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Cite as: [2015] EWHC 2404 (Ch)

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Neutral Citation Number: [2015] EWHC 2404 (Ch)
Case No: 4339 OF 2013


Manchester District Registry
Strand, London, WC2A 2LL

B e f o r e :


In the matter of PAG Management Services Limited
In the matter of the Insolvency Act

Secretary of State for Business Innovation and Skills
- and -

PAG Management Services Limited


Paul Chaisty QC and Lucy Wilson-Barnes (instructed by Wragge Lawrence Graham & Co) for the Petitioner
David Chivers QC and Jack Rivett (instructed by Irwin Mitchell) for the Respondent

Hearing dates: 10-12 and 16-17 March 2015



Crown Copyright ©

    Mr Justice Norris:

  1. Section 45 of the Local Government Finance Act 1988 imposes a liability to pay business rates (called "a national non-domestic rate" and usually referred to as "NNDR") upon hereditaments if four conditions are satisfied. One of the conditions is that the hereditament must fall within a class prescribed by regulations. Regulation 3 of the Non Domestic Rating (Unoccupied Property) (England) Regulations 2008 (SI 2008/386) prescribed all non-domestic hereditaments other than those exempted by Regulation 4. Regulation 4(k) of the 2008 Regulations exempted:-
  2. "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".
  3. PAG Management Services Limited ("PAG Management") was incorporated on the 24 August 2011 to manage and coordinate a business rates mitigation scheme to exploit this exemption for the benefit both of associated companies in the group of which it forms part and also for third party clients.
  4. The scheme operates in this way:-
  5. a) PAG Management incorporates a special purpose vehicle ("the SPV"):
    b) Contemporaneously PAG Management's client companies will grant leases to the SPV:
    c) The leases are generally for a term of 3 years at a rent of £1 per annum (and containing obligations as to use and repair) but terminable on 7 days' notice:
    d) Contemporaneously with the grant of the lease to the SPV the landlord waives the right to receive sums due under the lease:
    e) Contemporaneously with the grant of the leases the SPV is placed in members' voluntary liquidation (a course that is possible because, by virtue of the landlords' waiver, the directors of the SPV can make a statutory declaration of solvency):
    f) The SPV is now a company in members' voluntary winding up and is itself exempt from NNDR:
    g) The landlord (PAG Management's client company) is not in occupation of the hereditament:
    h) The members' voluntary liquidation proceeds slowly:
    i) Under a fee agreement entered into between the Landlord and PAG Management the latter receives by way of fee a percentage (varying between 15% and 40%) of the NNDR saved at a result of the lease being in place:
    j) Meanwhile the landlord refurbishes and/or markets the property and if a taker is found then the lease to the SPV is terminated and the new tenant takes occupation, no "empty rates" having been paid in the meanwhile.
  6. The Secretary of State for Business Innovation and Skills ("the SoS") considers that it is expedient in the public interest that PAG Management should be wound up and on 13 December 2013 presented a Petition under section 124A of the Insolvency Act 1986 ("the 1986 Act") seeking that relief. The complaints of the SoS are (in summary):-
  7. a) The leases granted by landlords to the SPVs are shams, for the SPV has neither the assets nor the financial and management structure to enable it to comply with any obligations, nor would the landlord accept anyone other than the SPV as a tenant on these terms, but in the event that a genuine trading tenant offered to take the premises would immediately extinguish the lease to the SPV and re-let on commercial terms;
    b) The statutory declaration of solvency cannot properly be given, because the director of the SPV in truth is a pure figurehead without any real knowledge of the assets or liabilities of the SPV:
    c) The scheme involves a breach of section 87(1) of the 1986 Act (which requires that the company shall from the commencement of the winding up cease to carry on its business except for the purposes of a beneficial winding up) whereas the SPV has had no business at all prior to the members' voluntary liquidation, and only commences business activities of any sort within the voluntary winding up;
    d) The scheme involves a breach of sections 91 and 92 of the 1986 Act in that if a liquidator indicates an intention to disclaim the leases (because they are of no advantage to the SPV) then he is removed from office and no new liquidator is appointed so that the members' voluntary winding up becomes dormant;
    e) The scheme involves an abuse of the insolvency legislation because the essential commercial object of the members' voluntary winding up is to continue it for as long as possible (whilst the landlord tries to find a genuine tenant for the premises on commercial terms, and whilst PAG Management draws its monthly fee calculated by reference to the NNDR saving):
    f) The business of PAG Management is artificial and demonstrates a lack of commercial probity both as regards the elements of the scheme (artificial leases, use of directors without any meaningful executive function, abuse of the insolvency legislation by incorporating companies whose sole reason for existence is that they should be put into a lengthy members' voluntary winding up) and as regards the object of the scheme itself (which is the avoidance of NNDR).
  8. There was a large measure of agreement about the principles to be adopted in the exercise of this jurisdiction. The principles I shall apply are these:-
  9. a) Even if the SoS thinks it expedient in the public interest to wind up a company, the Court still has a discretion whether or not to make an order.
    b) Before making an order the Court must be satisfied that it is just and equitable to wind the company up.
    c) The burden of proof lies on the SoS to persuade the Court (having proved matters of fact to the requisite civil standard) that it is just and equitable to wind the company up.
    d) The Court must 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 (per Nicholls LJ in Re Walter L Jacob & Co Limited [1989] BCLC 345 at 353 b-d).
    e) As a result of undertaking that exercise the Court must 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 (ibid at p353f);
    f) It is not necessary for the business of the company to involve illegality. As Millett LJ said in Re Senator Hanseatische [1997] 1 WLR 515 at 522h:-
    "On the contrary the phrases used (namely "expedient in the pubic interest" and "just and equitable") to my mind indicate that Parliament did not intend to impose such a restriction but instead simply decided to leave to the Secretary of State to form a view as to what was expedient in the public interest and the court then to decide on the material before it whether the justice and equity of the case dictated that the company concerned should be wound up".
    g) Where the business of the company does not involve the commission of illegal acts or breaches of regulatory requirements the company may nonetheless be wound up if its business is "inherently objectionable" because its activities are contrary to a clearly identified public interest. So in Abacrombie & Co Limited [2008] EWHC 2520 (Ch) the company operated a debtor advisory service. David Richards J explained:-
    "The purpose of the company's business as it related to clients with equity in their residential property was, prior to the client's bankruptcy, to sell the equity to the client's spouse or partner at as low a price as possible and to use the proceeds to fund the company's charges which were both excessive and unjustifiably charged to the debtor client. The effect, as the company…well appreciated, was to deprive the debtor's estate of any substantial return or value from the debtor's beneficial interest which was likely to have been the only asset of any substance. The effect was detrimental to creditors and undermined the proper administration of the bankruptcy of the debtor" (see paragraph [60]).
    He had earlier at paragraph [15] held:-
    "The arrangements, as operated by the company, in my judgment, subverted the proper functioning of the law and procedures of bankruptcy".
    h) Such conduct is sometimes described as disclosing "a lack of commercial probity", and whilst this frequently might involve preying on the public and inducing individual members of the public to participate in transactions which are without benefit to them, it can also involve prejudice to the public generally (for example by casting burdens on the general body of tax payers). An illustration of this may be found in SoS for Business Innovation and Skills v PGMRS Limited [2010] EWHC 2864 (Ch) in which four companies traded at the expense of HMRC (by not paying either VAT or PAYE) until such time as they were insolvent, conduct that the judge held represented a lack of commercial probity.
