Corporation tax – Law of Property Act receivership breaks a group for group relief purposes

Tue 19 Mar 2019

The Court of Appeal has agreed with the Upper and First Tier Tribunals and held in the case of Farnborough Airport Properties that the appointment of a Law of Property Act receiver breaks a group for group relief purposes.  Please get in touch with the Mazars corporate tax team to discuss any aspect of UK group relief.

Background and decision

The background to this case was summarised in an earlier tax blog on the Upper Tribunal’s decision.  The terms of the debenture that led to the lending bank’s appointment of the receiver, were considered to be standard and not unusual.  The receivership extended to the entire property and undertaking of Piccadilly Hotels 2 Ltd (PH2L, the company being placed in receivership), with the receivers being granted very extensive powers, including power to carry on the business of the company as they thought fit.

The taxpayer maintained that the shareholding structure remained the same before and after the appointment, and the shareholder rights of ‘Kelucia’ and the intermediate holding companies over PH2L were unaltered. The only things that did change related to the conduct of PH2L’s business. While the company was managed as usual by its board, the effect of the receivership was to vest these managerial powers in the receivers, but only for the proper purposes of the receivership and while it remained in force.

The duties of the receivers, in general terms, were to realise the secured property and business assets to the extent necessary to discharge the secured debt and to repay the secured lenders, with any remaining funds being returned to the company. But none of this (in the taxpayer’s view) had any effect on the constitutional rights of PH2L’s shareholders.  They considered that the circumstances of the present case are far removed from any artificial manipulation of the group relief system.

The Court of Appeal, however, considered that the agency arrangement of the receivers in respect of the company was of a purely ancillary nature, designed to facilitate realisation of the security for the benefit of the secured creditors. It did not in any sense enable the directors, and still less the shareholders, to give directions about how the business should be carried on.  As a result this deprived Kelucia (and the intermediate companies in the corporate chain) of their shareholder control of PH2L.  This satisfied effect 2 in CTA 2010 s154(3) for arrangements to be in place for other persons to obtain control of PH2L, thus breaking the group relationship for group relief purposes.