1. Companies Investigation Branch 

An Invitation From Companies Investigation Branch 

Companies Investigation Branch (“CIB”) investigates serious corporate abuse using compulsory powers under the Companies Act 1985. Cliff Callaghan, as Head of CIB Branch A, Vetting Section, recently wrote to Official Receivers (ORs) explaining a little of what CIB can do and how a closer working relationship may be mutually beneficial.  

It is now time to extend that invitation to Insolvency Practitioners (IPs). Consequential upon changes introduced in 2005 to the investigations legislation (specifically by the Companies (Audit, Investigations and Community Enterprise) Act 2004 – “CAICE”) and working practices, CIB is now able to effectively investigate a greater range of complaints and to disclose the results more widely to other Regulators and Enforcement Agencies, including to The Insolvency Service’s enforcement sections in so far as relevant findings from an investigation would assist an Official Receiver  to carry out his/her statutory investigative functions. 

By way of a short refresher, CIB receives complaints from a wide variety of sources including the Police, other Regulators and Enforcement Agencies, Trading Standards and members of the public. Those complaints which are accepted result in the target company being investigated under the, confidential, fact finding powers contained in Section 447 of the Companies Act 1985 (as amended) which enables the Secretary of State to appoint an investigator who can require a company, or any third party, to provide any documents or information he/she may specify and to provide explanations.  Failure to co-operate can lead to contempt proceedings. 

CIB's ability, post CAICE, to require third parties, including suppliers, customers and clients and investors to produce information has increased CIB’s ability to uncover serious misconduct in a range of cases where previously it might have struggled, for example, where the company under investigation had kept or retained little relevant documentation. Currently CIB considers that there are many cases which could be investigated but that go un-investigated because they do not meet the more specific criteria under which other Regulators and Enforcement Agencies operate.  Over the past year or so CIB has been endeavouring to raise its profile with, in particular, fellow Regulators and Enforcement Agencies, including ORs. The advantage CIB has over most other Regulators is the power to petition the court in the public interest to close down a wide range of businesses.  This usually results in the appointment of the OR as liquidator and all that can flow therefrom in terms of asset protection and recovery and follow up enforcement action.  Application under the directors’ disqualification legislation (s8 CDDA 86) and onward referral for criminal investigation are other follow up action options where the facts uncovered so justify. 

Further, CIB has a discretion to investigate, or not, which means that it is able to exercise some choice in the complaints that it accepts for investigation - subject to their passing the statutory ‘good reason’ test. This discretion extends to companies which are already subject to (any of) the various types of formal insolvency proceedings; to those which have recently been ‘abandoned’ awaiting Companies House dissolution, or a creditor’s winding up petition but where there are outstanding matters of concern; and to those which are ‘live’, including, in particular, ‘phoenix’ successors to an insolvent company’s business but where insolvency office holder(s), have only limited powers of enquiry, if any. 

Generally, in targeting companies for investigation CIB gives priority to complaints or concerns raised about ‘live’ trading companies rather than those which are subject to some form of formal insolvency proceedings where the protection of the public from further losses or damage is not immediately at issue; although CIB routinely considers the highest profile company failures for investigation, often but not exclusively at the invitation of the insolvency office holder, direct. 

That said, CIB would encourage IPs to consider referring cases to CIB where the activities of ‘live’ companies known to them in their local areas so merit. Such referrals might result from complaints or concerns about companies where there is evidence of:  

a)     a ‘phoenix’ successor to an insolvent company in which the IP is the appointed office holder;

b)     a live’ group or associate company(ies) connected to the investigation of such an insolvent company;

c)      a ‘live’ company otherwise unconnected to the investigation of an insolvent company but understood to be under the control of a director known to the IP (and one whose previous conduct gives legitimate cause for concern);

d)     a ‘live’ company(ies) unconnected to any insolvency investigation but which is understood to be carrying on the same or similar line of business to an insolvent company where the core business activity is considered by the IP to be contrary to the public interest i.e. it’s a scam;

e)     a company(ies) which is unconnected to any insolvency in the IP’s region but which local fraud liaison groups (including creditors’ committee contacts) indicates current concern. 