    i) However in making the judgment whether a business is inherently objectionable "the court has to be careful of being priggish" (see Re Force Sun Limited [2002] EWHC 443 (Ch) at paragraph [26], a point which Mr Chivers QC reinforced with a submission that this was a court of law and not a court of morals. If this is simply a submission that I am bound to decide the case according to law and by reference to principle and precedent I unhesitatingly accept the submission. If this is a submission that the law in this area is devoid of moral content, then I disagree. Concepts such as "inherent objectionability" or "want of commercial probity" are bound to have some moral content, though that content is not the subjective moral perception of the individual judge, but must be informed by any discernable policy of the law and guided by the view of other judges in other cases.
    j) Finally, to wind up an active and solvent company is a serious step, and the Court must be satisfied that reasons of sufficient weight have been advanced to justify taking that course (Re Walter L Jacob & Co Limited (supra) at p354d-e).
  10. These are the facts I find in relation to the issues I have to decide.
  11. Property Alliance Group Limited ("PAG") is a property developer, investor and asset manager with a property portfolio of about £190m spread throughout the UK, but with a particular focus on Manchester and the northwest. Its majority shareholder and chairman is David Russell. PAG engages Mr Jonathan Mather ("Mr Mather") as a consultant. Mr Mather is a qualified surveyor and has been involved in development and management of commercial property since 1988.
  12. Until April 2008 owners of non-domestic property were entitled to benefit from some relief against NNDR in relation to empty commercial and industrial properties. But from the 1 April 2008 that relief was removed. Shortly thereafter the global financial crisis occurred which led to a property recession. PAG was faced with increasing numbers of empty properties and a general fall in rental yields. As at April 2008 approximately 25% of its commercial and industrial property portfolio was wholly or partially empty. In anticipation of the removal of relief in respect of NNDR PAG began to operate what it called "a NNDR mitigation scheme".
  13. Under this initial scheme PAG set up a new company ("Newco") which entered into a lease with PAG to occupy the vacant property at a nominal rent, Newco assuming liability for the unoccupied business rates. On the day the lease commenced PAG would waive entitlement to the rent, and Newco would pass a special resolution to place itself into members' voluntary winding up. Although placed in a members' voluntary winding up, no liquidator was appointed. There was accordingly no one in office who could disclaim the lease, which would therefore simply continue until its 3 year term expired by effluxion of time (the lease generally being put in a drawer and forgotten about). If a bona fide third party tenant came along who wished to take a lease on genuine commercial terms then PAG would exercise a 7 day termination right so that the property became available to the incoming tenant with vacant possession.
  14. Although initially confined to properties of which PAG was the freeholder or head leaseholder, in about May 2009 the initial scheme was developed to include other landlords. In return for being allowed to participate in the scheme these third party landlords paid PAG a fee representing a proportion (generally 30% to 40%) of the amounts of NNDR saved by using the scheme. In all 13 Newco's were established. They saved PAG about £1.5 million in NNDR, and third party scheme users about £7.4 million.
  15. On the 31 May 2011 the SoS presented petitions against each of those companies for their winding up on public interest grounds. PAG decided not to oppose the petitions and winding up orders were made on the 27 July 2011. PAG itself was not the subject of a petition.
  16. On the 24 August 2011 PAG Management was incorporated for the purpose of managing and coordinating the operation of a revised scheme, that being its sole trading activity. The revised scheme was almost identical to the initial scheme, save for the fact that now a liquidator was appointed as soon as the SPV entered members' voluntary liquidation. Mr Mather was a director of PAG Management.
  17. In readiness for the implementation of the revised scheme Mr Mather approached Nicholas Muff ("Mr Muff"). Mr Muff was a friend of some 40 years' standing who was "down on his luck". Some 20 years earlier Mr Muff had owned a couple of residential rental properties: and he had been involved in a travel agency (and had become a director upon the incorporation of that business). But he had no property expertise and no great experience of being a company director. He was chosen by Mr Mather because he was known, and was regarded as trustworthy.
  18. Mr Muff's role was to lend his name to the incorporation of the SPVs, of which he was to be a sole director and sole shareholder. He was someone to whom it did not matter that he would become the director of a whole string of companies that would go into liquidation. He was not himself expected to do anything in relation to the incorporation of the SPV other than to sign the documents that were put in front of him.
  19. Mr Muff was to have no part in the negotiation of any of the leases which the SPV was to take from PAG or third party landlords. Indeed, he would have no contact with those intended landlords. Mr Muff's role would, once again, be to sign the documents put in front of him. Mr Muff said that when he came to perform his intended role he regarded himself in all respects as acting upon the professional advice of Mr Mather, and then himself exercising his independent judgment as director as to whether to undertake the relevant transaction, having read and considered the relevant transaction documents. But this evidence was singularly unconvincing: and I do not accept it. I find that Mr Muff did as he was told. The suggestion that, in relation to leases taken by the SPVs, he exercised independent judgment as to whether or not to take those leases or that he undertook scrutiny of their terms is fanciful. He did not: and it was never expected that he would.
  20. Immediately before the winding up orders were made in relation to the 13 Newcos participating in the original scheme, Ashburton Solutions Limited ("Ashburton") was incorporated on the 13 July 2011, with Mr Muff as its sole director and sole member. It had been intended that following the establishment of PAG Management in August 2011, Ashburton would be granted various leases in September 2011 and would then immediately enter a members' voluntary liquidation. But there was a problem with the leases and Ashburton did not immediately become operative.
  21. Meanwhile a second company (Beacon Property Solutions Limited ("Beacon")) was incorporated on the 3 October 2011 with Mr Muff again as its sole member and sole director.
  22. It was from the moment of their incorporation intended by PAG Management (as the real actor) and Mr Muff (as their nominee shareholder and director) that Ashburton and Beacon should be placed in members' voluntary winding up more or less immediately after they became tenants under intended leases.
  23. In due course leases in standard form were granted to Ashburton and to Beacon by PAG and by third party landlords utilising the revised scheme. The leases were outside the business tenancy protection given by the Landlord and Tenant Act 1954. There was no premium. The term granted was for 3 years: but clause 7.7 said that the landlord might determine the lease at any time by serving not less than 7 days' written notice (a period which Mr Cook, a director of Croudace Properties Limited, one of the major scheme users, recognised was "unfeasibly short" for a business tenant in actual occupation). The rent payable was £1 per annum. The SPV covenanted to use the premises only for "the permitted use", and to keep the premises clean and tidy (and the interior in a reasonable state of repair and condition). There was a covenant not to make any non-structural or internal alterations or additions without the prior consent of the landlord: and a covenant not to assign, charge, underlet or part with or share the possession or occupation of the premises except with the consent of the landlord (which was not to be unreasonably withheld). Crucially, in paragraph 26 of Schedule 2 to the lease the SPV covenanted to pay non-domestic business rates in respect of the premises as required by law. For its part the landlord covenanted to insure the premises (including an obligation to insure against 3 months' loss of the premises rent i.e. against the loss of 25p). In the event of an assignment the ground work was laid for a guarantor to secure the tenant's obligations under the lease.
  24. Third parties were invited to participate in the scheme by means of solicitation or advertisements. There is no advertisement available for December 2011. But there is a form that was used in November 2012 which was treated as typical of the sort of "sales pitch" that was made during marketing calls or in the exploitation of networking opportunities. It was in these terms:-
  25. "Vacant Rates Solution
    Remove 100% of the liability on your vacant commercial property rates.
    Turnkey solution.
    No fuss, disruption or damage.
    No occupation.
    Not a short term let.
    Not art, marketing or a charity.
    Suitable for properties with RV's over £50,000."

