In a Pakistani businessman’s appeal against the dismissal of his application for judicial review against the refusal of his application for further leave to remain as a Tier 1 (Entrepreneur) of the points based system (PBS), the Court of Appeal has held that the phrase “director’s loan” in paragraph 46-SD(a)(iii) of Appendix A of the Immigration Rules does not have a specialist meaning. The expression simply means a loan made by a director to their company and it covers any transaction whereby a director paid money to or for the benefit of the company on the basis that it would one day be repaid. The outcome yet again shows that the PBS requires strict compliance with the rules. Mr Sajjad entered the UK in 2011 with limited leave to enter as a Tier 1 (Entrepreneur). On 1 April 2015, he sought to extend his leave by claiming points on the basis of his investment in a UK company – i.e. Blanco Coffee Limited, latterly trading as Sajjad’s Grill and Restaurant – of which he was the sole director at all material times. The accounts provided showed that he had invested £495,470 in the company but he made the mistake of entering the words “not applicable” in a section of the application form headed “legal agreement (for director’s loans only)”. A summary of the company’s creditors showed a balance of £560,787 outstanding on the Director’s Current Account as at 15 March 2015.
The application was refused due to non-compliance with paragraph 46-SD(a)(iii) because no director’s loan agreement had been provided evidencing Mr Sajjad’s investment and showing the terms and period of the loan, the interest payable, and confirming that the loan was unsecured and subordinated in favour of third-party creditors. Compliance with the rule was mandatory and the UT refused to grant permission to seek judicial review. Elisabeth Laing J held that the decision-maker was entitled to refuse the application because the requirement to submit a director’s loan agreement had not been complied with. But her judgment was appealed on two grounds. First, that Mr Sajjad’s investment in his company did not take the form of a “director’s loan” within the meaning of paragraph 46-SD(a)(iii) and he was therefore not required to file a legal agreement detailing the terms of the loan. Second, Mr Sajjad submitted that in the alternative that the phrase “a director’s loan” is unclear, and that it was unfair and unreasonable for the decision-maker to refuse his application in reliance on that ambiguity without first contacting him or giving him a chance to comply.
The Court of Appeal
Overall, Sir Ernest Ryder (Senior President of Tribunals), Holroyde and Males LJJ were sympathetic with Mr Sajjad and his family. However, the court did not accept the excuse that a mere piece of paper was missing because in truth a director’s loan agreement was a necessary piece of evidence for him to have qualified for the points needed to obtain further leave to remain. The court first addressed the requirement to provide specified documents. It then proceeded to elaborating on the meaning of the phrase “director’s loan”. The Lordships’ point of departure was that the PBS aims to enable the Home Office to process large numbers of applications fairly and expeditiously by applying clear and objective criteria.
Burnett LJ’s approach in Kaur  EWCA Civ 13 is very clear that applicants must take great care to comply with the requirements of the PBS. Predictability, administrative simplicity and certainty come at the expense of discretion and consequently “failure to comply with all its detailed requirements will usually lead to a failure to earn the points in question and thus refusal.” Moreover, as held in Raju  EWCA Civ 754 “there is no room in the points based scheme for a near miss”.
(i) Specified documents
Applicants under the PBS must supply certain specified documents and it is clear in “stark terms” under paragraph 39B that if the necessary documents are not provided, an applicant will not meet the requirement for which those documents are required as evidence.
However, despite any failures to provide the requisite documents, paragraph 245AA, which had been examined by the court in Mudiyanselage  EWCA Civ 65, provided a limited degree of “evidential flexibility”. But this is only in the particular circumstances set out within that paragraph and there is no general policy allowing for the correction of minor errors. Underhill LJ explained that “occasional harsh outcomes are a price that has to be paid for the perceived advantages the PBS process” and expressing a similar view Sir Brian Leveson P let it be known that:
145. These are hard-edged decisions but the requirements of the PBS, Rules and Guidance are precise. Those who seek to make applications of this nature must take the utmost care to ensure that they comply with the requirements to the letter; they cannot expect discretionary indulgence beyond the very limited areas provided by evidential flexibility.
(ii) “Director’s loan”?