CIB would like to prepare a list of contacts (maximum two per IP firm) who may wish to act as CIB liaison points. A list of CIB vetting contacts is given below.  Please let CIB have the name(s) and contact details of a suitable member of staff accordingly.

CIB’s contacts are:  

Graham Tooke 020 7215 4616 graham.tooke@dti.gsi.gov.uk

Phil Keith 020 7215 4463 philip.keith@dti.gsi.gov.uk 

Peter Bott 020 7215 8723 peter.bott@dti.gsi.gov.uk

Dennis O’Callaghan 020 7215 4697 dennis.o’callaghan@dti.gsi.gov.uk

Ken Ko 020 7215 4608 ken.ko@dti.gsi.gov.uk

Referrals should be in writing (including e-mail) and need only include basic details at first instance but with an indication of whether (and if so, what) further information and documentation is available. 

Any enquiries regarding this article above should be directed towards Graham Tooke, Companies Investigations Branch: telephone; 020 7215 4616, e-mail graham.tooke@dti.gsi.gov.uk

2. Investigating “Live” Companies 

Where companies are being used as corporate vehicles for fraud and malpractice, but are not subject to formal insolvency procedures, they can be investigated by The Insolvency Service using powers given under the Companies Act. 

Changes 

A previous Dear IP article in March 2007 introduced Companies Investigation Branch (CIB) and the process of live company investigations. 

Since then, and following on from the Grant Thornton report in July 2008, a re-organisation has grouped together the vetting, investigation and enforcement work of The Insolvency Service to provide a co-ordinated approach to both live and insolvent company investigations. 

This has also underlined the separation of the investigation work from the Secretary of State decision-making role in both targeting and follow-up action, with the latter contained in the new Intelligence and Enforcement Directorate. 

The former CIB has been joined with the insolvent company investigation teams in Edinburgh, London, Birmingham and Manchester, and the whole organised into two new directorates: Company Investigations South and Company Investigations North. 

What’s new? 

The Intelligence teams seek to manage complaints and referrals made from a wide range of sources such as the public, insolvency profession and other regulators or law enforcement agencies, as well as to take a wider view by identifying trends and scanning the horizon for developing corporate abuse and misuse.  

Early action reduces the damage that can be done to the public and the business community by unscrupulous directors and fraudsters, but the use of powers under the Companies Act (most usually Section 447 CA 85) allow scrutiny of companies which may never reach insolvency procedures. 

“Intelligence: Operations” is the reception point for insolvency practitioner’s reports under the disqualification legislation as well as the initial stages of handling  complaints of misconduct received, including contacts made through
The Insolvency Service website and the Investigations Hotline. 

“Intelligence: Surveillance”: In addition to information gathering and analysis, this section also deals with the “vetting” process for live company investigations – which involves assessment of the information received in a live company complaint and making limited further enquiries in order to establish whether the exercise of s447 investigation powers are appropriate. Accepted cases are then passed on to the live company investigation teams. 

At the conclusion of the investigation process, the decision whether to wind up a company in the public interest, as well as other actions such as director disqualifications under Section 8 CDDA 86 and certification proceedings (an equivalent to contempt of court proceedings which can be taken where someone fails to comply with the requirements of an investigator under s447) is now undertaken by Authorisations Team. 

Outcomes 

The live company investigation teams based in London and Manchester have a long history of effective and efficient investigation covering a wide range of business sectors and companies. They maintain a high profile and good reputation in the regulatory community, with the courts and the public. 

One recent success has been the winding-up of 13 companies involved in a rates-avoidance scheme: 

•  In this scheme companies who owned empty commercial property on which they were liable for business rates would grant a tenancy to a second (“shell”) company which then passed a resolution to go into Members Voluntary Liquidation.

• While in liquidation the shell company took advantage of the relief available from business rates on premises occupied.

