Secretary of State for Business Innovation And Skills v PAG Management Services Ltd

Under section 124A of the Insolvency Act 1986, the court retains discretion whether winding up is just and equitable. Illegality is not required. Winding up may be justified where a business is inherently objectionable because it is contrary to a clearly identified public interest or lacks commercial probity. Tax mitigation and artificiality alone do not suffice. However, using companies in liquidation as shelters for assets created solely to generate fees, and prolonging the liquidations for that purpose, subverts the proper function of insolvency legislation. That misuse may justify winding up an active and solvent company. Broad economic policy questions remain matters for Parliament.

The Secretary of State petitioned under section 124A of the Insolvency Act 1986 for the winding up of PAG Management Services Ltd on public-interest grounds. PAG Management operated a business-rates mitigation scheme under which special-purpose companies took short leases of vacant commercial premises and entered members’ voluntary liquidation, thereby obtaining exemption from non-domestic rates. The petition alleged sham leases, defective declarations of solvency, breaches of sections 87, 91 and 92, abuse of insolvency legislation, and lack of commercial probity. The central issue was whether the scheme, considered as a whole, made it just and equitable to wind up PAG Management.

The petition succeeded. The court held that it was just and equitable to wind up PAG Management under section 124A of the Insolvency Act 1986. The company was required to cease marketing the revised scheme forthwith, although the formal winding-up order was deferred pending a consequential hearing.

1. The court retained a discretion even though the Secretary of State considered winding up expedient in the public interest. The Secretary of State bore the burden of proof. The court had to balance the competing reasons on the totality of the evidence, identify the public interest promoted by winding up, and give sufficient weight to the fact that winding up an active and solvent company was a serious step. This approach was consistent with Re Walter L Jacob & Co Limited [1989] BCLC 345.
2. The leases were artificial and uncommercial, but the evidence did not establish that they were shams. Some rights and obligations, including the leasehold estate, the landlord’s termination right and the liability for non-domestic rates, were genuinely intended to take effect. The statutory declarations of solvency and the figurehead role of the director did not justify winding up PAG Management.
3. No breach of section 87(1) was established. The special-purpose companies had not carried on a business before liquidation, and any marketing of the leases was asset realisation rather than trading. Although PAG Management controlled the liquidations, the delay in appointing replacement liquidators was treated as accidental and was not shown to be an integral or unlawful part of the business model under sections 91 and 92.
4. The promotion of NNDR mitigation was not, without more, inherently objectionable or contrary to the public interest. The court should not decide the wider economic and political question whether such schemes ought to be prohibited; that was for Parliament. The approach in Makro Properties Ltd [2012] EWHC 2250 (Admin) was adopted.
5. The decisive vice was the misuse of insolvency legislation. PAG Management created companies and assets solely for use in liquidation, controlled the liquidations, and prolonged them so that the assets sheltered the fee-generating scheme. Liquidation exists to collect, realise and distribute assets for creditors and members. Treating it as an asset shelter subverted that purpose, demonstrated a lack of commercial probity and engaged a clearly defined public interest warranting winding up.