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ARE THOSE CAVALRY BUGLES WHICH I HEAR?

AN ARTICLE by Peter Scrafton FIRRV, FCIArb, MRSA(Hon) Solicitor (Non-Practising)

August 2014.

The municipal wagon train has been drawn into a circle, yet again, as the wagons moved into a ratepayer’s reservation, and encountered fierce resistance from the deemed occupiers, as reluctant ratepayers. The battle was fought out in a magistrates’ court, before a District Judge. The ratepayer was successful before the District Judge, but will there be consequences of this decision? At the time of writing (June 2014) I have not heard whether or not a case has been sought for the consideration of the High Court; and so I am withholding the names of the parties, for the time being. Nevertheless, the case is of some interest as it raises a point which, as far as I am aware, has not previously been tested in the Courts.


The basic facts were all very simple: there was no dispute about the Council’s entitlement to collect rates (from someone), or the rateable value, the multiplier, the amount of the bill or indeed, the service of the demand. The issue arose as to who might be liable to pay that bill; for the company sought to be rated (which I will call “Company A”) had granted a lease to a different company (Company “B”) which Company A, the respondent to the summons, had become liable to pay the rate, having become entitled to occupation of the hereditament.


An anti-avoidance scheme was involved which, the names having been changed or omitted in order to protect the innocent, went something like this. Company A would grant a lease of the hereditament to Company B, for a year, at a peppercorn rent, which lease would include no insolvency clause, protecting Company A from liability to pay, as a result of just the kind of attack by a billing authority which took place. Further, a policy of indemnity insurance would be offered, were a claim by a billing authority to succeed against Company A, and a “hold harmless” letter of comfort by Company B (which would not be paying any rent) to Company A, offering a full indemnity, should the scheme fail.


In fairly short order after the grant, Company B would put itself into voluntary liquidation. The lease not being “onerous property” within the meaning of the Insolvency Act 1986, there would be no power to disclaim it, and so rates would not be recoverable by the billing authority, either from Company A or from Company B.


Already, I hear cries of horror and outrage from some billing authorities – but are such cries justified in law? Not that this necessarily means anything, but the package was put together, sent to and apparently found to be lawful by not one QC, but two. The solicitors who advised and who drafted the lease, are highly reputable. Then the whole package was put before one of the country’s most eminent rating surveyors, who also found nothing wrong with it, and who gave evidence to that effect, in Court. The surveyor was bound by a confidentiality agreement, to which, it was found, he adhered, fully and properly.


Well, Company A granted a lease, for a term of one year, at a peppercorn rent to Company B which then, it was argued, became liable to the rate. In accordance with the confidentiality agreement, Company A was not told that, shortly after taking its lease, the new “occupier” would go into voluntary liquidation, and there was considerable argument at the trial about who knew what, and at what stage, about the process which would follow the grant of that lease – for the billing authority argued, forcefully, that the whole transaction was a sham. I will return to this; but shortly after the lease was completed (apparently within hours of completion) Company B went into voluntary liquidation and a liquidator was appointed. When the billing authority made enquiries of the liquidator, its advances were rejected, as it was not a creditor of Company B (companies in liquidation not being liable to pay a rate.


Battle was joined, and the Council threw virtually everything it could think of, but to no avail. The judge found that, as far as the transactions of Company A with Company B and the introducers of the scheme to Company A were concerned, they went no further than Company A arranging its affairs to its best advantage. The lease to Company B was not a sham within the legal meaning of that word, Company A had not failed to divest itself of the hereditaments the subject of that lease and that, accordingly, the claim for a liability order failed.


It is now appropriate to traverse the arguments, briefly, and look at what the judge had to say.


