Law Report: Council's guarantee was void: Credit Suisse v Allerdale Borough Council, Queen's Bench Division (Commercial Court)(Mr Justice Colman), 6 May 1994

Although a local authority, in order to carry out some statutory function, may set up a company and guarantee the company's borrowings, the guarantee is unlawful if it is given on the basis of irrelevant and impermissible considerations, and is void and unenforceable regardless of the lender's ignorance of the council's position.

Mr Justice Colman held that the council was not liable under a guarantee to the bank for sums owing to the bank by Allerdale Development Co.

The council, in order to finance projects outside central government limits on local authority expenditure and borrowing, set up a limited company financed by the company's borrowing, to provide a pool and timeshare development. The council provided a guarantee of pounds 6m pursuant to a loan agreement between the company and the bank. The company became unable to make repayments to the bank and went into liquidation. The bank called the council's guarantee for pounds 5m owing.

The council argued that it had no statutory power to enter the guarantee. The bank contended that the council's powers were derived from section 19(1) of the Local Government (Miscellaneous Provisions) Act 1976 which gives the council power to provide recreational facilities or from section 111 of the Local Government Act 1972 which gives local authorities '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'.

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

MR JUSTICE COLMAN said that statute-given functions were the only foundation of the local authority's power to contract with other legal entities. If one wished to know whether a given contract was within the powers of a local authority it was necessary to inquire whether that contract fell within one of the local authority's statutory functions or was at least incidental to the discharge of a statutory function within section 111.

It was quite possible to envisage a company set up only for the purpose of carrying out particular functions and to which a local authority had delegated no more than ministerial or day-to-day decision-taking. The guarantee by a local authority of the obligation of a company set up by the local authority to enable it to provide recreational facilities under section 19 was not necessarily impermissible any more than was the setting up of the company itself. In order to decide in any given case whether a guarantee was within the local authorities incidental powers in section 111, it was necessary to ask what was the nature and purpose of the obligation performance of which was guaranteed.

Although the grant of a power to discharge a function might be taken to grant by implication a power to a local authority enabling it to borrow funds for that purpose, there could not be any implication empowering a local authority to acquire the use of borrowed money for such purpose by any other means than by borrowing the required funds itself and conforming with Part 1 of Schedule 13 to the 1972 Act. To guarantee the borrowing of the required funds by a totally different entity would be a means of acquiring the use of borrowed money which was outside the contemplation of Parliament.

There was no power in the council to give the guarantee - whether on the basis that such a power was incidental to the discharge of its express functions under section 19 or on the basis of its ancillary powers under section 111 or for the giving of 'assistance of any kind' under section 19.

If the council did have statutory power to give the guarantee, its decision was tainted by an irrelevant consideration, namely to evade the borrowing and spending controls on local authorities, and was an invalid exercise of the council's powers.

Turning to the effect of a local authority's decision which was unreasonable and therefore defective, in judicial review proceedings the court had been accorded by statute discretionary powers to withhold relief. Outside the discretionary supervisory regime of RSC Order 53, one was left with the underlying rights as a matter of substantive law without any basis under statute or rules which would justify withholding any remedy otherwise available in civil proceedings. Once the public body's want of power to act had been established in private law proceedings, the court had no alternative but recognise the act as a nullity.

The guarantee was void and unenforceable regardless of the bank's ignorance of the council's want of power. The bank's claim failed and was dismissed.

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