Transformation of Building Control Services Legal Considerations

Transcription

1 Guidance September 2015 Legal Considerations Pioneering Bahrain Construction Public sector Energy Real estate London Tax IT Dubai Manchester Inf Connecting Knowledge Pragmatic Malaysia Exeter Thought leadership Housing Agile Creative Connecting Private equity Local government Manchester Environment Focused Islamic finance Projects Abu Dhabi Corporate finance Passionate Team work Employment Regulation Procurement Expertise Specialist Planning Investment Committed Delivery IT Governance IP Corporate Infrastructure Value Development Private wealth Oman Governance Birmingham Corporate finance C Dynamic Pensions Dispute resolution Insight Banking and finance Arbitration Diverse Regeneration Care Communication 3 Bunhill Row London EC1Y 8YZ t +44 (0) f +44 (0) Contact Helen Randall Partner d +44 (0) e hrandall@trowers.com

2 Contents Page Content 3 Introduction 4 The models available 6 Local authority powers 9 Public procurement 11 Company law 13 Taxation 15 Employment 17 Pensions 19 State aid 20 Governance 21 Required documentation 22 Other issues to bear in mind 23 What can happen if an LATC becomes insolvent 24 Why you need to get it right 25 Jargon buster 26 Contact us Trowers & Hamlins LLP is a limited liability partnership registered in England and Wales with registered number OC whose registered office is at 3 Bunhill Row, London EC1Y 8YZ. Trowers & Hamlins LLP is authorised and regulated by the Solicitors Regulation Authority. The word partner is used to refer to a member of Trowers & Hamlins LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Trowers & Hamlins LLP s affiliated undertakings. A list of the members of Trowers & Hamlins LLP together with those nonmembers who are designated as partners is open to inspection at the registered office. Trowers & Hamlins LLP has taken all reasonable precautions to ensure that information contained in this document is accurate, but stresses that the content is not intended to be legally comprehensive. Trowers & Hamlins LLP recommends that no action be taken on matters covered in this document without taking full legal advice. Copyright Trowers & Hamlins LLP September 2015 All Rights Reserved. This document remains the property of Trowers & Hamlins LLP. No part of this document may be reproduced in any format without the express written consent of Trowers & Hamlins LLP.

3 Introduction Trowers & Hamlins is delighted to support LABC's work on the potential options to transform local authority building control services to respond to the expectation on local authorities to find innovative ways of delivering services given increasing financial pressures as a result of budget cuts. This note accompanies other guidance commissioned by LABC, including the Outline Business Case prepared by iese, and follows the LABC Policy Conference. It supplements our first draft of a sample shareholders agreement for a jointly-owned local authority trading company. We hope that local authorities find this useful in assisting them to understand the key legal considerations involved in establishment of alternative delivery models. If you have any queries or require further advice please contact: Helen Randall Partner d +44 (0) e hrandall@trowers.com THL

4 The models available Building control services differ from most local authority services because they are regulatory services with a statutory basis which dates back to the last century. The building control service may not have a high profile within some authorities but the decisions made by building control professionals do affect citizens' lives and livelihoods. There are also now concerns about the resilience of the service, recruiting the next generation of building control professionals together with the retaining and building of market share. We have been advising over 220 local authorities on the establishment of alternative delivery models for over 35 years and on alternative models for the delivery of building control services for over a decade. The creation of an alternative delivery model for building control involves a number of legal ramifications including legal powers ("vires"), public procurement, corporate law, tax and employment law. An overview of the alternative models In-house provision Shared services Local authority trading companies (LATCs) The 'traditional' model of delivery in which the local authority directly provides services using its own staff. The service is built into the local authority's internal decision-making and delegation processes. A local authority can charge for certain building control functions but may not generally trade with the public without setting up a company. Two or more local authorities working together. There are a number of models available under the Local Government Act 1972, including the delegation of functions, the establishment of joint committees, and the sharing of staff. Sharing services can help achieve economies of scale, but local authorities generally remain individually responsible for ensuring that their functions are carried out properly. A company set up by one or more local authorities to carry out activities on their behalf. Often but not exclusively an LATC used to enable activities to be carried out commercially. LATCs may be established as companies limited by guarantee or companies limited by shares, with the latter more usual where profit generation or incoming new shareholders are expected, or where it is desired to leave flexibility for either in due course. THL

