[2024] UKUT 00418 (IAC)

It is uncontroversial that the Directors Loan Agreement is evidence of a loan that creates a debt owed by the company to the applicant. Where, as here, the investment made by the applicant is in the form of a director's loan, paragraph 45 of Appendix A to the immigration rules requires an applicant to provide a legal agreement between the applicant and the business, showing, inter alia, that the loan is unsecured and subordinated to other creditors’ loans to the business.

As to the proper approach to the immigration rules and the points based system, in R. (Wang) v Secretary of State for the Home Department [2023] UKSC 21, the respondent appealed against a decision of the Court of Appeal that the Tier 1 (Investor) Migrant (Wang) had the requisite degree of control over money loaned to her under an investment scheme for the purposes of the Immigration Rules. The issue in Wang, was whether it is legitimate to look at a scheme in the round to see whether two particular "tick-box" conditions have been satisfied in fact.

Wang had borrowed £1 million from a UK financially regulated institution which was invested directly in a company, under a scheme designed to secure qualification for leave to remain in the UK. As to the interpretation of the immigration rules, Lord Briggs (with whom Lord Kitchin, Lord Burrows, Lady Rose and Sir Declan Morgan agreed) endorsed, at [31], the encouragement of Lord Brown in Mahad v Entry Clearance Officer to apply sensibly rather than strictly, the natural and ordinary meaning of the words, keeping in mind the context and purpose of the Immigration Rules. That is not, he said, inconsistent with a requirement of a purposive approach to construction and a realistic and unblinkered approach to the application of the relevant provisions to the facts.

In Wang, it was said on behalf of Wang that the approach to the interpretation of this PBS for Tier 1 (Investor) Migrants should be one that prioritised simplicity and predictability over sophistication so that, for example, it would be illegitimate to look at a scheme in the round, if steps in the scheme appeared on their face, viewed individually, to comply with the required elements in the "tick-box" scoring system. That approach was said on behalf of Wang to be consistent with what has previously been said by the Court of Appeal in cases such as Mudiyanselage v SSHD [2018] 4 W.L.R 55, at [52] to [56], that occasional harsh outcomes were the price that had to be paid for the perceived advantages of the points-based system process. Lord Briggs said:

“33.

As those cases demonstrate, the PBS does deliberately sacrifice discretion and (occasionally) perfect fairness or equity in the pursuit of a migration regime which is efficient, transparent and predictable, and as far as possible capable of being operated reasonably quickly and reliably by quite junior officials. But none of those aims comes near to displacing the need to take an unblinkered and realistic view of the facts to which the PBS regime is to be applied, for the purpose of deciding whether the requirements for achieving the specified scores are met. And where those facts include the use of a pre-ordained multi-step scheme, like the Maxwell Scheme, nothing in the Immigration Rules or in those cases requires the adjudicator (or the court on appeal or application for judicial review) to blinker itself to the reality revealed by appraising such a scheme in the round.

34.

I do not by that mean that where an applicant does tick all the relevant boxes under this or any PBS regime, the adjudicator or the court may nonetheless decide that the applicant fails to qualify because for other reasons he or she, or the scheme to which they have subscribed, appears to fall outside the general suitability for migration which the Secretary of State might be supposed to have intended. Just as the hard- edged elements in a PBS regime may fail to achieve perfect fairness and thereby exclude apparently deserving applicants (for example because of failure to comply with some time limit which there is no discretion to extend), so also it may qualify some applicants whose credentials, viewed in the round, may be far removed from that which the Immigration Rules were intended to admit. Notwithstanding their frequent amendment the Immigration Rules are far from being perfect, and both applicants and the Secretary of State, who makes the Immigration Rules, have to take the rough with the smooth in their operation: see per Jackson LJ in Pokhriyal v Secretary of State for the Home Department [2013] EWCA Civ 1568 [2014] Imm AR 711, para 43 .

35.

But the present question is whether it is legitimate to look at this scheme in the round to see whether two particular "tick-box" conditions have been satisfied in fact. The condition principally in issue is whether Ms Wang had the MAM loan money under her control. A positive answer to that question cannot sensibly be garnered from looking at one aspect of the Maxwell Scheme in isolation from the rest. Nor can Ms Wang rely on a perception that her strict legal rights under the written terms of agreements constituting the scheme might appear to give her that control if the practical reality, as between her, the companies involved and their owners DK and NK was that the MAM loan moneys were under their exclusive control throughout, rather than under hers.”

The facts in Wang are quite different, and where it is necessary to have regard to the type of scheme entered into, the need to take an unblinkered and realistic view of the facts to which the PBS regime is to be applied, for the purpose of deciding whether the requirements for achieving the specified scores are met, is all too apparent.

Here however, the requirement set out in the rules is unambiguous. It is, as the respondent submits, the legal agreement, that must show that the loan is unsecured and subordinated to other creditors’ loans to the business. The loan agreement must ‘show’; (i) the loan is unsecured, and (ii) the loan is subordinated to other creditors’ loans.

