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A non ‘priggish’ Court of Appeal allows MVL Business Rates Avoidance Scheme to survive: SoS –v- MB Vacant Property Solutions Limited  EWCA Civ 101711th August 2020 Corporate Recovery and Insolvency
Having successfully obtained a public interest winding-up order in Re PAG Management Services Limited  BCC 720 which operated a business rates avoidance scheme using Members’ Voluntary Liquidations, the Secretary of State for Business, Energy and Industrial Strategy unsuccessfully tackled its successor in the Court of Appeal.
The scheme in this case (Scheme 3) was a variant upon two earlier schemes, Scheme 2 being no longer in operation following the public interest winding-up of PAG Management Services Limited.
Scheme 2 exploited the fact that an occupier of a commercial premises is exempt from business rates if it is in liquidation, including members’ voluntary liquidation, and so a landlord with an empty commercial premises could avoid paying business rates on that empty property if it had a tenant in members’ voluntary liquidation until it could find an arms-length commercial tenant to occupy the premises, pay rent and pay the business rates.
Scheme 2 operated as follows:
- PAG Management incorporated an SPV;
- The Landlord wishing to avoid business rates granted a lease to the SPV for 3 years at £1 per annum, terminable on 7 days’ notice;
- The Landlord waived the right to receive sums due under the lease, so the SPV was not accruing any liabilities;
- The SPV was placed into members’ voluntary liquidation, steps 1-4 being contemporaneous;
- The Landlord was no longer in occupation and no longer liable to pay empty premises business rates; the SPV in MVL was exempt from business rates;
- When the Landlord found a genuine tenant, the lease to the SPV was terminated;
- The Landlord paid PAG Management a percentage of the business rates saved.
There was no suggestion that any of these elements were a sham, but it was acknowledged by all parties that the scheme was deliberately artificial, and designed to avoid paying business rates on empty premises.
One of the complaints by the Secretary of State about this scheme was that it “was artificial and demonstrated a lack of commercial probity as regards the object of the scheme itself being the avoidance of business rates” but this was rejected by the Court in relation to Scheme 2.
The reason why Scheme 2 failed and led to the Court winding-up PAG Management was that it held that the purpose of liquidation is the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlements of members.
Because Scheme 2 involved the creation of assets (the leases) to be held by the SPVs in liquidation, under control of the landlord and that control being exercised to ensure the continuation of the liquidations until the landlord could find a tenant, the purpose of the liquidations was subverted, a misuse of the insolvency legislation and against the public interest such that PAG Management should be wound-up on public interest grounds.
Scheme 3 was specifically designed to overcome the issues identified by the Court in Scheme 2, successfully as it turns out (for now).
Scheme 3 introduced a new element through new successor companies promoting the scheme (MBV): the payment of a ‘determination premium’ in relation to the lease by the Landlord to the liquidator of the SPV tenant. So when the Landlord found an arm’s length tenant, it would have to pay the liquidator the determination premium in order to terminate the lease and grant a new one to the newly found tenant.
This meant that the liquidator would be required to continue the MVL for the duration of the lease so as not to lose the opportunity of receiving the determination premium should the Landlord exercise its rights of determination.
A further device was in place pursuant to which MBV would – under its fee agreement with the Landlord - repay the Landlord a substantial proportion of any determination premium paid by the Landlord to the liquidator.
Discussion and Comment
Scheme 2 was objectionable because the real objective was that each liquidation would act as a shelter for the leases specifically created to be held by the SPV, and that was contrary to the purpose of liquidation as being the collection, realisation and distribution of assets. What was crucial in the Scheme 2 case was that there was no collection, realisation and distribution of assets intended or effected in the voluntary liquidations operated by PAG Management so that the only purpose of those liquidations was for them to operate as a shelter for assets which were not being collected, realised and distributed.
Scheme 3 survived the Court of Appeal because it was held that the “insolvency legislation is not misused where the MVLs do indeed involve the collection, realisation and distribution of assets, even though the process is designed to achieve that objective and deploys the use of artificial assets for that very purpose. Alternatively, to the extent that it might be said that there is a misuse, it is not sufficiently reprehensible when set against the whole of the factual and legislative context to justify a conclusion that the activities of the Companies are so clearly lacking in commercial probity or otherwise so clearly against the public interest”.
There was acknowledgment of “the accepted general principle that it is perfectly proper for companies as artificial constructs to be incorporated with a view to obtaining a fiscal advantage, to create or have transferred to them assets which are artificial from a commercial perspective to achieve the same purpose and/or to be placed into liquidation, again artificially from a commercial perspective to achieve the same purpose, so long as each transaction is a legally genuine and effective transaction and not a sham and so long as each step in the transaction is in accordance with, and not contrary to, the general purpose or a specific purpose of the legislation governing such transactions”
Importantly, the Court could not find any evidence of harm to the public and so an essential element of a public interest winding up petition, was missing. Conversely, in Scheme 2, the public needed protecting from the general abuse of the insolvency legislation.
Tax avoidance schemes are frequently subject to the scrutiny of the Court, usually when challenged by HMRC. Less frequent are such schemes deploying the insolvency regime purely to avoid taxation in a general commercial setting.
It is clear from the order recited at the end of the judgment that the Secretary of State sought permission to appeal to the Supreme Court which was refused. It remains to be seen whether the Secretary of State will seek permission directly from the Supreme Court and either way, whether Parliament will legislate to close the loophole. I suspect so.