Clever ruses foiled again

A recent legal case has important implications for council spending.

Millions of pounds-worth of local authority finance deals, designed to circumvent government borrowing controls, may be unlawful, a recent court case revealed. The result could dislocate future capital budgets if existing contracts are not renewed.

Although it is now more than a month since the Court of Appeal reached judgment on the Credit Suisse versus Allerdale Council case, the wide- ranging implications of the decision are only now being recognised. Initially the case seemed to have a limited impact, the court having ruled that a council could not issue a financial guarantee through a wholly owned company for an activity that it was only empowered to undertake directly itself.

But council finance officers were told at last week's Chartered Institute of Public Finance and Accountancy conference that many other contracts could be affected. The most important aspect of the case is that the judges ruled that local authorities cannot get involved in clever schemes, in order to avoid government finance controls.

"The establishment of the company and the giving of the guarantee were part of an ingenious scheme designed to circumvent the no doubt irksome controls imposed by central government," said Lord Justice Neill, giving the judgment. "The council, however, could only do what it was empowered to do by statute. Neither the establishment of a company nor the giving of a guarantee fell within the express, or implied, powers of the council."

While the full implications of this will remain unclear for some time, it raises doubts over the validity of a wide range of contracts.

"If Allerdale is upheld in the House of Lords, or remains on the record as a Court of Appeal case, people will not be seeking to implement innovative schemes to get round controls, because the court has given notice that it will take action," says Ray Ambrose, a consultant on local government and public law at Nabarro Nathanson. "Any use of a company which is relying on Section 111 [which empowers councils to do anything to facilitate its functions] needs to be looked at in the light of the Allerdale judgment."

Councils' use of deferred purchase schemes, other than lease agreements, are particularly at risk. The schemes allowed councils to obtain assets in advance of the formal purchase of items.

The Department of the Environment has this week sent out a special notice to authorities advising that in the view of its legal counsel, the Allerdale judgment does not affect deferred purchase agreements. This is in advance of a meeting to be held on Friday of the Local Authority Powers Group, which has not met for four years, to discuss the problem.

Some district auditors are now looking at individual deferred purchase contracts, considering whether they were legally drawn up. And a number of local government legal specialists doubt whether the DoE is correct.

"The issue is not clear," says Martin Pilgrim, finance under-secretary of the Association of Metropolitan Authorities. "Each deferred purchase agreement would have to be taken on its own merits."

Martin Thomas, a litigation solicitor at Travers Smith Braithwaite, who spoke on the problem at the Cipfa conference, agrees. "The structure of transaction varies, they are all different," he says. "What it underlines is the fact that any kind of transaction with a local authority has the potential to be undermined by the courts as ultra vires [outside its powers], even when nobody could possibly be aware of that.

"The Allerdale case has brought this to the front of people's minds. The banking community will shy away from the sector, because they don't like ultra vires," adds Mr Thomas.

It is the loss of existing contracts that could cause the biggest problem for authorities. In some cases, deferred purchase contracts have been used for items that have no re-sale value, such as taps and boilers. If the contracts were unlawful it is unclear what should happen at the end of the agreement regarding ownership of the items, what payment should be made, and how payment can be made if it forces a council above its capital spending limits.

Because councils' legal advice said the contracts were valid, there will be no surcharge action against councillors. But the Allerdale judgment undermines the Government's Private Finance Initiative by making banks more cautious. Similar problems might arise with NHS trusts, which are also controlled by ultra vires considerations.

But the Allerdale case can be viewed positively. Ambrose, whose firm Nabarro Nathanson is giving a presentation on the implications of the judgment this evening, says: "Local government directors of finance will now know where they are, and there will be an element of certainty. So it may be a good thing."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Manager

    £40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

    SThree: Talent Acquisition Consultant

    £22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

    Recruitment Genius: Experienced Financial Advisers and Paraplanners

    Negotiable: Recruitment Genius: This extremely successful and well-established...

    Guru Careers: FX Trader / Risk Manager

    Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

    Day In a Page

    How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

    How to stop an asteroid hitting Earth

    Would people cooperate to face a global peril?
    Just one day to find €1.6bn: Greece edges nearer euro exit

    One day to find €1.6bn

    Greece is edging inexorably towards an exit from the euro
    New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

    'Iron Man' augmented reality technology could become reality

    Holographic projections would provide extra information on objects in a person's visual field in real time
    Sugary drinks 'are killing 184,000 adults around the world every year'

    Sugary drinks are killing 184,000 adults around the world every year

    The drinks that should be eliminated from people's diets
    Pride of Place: Historians map out untold LGBT histories of locations throughout UK

    Historians map out untold LGBT histories

    Public are being asked to help improve the map
    Lionel, Patti, Burt and The Who rock Glasto

    Lionel, Patti, Burt and The Who rock Glasto

    This was the year of 24-carat Golden Oldies
    Paris Fashion Week

    Paris Fashion Week

    Thom Browne's scarecrows offer a rare beacon in commercial offerings
    A year of the caliphate:

    Isis, a year of the caliphate

    Who can defeat the so-called 'Islamic State' – and how?
    Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

    Marks and Spencer

    Can a new team of designers put the spark back into the high-street brand?
    'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

    'We haven't invaded France'

    Italy's Prime Minister 'reclaims' Europe's highest peak
    Isis in Kobani: Why we ignore the worst of the massacres

    Why do we ignore the worst of the massacres?

    The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
    7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

    Remembering 7/7 ten years on

    Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
    Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

    They’re here to help

    We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
    Time to lay these myths about the Deep South to rest

    Time to lay these myths about the Deep South to rest

    'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
    What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

    What exactly does 'one' mean?

    Court of Appeal passes judgement on thorny mathematical issue