The government submitted that for points to be awarded for an investment in a UK business, the applicant must establish that the investment has taken one of only two permissible forms, namely an investment by way of a director’s loan, or investment by way of purchase of share capital. Any other alternatives would expose the system to abuse and it was stressed that in line with the approach in Mahad v Entry Clearance Officer  UKSC 16 the Immigration Rules must be construed “sensibly according to the natural and ordinary meaning of the words used.” Therefore, Holroyde LJ found that Mr Sajjad’s investment in the company was a “director’s loan” and he held that:
31. The Rules do not limit the ways in which a migrant may choose to invest in a UK business, but they do limit the circumstances in which an investment may qualify for an award of points in support of an application for leave to remain. Bearing in mind the nature and objective of the PBS, and adopting the approach directed by the Supreme Court in Mahad, it seems to me that the phrase “a director’s loan” was intended to bear the simple and clear meaning of a loan made by a director to the company of which he or she is a director. It would be inconsistent with the nature and objective of the PBS to interpret the phrase as carrying some specialist meaning which would or might in particular circumstances require a detailed analysis of finer points of contract law or company law.
The court was not in any doubt that Mr Sajjad was a director of the company in which he made his investment. His accountant gave a letter, reflecting the reality of the situation, confirming that all the sums paid by Mr Sajjad to or for the benefit of the company, as reflected in the director’s current account, were an investment in the business which in legal terms “is considered as a loan to the company without interest for indefinite period”. The court’s interpretation of the phrase in this manner was not unreasonable or unfair and it explained that:
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.
Overall, the clear conclusion was that because his investment was a director’s loan, Mr Sajjad should have provided a written legal agreement showing the particulars set out in paragraph 46-SD(a)(iii). His failure to do so was his own problem and the Upper Tribunal had rightly found that the decision-maker had not acted unlawfully in refusing his application for further leave to remain as a Tier 1 (Entrepreneur). The appeal against the Upper Tribunal’s judgment was unassailable and there were no arguable grounds to disturb its conclusions.
(iii) Points by Males LJ
Males LJ added that fact that Mr Sajjad does not qualify for leave to remain under Tier 1 (Entrepreneur) of the PBS was “not a mere technicality” because in effect it was mandatory for him to score 75 points failing which his application fell to be refused. It was up to him to comply with paragraph 46-SD(a)(iii) and he should have included a written loan agreement showing the required particulars with his application for leave to remain. Indeed, as Males LJ explained:
40. In the case of a company, the obvious ways in which to invest are either debt or equity … An equity investment provides the investor with an ownership interest in the company, but in the event of the company’s insolvency the interests of shareholders rank behind those of the company’s creditors.
A legal agreement between Mr Sajjad and the company needed to show (i) the terms of the loan, (ii) the interest payable, (iii) the period of the loan, and (iv) that the loan is unsecured and subordinated in favour of third-party creditors. The words of paragraph 46 were entirely unambiguous and the agreement was mandatory as it must be provided in all cases and Males LJ ended his judgment by imparting advice to Tier 1 (Entrepreneur) applicants and pointed out that:
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.
These corporate and insolvency law principles were very important because it was never suggested that the terms on which Mr Sajjad loaned his money to the company included a provision for subordination. Despite expressing sympathy for Mr Sajjad, his Lordship judged that the position was not that he had simply failed to produce a piece of paper, rather the truth was that “he failed to produce the necessary evidence to qualify under the points based system on an important matter of substance.”
Notably, by virtue of Statement of Changes HC 1919, the Tier 1 (Entrepreneur) and Tier 1 (Graduate Entrepreneur) categories were replaced by the new Innovator and Start-up categories. The outcome in this case clearly shows that the evidential burden lies on PBS applicants to provide all the necessary documentation to succeed in obtaining their visas. Just ticking the wrong box in a “hit and hope” exercise is a wasteful way to make such applications and this judgment is a clear reminder that the Home Office does not have the task of seeking out bits of information from applicants because they “must take the utmost care to ensure that they comply with the requirements to the letter.”
Therefore, the non-disclosure and non-provision of the loan agreement was a fatal flaw in Mr Sajjad’s application for leave to remain despite his otherwise positive credentials. His predicament serves as a clear warning even to the fittest entrepreneur that keeping one’s business affairs in order is highly advisable to ensure success and that any expectation of leniency in the PBS is misconceived.