• The shell company did not appoint a liquidator thereby avoiding the controls contained in Chapter 3 Insolvency Act 1986, and allowing the liquidation to continue indefinitely.

• The result was that because of both the tenancy and the MVL relief neither the shell company nor the original landlord company were liable for business rates on the property.

• In operation the scheme was marketed to property companies and each “shell” in fact held many leases, the relief continuing until such time as a landlord found a new commercial tenant.

• The shell companies would charge the client landlords a fee usually calculated as a percentage of the rates bill saved on each property.

This scheme resulted in a loss of millions of pounds to local authorities and represented a significant abuse of the insolvency legislation. 

Other recent successes have been the well-publicised winding-up of several companies involved in Land Banking investment scams. 

However, Section 447 investigations are confidential, and in most cases it will not be possible to confirm whether a complaint has resulted in an investigation, or what the outcome may be until any public proceedings, such as winding-up, are commenced.

What does this mean for Insolvency Practitioners? 

Investigation powers under the Companies Act are not normally used once a company is in formal insolvency procedures, as both Insolvency Practitioners and the Official Receiver have duties and powers to investigate any wrongdoing. They are regulatory in nature and cannot be used to arbitrate in commercial disputes or to support civil recovery action. 

However office holders in administrations, receiverships and liquidations are ideally placed to spot malpractice, scams and fraud, whether specifically related to insolvency procedures, or more generally. 

These scams not only harm profitable companies and members of the public, they can also effect re-constructions and businesses trying to emerge from insolvency procedures.  

Insolvency Practitioners encountering malpractice are encouraged to report this to the Insolvency Service Investigations and Enforcement Directorate. General concerns about developing behaviours and specific complaints about live companies should be sent to Intelligence.Live@insolvency.gov.uk, other contact details, including an on-line complaints form, can be found

at www.bis.gov.uk/insolvency and following the links from the front page (these also include a postal address for paper-based communications). 

Any enquiries regarding this article should be directed towards Jon McGurk, Cobury House, Mayflower Street, Plymouth PL1 1DJ Telephone: 01752 635  241 Email: jon.mcgurk@insolvency.gov.uk

General enquiries may be directed to email: Enforcement.Directorate @insolvency.gov.uk 

3. National Non-Domestic Rates 

On 29 July 2011 The Insolvency Service’s Company Investigations successfully applied for the winding up of 13 companies that had passed resolutions for a members voluntary liquidation and had failed to appoint a liquidator to deal with their affairs. These companies had been set up for the purpose of holding leases in business premises for which the landlord was then able to claim an exemption regarding the payment of national non-domestic rates. The court found that such a scheme was contrary to the public interest.

The Service now has reason to believe that a variation on this arrangement has emerged, allowing landlords to avoiding 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 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 the 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. 

Any enquiries regarding this article should be directed towards Gareth Allen, Intelligence & Enforcement Services, 4^th Floor, 21 Bloomsbury Street, London WC1B 3QW.  Telephone: 020  7291  689.  Email: gareth.allen@insolvency.gov.uk  

General enquiries may be directed to email IPPolicy.Section@insolvency.gov.uk

4. Avoidance of National Non-Domestic Rates

Issue 53 of Dear IP (March 2012) contained an article which outlined the Insolvency Service’s concerns about the operation of schemes that use members’ voluntary liquidations (MVLs) to enable commercial property landlords to avoid the national non-domestic rates (NNDR) that would otherwise be payable on their empty properties. The schemes in question take advantage of the fact that companies in liquidation are exempt from NNDR and the Service was concerned that such arrangements were contrary to the public interest.

The position with regard to this issue has recently been clarified following an investigation undertaken by the Service’s Company Investigations team in Manchester under Section 447 of the Companies Act 1985.

The case in question related to a company, PAG Management Services Ltd (PAGMSL) which operated a NNDR mitigation scheme that was marketed to third part clients (i.e. owners of commercial property). The scheme operated by PAGMSL worked as follows:

·         Special purpose vehicle companies were formed under the control and direction of PAGMSL.

