Council scheme was unlawful

LAW REPORT 7 June 1996

Credit Suisse v Allerdale Borough Council; Court of Appeal (Lord Justice Neill, Lord Justice Peter Gibson and Lord Justice Hobhouse) 8 May 1996

A local authority acted ultra vires when, in order to circumvent spending controls, it devised a scheme involving the setting-up of a company to develop a timeshare and leisure pool complex and then guaranteed repayment by the company of a pounds 6m bank loan.

The purpose of the scheme was to enable the local authority to provide the leisure pool, its construction being funded out of profits from sales of timeshare units. But sales of the units failed to meet expectations and the company went into liquidation. The bank then claimed against the local authority under the guarantee.

The Court of Appeal affirmed the decision of Mr Justice Coleman ([1995] 1 Lloyd's Rep 315) dismissing the claim of the bank, Credit Suisse, against Allerdale Borough Council, for pounds 5,233,312.85 due under a contract of guarantee dated 23 May 1986.

Christopher Clarke QC and Catherine Otton-Goulder (Clyde & Co) for the appellant bank; Jules Sher QC and John Howell QC (Ward Hadaway, Newcastle upon Tyne) for the council.

Lord Justice Neill said that at the material time in 1986 and 1987 the capital expenditure of district councils was subject to the provisions of the Local Government, Planning and Land Act 1980, under Schedule 12 of which the acquisition of land and the construction of buildings was subject to control. Their power to borrow money for capital schemes was likewise under tight restraint. Against this background the council considered the use of a company to borrow the funds needed for what were thought desirable developments in its area.

Section 19 of the Local Government (Miscellaneous Provisions) Act 1976 provided:

A local authority may provide . . . such recreational facilities as it thinks fit and . . . the powers conferred by this subsection to provide facilities include the powers to provide buildings, equipment, supplies and assistance of any kind . . .

Section 111(1) of the Local Government Act 1972 provided:

A local authority shall have power to do anything (whether or not involving the expenditure, borrowing or lending of money . . .) which is calculated to facilitate, or is conducive or incidental to the discharge of any of their functions.

The bank argued that these provisions between them empowered the council to set up a company in order to provide recreational facilities and to guarantee its borrowing.

In his Lordship's view, the words "assistance of any kind" in section 19 had to be construed in their context, as part of the power to provide recreational facilities, and the beneficiaries were intended to be those using the facilities. The words could not be construed to mean that assistance could be given to those providing the facilities.

In considering an authority's implied powers under section 111, it was necessary to identify the relevant statutory functions. The word "functions" embraced all the duties and powers of a local authority, the sum total of the activities which Parliament had entrusted to it.

The 1972 Act already provided the means by which the council could accomplish its functions under section 19, namely by means of its power to borrow, as defined and limited in the code established by Schedule 13 to that Act.

One had to look at the statutory powers of local authorities as a whole. The only implied power could be for the council itself to borrow money. The implied powers in section 111 did not provide an escape route from the statutory controls imposed by central government.

Neither the setting-up of the company nor the provision of the guarantee fell within its express or implied powers, and they were accordingly ultra vires and an invalid exercise of the council's powers.

It followed that the council's decision to enter into the contract was void and therefore unenforceable.