Distinguishing Genuine MVLs from Misuses: The Impact of Determination Premiums in Business Rate Avoidance Schemes

Introduction

The case The Secretary of State for Business, Energy And Industrial Strategy v. PAG Asset Preservation Ltd ([2020] EWCA Civ 1017) deliberates on the legitimacy of business models employed by companies to circumvent liabilities arising from national non-domestic rates (NNDR) on unoccupied commercial properties. The central issue revolves around whether the "Scheme 3" operated by PAG Asset Preservation Limited (PAGAPL) and MB Vacant Property Solutions Limited (MBV) constitutes a misuse of insolvency legislation, warranting the winding up of these companies on public interest grounds. This commentary examines the Court of Appeal's comprehensive analysis, emphasizing the distinctions between "Scheme 2" and "Scheme 3," the role of determination premiums, and the broader implications for insolvency law and business rate avoidance schemes.

Summary of the Judgment

In the High Court, Justice Stephen Davies dismissed the Secretary of State's petitions to wind up PAGAPL and MBV, concluding that "Scheme 3" did not exhibit the same lack of commercial probity as "Scheme 2," which had previously been wound up. The Court of Appeal upheld this decision, affirming that the inclusion of a determination premium in Scheme 3 introduced a genuine contingent asset, differentiating it substantially from Scheme 2. Consequently, the liquidation processes under Scheme 3 were deemed legitimate, involving actual asset collection and distribution rather than merely serving as asset shelters. The appeals were dismissed, and the Secretary of State's attempts to wind up the companies were refused.

Analysis

Precedents Cited

The judgment extensively references previous cases to delineate the boundaries of legitimate insolvency practices versus their misuse:

In re PAG Management Services Ltd [2015] BCC 720: Established that Scheme 2 lacked commercial probity by subverting the purpose of liquidations.
Aldrington Garages v Fielder (1983) 7 HLR 51: Highlighted the necessity of discerning the true nature of transactions over their superficial intent.
MacFarlane v Falfield Investments Limited [1998] SC 14: Emphasized that premeditated structuring to gain statutory advantages does not invalidate transactions unless they are sham.
Shell Mex v Manchester Garages [1971] 1 WLR 612: Stressed the importance of determining the genuine nature of transactions irrespective of the parties' intended benefits.
Re Senator Hanseatische [1997] 1 WLR 515: Clarified that the authority to wind up a company on public interest grounds does not necessitate the company's business being illegal.

These precedents collectively support the court's approach to evaluating the legitimacy of insolvency processes and asset shelters.

Legal Reasoning

The Court of Appeal meticulously dissected the differences between Scheme 2 and Scheme 3, particularly focusing on the incorporation of the determination premium in the latter. Under Scheme 2, the Special Purpose Vehicles (SPVs) incorporated by PAG Management were solely intended to enter into liquidation, serving as mere shelters without any real asset collection or distribution. This lack of genuine activity led to the conclusion that Scheme 2 misused insolvency legislation.

In contrast, Scheme 3 introduced a determination premium into the leases granted to SPVs. This premium represented a genuine contingent asset, entitling liquidators to collect and realize value from the leases before finalizing the liquidation. The court found that this addition transformed the liquidation process into one that genuinely aimed at asset collection and distribution, aligning with the true purpose of insolvency procedures. Therefore, despite the artificial structuring designed to avoid business rates, Scheme 3 did not subvert insolvency laws.

The judge underscored that the mere artificiality of a business model does not automatically constitute misuse. Instead, the focus should be on whether the insolvency process is used to truly realize and distribute assets, as opposed to merely sheltering them.

Impact

This judgment has significant implications for future business rate avoidance schemes and the application of insolvency laws:

Clarification of MVL Use: Reinforces that Members' Voluntary Liquidations (MVLs) can be legitimately employed in business models aimed at asset collection and distribution, provided they are not mere shelters.
Determination Premiums: Establishes that the inclusion of genuine contingent assets, such as determination premiums, can differentiate legitimate schemes from unlawful misuse of insolvency legislation.
Legal Scrutiny: Encourages courts to conduct thorough analyses of the underlying purposes and mechanisms of business schemes rather than making judgments based solely on structural similarities.
Policy Implications: May influence legislative reviews and policy formulations regarding business rate avoidance and the utilization of insolvency laws in corporate structures.

Ultimately, the judgment delineates the boundary between legitimate restructuring for asset management and corporate misconduct aimed at evading fiscal responsibilities, guiding both legal practitioners and policymakers.

Complex Concepts Simplified

The judgment employs several intricate legal concepts which are pivotal to understanding the court's reasoning:

Members' Voluntary Liquidation (MVL): A legal process where the directors of a solvent company decide to wind up its affairs voluntarily. The purpose is typically to realize assets and distribute proceeds to shareholders.
Special Purpose Vehicle (SPV): A subsidiary created by a parent company to isolate financial risk. In this context, SPVs were used to hold leases on properties to manipulate business rate liabilities.
Determination Premium: An agreed-upon sum that the landlord may pay to terminate a lease before its natural expiration. In Scheme 3, this premium served as a genuine contingent asset, influencing the liquidation process.
Lack of Commercial Probity: Refers to the absence of honesty and fairness in commercial dealings. The court assesses whether business practices adhere to accepted ethical standards.
Public Interest Grounds: Legal basis for winding up a company if its activities are deemed detrimental to the public good, irrespective of their legality.

Understanding these terms is essential to comprehend the court's assessment of whether the liquidation processes in question were genuine or constituted misuse of insolvency laws.

Conclusion

The Court of Appeal's decision in The Secretary of State for Business, Energy And Industrial Strategy v. PAG Asset Preservation Ltd underscores the nuanced evaluation required when assessing the legitimacy of corporate liquidation schemes. By distinguishing between mere asset shelters and genuine processes aimed at asset realization and distribution, the court has provided clarity on the permissible boundaries of utilizing MVLs within business models. The pivotal role of determination premiums in legitimizing the liquidation process marks a significant precedent, highlighting that the presence of contingent assets can transform an artificial business arrangement into one that aligns with the true objectives of insolvency law. Consequently, this judgment offers a critical reference point for future cases involving business rate avoidance and the strategic use of insolvency processes, ensuring that the integrity of insolvency legislation is upheld while allowing lawful business restructuring.