Secretary of State v PAG Asset Preservation Limited

The Court of Appeal dismissed appeals against the refusal to wind up two companies under section 124A of the Insolvency Act 1986. The court applied established principles governing winding up in the public interest and held that the relevant question was whether the members' voluntary liquidations (MVLs) were being used to subvert the insolvency regime by sheltering assets and prolonging liquidations for that purpose.

The court found that Scheme 3 differed materially from the earlier Scheme 2 (considered by Norris J in In re PAG Management Services Ltd [2015] BCC 720) because Scheme 3 created genuine contingent assets in the form of a contractual "determination premium" in the leases. Those contingent assets justified liquidators maintaining MVLs until leases were determined or expired so as to collect and realise assets for distribution. As a result the court held there was no misuse or subversion of the insolvency legislation and no sufficient public interest harm to justify winding up under section 124A.

Background and parties: The Secretary of State for Business, Energy and Industrial Strategy presented petitions under section 124A, Insolvency Act 1986 seeking winding up of PAG Asset Preservation Limited and MB Vacant Property Solutions Limited on public interest grounds. The companies operated a business-rates mitigation regime called "Scheme 3", which involved granting short, artificial leases to special purpose vehicles (SPVs) that would be placed into members' voluntary liquidation (MVL) so that the SPVs were exempt from non-domestic rates under applicable regulations.

Nature of the application: The Secretary of State sought winding up orders on the basis that the companies' business model lacked commercial probity and misused or subverted the insolvency legislation in the same way as the earlier Scheme 2 that had led Norris J to wind up PAG Management Services Ltd.

Issues framed:

• Whether Scheme 3 was a misuse or subversion of the insolvency legislation comparable to Scheme 2;
• Whether the differences in Scheme 3 (notably the inclusion of a contractual "determination premium" in the leases and a short time-lapse before MVL) meant the MVLs genuinely involved collection, realisation and distribution of assets;
• Whether, on the evidence, it was just and equitable in the public interest to wind up the companies under section 124A.

Court's reasoning: The court reviewed the statutory framework (including s.124A Insolvency Act 1986 and sections of the Local Government Finance Act 1988 and subordinate regulations) and the authorities on public interest winding-up jurisdiction. It accepted that creating SPVs and arranging pre-determined steps is not unlawful or necessarily objectionable provided transactions are genuine and not shams. The critical distinction from Norris J's decision on Scheme 2 was that Scheme 3 created genuine contingent assets (determination premiums) which made it objectively appropriate for liquidators to continue MVLs until those assets could be realised. Because liquidators legitimately pursued collection and distribution of assets, the court concluded there was no misuse of the insolvency regime. The judge below had also found no evidence of identifiable public harm beyond reduced business-rates receipts; that absence of demonstrable public harm was material to the exercise of the s.124A discretion.

Conclusion: The Court of Appeal affirmed dismissal of the petitions and refused permission to appeal to the Supreme Court.

Appeal dismissed. The court held that Scheme 3 differed materially from the previously condemned Scheme 2 because Scheme 3 created genuine contingent assets (determination premiums) which justified liquidators maintaining MVLs to collect and realise assets. Consequently there was no misuse or subversion of the insolvency legislation sufficient to make it just and equitable in the public interest to wind up the companies under section 124A of the Insolvency Act 1986.

Appeal from the High Court (Business and Property Courts), Manchester, HHJ Stephen Davies, judgment reported at [2019] EWHC 2890 (Ch). The Secretary of State appealed to the Court of Appeal, which delivered judgment on 31 July 2020 ([2020] EWCA Civ 1017).