5 The LATC model can accommodate numerous variants such as a community interest company, an employee mutual, a community benefit society, a co-operative benefit society, a charitable incorporated organisation, a charity and a joint venture with a private sector interest or contractor (to name just a few options). The suitability of the particular form of corporate vehicle will depend on a number of factors including policy and commercial objectives and who will be investing in the LATC. As with the LABC model Outline Business Case, the remainder of this note focuses on the LATC as a company limited by shares as the exemplar model. THL

6 Local authority powers Local authorities are statutory bodies created by Acts of Parliament. Therefore, unlike individuals or commercial businesses, local authorities may act only in ways which Parliament permits. Behaving in a way which is not authorised by legislation can lead to decisions and actions of local authorities being vulnerable to legal challenge by the individual or business affected by the decision, by external auditors or by any aggrieved party who has a right to do so if a decision is outside the authority's powers. This is the "ultra vires" rule - see section 13 for more detail. Over the years, this led to much confusion about what local authorities could, or could not, do to transform their services, and discouraged local authority innovation. In recent times, there have therefore been moves to give local authorities much more general powers to use as they choose. The general power of competence This culminated in the Localism Act 2011, 'general power of competence', which was intended to give local authorities similar broad powers as individuals and to allow them to carry out any lawful activity. Much has been written about the general power of competence and the new opportunities it brings. However, unfortunately it does not yet give authorities complete freedom, and it is risky to treat it as an entire solution to the problem of ultra vires. There are three important provisos: 1 If a local authority is using the new general power to do something for commercial purposes, it must do so through a company. This means that, unless local authorities have a separate power to charge for services contained in another piece of legislation, any trading activity should be carried out through a company. This ensures that the potential risks involved with trading activity is isolated from the local authority's core activities and that the trading activities compete fairly with the private sector by being carried out by a tax-paying organisation. More detail on company law and taxation follows in sections 5 and 6 below. THL

7 2 A local authority cannot carry out an activity commercially using the general power if it is something that the authority is required to provide as part of its statutory duties. This prevents local authorities converting required statutory duties to the public into commercial activities. Nor may local authorities charge for services using the general power if separate statutory provision has already been prescribed as to how charges should be made: the general power does not allow for those charging schemes to be rewritten. 3 Despite the breadth of the general power, local authorities cannot use the power to circumvent any prohibitions on how they carry out their activity which were introduced before the Localism Act 2011 came into force, i.e. the general power of competence did not repeal previous statutory restrictions on what local authorities could do. What does all this mean for building control? Compulsory core activities Local authorities are under a duty, under section 91 of the Building Act 1984, to ensure that building control laws are applied and enforced in their area. As enforcement in their own area is a legal requirement on local authorities, this cannot be performed for commercial purposes using the general power. Therefore, the enforcement aspects of the regime will remain a function of local authorities to fund and carry out as part of their public service provision. Support activities Support activities to assist a local authority with its enforcement and other compulsory duties may be outsourced to an external party, whether this is a private-sector provider or an alternative delivery vehicle established by one or more local authorities. However, only the services may be outsourced, not the duties themselves. Therefore, the local authority itself remains responsible for ultimate decision-making, and needs to retain enough capacity within its own establishment to make such decisions, even if they are reliant on support and recommendations from an external provider. Chargeable functions and chargeable advice Certain functions connected with applications for building consent, and associated advice, must be provided at a charge under the Building (Local Authority Charges) Regulations 2010 (the Charges Regulations). These Charges Regulations set out how the charging structure for these functions is to be calculated. They require that charges be set with the intention of recovering the cost of THL

