Crédit Suisse v Allerdale Borough Council
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NEILL,LORD JUSTICE PETER GIBSON,LORD JUSTICE HOBHOUSE |
| Judgment Date | 08 May 1996 |
| Judgment citation (vLex) | [1996] EWCA Civ J0508-8 |
| Docket Number | CBCMF 94/1102/B |
| Court | Court of Appeal (Civil Division) |
| Date | 08 May 1996 |
[1996] EWCA Civ J0508-8
Lord Justice Neill
Lord Justice Peter Gibson
Lord Justice Hobhouse
CBCMF 94/1102/B
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(Mr Justice Colman)
Royal Courts of Justice
Strand
London WC2
MR C CLARKE QC and MS C OTTON-GOULDER (Instructed by Clyde & Co, EC3M 1JP) appeared on behalf of the Appellant
MR J SHER QC and J HOWELL QC (Instructed by Ward Hadaway & Co, Newcastle) appeared on behalf of the Respondent.
(As Approved)
Wednesday, 8th May 1996
I. INTRODUCTION AND THE FACTS.
This is an appeal by Credit Suisse (the bank) from the order dated 29 July 1994 of Colman J. dismissing the bank's claim against the Borough Council of Allerdale (the council) under a contract of guarantee dated 23 May 1986. Colman J's decision is reported: [1995] 1 Lloyd's L.R. 315. The appeal raises a number of questions relating to the powers of local authorities including the subsidiary powers conferred by Section 111(1) of the Local Government Act 1972 (the LGA 1972). Before I come to examine these questions, however, it is necessary to set out the relevant facts in some detail.
Background to the Case.
The council was formerly the Allerdale District Council. The council came into existence as a District Council on 1 April 1974. The constitution of the council is therefore governed by section 2 of the LGA 1972, which provides (in section 2(2)) that the council is to consist of a chairman and councillors and that the council is to have all such functions as are vested in them by the LGA 1972 or otherwise, and (in section 2(3)) that it shall be a body corporate. It is to be noted that by section 101(1) of the LGA 1972 a local authority may arrange for the discharge of any of their functions by a committee, a sub-committee or an officer of the authority, though this arrangement is subject to any express provision in the LGA 1972 or in any subsequent Act.
It is therefore important to remember, as Lord Templeman explained in Hazell v Hammersmith London Borough Council [1992] 2 AC 1 at 23, that a local authority "although democratically elected and representative of the area, is not a sovereign body and can only do such things as are expressly or impliedly authorised by Parliament."
It is also important to remember that for many centuries Parliament and central Government have exercised a large measure of control over the financial affairs of bodies involved in local administration. Since about the middle of the 19th century this control has become increasingly stringent as a larger proportion of local authority expenditure has been funded by moneys contributed by central Government. For the purposes of this judgment it is sufficient to refer to two of the principal forms of control—the control of expenditure and the control of borrowing.
At the material time in 1986 and 1987 the capital expenditure of District Councils was subject to the provisions set out in Part VIII of the Local Government, Planning and Land Act 1980 and schedule 12 to that Act. Schedule 12 to the 1980 Act set out the categories of prescribed expenditure which were subject to control. Prescribed expenditure included expenditure on the acquisition of land including buildings as well as the construction of buildings.
At the material time the principal provisions relating to the control of borrowing by District Councils were contained in section 172 of the LGA 1972 and in schedule 13 to that Act. By paragraph 1 of Schedule 13 it was provided (a) that a principal council might borrow money for the purpose of lending money to another authority, and (b) that a local authority might borrow money for any other purpose or class of purpose approved by the Secretary of State and in accordance with any conditions subject to which the approval was given. This power to borrow was expressed to be without prejudice to section 111 of the LGA 1972, but as, by section 113(3), the power of the local authority to borrow under section 111(1) could not be exercised except in accordance with the enactments relating to borrowing, a local authority's power to borrow was effectively constrained by the need to obtain the approval of the Secretary of State.
