (the landlord) was not in occupation of the hereditament. The existence of the lease precluded its right to occupy;
8 The members’ voluntary liquidation proceeded slowly;
9 Under a fee agreement the Landlord paid PAG Management a percentage (15% – 40%) of the NNDR saved at a result of the lease being in place; and
10 The landlord refurbished and/or marketed the property. If a tenant was found the lease to the SPV was terminated and the new tenant took occupation, without any “empty rates” having been paid in the meanwhile.
The Secretary of State sought the winding up of PAG Management on a number of grounds. The successful one’s were an amalgam of “abuse of the insolvency legislation” and “lack of commercial probity having regard to the elements of the scheme”.
The court said the business of PAG Management necessarily involved:
– the creation of companies which existed for no purpose other than immediately going into liquidation.
– the creation of assets for no purpose other than their being held by those companies in liquidation but recoverable by the freeholder if the freeholder could turn them to advantage;
– PAG Management making arrangements for effective control over the liquidations to facilitate the maintenance in being of those assets; and
– the exercise of that control to secure that the liquidations continue rather than get concluded to shelter the assets so that PAG Management might earn fees.
This ran counter to the true purpose of liquidation which was the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlements of members.
Any adjustments legislation made to third party rights (including tax exemptions) were made to achieve that purpose.
There was a clear public interest in ensuring that the real purpose of liquidations was not subverted by treating a company in liquidation as a shelter (and seeking to prolong its continuation as such).
This misuse of the insolvency legislation demonstrated a lack of commercial probity. It its own way it also “subvert[s] the proper functioning of the law and procedures of bankruptcy”.
The business of PAG Management involved creating artificial leases incorporating elements of pretence, and the use of placemen to distance PAG Management’s owners and managers from the liquidation process. This suggested an awareness that necessary elements of PAG Management’s business might be thought improper and have to be disguised. These elements supported the court’s holding that PAG’s business lacked commercial probity.
PAG Management itself was an active and solvent business. That business involved the promotion of an NNDR mitigation scheme. Of itself the promotion of tax mitigation schemes was not an inherently objectionable activity.
But in the course of so doing:
– it used artificial leases having no commercial reality and containing some terms which were mere pretences;
– having procured that the companies it had created entered liquidation, it had delayed appointing new officeholders.
These would not of themselves be of sufficient weight to warrant a winding up. But PAG Management’s business model involved a misuse of the insolvency legislation and it was just and equitable to wind up the company. The court should exercise its discretion conferred by 124A of the insolvency Act 1986 to wind the company up.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.