8 performing those functions and providing related advice, as precisely as possible. The Charges Regulations do not permit these services to be provided with the intention of generating a profit, and nor should the services be subsidised by general local authority funds. The detail of setting these charges and apportioning shared costs to the regulated functions needs to comply with legal and accounting requirements. With regard to the restrictions on the use of the general power of competence mentioned above, these Charges Regulations have a number of effects. First, because they provide specific permission to charge fees, the requirement to use a company in order to charge these regulated fees does not apply. This is why these chargeable functions may be carried out in-house by local authorities. Secondly, because there are specific rules as to how the fees should be structured, local authorities are not permitted to use the general competence power to create a different charging structure. Thirdly, because the Charges Regulations contain prohibitions on generating a profit (which pre-dated the Localism Act 2011); the general power of competence does not provide a freedom to generate a profit on charges made under the Charges Regulations. As with enforcement support, local authorities may task external parties with providing underlying services, related to applications and advice. Although a local authority must retain control of ultimate decision-making. The Charges Regulations continue to apply, so a local authority cannot currently use an alternative delivery vehicle as a way of generating a profit on providing building control application services within its own local area. Other commercial services A local authority may wish to use the expertise and capacity of its building control team to perform activities which are neither the compulsory core enforcement functions, nor the regulated application services. These might include providing certain consultancy services, or potentially performing 'approved inspector' services outside the boundaries of its administrative area. Local authorities are entitled in principle to use the general power of competence to carry out these activities. However, if they are for commercial purposes such as generating extra revenue, they would need to be carried out within a company rather than in-house. THL

9 Public procurement A local authority wishing to entrust the day-to-day operation of its building control services to an LATC will need to enter into a services contract with the LATC, setting out a specification of the services which that body should provide. The contract would provide for the LATC to be paid by the local authority, whether from its own funds in respect of non-chargeable functions or by passing on the regulated fees from applicants for chargeable functions. The award of services contracts involving payment from local authorities is governed by the Public Contracts Regulations 2015 (the Procurement Regulations). The Procurement Regulations generally require that all contracts over a certain threshold be openly advertised in the Official Journal of the European Union and awarded only after a transparent competition during which all bidders receive equal treatment. Local authorities wishing to award contracts to an LATC without needing to advertise or compete the opportunity must satisfy one of the exemptions in the Procurement Regulations. A failure to advertise a regulated services contract will, unless an exemption applies, leave the contract liable to be declared 'ineffective' by the courts. This causes the arrangements to terminate immediately, however much disruption that might cause. In addition to the ineffectiveness declaration itself, and any damages payable to the competitor bringing the challenge, the local authorities involved would also be required to pay a civil financial penalty for the breach of the procurement regulations. One exemption is known as the Teckal exemption, after the case in which it was first described. Broadly speaking, a local authority can issue a contract to an LATC without having to go through a procurement process if: (a) (b) (c) It controls that LATC in a similar way to that which the authority controls its own departments; If more than 80% of the LATC's activities are performed for the local authority rather than for the open market; and If there is no private-sector ownership of any shares. The Procurement Regulations helpfully go further, and allow an LATC to be jointly owned by a number of local authorities who together share control, so long as the other criteria still apply. This is sometimes known as 'Joint Teckal' and would form the basis of a model in which several local authorities all entered into service contracts with a jointly owned LATC that they had set up together. THL

10 The requirement on the LATC to carry out more than 80% of its activities for its controlling local authority or authorities means that income derived from performing true commercial services for third parties cannot exceed 19.99% of its total turnover. If it appears that this threshold is likely to be exceeded, local authorities may wish to consider 'spin out' their commercial services into a separate vehicle which would not be a 'Teckal' body. A further exemption can apply where two local authorities pool their own resources rather than set up a new body. In this arrangement, whilst resources and costs may be shared, the arrangement cannot be used for one authority to trade its services to the other authority for a profit. Will the new body have to follow the procurement rules in awarding its supply contracts? It is important to remember that a body created by local authorities (particularly one which qualifies as a Teckal body) is likely itself to be governed by procurement law. It would therefore have to follow the Procurement Regulations when making purchases for its own requirements. Fortunately, a Teckal body controlled by a single local authority is entitled to make unadvertised direct purchases from its controlling local authority, allowing it to 'buy-back' services such as IT or HR from its parent local authority. The situation is less simple for jointly-owned LATCs, who should seek specialist advice on their procurement law position before making major purchases. THL

