Paul said: "Like many of these things this all started with an email. Bill had asked if it was something I might be up for.
"Writing a musical is not something that had ever really appealed to me but Bill and I met up with Lee Hall and had a chat and I found myself thinking this could be interesting and fun."
The film plot tells the story of George Bailey (James), who is saved by his guardian angel Clarence Odbody (Henry Travers) after being on the brink of taking his own life.
Paul is quoted by The Sun newspaper as saying: "It's a Wonderful Life is a universal story we can all relate to."
The 77-year-old star is said to be writing the music for the production, and he has joined forces with Lee Hall to pen the lyrics.
Bill won the rights to the project three years ago.
He said: "It was a Friday night and I was in the office. I suppose you could say it hadn't been the best of weeks.
"No real progress on multitudinous film and theatre projects - and Everton had lost the previous Saturday.
"Out of the blue I got an email from Paul asking my thoughts on his first stab at an opening song.
"He wasn't sure - but wanted to know what Lee and I thought of it? I played the demo. Lee and I were unanimous. Our hero was a musical theatre writer."