    In evidence Mr Mather explained that other schemes depended upon moving desks and such like into the demised premises, with the potential for damage to be caused: whereas the PAG Management scheme did not. His explanation was that a scheme user would be told (a) that initially there would be no occupation; (b) that that might continue to be the case throughout the intended liquidation of Ashburton; (c) but if a subsequently appointed liquidator of Ashburton found someone to occupy the premises then the landlord could exercise the break clause, either to prevent occupation at all (if he did not like the proposed occupier) or to negotiate the grant of a direct new lease (if he did like the proposed new occupier).

  26. Where a third party landlord granted a lease to Ashburton that third party landlord had also to enter into a fee agreement with PAG Management. In the sample agreement in the trial bundle the obligation was expressed in these terms:-
  27. "Where the above mentioned lease is in existence at the above property the landlord will pay [PAG Management] a fee equivalent to 30% of its non-domestic rates saving resulting from the lease being in place plus VAT at the applicable rate. These fees are to be paid by monthly direct debit".

    Thus it was in the commercial interest both of PAG Management (which was collecting a 30% fee) and of the landlord (which was achieving a 70% reduction in the burden of NNDR) that the lease should continue in existence whilst there was no commercial tenant willing to take the premises on usual terms. The evidence suggested that the total fee income generated for PAG Management by Ashburton, Beacon and the other SPVs with which I am not concerned was about £12 million per annum. The landlord was also obliged to promise that the fee agreement and the lease were to be treated as absolutely confidential and to agree not to disclose the terms of the agreement or the existence of the mechanisms used to achieve the exemption from NNDR "to any third parties whatsoever". Mr Mather explained that this was not to conceal the true position from the rating authorities but primarily to prevent other mitigation scheme operators from knowing the details of the PAG Management scheme.

  28. The relevant leases were granted to Ashburton on the 8 December 2011. As Mr Mather acknowledged in cross-examination, nobody expected Ashburton to exercise any of the tenant's rights or to perform any of the tenant's obligations. In particular, nobody expected Ashburton to pay the "business rates" (or NNDR) in any circumstances: it had no bank account and no assets (apart from the leases themselves). Ashburton was simply granted some rights (including the right of possession) and undertook some obligations (the performance of which was waived). Indeed, the keys to the demised premises were not given to Mr Muff as the sole director of Ashburton, but were retained by the landlord (or the landlord's marketing agent) and "held to the order" of Ashburton; though it appeared that the landlord in fact exercised a right to show round prospective tenants and to conduct works of refurbishment at the demised premises ignoring Ashburton's interest.
  29. On the 13 December 2011 Ashburton resolved to enter members' voluntary winding up. To achieve this Mr Muff had to sign a declaration of solvency in his capacity as director. On the 13 December 2011 he signed a Declaration of Solvency in these terms:-
  30. "We Nicholas Muff.. do solemnly and sincerely declare that we have made a full inquiry into the affairs of this company, and that, having done so, we have formed the opinion that this company will be able to pay its debts in full together with interest at the official rate within a period of 12 months to the commencement of the winding up… we making this solemn declaration conscientiously believing it to be true…".