11 Company law Under current legal powers, local authorities wishing to trade or act for a commercial purpose must do so through a company. There are a number of different forms of company, but the most common form is the private company limited by shares. This type of company is well-suited to a business plan which involves trading for profit. It is a basic tenet of company law that the directors of a company have primary duty to the company to run it in the interests of the company, and not necessarily in the interests of any individual shareholders. This must be recognised by local authorities when becoming a shareholder in a company. Notwithstanding the concept of "control" as understood to satisfy the first limb of the Teckal exemption, the directors are obliged to run the LATC as they see fit. That raises a potential but real area for conflicts of interest in connection with their responsibilities to the nominating local authority, especially if directors are also elected members. That is not to say that the shareholders do not have rights. If they are dissatisfied with the way the LATC is run, they may remove the directors, or they may appoint additional directors such that the original directors' influence is diluted. Furthermore, some decisions are likely to be reserved to the shareholders in a shareholders' agreement. We would recommend that a very clear written mandate is given to directors nominated by each local authority so that they understand their role and where conflicts of interests may arise, and that there is a protocol agreed for the managing of those conflicts so that they not only comply with the requirements of the relevant local authority's constitution, but also with the relevant Code of Conduct/Nolan principles. As noted above, a director will owe duties to the LATC. The general statutory duties of directors are now set out in the Companies Act They are: the duty to act within powers (section 171); the duty to promote the success of the LATC (section 172); the duty to exercise independent judgment (section 173); the duty to exercise reasonable care, skill and diligence (section 174); the duty to avoid conflicts of interest (section 175); the duty not to accept benefits from third parties (section 176); and the duty to declare interest in proposed transaction or arrangement (section 177). THL

12 Remedies for breach of these duties may include personal liability for damages or compensation where the LATC has suffered a loss, restoration of the LATC's property, a liability to account of profits, or rescission of a contract where the director has failed to disclose his or her interest. In addition to the duties summarised above, directors are subject to duties to keep accounting records, to file accounts and returns at Companies House and to other duties arising from insolvency and health & safety law. Directors should ensure that they fully understand the duties that apply to them and the terms of any insurance or indemnity that may be available to them in the event of any liabilities arising. It is recommended that the directors undertake specific training to equip them with a complete understanding of their legal responsibilities before they assume office. Holding company Authorities may wish to consider using a group corporate structure with a holding company. This can involve separate subsidiaries such as a commercial company trading in consultancy services and a company carrying out public functions only for its parent authorities. A group company structure can be helpful to ensure operation in compliance with the overriding objective and maintenance of the Teckal exemption. The structure may initially appear complex but in fact can operate in a streamlined way and some of its advantages are that it provides more flexibility for the future for example, increased external trading, deployment of staff across different activities and the ability to trade in other services. The structure is illustrated in the diagram below. S101 - co-operation LA1 LA2 LA3 Other LAs S/H S/H S/H Supply BC services Teckal Co S/H HoldCo S/H Trading Co Sell services Other customers THL