It is further to be noted that in practice the approval of borrowing was effected by means of a block borrowing approval which in broad terms entitled a District Council to borrow to meet the cost of its prescribed expenditure. According to the figures which were produced at the trial the prescribed expenditure limit for the council for 1985/86 was £5,382,000 and for 1986/87 £4,685,000. These limits included adjustments and the use of capital receipts. The borrowing limit for the council for 1985/86 was £3,682,000 and for 1986/87 was £2,726,000.
It will be seen therefore that at a time when public spending, including spending by local authorities, was under tight restraint the scope for local authorities to borrow money for capital schemes, however desirable they might seem to be among the local community, was extremely limited. In general terms any borrowing required the approval of the Secretary of State who would clearly be guided by the economic policy for the time being pursued by central Government.
It is true that under section 137 of the LGA 1972 a local authority was empowered to incur expenditure which in their opinion was in the interests of their area or any part of it or all or some of its inhabitants (including giving financial assistance, such as by giving a guarantee, to persons carrying on commercial or industrial undertakings), but at the relevant time this expenditure was limited to the product of a rate of 2p. in the £ for the area. For the council the product of a 2p. rate was less than £200,000.
It was against this background that the council, following a trend among other local authorities which had already been established for a few years, came to consider the use of a company to borrow the funds which were needed for what were thought to be desirable developments in the area.
From the early years of its existence the council, which was then the Allerdale District Council, was urged by the Keswick Town Council, then the lower tier of local government, to consider the provision of a swimming pool. A possible site for the swimming pool was the old railway station and the surrounding land which had been acquired in 1979 by the Lake District Special Planning Board (the LDSPB). The railway station had been closed down some years before.
In his judgment Colman J. traced the history of some of the earlier schemes which were considered between 1983 and 1985 which involved the provision of a swimming pool and other recreational facilities. For the purposes of this appeal, however, it is sufficient to restrict my account to a description of the plan which began to take shape towards the end of 1985.
On 18 December 1985 Mr. A.G. Perry, the council treasurer, wrote a note for the forthcoming meeting of the Council's Joint Management Team (the JMT). The purpose of the note was to provide an up to date report on the plans for the redevelopment of the Keswick station site. By that stage the redevelopment envisaged a joint scheme involving both the council and Clifford Barnett Developments Ltd. (Clifford Barnett). It was also anticipated that the redevelopment would include a time share development. In his note Mr. Perry recommended that the service company of the Chartered Institute of Public Finance Accountants—CIPFA Services Ltd.—should be engaged as financial advisors to the project and should be used in connection with the funding of the scheme.
On 15 January 1986 CIPFA produced a report on the Keswick station site. I should refer to passages in this report:
"1. The structure chosen to achieve this development is:
(a) Allerdale creates a company limited by shares and underwrites its borrowings.
The reasons for this are that by channelling all the capital expenditure through the company, the Council completely avoids capital expenditure controls, whilst at the same time ensuring that the borrowing can be done at the finest rates.
(b) Allerdale appoints 2 or 3 councillors plus the chief executive/treasurer as directors of the board who implement the Council's policy.
(c) The company engages:
Aspect Leisure to market the time share.
CIPFA Services Ltd. to arrange bank finance.
Clifford Barnett to design and build;
manage the pool;
manage the time share.
(d) Allerdale District Council purchases the freehold of the 2 sites and grants the company a long lease.…..
………………
(f) The proceeds of the time share will be used as follows:
(i) to pay off all bank borrowings, fees and rolled-up interest.
(ii) all marketing expenses.
(iii) any other cost attributable to the scheme.
Only after all costs have been discharged will there be any distribution between the company and Clifford Barnett Developments Ltd.
……………………..
3. Clifford Barnett Developments Ltd.
Three separate agreements are required:
(i) the design and building contract is quite straightforward and presents no special problems.
(ii) the management of the pool has now to be negotiated in detail. Broad outline of terms are:
- 25 years at nominal rental.
- company to bear all losses and keep all profits.
- council to have representation on board.
Details of opening hours, prices, access of time sharers etc. still to be finalised.
(iii) the management of timeshare. Many details have still to be worked out but broad outlines are:
- the company will bear all losses and take all profits...
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