    Mr Muff had made no enquiry into the affairs of Ashburton. He knew only what he had been told by Mr Mather. From 30 July 2011 until 8 December 2011 Ashburton had been essentially inactive. There must have been some activity connected with encountering and resolving a problem over the intended leases: but there was no direct evidence that this activity was undertaken by Ashburton rather than by PAG Management, and the evidence of Mr Muff's non-involvement with lease negotiations founds the inference that this was the work of Mr Mather as agent of PAG Management.

  31. Ashburton's "affairs" consisted of taking a number of leases on 8 December 2011 and accepting from the landlords a waiver of performance of the rent covenant. The only reason for going into liquidation five days after commencing business can have been to avoid the liability for the payment of NNDR that Ashburton had just assumed under each of the leases. Mr Muff did not suggest any other reason: and I find that he did not himself give any independent consideration to whether Ashburton should or should not go into liquidation or as to whether a members' or a creditors' voluntary winding up was in order. He simply implemented the scheme that had been outlined to him by Mr Mather and for which he was being paid £750 per month by PAG Management to implement.
  32. Appended to that declaration was a statement of the assets and liabilities of Ashburton. The statement of assets was stated simply to be "leases" estimated to realise £1. Ashburton at that time held perhaps 14 leases, so each was being given a value of about 6 pence.
  33. The winding up resolution appointed Jason Elliott ("Mr Elliott") to be the liquidator. The arrangements for his appointment were made by PAG or by PAG Management. Mr Elliott's pre-appointment fee was fixed (by PAG or by PAG Management) at £5000.00 + VAT and his post-appointment fee at a maximum of £10,000 + VAT which the resolution said was "to be paid at the liquidator's discretion, as and when funds are available". But it was not intended that the liquidator should take his £15,000 fees out of the realised assets of Ashburton. The only "assets" of Ashburton were its leases. The idea that a liquidator could realistically assign (or surrender) a wasting 3-year term granted without a premium and determinable on 7 days' notice for a premium of substance sufficient to pay his fees is unreal. So instead it was arranged that the liquidator's fees would be paid by PAG.
  34. In March 2012 the Insolvency Service published the 53rd issue of its "Dear IP" newsletter. This referred to the winding up of the original PAG Newcos in July 2011 and continued:-
  35. "The Service now has reason to believe that a variation on this arrangement has emerged, allowing landlords to avoiding [sic] paying rates. A number of cases have been brought to The Service's attention of instances where an insolvency practitioner has been appointed as liquidator of a company in a members voluntary liquidation, shortly after the company has entered into a lease, for premises it appears to have no legitimate use for. These instances have been characterised by features such as an extremely short period of time between the company entering into the lease and entering members voluntary liquidation, and peppercorn rents. In the light of the court's decision to wind up the 13 companies on the grounds the arrangement was held to be contrary to the public interest, The Service is of opinion that in cases where a practitioner takes an appointment in a members voluntary liquidation, in which the main aim of the arrangement is to facilitate the non-payment of rates, such an arrangement would also be contrary to the public interest. As such, if The Service is made aware of practitioners participating in these types of arrangements, it will consider reporting the matter to his/her Recognised Professional Body".
  36. On 3 April 2012 Beacon entered members' voluntary winding up. The winding up resolution appointed Gary Bell ("Mr Bell") to be the liquidator. He had been selected by PAG or PAG Management. His fees had been negotiated by one or other of them and were payable by PAG. That day Mr Muff made a statutory declaration of solvency. Beacon's only assets were 15 recently granted leases in the same form as those taken by Ashburton: but this time Mr Muff gave them an estimated realisable value of £20,000. Mr Muff said in evidence that he asked no questions about the valuation but simply accepted the figure provided to him by Mr Mather. I am satisfied (notwithstanding Mr Muff's protestations that he was not a "nominee director", but was a director who took advice and decided for himself) that in relation to the decision to enter liquidation and in the completion of the relevant forms to achieve that objective Mr Muff was a mere cipher, acting as the place-man of PAG Management (which itself acted through the agency of Mr Mather). Neither in his capacity as shareholder nor as director did he act independently.
  37. In view of the terms of the "Dear IP" letter both Mr Elliott and Mr Bell became concerned as to their involvement in the liquidations. Mr Elliott suggested disclaiming the Ashburton leases and bringing the liquidation to a close. But Mr Mather dissuaded him from that course because, as he said in evidence, "from a commercial point of view that process would not be economic". (In fact in relation to some other SPVs the liquidator did disclaim: but PAG Management procured that fresh leases were immediately granted to a new SPV which was in turn put into liquidation). For his part, Mr Bell simply wanted to resign. To assuage the concerns of both, an assignment of the leases to Mr Muff was proposed, and whilst the proposal was considered the liquidations continued. But it was eventually appreciated that that was impossible to implement. In July and August 2012 Mr Elliott and Mr Bell were (with their agreement) removed as liquidators of their respective companies. When interviewed on 31 January 2013 Mr Muff said that he did not recall signing any forms to vote Ashburton's liquidator out of office, but that his failure of recollection did not mean that he had not signed the relevant forms adding:-
  38. "…if I did sign any forms to do so then it was because I was asked to do so by PAG"

    That provides a cameo of the relationship between PAG Management on the one hand and Ashburton and Beacon on the other.