13 Taxation Local authorities enjoy a beneficial VAT position, enabling them to recover VAT in situations that other taxpayers could not and also benefit from exemption from corporation tax. An LATC would not enjoy either of these benefits. In relation to VAT it is important to ensure not only that, so far as possible, all VAT incurred is recoverable from HMRC but also that VAT is properly charged and accounted for where due. This means that it is important to analyse what supplies are being made to and by the LATC, such as in relation to the provision of staff, back office functions and office space as well the provision of building control services themselves. If the local authority were to provide staff to the LATC, for example, the different methods of providing staff, such as by secondment, can change the VAT treatment. While it may be possible to VAT group a local authority and an LATC, we would generally not expect this to be desirable to the local authority and would not recommend such a course of action. It may be possible to set up an LATC which is owned by more than one local authority in a way which means that it falls within the "shared services exemption" from VAT. In these circumstances, however, obtaining the benefit of this exemption could actually increase the overall VAT costs and therefore it would be preferable to ensure that the exemption was not actually available. It is important that the VAT position is properly understood as a failure to account for VAT by either the LATC or the local authority can result in interest and penalties. As the rate of VAT is 20% it will be important for both the LATC and the local authority to avoid any VAT inefficiencies. In relation to corporation tax, in the absence of agreeing a special tax treatment for the LATC (as happened with local authorities and their Arms' Length Management Organisations), the starting point is that the LATC would be liable to tax on its profits and, due to the application of transfer pricing rules, HMRC may expect the LATC to provide its services on arms' length pricing, which may result in a larger taxable profit being made than is anticipated when the structure is being set up. This is an evolving area and we suggest specialist legal advice is sought if considered an issue. Again, interest and penalties can be imposed by HMRC if corporation tax is not properly accounted for and therefore it will be important for the LATC to receive corporation tax advice. It is likely to be more corporation tax efficient for the LATC to be funded by way of debt rather than equity although specific advice should be sought on this aspect. To the extent that the LATC obtains any interest in land, such as a lease of office space, then stamp duty land tax will become a consideration. If the land is acquired from the local authority parent then the LATC may be able to claim group relief against that tax liability if it is a company THL

14 limited by shares, but not if it is limited by guarantee. Again, specific SDLT advice should be taken in order to ensure any available exemptions or reliefs are utilised and that the LATC's SDLT obligations are fully complied with in order to avoid interest and penalties. Whilst the above comments are high level, limited in scope and only relate to LATCs, they indicate the importance of obtaining specific advice in setting up any alternative delivery model in order to make the most of tax efficiencies whilst remaining compliant with the overriding objective and procurement law. THL

15 Employment Where a service or function is transferring to the new subsidiary, the parties must consider the effect of the Transfer of Undertakings (Protection of Employment) Regulations 2006, as amended (TUPE). TUPE will apply in most cases to transfer all employees who are "assigned" to the service which is transferring to the LATC. TUPE applies as a matter of law and the new entity will inherit all those assigned employees along with all their employment rights, liabilities and contractual terms and conditions. Normally the authorities will be expected to indemnify the LATC for the liabilities it will inherit. These will need careful drafting given the potential financial exposure to the local authorities and the practical and legal risks which the LATC will inherit in taking on a large public sector workforce. There are alternative models to TUPE, which authorities may wish to consider, for example where there are: functions or roles which must, as a matter of law, be performed by an officer or employee of the local authority; roles which the local authority wishes to retain in its employment; and/or liabilities which the local authority wishes to protect the LATC from on a commercial basis. Alternative models include secondment, the retention of employment model, joint employment and dual employment. The parties should seek separate advice on these models if any of the above circumstances are likely to apply or there are other concerns about TUPE. If the alternative model is not correctly set up, TUPE could apply automatically as a matter of statute leaving both the local authorities and the LATC exposed to unexpected employment risks. Information and consultation Both the authority and the LATC as employers will have responsibilities to inform and consult the "appropriate representatives" of the employees affected by TUPE. The appropriate representatives will normally be the recognised trade union. It is normal practice, but not a legal requirement, for the two employers to co-operate in conduct of the TUPE consultation. The transferor employer must notify the representatives of the fact of the transfer and the implications for the employees. Both employers must notify the other employer of any "measures" they envisage and must consult about their own measures. There is no obligation on either employer to consult about the other's measures. This is commonly misunderstood. There is a procedure in TUPE for the transferee to follow if it wishes to engage in pre-transfer consultation. The procedure only applies where section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992 applies, which is the requirement for collective redundancy THL