·         Each special purpose vehicle company signed a number of leases, typically 20 each, relating to the empty commercial properties owned by PAGMSL’s clients. Each lease was for a nominal rent and contained a clause that enabled the property owner to terminate the lease on seven days’ notice.

·         Immediately after signing the leases, PAGMSL arranged for the special purpose vehicle company to be placed into MVL with the result that the properties leased to the special purpose vehicle company became exempt from business rates.

·         The terms of the lease enabled the owner of the property to remove the property from the scheme in the event that a genuine, rent-paying tenant was subsequently found, at which point the new tenant would become liable for the business rates.

PAGMSL was able to generate a substantial income by charging its clients a proportion of the NNDR savings achieved whilst their property remained in the scheme. The investigation established that, during the 18-month period to March 2013, PAGMSL generated fee income of £1.8million from its clients and that, during the same period, NNDR totalling £6.4million was avoided by the property owners as a consequence of the scheme’s operation.

The investigation concluded in 2013, and the Secretary of State formed the view that PAGMSL was acting against the public interest in the operation of the arrangements outlined above. Consequently, in December 2013, winding-up petitions were issued against PGMSL and two of the special purpose vehicle companies it had used within its scheme (Ashburton Solutions Ltd and Beacon Property Solutions Ltd).  The petition against PAGMSL was strongly resisted by the company and a 5-day trial eventually took place in March 2015 before the Vice Chancellor, Mr Justice Norris, sitting at the High Court in Manchester. During the trial of the winding-up petition, the Court heard evidence that the scheme operated by PAGMSL had continued to expand beyond March 2013 and that by March 2015, the NNDR being avoided by use of the scheme was estimated to be in the region of £12million per year.

Mr Justice Norris handed down his judgement on 9 August 2015, and found that the business of PAGMSL lacked commercial probity and should be wound up in the public interest as a result. The winding-up orders were formally made on 9 October 2015 against each of PAGMSL and the two associated companies, Ashburton Solutions Ltd and Beacon Property Solutions Ltd.

The effect of the winding-up order against PAGMSL was initially suspended pending an appeal that was lodged by the company, but that appeal was formally dismissed on 15 November 2016 at the company’s request and the winding-up order took effect on 5 December 2016 when it was drawn up by the Court.

What does this mean for insolvency practitioners?

In reaching his verdict that PAGMSL’s business lacked commercial probity such that it warranted winding-up in the public interest, Mr Justice Norris found that PAGMSL’s business model involved a misuse of the insolvency legislation. In particular, he found that the true purpose of the voluntary liquidations engineered by PAGMSL were to act as shelters for the leases that were created so that PAGMSL could earn fees as a result and that this was a misuse of the insolvency legislation.  Mr Justice Norris contrasted this with his view that the proper purpose of liquidation is the collection, realisation and distribution of assets in satisfaction of the claims of creditors and the entitlement of members. In this regard, Mr Justice Norris stated 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.  In its own way it also subvert[s] the proper functioning of the law and procedures of bankruptcy.”

Whilst Mr Justice Norris found that, of itself, the promotion of tax mitigation schemes was not an inherently objectionable activity, it is clear from his judgement that such schemes do cross that line when they involve a misuse of the insolvency legislation.

Whilst the scheme in this case involved the use of companies being placed into MVL, the Service is of the view that the same principles which underpin the judgement will apply to any form of liquidation where the insolvency legislation is being similarly misused. Practitioners should therefore be aware that the Service will act swiftly to investigate any companies that are suspected of operating schemes of this nature and which appear to be abusing and subverting the UK’s insolvency regime. In doing so, we will look closely at the involvement of practitioners who facilitate the operation of such schemes and will have no hesitation in reporting the involvement of practitioners to their Recognised Professional Body where appropriate.

General enquiries may be sent to:  intelligence.live@insolvency.gov.uk