Purchasing a business can be done in two ways. The first is for the purchaser to buy the shares in the company which runs the business and acquire all the equipment, people, knowhow, contracts and other bits and pieces owned by the company in running the business. The disadvantage is that the purchaser won't necessarily know what the company has so there could be nasty liabilities lurking in the background of which it knows nothing. Hence the second approach – buying the assets and sticking them into a new, clean company. The purchaser then picks the bits it wants and should have a much better idea what it is getting.

Rail companies have lots of contracts and these can be troublesome whichever approach is adopted. There may be consent issues to overcome as a transfer of the contract from the seller to the purchaser would require consent and a transfer of the company with no transfer of the contract may nevertheless require consent to a change of control.   

The clever people who came up with rail privatisation were wise to this and developed a statutory transfer scheme.  When a franchise ends and transfers to a new franchisee, assets can transfer to the new franchisee with the advantage that third party consent is not required.  The scheme is not perfect and there are ancillary issues to resolve, but this is inevitable whichever transfer route is adopted.

One of those issues is how to deal with pre-transfer liabilities which emerge post transfer.  If a purchaser knows what it is getting the solution of obvious and that is for pre-transfer liabilities to stay with the old franchisee and for post-transfer liabilities to move to the new franchisee.  But if rather than transferring selected assets the entire business is moving across the new franchisee won't necessarily know what it is taking on.  In this case some post-transfer liabilities should properly stay with the old franchisee.

This is relevant as the rumour is that in transferring the East Coast franchise to Stagecoach/Virgin the transfer scheme mechanism will not be used and instead the DfT is selling the present operator as a going concern, i.e. it is a share transfer.

If the statutory transfer scheme is to be eschewed the new franchisee will want to ask itself a number of questions.  First, what happens if a consent cannot be obtained?  Typically there should be some flexibility over this although there could also be a cost.  Who is to bear this?  Second, if a claim arises who is to manage the claim? If the old franchisee is responsible for the claim it will want to manage it but will the new franchisee be content with it doing so?  Finally, will the old franchisee be good for the money if it has to reimburse the new franchisee?  This is not an issue where DfT is the old franchisee but could be a real issue in other circumstances.

The implications are financial and, if they detract the new franchisee from operating the franchise, operational and reputational.