  39. For the following eight months there were no liquidators in office. Mr Mather said that it was difficult to find replacements in view of the "Dear IP" letter (which I accept), but in his oral evidence went on the elaborate (in a manner I did not find convincing) upon the efforts he made. Eventually two members of Wilson Field were appointed on 9 April 2013 (shortly after the Secretary of State's investigators began to enquire into the PAG Management scheme). The new liquidators converted the members' voluntary liquidation into a creditors' voluntary liquidation by "recognising fees payable in relation to the liquidation as liabilities" in order (as they thought) to avoid the direct effect of the "Dear IP" letter (which had referred to practitioners taking an appointment in a members' voluntary liquidation).
  40. By this stage (March 2013) the operation of the revised mitigation scheme had saved PAG over £1 million in NNDR, and it had saved third parties about £5.375 million (on which saving PAG Management had earned £1.8 million in fees).
  41. When the Insolvency Service became interested in the revised PAG Management scheme one of the issues it investigated was whether the liquidators marketed the leases held by Ashburton and Beacon. At interview Mr Mather had explained the theory of the scheme, namely (a) that the appointed liquidator could see that there was potential value in the lease and marketed it; (b) the landlord could also terminate the lease if he found a prospective tenant; (c) the liquidator could also disclaim the lease after he had marketed it for a period of time and had discovered that he could not find a tenant for the lease. But in answer to an enquiry as to what actually happened Mr Mather acknowledged that "at first" maybe the liquidators did not market the leases but said that currently (March 2013) one liquidator was doing so..
  42. In truth it is difficult to see what a liquidator could sensibly offer to the market (particularly if the landlord was simultaneously offering a lease of the same premises on standard commercial terms). The evidence demonstrated that agents struggled to identify any commercial value. One suggested that the liquidator's interest offered a "try before you buy" scenario, another that it offered "a foothold in the property in order to start a negotiation with the landlord": but of course only to an occupier who was willing to assume the risk of bearing the NNDR burden and the risk of eviction at "unfeasibly short" notice. When the replacement liquidators of Beacon sought advice the answer they received from estate agents was:-
  43. "…. the value of the achievable premium that we would attach to each lease is a subjective matter that will depend on the incoming tenant's view of the premises and their intended use of the premises to name but a few factors".

    The agents went on to suggest that "a minimum mean value per lease of £5000" would represent a "rough estimation with no future guarantee nor liability" based on unstated "pre-marketing assumptions"; but they actually advised against marketing the leases at that premium in the hope that "we will be able to negotiate a premium that will reflect the market demand for a particular property". The figure of £5000 seems to have been plucked out of the air and is not rationalised in any way. The valuation was not tendered as expert evidence (but merely as part of the factual background) and I do not treat it as a reliable indicator of commercial value. The marketing strategy failed to attract a single viewing.

  44. On the evidence no liquidator ever disposed of a lease vested in him, and none received any offer to take an assignment or any request for a viewing: though one liquidator did succeed in entering into a very short term occupancy arrangement for one unit with a theatre troupe in Eastbourne (which use itself would have jeopardised the empty property relief).
  45. On the evidence (even as supplemented by the hearsay evidence admitted during the trial) it is not clear that any liquidator actually marketed the interest held by Ashburton or Beacon or any other SPV (as opposed to allowing the landlord's appointed agents to market the premises themselves for whatever interest in them the landlord was prepared to grant). The clear impression I have gained is that no liquidator ever himself selected and instructed his own agents to market the specific interest vested in the liquidating company.
  46. I must now determine the complaints of the SoS by applying the principles I have summarised to the facts I have found.
  47. The first complaint was that the leases granted by the landlords to Ashburton and Beacon were shams because they were not intended to have their apparent effect. Set in context the nub of the argument was that PAG Management ought to be wound up on the just and equitable ground because it procured the grant of sham leases by landlords to companies which PAG Management effectively had brought into being.
  48. Sensibly, Mr Chivers QC did not seek to argue that the leases so created reflected any commercial reality. He accepted that they were artificial. The argument he pursued was that "artifice" is different from "sham".
  49. I accept that there is a difference between "artifice" and "sham". The description of "sham" by Diplock LJ in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802D-E is familiar, and may be taken as read. For present purposes I need cite only two passages in the judgment of Neuberger J in National Westminster bank plc v Jones [2001] 1 BCLC 98. First, at paragraph [59] the judge said:-
  50. "A sham provision or agreement is simply a provision or agreement which the parties do not really intend to be effective, but have merely entered into for the purpose of leading the court or a third party to believe that it is to be effective. Because the finding of a sham carries with it a finding of dishonesty, because innocent third parties may often rely upon the genuineness of a provision or an agreement, and because the court places great weight on the existence and provisions of a formally signed document, there is a strong and natural presumption against holding a provision or a document at sham."