Ramsey


This is a bit of an ageing warhorse, now, decided in 1982, thrown into action by many councils, and never yet known (by me, anyway) to be successful. The argument is that rating legislation is fiscal in character and should therefore be interpreted, purposively rather than, as was formerly the case, having any ambiguity construed in favour of the subject. The courts have not yet gone that far in rating (and indeed, while Ramsey was being argued I was in the Solicitor of Inland Revenue’s Office, contending to a foreign government that rates are not a tax, but an impost by local government). No anti-avoidance legislation referable to rates was drawn to the attention of the court in the present case, which found that (as is well-settled) there can be no objection to a person or company so arranging its affairs, within the law, as to gain the maximum advantage for itself. When the current empty rate regime was being introduced, the government of the day invited all and sundry to put forward proposals for anti-avoidance legislation; but nobody took them up on it; so the government said that it would reserve the right to come back on that one, and moved on.


Having considered Ramsey and the 2001 decision in MacNiven –v- Westmoreland Investments Ltd the District Judge decided that, in considering transactions in a tax avoidance scheme, the court should not consider each step within the scheme as a distinct act, but should look at the entirety of the scheme and at each step within the context of the scheme as a whole. The Council suggested that Company A knew all along that Company B was going to be liquidated; but, having regard to the confidentiality agreement and to the quality of the oral evidence by Company A’s witnesses, such knowledge could not be implied in this case, even though, as a matter of principle, post-completion acts could be taken as evidence of pre-completion intentions.


The other problem which the Council faced was that each act complained of came from a different area of legislation. Rates are imposed under local government legislation, leases are created under landlord and tenant legislation, liquidations under the Insolvency legislation and rate collection comes, again, under local government legislation. If the judge was to consider the statutory purpose of the relevant legislation in its context, then should the court consider the local government, the landlord and tenant or the insolvency purpose? There was no legislation or case law which crossed the various areas of legislation in this particular case.


The court, it held, had to stay rigidly within the law as it stood at the moment, and could not expand Ramsey.


Sham


The other main plank of the Council’s case was that the whole transaction was a sham.


The starting point being that a person is entitled so to arrange affairs within the law to their best advantage, it seems to be clear that an artificial transaction is not necessarily a sham (see Snook –v- London and West Riding Investments [1967] CA) it is necessary for the complainant to show that the parties shared an intention of not creating the legal relations and obligations which the documents on their face purported to create. There was no evidence of this in this case, and no intention of deceit or dishonesty, even though there was a confidentiality agreement in place. There was no evidence that Company A knew beforehand that Company B was going to go into liquidation immediately; and the judge found that, at the time when it entered into the lease, Company B knew that it was going to become liable to pay the rate and declared itself insolvent as it could not pay. The lease was not a “sham”; and no dishonesty was involved.


The liquidator was challenged, with accusations that he was “in cahoots” and “compliant and complicit” in the scheme; but these suggestions were rejected, totally by the judge. Having accepted the appointment as liquidator in a voluntary liquidation, he was able neither to disclaim the lease nor to wind up the company; and so bona vacantia did not apply (as we know, companies in liquidation do not pay rates, and the obligation to pay would arise upon the Respondent only when the right to occupy reverted to it).


So the Council lost, all along the line.


But what about the bugles of the cavalry, riding to municipal rescue?


Insolvency practitioners received a letter from the Insolvency Service in 2011 telling them that the Service had successfully had wound up a company being used in a similar scheme, where the company concerned had placed itself in voluntary liquidation but had not appointed a liquidator. The court there held that the scheme was not in the public interest, and the Service warned that the acceptance of appointments as liquidator would be acting contrary to the public interest, and the practitioner might be reported to their professional body; but no basis for such a report was given, and no suggestion was made as to any course of action to be taken, were such a scheme to be already in place.


It is right to record that, while the practitioner in this case said that he had accepted no similar appointments since receiving the Service’s letter, he still believed that he would have been unable to disclaim the leases.


So – will the Insolvency Service ride to the rescue of the municipal wagon train? We will have to wait and see.


Permitting myself a personal comment, it strikes me as a shame that the rating system has been allowed to become so convoluted that what used to be a relatively simple charge to operate, is now succumbing to the current trend for attempting to legislate for all possibilities, to the exclusion of common sense, combined with a political desire to raise ever more revenue, even from those who may not readily be able to pay. But we are where we are; and there can be no substitute for ever more technical training.


Peter Scrafton

©J.P. Scrafton, 2014

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