I reject the claim that the respondent has misconstrued the rules as requiring a loan agreement to state in terms that the loan is unsecured and is subordinated. In Sajjad v SSHD, Holroyde LJ, accepted the investment made was a ‘Directors Loan’ for the purposes of the immigration rules. He said:

“32.

…In order to operate the PBS fairly and efficiently, the respondent must be able to ascertain quickly, from the information provided by an applicant, the precise nature and legal status of the investment made in order to confirm that it attracts an award of points under the terms of the scheme. That can effectively be done if the phrase is interpreted as covering any transaction in which a director pays money to or for the benefit of his company on the basis that it will one day be repaid. It cannot effectively be done if the respondent is to be required, on an application-by-application basis, to make an analysis of whether a particular transaction by which money passed from a director to a company amounted to a director's loan.”

Having accepted the investment made was a ‘Directors Loan’ Holroyde LJ said the applicant was required to provide, as a specified document, a legal agreement showing the four important details. He said the applicant had failed to do so and that itself was sufficient to defeat the first ground of claim. Males LJ agreed with Holroyde LJ but went on to explain why, despite the investment made, the fact that Sajjad did not qualify for leave to remain as a Tier 1 (Entrepreneur) Migrant under the points based system was not a mere technicality.

Males LJ rejected the claim made on behalf of Sajjad that the investment made was a loan which, although made by a director, was not a director's loan. He said:

“That being so, the appellant was required to provide a legal agreement between himself and the company showing: "(1) the terms of the loan, (2) the interest that is payable, (3) the period of the loan, and (4) that the loan is unsecured and subordinated in favour of third-party creditors". As paragraph 46 makes clear by its insistence on documentary evidence and its mandatory terms ("must be provided in all cases"), the requirement is for a written agreement setting out these matters.” (my emphasis)

In considering the fourth requirement that the loan is unsecured and subordinated in favour of third-party creditors, Males LJ said:

“45.

The fourth matter is important. The requirement that the loan be unsecured ensures that in the event of the company's insolvency, secured creditors will have priority over the debt payable to the director. The requirement for subordination ensures that other unsecured creditors will have such priority. In the absence of such a provision, the loan to the director would rank equally with debts to other unsecured creditors and, if the amount of the loan represents a substantial proportion of the company's debts, could mean that the director takes the greater part of whatever assets there are. Accordingly the requirement for subordination puts an applicant who chooses to invest in his company by making a loan in the same position, in the event of the company's insolvency, as one who makes an equity investment.”

Adopting the analysis by Males LJ it is clear that the word “showing” in paragraph 45(d)(iii) of Appendix A to the immigration rules, properly construed, imposes a requirement that the loan agreement sets out the four factors identified in the rule. That is; (i)the terms of the loan, (ii) any interest that is payable, (iii) the period of the loan, and (iv) that the loan is unsecured and subordinated to other creditors’ loans to the business. The fourth of those factors ensures that it is clear and there can be no doubt that secured and unsecured creditors will have priority over the debt payable to the director. That construction of the requirement is in context, consistent with a purposive approach to construction of the relevant provision of the rules.

It follows that in my judgment, albeit harsh in circumstances where the applicant had made a substantial investment, there is no public law error in the decision of the respondent. The applicant was provided an opportunity prior to the respondent’s decision of 6 May 2022 to provide evidence of a Director’s Loan that meets the requirements of the rules but resubmitted the same document. The loan agreement does not comply with the requirements and it was open to the respondent to refuse the application because the loan agreement relied upon makes no reference to the loan being unsecured and unsubordinated to other creditors’ loans to the business. The remaining grounds for review relied upon by the applicant proceed upon the premise, which I have rejected, that the respondent erred in construing the rules as requiring an express statement that the loan is unsecured and subordinated to other creditors’ loans, rather than reaching a decision based upon an informed analysis of the Directors Loan agreement.

The difficulty with an informed analysis of the loan agreement is that the terms of the agreement are far from clear. For example, section 8 of the loan agreement defines “Events of Default”. They each refer to acts of ‘the borrower’. Clause 9.1 of the agreement provides for the conversion of the loan into shares if the ‘lender gives notice to the borrower that it wishes to convert part or all of the loan into shares in the borrower, or in an ‘’Event of Default’, ‘on the basis of a shareholder agreement’. The terms of any shareholder agreement are not apparent and neither is the fact that the loan is unsecured and subordinated in favour of third-party creditors. Furthermore, paragraph 10.1 of the loan agreement provides that the lender may assign, transfer, charge or sub-contract [his] rights and obligations under the agreement to somebody else. The clause is vague, but on one reading permits the lender to charge his rights under the agreement, albeit, it seems, to somebody else. The loan agreement lacks sufficient clarity to establish that on any view, the loan is unsecured and subordinated to other creditors’ loans

It follows that the respondent was entitled to refuse the application for the reasons given in the decision of 6 May 2022 and to maintain that decision following Administrative Review for the reasons set out in the respondent’s decision of 5 June 2023.

I therefore dismiss the claim for Judicial Review.