Company – Business rates – Winding up – Petitioning secretary of state seeking to wind up respondent company set up to manage and co-ordinate business rates mitigation scheme – Whether scheme involving abuse of insolvency legislation – Whether respondent’s business demonstrating lack of commercial probity – Petition granted
The respondent company was incorporated to manage and co-ordinate a business rates mitigation scheme to exploit the exemption from business rates contained in regulation 4(k) of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386), for the benefit both of associated companies in the group of which it formed part and also for third party clients. The regulation 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”.
Under the scheme, among other things, the respondent incorporated a special purpose vehicle (SPV) to which its client companies granted leases. Contemporaneously with the grant of the lease, the landlord waived the right to receive sums due under the lease. At the same time, the SPV was placed in members’ voluntary liquidation with the result that the SPV was a company in members’ voluntary winding up and was itself exempt from business rates.
The petitioning secretary of state considered that it was expedient in the public interest that the respondent should be wound up and presented a petition under section 124A of the 1986 Act seeking that relief. The petitioner complained, among other things, that the scheme involved an abuse of the insolvency legislation because the essential commercial object of the winding up was to continue it for as long as possible while the landlord tried to find a genuine tenant on commercial terms, and the respondent drew its monthly fee calculated by reference to the business rate saving. Furthermore, the business of the respondent was artificial and demonstrated a lack of commercial probity both as regards the elements of the scheme (artificial leases, use of directors without any meaningful function, abuse of the insolvency legislation by incorporating companies solely to be put into a lengthy members’ voluntary winding up) and as regards the object of the scheme itself, which was the avoidance of business rates.
Held: The petition was granted.
(1) Even if the petitioner thought it expedient in the public interest to wind up a company, the court still had a discretion whether or not to make an order. Before making an order the court had to be satisfied that it was just and equitable to wind the company up. The burden of proof lay on the petitioner to persuade the court, having proved matters of fact to the requisite civil standard, that it was just and equitable to wind the company up. The court had to 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. As a result of undertaking that exercise the court had to 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. It was not necessary for the business of the company to involve illegality: Re Walter L Jacob & Co Ltd [1989] BCLC 345 and Re Senator Hanseatische [1997] 1 WLR 515 applied.
(2) Where the business of the company did not involve the commission of illegal acts or breaches of regulatory requirements the company might nonetheless be wound up if its business was inherently objectionable because its activities were contrary to a clearly identified public interest. Such conduct was sometimes described as disclosing a lack of commercial probity, and while that frequently might involve preying on the public and inducing individual members of the public to participate in transactions which were without benefit to them, it could also involve prejudice to the public generally, for example by casting burdens on the general body of tax payers. However, in making the judgment whether a business was inherently objectionable the court had to be careful of being priggish. Concepts such as “inherent objectionability” or “want of commercial probity” were bound to have some moral content, though that content was not the subjective moral perception of the individual judge, but had to be informed by any discernible policy of the law and guided by the view of other judges in other cases. Finally, to wind up an active and solvent company was a serious step, and the court had to be satisfied that reasons of sufficient weight had been advanced to justify taking that course: Re Abacrombie & Co Ltd [2008] EWHC 2520 (Ch) and Secretary of State for Business Innovation and Skills v PGMRS Ltd [2010] EWHC 2864 (Ch) applied.
(3) Applying those principles to the present case, on the evidence, it was just and equitable that the respondent should be wound up because its activities were contrary to a clearly defined public interest and, on balance, the public interest was better served by winding up than any other outcome.
The respondent’s business necessarily involved the creation by the respondent of companies whose only purpose was to immediately go into liquidation, the creation of assets for the sole purpose of their being held by those companies in liquidation, the putting in place of arrangements which enabled the respondent to have effective control over the conduct of those liquidations as regards the maintenance in being of those assets and the exercise of that control to secure that the liquidations continued rather than proceeded to a conclusion, the real object being that each liquidation should act as a shelter for the assets specifically created to be held by the company in order that the respondent might earn fees in relation to those assets.
The purpose of liquidation was 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 were made to achieve that purpose. There was a clear public interest in ensuring that the purpose of liquidations was not subverted, as it was by treating a company in liquidation as a shelter and seeking to prolong its continuation as such. That misuse of the insolvency legislation demonstrated a lack of commercial probity and, in its own way, subverted the proper functioning of the law and procedures of bankruptcy.
Paul Chaisty QC and Lucy Wilson-Barnes (instructed by Wragge Lawrence Graham & Co) appeared for the petitioner; David Chivers QC and Jack Rivett (instructed by Irwin Mitchell) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read transcript: Secretary of State for Business Innovation and Skills v PAG Management Services Ltd