16 consultation. The employers should seek separate advice if wishing to use that procedure because there are particular conditions with which the parties must comply. The transferor must provide the transferee with the Employee Liability Information about the transferring employees at least 28 days before the transfer. Restructures and changes to terms and conditions Under TUPE, employees are protected from dismissals and changes to their contractual terms and conditions which happen because of the transfer. Employers wanting to make changes and/or implement dismissal must have: A reason which is not the transfer; and/or An economic, technical or organisational reason entailing changes in the workforce (this is commonly called "an ETO reason"). For changes to terms and conditions, the employer may also require the agreement of the employees and/or an appropriate variation clause in the contracts of employment. Employers will also need to consult with the employees and their representatives, as well as following the appropriate redundancy or managing change policy and procedures. There are separate rules under TUPE which apply to collective agreements. It is essential that any proposed dismissals and/or changes to terms and conditions (including harmonisation) affecting employees under TUPE must be the subject of separate, legally privileged advice given the risk that otherwise the dismissals are automatically unfair and the changes to terms are invalid. There are technical legal requirements for both the business case and the individual and collective consultation requirements. These require early consideration and the employers will need time to ensure a full and fair consultation process. In our experience, without proper planning, there can be unrealistic expectations about the speed with which a new delivery vehicle can move towards more commercial employment policies and procedures unless the implications under TUPE have been fully considered beforehand. THL

17 Pensions Any potential transfer of staff from a local authority tends to require careful consideration of pension matters. There will almost inevitably be a need to ensure that an LATC will be able to continue to offer access for transferring staff to the Local Government Pension Scheme (LGPS). LGPS participation and the LATC The Local Government Pension Scheme Regulations 2013 (the LGPS Regulations) specify the criteria for participation as a scheme employer under the relevant LGPS fund. The LATC may be able to secure participation in the LGPS as either a designated body or an admission body. The two tests are set out below. Designated Body This is a body falling within Part 2 of Schedule 2 of the LGPS Regulations. A designated body employer has the power to designate which of its employees may join the LGPS. A company "connected with" a local authority is capable of being a designated body. Admission Body An employer can become admitted to the LGPS where it is either: a body that provides a service to an LGPS employer by means of a contract and satisfies the requirements of the LGPS Regulations. This body can participate in the LGPS fund by an admission agreement approved by the pensions committee of the Fund. The admitted body may be required to provide an indemnity bond as determined by the LGPS fund actuary; or a body providing a public service (not for gain) with sufficient links to an LGPS employer to have a community of interest. In order for the LATC to participate as a Designated Body, it would need to satisfy the definition of 'a company' under the LGPS Regulations. It would be a matter for the pensions services team of the relevant LGPS fund and the local authority to determine whether the LATC could be a Designated Body. A successful application THL

18 would depend on a 'connected with' test being met. A range of funding considerations and ancillary implications will arise depending upon whether the LATC can be deemed to be a "Designated Body" or an "Admission Body". This in turn can impact the future employer contribution rate payable by the LATC. Ascertaining the correct status for the LATC can have significant ramifications particularly where shared service arrangements are entered into and therefore specialist advice should be obtained. When the LATC ceases to be a scheme employer for the purposes of the LGPS Regulations and the assets in the fund attributable to the LATC are insufficient to meet its liabilities, then the LATC will be obliged to make a payment to the fund equal to any pension deficit calculated. There are number of additional issues for the LATC to consider where LGPS participation is secured as an admission body. Relevant issues include provision of a pension bond and admission agreements for each service contract entered into with a local authority. THL

19 State aid State aid is a particular concern if the LATC is to trade or compete on the market with private sector business, and specialist legal advice should be sought to prevent aid to the LATC being at risk of challenge as unlawful. State aid is the use of public funds in support of particular businesses. It is generally unlawful under EU law and, if the European Commission finds that it has been provided without a lawful reason, it can order that the aid be repaid immediately with interest, even if that causes the recipient to become insolvent. State aid does not just arise where there is a grant, it can also arise with other forms of financial assistance such as loans, providing accommodation, paying more than the market rate for services provided to the local authority or charging less than market rates for goods and services provided by the public sector to the LATC. Certain exemptions apply which can mean the aid would not be regarded as unlawful. In our experience it is helpful to scope the potential exemptions at the business planning stage. THL

