Six companies that were part of a scheme which abused the insolvency regime have been forced into compulsory liquidation by the High Court. The businesses were wound up in the public interest for their part in an abuse of insolvency legislation and operating in a manner that lacked commercial probity.

The six firms were part of a series of 22 single purpose vehicle companies that effectively saved landlords £26.5milion in a clear breach of the Insolvency Act 1986. Following confidential investigations by Company Investigations, part of the Insolvency Service, winding-up petitions were presented by the Secretary of State for Business, Innovation & Skills.

The winding up petitions for the first 16 companies were presented in the High Court on 18 February 2013, and those companies were placed into compulsory liquidation on 3 July 2013. The last six companies in the group were wound up on 18 February 2015, following petitions presented on 18 September 2014.

A clear breach of the Insolvency Act

The Insolvency Service investigation found that each of the six companies had taken the lease or the leases of unoccupied commercial properties, before almost immediately entering into a members’ voluntary liquidation. However, without exception, the companies failed to appoint a liquidator and did not cease their business, constituting a clear breach of the Insolvency Act.

The process of voluntarily winding-up a business begins once the resolution for winding-up has passed. The effect of the six companies entering into a members’ voluntary liquidation without appointing a liquidator meant that the companies, as leaseholders on the properties, would be liable to pay business rates. However, they were able to claim an exemption from doing so.

As a result of these calculated actions, the landlords of the properties, who would have had to pay business rates if the properties in question had remained occupied, obtained a clear benefit.

Not in the public interest to pursue the ringleader

The scheme was in operation between February 2010 and October 2013. In this time it resulted in the non-payment of approximately £26.5million of business rates which would have been payable if the scheme had not been in operation.

Despite this considerable detriment to the public purse, the Secretary of State came to the conclusion that it did not remain in the public interest to pursue the company which had been responsible for promoting and facilitating the scheme.

The decision not to pursue the winding-up petition against the facilitating company was made following undertakings offered by the firm. The company’s directors and shareholders claimed the company no longer carried on the promotion or operation of the scheme and had no intention of doing so in the future. These assurances were accepted by the court.

However, the court did find that the operation of the scheme was an obvious abuse of the insolvency legislation and lacked commercial probity. As a result, the final six firms involved in the scheme were wound up.

A systematic abuse of the corporate regime

Welcoming the court’s decision to place the firms into compulsory liquidation, David Hill, a chief investigator at the Insolvency Service, said: “The systematic abuse of both the insolvency and the corporate regime enabled those behind the companies to benefit at the expense of the crown.

No one should be in doubt that whenever we discover there are serious failings, as with these companies, we will investigate and take action to close down their activities.”

The winding up of a company is not taken lightly and any compulsory liquidation threat must be taken very seriously as it can lead to disqualification and or a fine. If you have any doubts about what to do when faced with compulsory liquidation (winding up) call 0800 074 6757.