.

.

.

.

Court of Appeal

LEGAL EAGLE'S COMMENTS    28.08.2015
There is not much to add to the comments that Joel Cayford has made in his article.  Perhaps a couple of points need emphasising.

Protected transactions and the power to rate
The protected transaction provisions in the LGA state that loan agreements entered into by a local authority are "valid and enforceable" even though the local authority broke the law in entering into the agreements.  The reason is that it is almost impossible to ensure that a local authority ticks every legal box, and to avoid the situation in the UK in the 1990s when some local authorities used their own illegal actions to wriggle out of liability for loans.

The statutory provisions prevent that from happening.  But all they do is allow the bank to sue the council.  They do not create any special powers to secure income to meet the contractual obligations.

The problem is that in recent years councils have taken on more debt, have the power of general competence, are more cavalier in their approach to legal compliance and with the watchdog - the OAG - fast asleep, councils are wandering off the legal path.  Coupled with this, the restrictions on ratepayers being able to object to illegal rates have been largely removed.  So, whilst under the old legislation the banks were pretty well guaranteed that any loan granted to a bank would have to be paid by the ratepayers, the situation has changed and the financial security offered by the legislation to banks is now much narrower.

The MRRA agrees that a council is obliged to repay the debt to the bank, BUT, and it is a very big but, the ratepayer is not party to that contract and cannot be compelled to perform any of the obligations of the contract.  Quite separately, the council has the statutory power to set a rate to finance an activity but it does not have the power to set a rate for an activity which has been declared by the court to be unlawful, which is the situation with EcoCare.

Heath J tried to get around the impasse by suggesting that the protected transaction provisions created an implicit obligation on a council to perform the contract which in turn gave it the implicit right to set a rate to meet that obligation.

Lawyers were left scratching their heads as it was hard to find any evidence of such implicit provisions in the legislation, so in the Court of Appeal, David Goddard (QC for the KDC) went down a different path.  He argued that the because the council is compelled to repay the loan it is a “proper purpose” and the council has an obligation under ss 101 LGA to balance its budget and must therefore be able to raise income from rates or otherwise to meet its proper financial obligations.

He emphasised that the protected transaction is like any other contract of the council and creates binding obligations.

The MRRA does not disagree.  But having a binding obligation to perform a contract under the protected transaction provisions does not empower the council to act unlawfully in raising monies to meet that obligation.  It is certainly desirable to balance the budget but it is implicit in the legislation that when a statutory authority raises income then it must do so prudently, in the best interests of ratepayers, and all actions must be lawful.

Nuclear consequences
Justice Miller was highly concerned at the possible consequences of the KDC being placed into receivership.  At first he used the epithets significant, appalling and catastrophic but by the second day this had expanded to nuclear.  He, and the other judges to some extent, felt that a receiver would have extensive powers to set rates and sell off the assets of the council and virtually run the council.

The reality is far removed.  As Matthew Palme pointed out in his rebuttal presentation at the end, receiverships of local authorities are severely constrained by the legislation.  The council continues to function, health and safety requirements take precedence, a rate may be set to meet the “commitment” under the loan defaulted on, but there is no provision for repayment of principal and limited powers in respect of property and other assets.

The Court was told that the MRRA would prefer an unelected receiver to unelected commissioners.

Another consideration is the political pressure on the bank and the government if the KDC was teetering on the brink.  All sorts of pressures would come into play to make sure that all of those responsible for the Kaipara debacle were obliged to pay their fair share of the debt.

Perhaps the final point of relevance is that clause 15 of the Schedule to the Receivership Act states:

15 Exception in relation to Commissioners and commission
If a Commissioner of a local authority is or has been appointed under section 255 or section 258 of the Local Government Act 2002 or if a commission has been appointed under clause 14 of Schedule 15 of that Act (either before or after the appointment of a receiver in respect of some or all of the assets or rates of that local authority under section 40A or section 40B(1)), the High Court may order that any receiver so appointed may not, until the High Court so orders, exercise any of the rights, powers, and duties of a receiver.

In other words the High Court has control of what actions a receiver takes. 

Again, the MRRA members would prefer to place their trust in the High Court rather than trusting the current commissioners.  At least there would be honesty and accountability, ratepayers would be able to have some input, and all decisions would be in compliance with the law.

Consequences and local authorities
It should also be pointed out that in relation to local authorities any legal action taken by anyone is going to impact on all ratepayers.  If I sue an individual or a company then any award of damages or any costs of litigation comes out of the coffers of that person or entity.  Local authorities are different,  They are transparent in that the only assets that they have come from from other ratepayers, so that any costs defending a case or making a payment awarded by the court impacts on other innocent ratepayers.  These are the unfair consequences that the judges referred to and which they say they are obliged to consider when exercising their discretion.  (Judicial review is discretionary.)

That is the nature of local authorities and this intrinsic unfairness cannot be avoided.  If a council could plead this effect as a reason for not controlling the unlawful acts of a council then the courts would be granting carte blanche for all local authorites to flout the law at will.  Perhaps the solution is to ensure that those who are responsible for illegal activities are compelled to foot the bill themselves.

Whilst the judges concentrated on the dire effects of receivership on all ratepayers, thankfully put into context by Matthew Palmer, the real issue is the dire effect on current ratepayers, and several generations of ratepayers, of the massive illegal debts that they might be forced to bear that were brought about by the negligence, incompetence and illegal actions of others.