The Secretary of State for Business, Energy And Industrial Strategy v PAG Asset Preservation Ltd

On a public-interest winding-up petition under section 124A of the Insolvency Act 1986, the court must identify the public interest which an order would promote and balance all relevant circumstances. Artificiality, fiscal motivation and predetermined transactions do not themselves establish commercial impropriety.

A members’ voluntary liquidation is not subverted where it genuinely collects, realises and distributes assets. A genuine contingent asset cannot be disregarded merely because it was created to obtain a statutory fiscal advantage. Where its possible realisation properly requires the liquidation to continue, that continuation is not an artificial prolongation. Winding up an active, solvent company remains a serious discretionary step requiring reasons of sufficient weight.

The Secretary of State petitioned under section 124A of the Insolvency Act 1986 to wind up two companies operating a scheme which enabled owners of unoccupied commercial property to avoid business rates. Landlords granted leases to special purpose companies which then entered members’ voluntary liquidation. The statutory exemption for property owned by a company in liquidation consequently applied.

The High Court dismissed the petitions in [2019] EWHC 2890 (Ch). It held that a determination premium payable upon early termination of each lease was a genuine contingent asset. The liquidators could therefore maintain the liquidations while awaiting the possible realisation of those assets.

The appeals asked whether that feature sufficiently distinguished an earlier scheme condemned as a misuse of insolvency law, and whether the companies should nevertheless be wound up in the public interest.

1. Appeals dismissed. The determination premiums were legally effective obligations under legally effective leases. They were genuine contingent assets, notwithstanding the artificial design of the scheme and the reimbursement of landlords for most of the payments.

2. The purpose of a voluntary liquidation is the collection, realisation where appropriate, and distribution of assets. Under the earlier scheme considered in In re PAG Management Services Ltd [2015] BCC 720, the liquidations existed solely to shelter commercially valueless leases and were artificially prolonged. The present scheme was materially different. Its liquidators were entitled, and indeed obliged, to await the determination or expiry of the leases so that all potential determination premiums could be collected. The liquidations were therefore neither artificially prolonged nor a subversion of insolvency law.

3. Once a transaction is accepted as genuine and not a sham, its legal effect cannot be undermined merely by the fiscal motive for creating it. The artificiality of the scheme, the predetermined sequence of its steps and its object of avoiding business rates did not permit the court to disregard the contingent assets. Advance planning and the use of special purpose companies are familiar commercial features and do not themselves make transactions contrary to the public interest.

4. Under section 124A of the Insolvency Act 1986, the Secretary of State’s opinion that winding up is expedient is only the prerequisite for presenting a petition. The court must independently balance all the evidence, decide whether winding up is just and equitable, and identify the public interest which an order would promote. Illegality is unnecessary, but an active and solvent company should be wound up only for reasons of sufficient weight.

5. No evidence established harm to the public or to an identifiable class of the public. That essential element of the petitions was absent. In any event, the judge was entitled to conclude that any possible misuse was insufficiently reprehensible to justify winding up. Newey and Floyd LJJ agreed with Asplin LJ.

1. Court of Appeal (Civil Division): The appeals were dismissed unanimously. The High Court’s refusal to wind up the companies was upheld: [2020] EWCA Civ 1017.
2. High Court (Business and Property Courts), Manchester: HHJ Stephen Davies dismissed the Secretary of State’s petitions under section 124A of the Insolvency Act 1986 and declined to wind up either company: [2019] EWHC 2890 (Ch).