In a recent first instance decision of David Richards J in Re Neath Port Talbot, a local authority was permitted to dispose of certain assets forming part of a failed PFI project even though the financing bank claimed to have a security interest in the assets concerned. The case serves as a useful reminder of the ability of the court to order the sale of property affected by legal proceedings and the risks to secured creditors resulting from the availability of this power and the willingness of courts to assist public bodies in the performance of their statutory duties (see box on page 2).

In the case, there was a dispute over the effects of the termination of the project on the financing bank’s security over equipment. The Council argued that no effective charges were created in favour of the bank or, in the alternative, that the charges had been released on termination of the project. The bank commenced proceedings seeking to establish the validity of its security.Within those proceedings, the Council made an application for an order for sale of the equipment (under CPR Part 25.1, which allows the court to grant as an interim remedy an order for the sale of property affected by the litigation where the property is of a perishable nature or where, for any other good reason, it is desirable to sell the property quickly).

Taking into account its statutory duty to dispose of waste, the Council argued that it was desirable to sell the relevant equipment before the conclusion of the dispute relating to the validity of the bank’s security on the following grounds. Having terminated the existing PFI contract, the project had to be re-tendered to find a replacement contractor. However, given the previous failures, which had led to the termination, the existing project was not considered to be an attractive proposition to potential bidders. To enhance the project’s attractiveness the Council decided to incorporate an expansion of the facility in the re-tendered project, for which significant EU funding was available. However, the funding entitlement was available only for a limited period, which, when also taking into account the prolonged procurement process required to be followed and the lengthy construction period, effectively required the project to be re-tendered quickly. To re-tender, the Council required good title to the existing assets to pass on to the successful bidder – to run the re-tendering without knowing whether the Council could pass good title to the assets would be ‘commercially hopeless’.

In addition, the Council contended that rapid retendering would allow the revised project to be included in the regional waste strategy attracting additional funding support from the regional government, an opportunity that would be lost with delay.

The bank argued that the balance of advantage was against the exercise by the court of its discretion to order a sale. The bank should be allowed to choose the time at which the equipment was sold and to conduct the sale process in the manner it considered most likely to achieve the best price. In addition, the bank argued that the availability of compensation for a wrongful sale was not an adequate remedy, as ascertaining the compensation would be problematic.

The court decided that in these circumstances a quick sale was desirable, and that the damage the Council would suffer by delay, which could not be compensated financially, outweighed the bank’s concerns. An order for sale should be made subject to the court being satisfied that the terms of the order provided adequate protection to the bank’s position. Interestingly, the court did allow the bank to bid in the auction of the equipment but gave the Council the right to apply to court to have the bid disallowed if it could be shown that the bank had not made a genuine bid at market value (but was seeking a collateral advantage by using its bid in a way that damaged the ability of the Council to re-tender the project successfully).

Security enforcement limited over assests required for statutory duties

The enforcement of security over assets owned by a public body is always subject to the discretion of the court. The Re Neath Port Talbot case concerns assets owned by a private sector company (ownership of the assets was actually in dispute in the litigation between the bank and the Council, but the rights of ownership of the project company were accepted for the purposes of the interim application). However, it is worth remembering that a line of 19th century cases holds that the enforcement of security will not be allowed to interfere with the performance by public bodies of their statutory duties.

In these 19th century cases (the leading ones being Gardner v London Chatham and Dover Railway Company (No.1), In re Bishop’s Waltham Railway Company and Potts v The Warwickshire and Birmingham Canal Navigation Company), the principle was established that there are limitations on a public body’s ability to dispose of assets required for the discharge of its statutory duties – duties inconsistent with the complete surrender of possession of the assets.

In these cases, the courts have limited enforcement of security over such public assets. For example, in Gardner security was limited to a right to the earnings from the relevant railway assets, and the court exercised its discretion to prevent any exercise of any right to possession, power of sale or sale proceeds (which would normally be available to a secured creditor), enabling the relevant public body to continue to discharge its statutory function.

In Re Neath Port Talbot, there was a dispute over the validity of the bank’s security and the chargor was taken to be the private project company so that the principle in the old cases did not arise. However, when public bodies are involved, it is important to remember that creditors’ rights may be affected by the existence of statutory functions imposed on these bodies – either directly, where assets of the public body needed for the performance of such functions are involved, or indirectly because courts, in any dispute, will place weight on the need to assist the public body in performing those functions.