20 Governance Most alternative delivery models involve the delegation of some elements of day-to-day activities to others, whether that is an LATC, another local authority in a shared services arrangement, or a commercial outsourcing provider. The freedom to make decisions with agility and a commercial focus can be a key factor in the decision to use such models. Nevertheless, local authorities must consider carefully how decisions are to be made and may later be scrutinised. As noted above, local authorities cannot delegate entire responsibility for exercise of their statutory functions. Although, they can ask other bodies for help in performing tasks to support those functions. Therefore, ultimate decision-making structures and capabilities must remain within each local authority for these services, with the LATC confined to carrying out the preparatory work to allow those decisions to be made. Local authorities will wish to carefully consider which tasks should be entrusted to the LATC, how those tasks are to be performed, how budgets are to be managed, and how the LATC should report on its activities to its parent organisations. This level of supervision should first be decided within the local authorities and tends to involve adjustments to the standard scheme of delegation. The requirements on the LATC may be contained within its services contract and within its constitutional documents such as its articles of association and a shareholders agreement (which can reserve certain important decisions for shareholder approval) and the documentation such as the Business Case and reports to elected members evidencing the decision-making process towards establishing the LATC should be consistent with the legal documents. The level of control required by local authorities requires careful consideration, balancing the rationale for using a separate body with the need to maintain democratic oversight, accountability and financial controls. Furthermore, a degree of control is required in order for the LATC to remain a Teckal body able to take on work under services contracts without competing in a procurement process. THL

21 Required documentation The following is an overview of the documentation that in our experience is usually required to establish an LATC to deliver building control services: Local authority decision-making documentation (e.g. cabinet reports and resolutions) Charging scheme Business Case (to be agreed with other local authorities for joint arrangements) which will need to comply with government guidance and be framed in such a way so as not to give rise to potential constructive dismissal claims from affected employees. Service specification Services contract Articles of association for LATC Shareholders agreement for LATC (if joint arrangements with other local authorities) Other ancillary agreements (accommodation leases, support services buy-back agreements and others) Loan agreements Employee documentation (including TUPE requirements, admission agreements for LGPS continuation, secondment agreements) Director and shareholder mandates and director indemnities Documents should be carefully drafted to be consistent and thus prevent the potential for dispute, invalidity or grounds for legal challenge. THL

22 Other issues to bear in mind Local authorities may wish to carry out a skills audit to ensure that they will have the necessary expertise and capacity to supervise building control functions, especially after the transfer of most relevant staff to the LATC. Lawyers assisting authorities to undertake this process will need to apply experience of [ ] the specific legislation applicable to building control, vires, procurement, company and corporate law, tax, employment law, pensions and state aid and understand how these regimes interact with each other and the commercial issues affecting trading companies. Local authorities should also consider their intended duration of the new arrangements. Exiting from LATC or shared service arrangements is rarely straightforward, especially if multiple local authorities are involved. For example, it is unlikely that a local authority would receive the same cohort of staff back from the LATC through another TUPE transfer, as staff are likely to be allocated across authority boundaries. The withdrawal of one local authority will need careful negotiation with other authorities, given the investment by each party in the LATC and the reduction of capacity. THL