    Second, at paragraph [46] the judge said:-

    "…one should not lose sight of the fact that there is obviously a strong presumption, even in the case of an artificial transaction, that the parties to what appear to be perfectly proper agreements on their face intend them to be effective, and that they intend to honour and enjoy their respective obligations and rights. That that is so is supported by the fact that an allegation of sham carries with it a degree of dishonesty, and the court should be slow (but not naïvely or unrealistically slow) to find dishonesty."
  51. These passages demonstrate that artificial transactions are not necessarily sham transactions because they may be honest. This had been the point made by Sir Thomas Bingham MR in Belvedere Court Management Ltd v Frogmore Developments Ltd [1997] QB 858 in a passage reported at 876D in these terms (with citations omitted):-
  52. "I would … accept the judge's view that the … leases were an artificial device intended to circumvent a result the [Landlord and Tenant Act 1987] would otherwise have brought about. But the finding of such a device did not defeat the reversioners in [Jones] nor the lessor in [Hilton] and I am not for my part satisfied that in the field of real property the principles in [Ramsay] and [Furniss] entitle the court simply to ignore or override apparently effective transactions which on their face confer an interest in land on the transferee. Many transactions between group companies may be artificial. That does not entitle the court in ordinary circumstances to treat such transactions as null."
  53. No landlord was a party to the present proceedings. To find each scheme user to be dishonest on the evidence of PAG Management's witnesses alone would be a strong thing. The quality of the evidence does not justify that finding. There is a strong case that there is an element of pretence about some of the provisions in the leases. There is a prima facie case (i.e. one that will succeed in the absence of an answer in evidence from each landlord) that neither party to any given lease (1) intended Ashburton or Beacon (a) actually to go into occupation of the demised premises or (b) actually to comply with any positive covenant as to user or (c) actually to keep the premises in a reasonable state of repair and condition; or (2) intended that the landlord really should insure against loss of rent. Indeed, Mr Cook of Croudace Properties Ltd (the only scheme user called) confirmed that so far as he was concerned it was never contemplated that the lessee would occupy premises or be held to the repairing covenant.
  54. But there is a strong case that each party did intend (a) to create an estate in the land vested in Ashburton or Beacon giving the lessee a right to occupy (b) to confer a right for the landlord to recall that estate at short notice and (c) to impose binding and effective covenants that the lessee would have the liability to pay the NNDR and the obligation not to assign, sublet or share occupation of the demised premises without the consent of the landlord (even if the estate created was in fact unlikely to be the subject of assignment by reason of its nature). There would be no pretence about that. Those aspects of the transaction were genuine.
  55. The arrangement was undoubtedly artificial and uncommercial, and to some degree the parties to it sought to disguise that artificiality by the pretence of imposing obligations that it cannot have been thought would be performed (which of itself might itself be an indicator of dishonesty): but the evidence does not justify my finding each lease to be a sham. I think the true complaint is that PAG Management procured that Ashburton and Beacon on the one hand and scheme users on the other should enter into artificial and uncommercial transactions designed to mitigate NNDR. That complaint I consider below.
  56. The second complaint was that statutory declarations of solvency could not properly be given because Mr Muff was a figurehead without any real knowledge of the liquidating company's assets or liabilities.
  57. It is true that Mr Muff was PAG Management's placeman. But the operation of the scheme did not depend upon Mr Muff's personal ignorance as to the true state of Ashburton's or Beacon's affairs, or upon his willingness to rely on what he was told by Mr Mather and PAG Management's selected liquidator. That is, as I see it, a mere accidental feature. Whether the declaration of solvency was accurate or inaccurate is a matter of concern only to creditors (of whom there were none, or perhaps only one, namely PAG) and members (of whom there was only one, namely Mr Muff himself). It is immaterial to a consideration of whether PAG Management ought to be wound up on the just and equitable ground. What form the insolvency took (whether it was a members' or a creditors' voluntary liquidation) does not matter for this purpose: the truth of the declaration of solvency did not matter in that context. The real complaint is that the insolvency process was used at all. That complaint I consider below. The complaint made really focuses on Mr Muff's fitness to be a director, rather than upon PAG Management's fitness to remain in business, so it would not be just and equitable to wind up PAG Management on this ground.
  58. The third complaint was that the scheme involved a breach of section 87(1) of the 1986 Act. In context, the nub of the argument was that it was just and equitable that PAG Management be wound up because it procured the formation of companies which did not themselves conduct any business prior to entering insolvency and only sought to conduct business having entered insolvency (by desultory marketing of the leases held).
  59. In my judgment this ground is not made out. I find and hold that neither Ashburton nor Beacon (nor indeed any of the other SPVs about which I was told) conducted any business in the few days between incorporation and entering into voluntary liquidation. Neither company conducted any trading activity for which it might have required the various premises which it leased. Nor did it acquire those premises either as trading stock (with a view to their disposal in the course of a property trading business) or capital assets (with a view to their exploitation in the course of a property investment business). The leases were acquired simply for the purpose of being held, and of being held within a liquidation.
  60. But I also find and hold that neither Ashburton nor Beacon actually conducted any business in insolvency. If any marketing took place (and there is no clear evidence that any liquidator actually marketed the interest held by either Ashburton or Beacon) then this was simply an attempt by the liquidator to dispose of an asset in the course of realisation and did not amount to embarking upon a trading business. It would not be just and equitable to wind up PAG Management on this ground.
  61. The fourth ground is that PAG Management ought to be wound up because it promotes a scheme that involves the commission of breaches of sections 91 and 92 of the 1986 Act. Section 91 of the 1986 Act provides that in a members' voluntary winding up the company in general meeting "shall" appoint a liquidator for the purpose of winding up its affairs and distributing its assets: and section 92 provides that if a vacancy occurs by resignation the company in general meeting "may" fill the vacancy. The gravamen of the present complaint is that as soon as the liquidators of Ashburton and Beacon proposed to wind up the company affairs by disclaiming the leases PAG Management brought about their removal and then failed to bring about the appointment of any new liquidators so that the insolvency continued to the mutual advantage of the client landlords and PAG Management. The situation so created was not materially different to that arising under the original scheme.
  62. It is in my judgment clear that PAG Management controlled the liquidations of Ashburton and Beacon. Those companies entered liquidation because PAG Management decided that they should, and when they should. PAG Management selected the liquidator. PAG Management brought about the removal of the liquidator. PAG Management found and procured the appointment of replacement liquidators. But the delay in the appointment of replacement liquidators seems to me to be an accidental incident of the liquidations of Ashburton and Beacon and not an integral part of PAG Management's business model for the operation of the scheme. There was, of course, a bias in the business model that tended to favour delay: but on the state of the evidence I cannot find that that bias was probably the actual cause of the delay in the appointment of replacement liquidators for Ashburton and Beacon (rather than the difficulty in finding willing candidates in view of the "chilling effect" of the "Dear IP" letter) so as to amount to a breach of s.91 of the 1986 Act. Nor can I hold that the operation of the scheme necessarily or in practice involves unlawfulness in that regard. It would not be just and equitable to wind up PAG Management on this ground.
  63. I can take the fifth and sixth grounds of complaint together. These rely (a) upon an alleged abuse of the insolvency legislation because the object of the voluntary winding up is for it to continue for as long as possible; and (b) upon a general lack of commercial probity as regards the elements of the scheme operated and the object of the scheme itself.
