Company Wound Up For Using MVL Rates Avoidance Scheme
Property Alliance Group Limited (“PAG”), a property developer, investor and asset manager with a property portfolio in excess of £190million in the UK, operated a rates mitigation scheme from April 2008.
Under the scheme managed by PAG a new company (“newco”) would be incorporated which entered into a lease with PAG to occupy vacant property at a nominal rent and assume liability for NDR. The newco would then pass a special resolution to place itself into a members voluntary winding up whilst the property was renovated and / or a genuine tenant was sought (thereby seeking to avoid empty property business rates).
The members voluntary winding up was possible as the landlord (PAG) would waive any right to receive sums under the lease and the director of newco could make a statutory declaration of solvency. No liquidator would be appointed so the lease would not be disclaimed and would continue until it expired or until it was terminated by PAG when a new tenant was typically found on commercial terms.
The scheme was originally used for the benefit of properties owned by PAG but was then later developed to include third party landlords, who would pay PAG a fee representing a proportion of the amounts of rates saved. All in all 13 newcos were incorporated and they saved PAG around £1.5m in rates and the third party scheme users c£7.4m
In May 2011 the Secretary of State presented winding up petitions against each of the newcos established by PAG for their winding up on public interest grounds. The petitions were unopposed and winding up orders were made on 27 July 2011. PAG was not itself the subject of a winding up petition.
PAG Management Services Ltd (“PAGMS”) was subsequently incorporated in August 2011 and its sole purpose was the management of a revised rates mitigation scheme. The new scheme was virtually identical to the scheme operated by PAG, save for the fact that a liquidator would now be appointed as soon as the newco entered members voluntary liquidation. By the end of March 2013 this new scheme saved PAG over £1m in rates and third party users c£5.3m (from which PAGMS reportedly earned around £1.8m in fees).
A winding up petition was presented against PAGMS under s124A of the Insolvency Act 1986. The Secretary of State for Business, Innovation and Skills has the power to present a petition for a company to be wound up if it appears to be in the public interest for that company to be wound up.
The winding up petition was heard before Mr Justice Norris who made the following comments. Even if the Secretary of State thinks it is in the public interest to wind up a company, the Court still has discretion whether or not to make an order and before making the order the Court must be satisfied that it is just and equitable to wind the company up. The burden of proof (that it is just and equitable to wind the company up) lies with the Secretary of State. The Court will then balance the competing reasons why the company should be wound up and why it should not be wound up.
It is not necessary for the business of the company to involve illegality. However the company may still be wound up if its business is “inherently objectionable” because its activities are contrary to a clearly identified public interest. This is sometimes described as disclosing “a lack of commercial probity” which may involve prejudice to the public (for example casting burdens on the general body of taxpayers).
When making a judgment the Court must reach a decision according to law and by reference to principle and precedent. Concepts such as “inherent objectionality” and “commercial probity” ultimately will have some moral content but a judgment must be informed by the existing legislation and guided by the view of other judges in other cases.
Ultimately to wind up an active solvent company is a very serious step and the Court must be satisfied that reasons of sufficient weight have been put forward to justify taking that course of action.
Numerous grounds were advanced by the Secretary of State, most of which were unsuccessful. Mr Justice Norris found that the Court could not conclude on the evidence or in principle that the rates avoidance scheme was by its nature contrary to public interest or that the leases entered into with newcos were a sham.
Mr Justice Norris did however find that the Secretary of State was justified in seeking a winding up order on the basis that PAGMS’ activities were an abuse of the insolvency legislation and demonstrated a lack of commercial probity and therefore contrary to public interest. The purpose of a liquidation is the collection, realisation and distribution of assets in order to satisfy the claims of creditors. There is a clear public interest in ensuring that the purpose of liquidations is not subverted.
Disappointingly, Mr Justice Norris did not determine that the rates avoidance scheme was contrary to the public interest.
PAGMS was wound up as the scheme they operated was a misuse of insolvency legislation, and not business rates legislation.
Therefore whilst this decision does not sound the death knoll of the rates avoidance scheme or the use of members voluntary liquidation to avoid rates liability it does highlight the fact that a liquidation must involve a genuine collection and distribution of assets, not to be used to shelter assets such as commercial properties from rates indefinitely for the purpose of profit (for a third party).