23 What can happen if an LATC becomes insolvent? As with any entity, an LATC can become insolvent if cannot pay its debts when due, i.e. it has insufficient income to meet its expenditure. Businesses can fail due to cash flow difficulties because income from their customers does not come into the business bank account quickly enough to meet the business's outgoings. LATCs which are dependent on winning business from customers will need to ensure the cash flow targets in their business plan will be achievable. As an LATC is a limited liability company, its shareholding local authorities are not themselves directly responsible for the debts of the LATC if it becomes insolvent unless the authority has indemnified or guaranteed the LATC. However, the collapse or failure of an LATC is likely to cause reputational harm to the local authorities involved and additional cost to bring the service back in house or to procure a different provider. The directors of an insolvent LATC may incur personal liability if they contributed to the reasons for insolvency either through not complying with their duties as directors or through allowing the LATC to continue to trade. Many companies take out directors indemnity insurance which covers some (but not all) of these circumstances. If an LATC became insolvent, its assets would be managed by an insolvency practitioner: either an administrator, who operates the business in the hope of achieving a better outcome, or a liquidator who arranges for the sale of assets to raise funds for creditors. In either of these situations it is likely that a local authority would terminate its services contract with the LATC, and the LATC would cease to comply with the Teckal exemption. Appropriate termination rights should therefore be included in the documentation. Until the LATC has an established trading history, parties dealing with the LATC might ask its shareholding local authorities to agree to guarantee its debts. Specialist advice should be taken before doing so, as such a guarantee may breach local authorities powers and might not constitute unlawful state aid. THL

24 Why is it important to get it right? The use of alternative delivery vehicles can sometimes be controversial, with some elected members, citizens, trade unions and other interest groups viewing the arrangements as akin to privatisation and private sector businesses concerned that an LATC will enjoy an unfair competitive advantage. Challenges to proposals could take the form of judicial review actions claiming that the authority which established the vehicle has acted ultra vires. If arrangements are found to be ultra vires, the court can rule that they have no legal effect, damages may be payable to parties who have suffered a loss and the authority will be liable for the challenger's legal costs. Similar outcomes may arise through challenges under procurement or state aid law. Local authority elected members and officers should also be aware that the responsibility for the proper and lawful performance of building control services remains with the authority whatever external delivery structure is established, meaning that it is the reputation of the local authority that is in jeopardy in the event of a failure. Careful consideration at the planning stage together with a sensible governance structure that balances supervision with commercial freedom is in our experience vital to reduce this risk. Legal actions can also be brought by the authority's external auditor, employees, trade unions, interest groups or any other aggrieved party who can demonstrate to a court that they have sufficient interest. Of course, each local authority is unique and the law changes on a daily basis, so please note this guide is a general overview of the principal legal issues which from experience tend to arise but should not be relied upon as a definitive and comprehensive statement of all legal issues that might apply to any particular proposal. THL

25 Jargon buster Term Definition Company A separate organisation set up under the Companies Act 2006 and registered at Companies House. Companies are owned by their shareholders and managed by their directors. Charges Regulations The Building (Local Authority Charges) Regulations These permit and require local authorities to charge for certain building control activities, but impose strict rules on the level of fees chargeable. directors The board members of a company who are legally responsible for managing the company in its best interests. general power The general power of competence in the Localism Act The general power gives local authorities much wider powers than they previously held, but it is subject to important restrictions, set out in section 2 of this guide. LATC Local Authority Trading Company. A company set up and owned by one or more local authorities to carry out trading activity. LGPS Local Government Pension Scheme shareholders The owners of a company. Shareholders often appoint directors but do not themselves directly manage the day-to-day affairs of the company. Shareholders who jointly own a company may enter into a shareholders' agreement setting out their expectations for how the company should operate. state aid The use of public money to support an economic undertaking. State aid is generally unlawful unless permission is obtained from the European Commission or an exemption applies. Teckal A procurement case in which the court decided that public bodies could, in some circumstances, grant contracts to their subsidiaries without advertising them first, if they meet certain conditions. TUPE The Transfer of Undertakings (Protection of Employment) Regulations TUPE often applies when a service transfers to a new organisation and in most cases transfers employees assigned to that service to the new organisation. ultra vires A decision or act which is outside of the powers given to local authorities by Parliament. Acts which are ultra vires can be declared void in court. THL

26 Contact us If you have any queries or require further advice please contact: Helen Randall Partner d +44 (0) e hrandall@trowers.com September 2015 Trowers & Hamlins THL