In a case that will be of interest to all PFI lenders, a court has allowed a local authority to sell certain assets despite a claim by the Bank that they were secured by charges. Whilst this decision might appear to give PFI lenders cause for concern, the real issue as to whether the Bank's security survived termination of the contract by Council is yet to be determined.
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In a case that will be of interest to all PFI lenders, a court has allowed a local authority to sell certain assets despite a claim by the Bank that they were secured by charges. Whilst this decision might appear to give PFI lenders cause for concern, the real issue as to whether the Bank's security survived termination of the contract by Council is yet to be determined.
In Bank of Scotland v Neath & Port Talbot County Borough Council the bank funded the establishment of a waste management facility in Swansea operated by HLC Neath Port Talbot Limited ("NPT"). The Bank took charges over the plant and equipment used at the facility. The Council ultimately terminated the PFI arrangement with NPT due to operational difficulties with the facility.
A dispute then arose between Council and the Bank as to the status of the Bank’s charges as a consequence of the termination. The Council argued that the termination vested the equipment, free of the Bank's charges, in the Council. Not surprisingly, the Bank disputed this.
The Bank commenced legal proceedings against the Council. In the course of those proceedings, the Council applied to the Court for an order that the plant and equipment be sold even though the dispute as to the Bank’s charges had not been finally determined. If the equipment was sold but the Bank was ultimately successful in the proceedings, it would have a claim against the Council for compensation.
In considering the Council’s application, the Court was first required to determine if there was a good reason for the equipment to be sold. The Council argued that it had statutory obligations to provide waste disposal services and needed to urgently commence the procurement process for a new operator of the facility. It was intended to make the equipment available to the new operator for sale. The Court agreed.
The Court then had to decide whether it should, in fact, make an order that the property be sold. As to this question, it concluded that an order should be made. This was because of the prejudice likely to be suffered by the Council. However, in doing so, the Court was also concerned to protect the interests of the Bank. On that basis it ordered that the "sale of the equipment be conducted by a suitably experienced independent agent......for a sale by early October"
This represents an interesting balancing of the competing public policy considerations advanced by the Council versus the pure legal rights asserted by the Bank. Of particular interest is the last paragraph of the judgment:
"The decision as to what, if any, order to make......involves the balancing of a number of legitimate competing interests. There is no perfect solution. I have aimed to produce a result which is, in all the circumstances fair.
We will report on the outcome of the further proceedings between the Bank and the Council when that decision is handed down.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 02/10/2006.
