PAG Management Services – abuse of insolvency law justified winding up in public interest
PAG Management Services Limited (“PAG”) were wound up under an application by the Secretary of State (“SoS”) in the case of PAG Management Services Limited  EWHC 2404 (Ch) on the grounds of public interest.
PAG set up and managed a business rates mitigation scheme for vacant commercial premises. The company used a rates exemption under s 45 Local Government Finance Act 1988 for premises owned by another company in compulsory or voluntary winding up.
PAG’s scheme involved granting a lease of the premises at minimal rent and on very short notice to a Special Purpose Vehicle (“SPV”). The SPV would then be placed into Members Voluntary Liquidation (“MVL”) that would proceed slowly whilst the owner of the property refurbished the premises. PAG received their fee based on the amount of rates they saved their client.
SoS had previously wound up some of PAG’s SPVs and contended to wind up PAG in the interest of the public under s.124a Insolvency Act 1986. SoS contended this on several bases, two in particular:
1. The business model was an abuse of insolvency legislation because the MVLs were intended to continue for as long as possible;
2. A general lack of commercial probity.
The judge in the matter did not accept that it was a sufficient ground to wind up PAG that the object of the scheme which it promoted was simply the avoidance of business rates. The SoS did however succeed on the basis of abuse of insolvency laws and a lack of commercial probity in terms of the elements of the actual scheme. The judge held that PAG’s business involved:
a. The creation of SPVs that existed for no purpose other than immediately going into liquidation;
b. The creation of leases for the sole purpose of sheltering SPVs in liquidation;
c. Arrangements that were designed to give PAG control over the conduct of the liquidation and also the duration of liquidation that would last as long as needed by SAP.
The judge further stated that if the liquidation is not genuinely a collection and distribution of assets then its validity would need to be reconsidered, it is the use of the SPV in liquidation as an asset shelter and that it would consistently prolonged is contrary to the true purpose and proper functioning of insolvency law.
To note, in the absence of any legality or breach of regulatory requirements a company can still be wound up if its business is objectionable because its activities are against public interest. However the judge did state that the courts must be careful and that moral content is informed by policy and jurisprudence, not the subjective moral perception of the individual judge.
Should you have any questions regarding this or any other insolvency updates please do not hesitate to contact a member of the team at Blake Morgan.