  64. It is necessary to separate out a number of strands in the argument.
  65. First, there was an issue as to the extent to which it was open to the SoS to argue that the commercial objective of PAG Management was of itself "inherently objectionable", rather than simply to rely upon features of its business model. PAG Management complained of a lack of particularity in the case of the SoS in that there had been no meaningful attempt to relate the evidence filed in support of the petition to the grounds for winding up stated in the petition. Having stated that it appeared to them that the sole basis for seeking winding up orders was the alleged abuse of the insolvency legislation, they required the SoS to say whether or not it was going to be asserted at trial that the purpose of the revised scheme was the improper avoidance of NNDR. I am satisfied that the position was made clear in the fifth witness statement of Mr Cronin, and that the contention that the operation of the revised scheme is adverse to the public interest because it involves avoiding liability for NNDR is fairly and squarely raised.
  66. Second, it is necessary to consider the strength of that argument i.e. that PAG Management lacks commercial probity because the object of its business is the promotion of schemes which avoid NNDR. I hold that this is not a sound basis upon which to wind-up PAG Management on the just and equitable ground.
  67. The primary reason for this conclusion is that I do not consider that the Court can conclude on the evidence or in principle that the particular NNDR mitigation scheme offered by PAG Management is by its nature contrary to the public interest.
  68. The assumption on which the argument proceeds is that the "avoidance" (as Mr Chaisty QC would have it) or the "mitigation" (as Mr Chivers QC would have it) of NNDR is inherently bad. It was common ground before me that both the alterations in empty property relief made in 2008 and steps taken by property owners in response had generated concern.
  69. I was referred by Counsel for the SoS to a Discussion Paper on "Business Rates Avoidance" signed by the then Financial Secretary to the Treasury and the then Parliamentary Under Secretary of State for Communities and Local Government in December 2014. It recorded that in 2013–14 the amount of empty property rates exemption given in England was £988 million: and it noted a number of techniques employed to obtain those exemptions (including the use of insolvency legislation). The Foreword to the Discussion Paper said:-
  70. "The vast majority of ratepayers pay the business rates that they should pay. However, there are a small minority who avoid paying the business rates that are properly due. This imposes an unfair burden on the honest majority and prevents money from reaching the crucial public services that need it. We want to stop people exploiting the system and collect the amounts that are properly owed. Unlike evasion, avoidance is not itself illegal, but it involves exploiting business rates law to gain a financial advantage that Parliament did not intend. It frequently involves contrived, artificial arrangements that serve little or no purpose other than to reduce rates liability. And it enables some ratepayers to gain an unfair advantage, undermining confidence in the rates system"
  71. I was referred by Counsel for PAG Management to the Eighth Report of the Business Innovation and Skills Committee for the 2013-14 session of the House of Commons which recorded:-
  72. "Business rates are a substantial cost to doing business in the United Kingdom, and are one of the highest forms of local property tax in the European Union. Our evidence overwhelmingly cited the issue of Business Rates as one of the principal threats to the survival of existing retail businesses in the High Street. It was also cited as the biggest obstacle to new retail businesses starting up … We conclude that Business Rates, in their current form, are not fit for purpose. The government needs to carry out a wholesale review of the current Business Rate system. Whilst this is a matter for the Treasury, the Department for Business, Innovation and Skills needs to play a leading role in that review, to reflect the needs of businesses…."
  73. PAG Management also relied on impressive evidence from Mr Cook. He explained that before a landlord could refurbish premises it was necessary to take back units that were in occupation, but that it was not possible to obtain possession of all units simultaneously. Accordingly some units had to be taken back and then held void pending assembly of the remainder of the site for the refurbishment works. He said that using a mitigation scheme in relation to those void units lowered the cost of the refurbishment scheme and gave the landlord the confidence to go ahead. He gave as a concrete example London House at Maidstone.
  74. "In 2008 a long lease on that property came to an end. The property was a 1960s office block and was redundant in a market which had a surplus of superior accommodation. In 2009 Croudace marketed the building for sale and looked for an alternative use for it. The site could have been cleared for development, but it was desirable to find an alternative user who would keep the structure. The rates on the building doubled from £44,000 per annum to £88,000 per annum with the removal of 50% relief on office premises. At that level, any value in the property structure would soon be lost. When the property was not sold 12 months later, the pressure to demolish it and to save the rates would have been overwhelming. However, due to the scheme Croudace was sheltered from most of the cost of the business rates. We were able to try one more round of marketing and spend some time and money on planning to explore hotel use. The property was sold in 2012 and the old building has now been converted into a Premier Inn … without rates mitigation, the building would undoubtedly have been demolished. In these days of making best use of resources, the pressure for such waste seems wrong"
  75. On this evidence it is not possible to find that NNDR avoidance/mitigation schemes are contrary to the public interest (though they may be): nor would it in principle be right for the Court in one case to resolve what is essentially a far-reaching economic and political question that is properly the province of Parliament. I agree with the view expressed by HHJ Jarman QC in the Makro Properties Ltd case [2012] EWHC 2250 (Admin). This involved a consideration of whether empty rate relief was available on a warehouse for a second period by reason of minimal and artificially contrived occupation for a short intervening period at the end of the first empty rate period. In holding the occupation sufficient the judge said (at paragraph [56]):-
  76. "[Counsel] submitted that such an outcome means that a scheme to avoid paying rates for six months has succeeded….She further submitted that such an outcome could not have been foreseen when the 2008 reforms were made… It has been recognised for a considerable amount of time that ratepayers or potential ratepayers can and do organise their affairs so as to avoid paying rates. In Gage Alverstone CJ dealt with this question and stated that if the ratepayer thought that she would not be within the charging act by going out of possession, she was quite entitled to do so. In my judgment the same applies to going in and then out of occupation. It has often been emphasised that the court is not a court of morals, but of law. If the outcome of this case is seen as unacceptable then it is for the legislature to determine whether further reform is needed."
  77. Once the conclusion is reached that in this action it cannot be held that avoidance/ mitigation schemes are contrary to the public interest then, as Counsel for PAG Management submitted, it is irrelevant that huge sums are involved ( whether those sums are NNDR saved or fees earned).
  78. A further reason for this conclusion is that I am not persuaded that companies and partnerships that offer tax mitigation schemes (I say nothing of tax evasion schemes) are in general carrying on a business which is inherently objectionable even if the products offered are highly artificial. There are many such companies and partnerships, some of which are of the highest repute.
  79. This leaves for consideration the remaining grounds which are an amalgam of "abuse of the insolvency legislation" and "lack of commercial probity having regard to the elements of the scheme". I hold that the SoS succeeds on this ground, that upon consideration of all the evidence it is just and equitable that PAG Management should be wound up because its activities are contrary to a clearly defined public interest, and because on balance the public interest is better served by winding up than by any other outcome.
  80. Paragraphs 64.1 of the Amended Petition complained that Ashburton and Beacon and the other SPVs were in fact under the direction and control of PAG Management. Paragraph 64.3 of the Amended Petition alleged:-
  81. "[PAG Management] facilitated and arranged for leases to be entered into between the landlords and the vehicle companies which were, despite the wording on the face of the leases entered into, not intended to have their apparent effect. The leases were entered into in the knowledge that the vehicle companies would be put into MVL and thereby avoiding liability for NNDR. This is a misuse and abuse of the purpose of insolvency legislation."

    Paragraph 59 of the Amended Petition had complained that when Mr Elliott and Mr Bell had indicated an intention to disclaim the leases PAG Management had arranged for them to be removed, and that this was an abuse of the insolvency legislation. Paragraphs 40 to 43 of the SoS's Skeleton Argument drew the threads together in this way:-

    "..the Petitioner submits that the level of artificiality arising from the use of the lease as a device is … a matter showing a lack of commercial probity … [I]n addition to the lack of transparency in the arrangement behind the lease is the lack of transparency in the management of the vehicle companies which is at the direction of [ PAG Management]…. The second scheme is not a commercial arrangement between a number of parties, but is a designed scheme… [I]n the process it uses vehicle companies with directors who have no meaningful executive function… It is submitted overall therefore that the second scheme as operated by [PAG Management] which exploits the use of the lease as a device, the insolvency legislation and the use of limited companies does so with a lack of commercial probity. There is an absence of any arm's-length commerciality between it, the client and the vehicle company and the essential statutory provisions relating to member's voluntary liquidation are given scant regard or wholly ignored. The second scheme is therefore wholly improper, as is the intended consequence of it…."
  82. I find that the business of PAG Management necessarily involves (a) the creation by PAG Management of companies which exist for no purpose other than immediately going into liquidation; (b) the creation by PAG Management of assets for the sole purpose of their being held by those companies in liquidation (subject to the right of the freeholder to recover them if the freeholder can turn them to advantage); (c) the putting in place by PAG Management of arrangements which enable it to have effective control over the conduct of these liquidations as regards the maintenance in being of those assets; and (d) the exercise of that control to secure that the liquidations continue rather than proceed to a conclusion, the real objective being that each liquidation shall act as a shelter for the assets specifically created to be held by the company in order that PAG Management might earn fees in relation to those assets. In my judgment the purpose of liquidation is 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 (whether they be stays upon enforcement or exemptions from fiscal liabilities otherwise falling upon companies) are made to achieve that purpose. I hold that there is a clear public interest in ensuring that the purpose of liquidations is not subverted, as I consider it is by treating a company in liquidation as a shelter (and seeking to prolong its continuation as such). This misuse of the insolvency legislation demonstrates a lack of commercial probity. It its own way it also "subvert[s] the proper functioning of the law and procedures of bankruptcy".
  83. The business of PAG Management actually involves the creation of artificial leases incorporating elements of pretence, and the use of placemen in order to distance PAG Management's owners and managers from the liquidation process. These features suggest that there is an awareness that the necessary elements of PAG Management's business might well be thought improper and have to be disguised. These elements support but do not ground my holding that PAG's business lacks commercial probity.
  84. Mr Chivers QC, who has great experience and high standing in this field, gave evidence from the Bar that many corporate reconstruction schemes involve the interposition of a company to receive assets and then to be wound up (perhaps for tax reasons or as a mechanism of distribution) and that it had never been suggested that this was improper; and that many schemes of very many sorts require directors to take steps which are wholly predetermined (in relation to which it was never contemplated that they would exercise independent judgment). Of such schemes I say nothing, save that if the liquidation is not genuinely a collection and distribution of assets then its propriety might need to be reconsidered. For me it is the use of the company in liquidation as an asset shelter and the inherent bias towards prolongation of the liquidation that is subversive of the true purpose and proper functioning of insolvency law. So I cannot accept Mr Chivers QCs submission that the operation of the scheme through the medium of insolvency is not commercially improper.
  85. When the SoS presented a petition which included amongst its charges a complaint that PAG Management delayed in the appointment of replacement liquidators (having procured the resignation of the liquidators in office) Mr Mather offered on its behalf an undertaking:-
  86. "[PAG Management] would be willing to undertake to the Court (on a pragmatic basis and not by way of any admission) that in the event that liquidators of other companies in the Revised Scheme resigned all need to be replaced … PAG Management would take the necessary steps to ensure that replacement liquidators are appointed within a reasonable time…. or would otherwise withdraw the relevant company or companies from the Revised Scheme."

    This undertaking was not accepted by the SoS: and it does not in my judgment meet the real vice in PAG Management's business model. It addresses an accidental incident. The question is whether PAG Management should be wound up, or the petition dismissed and it be permitted to continue in business.

  87. PAG Management is an active and solvent business. That business involves the promotion of an NNDR mitigation scheme. Of itself the promotion of tax mitigation schemes is not an inherently objectionable activity. In the course of so doing it incidentally uses artificial leases having no commercial reality and containing some terms which are mere pretences; and on occasion having procured that its creature companies enter liquidation, it has delayed appointing new officeholders. These historic events would not of themselves be of sufficient weight to warrant a winding up. But PAG Management's business model involves a misuse of the insolvency legislation in the way I have described and the SoS has satisfied me that it is just and equitable to wind up the company that I ought to exercise the discretion conferred by 124A of the 1986 Act in that way: and I will so order.
  88. The judgment in this Manchester case is being handed down (subject to editorial corrections) in London and in the vacation. I do not require the attendance of legal representatives. No winding up order will be made until the conclusion of any hearing on consequential matters: but PAG Management must cease marketing its revised scheme forthwith. I extend time for appealing until the conclusion of that hearing (at which I will address the question of any further extension if required). Counsels' clerks will please liaise with a view to fixing that hearing in the week commencing 5 October 2015 in Manchester .

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