ECTC Concerns


Lib Dem Councillors standing in a group

Some of the East Cambridgeshire District Council Lib Dem group after being denied the chance to scutinise the Council's trading companies

East Cambridgeshire District Council’s Liberal Democrat Group, consisting of 13 of the 28 councillors on the council, has issued an open letter concerning the governance of the Council’s trading companies, and in particular East Cambs Trading Company Ltd (ECTC).

The published accounts of ECTC disclose losses of £3/4m. We are concerned that the finances of ECTC, its business plans and the governance of the company place both East Cambridgeshire District Council and the residents of East Cambridgeshire at risk of serious financial loss.

On Tuesday 8 October all the councillor members of the company board resigned their positions as directors.

On Thursday 10 October we attended a shareholder meeting hosted by the trading company, prepared with a number of questions to try to gain full reassurance about these matters. Neither the Chairman of the company board nor the Managing Director was present, and the chairman of the council and council officers were unclear as to the status of the meeting and the rules under which it was being run. It subsequently transpired that they simply intended to deliver a number of presentations. This is not scrutiny of the companies, and in view of the lack of clarity about the status of the meeting Liberal Democrats felt it was necessary to leave.

This left us with no option but to raise these concerns directly with the auditors of the company and the auditors of the council. We immediately issued an open letter to both sets of auditors and to the remaining directors of the company.

East Cambridgeshire District Council Liberal Democrat Group Open Letter To: Price Bailey (Auditor East Cambs Trading Company Limited) Ernst & Young (Auditor East Cambridgeshire District Council) Paul Remington – Chairman John Hill – Managing Director Emma Grima – Director and Company Secretary John Elworthy, Archant Ben Hatton, Local Democracy Reporter Dan Barker, Newmarket Journal Hannah Olsson, BBC Radio Cambridgeshire Ben Schofield, BBC Look East 11 October 2019 East Cambs Trading Company Ltd We, the Liberal Democrat Group on East Cambridgeshire District Council, wish to raise concerns as to the risk and governance of East Cambs Trading Company Ltd and its relationship to its only shareholder, East Cambridgeshire District Council (ECDC) and its principal funder, The Cambridgeshire and Peterborough Combined Authority (CPCA). We note with significant concern the recent resignations as Directors of Cllrs Bailey, J Schumann, D Ambrose-Smith and Brown which have left both companies with fewer than the minimum number of Directors. We understand that this means that neither Board can take decisions whilst they remain below the minimum number of Directors. We acknowledge that genuine benefits can arise from the use of trading companies to assist in delivering council services. This is particularly useful in Teckal Compliant Companies. We also acknowledge that Community Land Trusts (CLT) are very useful vehicles to enable community led development of land to provide for such issues as a lack of housing which forces young adults to leave the places they were raised. In the case of ECDC, we have seen that CLTs have too often been used in a manner that abuses the purpose for which they were designed and is focused on the delivery of financial returns for ECDC by channelling these CLT developments into ECTC as “the trading companies are central to the achievement of the Council’s medium term financial strategy and its long term financial sustainability and self-sufficiency”.

ECTC has borrowed significant sums from both ECDC and CPCA, without any of its own capital to aid development. The impact of this is that trading costs have simply absorbed a great deal of the money and the business plan for ECTC acknowledges that it is dependent on securing £2m surplus from the Kennett development in order that it will be able to repay ECDC by March 2021, as set out in the loan agreement. The business plan then excludes Kennett (according to the unnumbered page headed ‘Financial projections – Property and Community Housing’ [27]) and on unnumbered page under the heading ‘Kennett Garden Village’ [25] it states ‘ECTC...is aiming to commence development in 2021’. It is therefore clear that the Kennett project is not expected to deliver in time to repay the £5m loan from ECDC. This places ECDC at risk of default as at March 2021. Even if an extension period was agreed for repayment, there would still be the risk of default if the widespread public and media opposition to Kennett is successful. The ECTC Business Plan also acknowledges that the lack of an up to date Local Plan for ECDC places at risk the business rationale of ECTC as, without a defensible Local Plan, it is likely that commercial developers could step in and develop the land outside the development envelope. Looking at the figures provided by ECTC, it is possible to separate the commercial activities from the housing activities and we see that the housing development activities are making losses and the financial position of ECTC is dependent on the commercial activities. The forecast profit shown in Financial Projections – Property and Community Housing exclude the interest charges. Profit before tax 2016/17 2017/18 2018/19 2019/20 2020/21 TOTAL Commercial 95,423* 147,268* 154,059 160,245 131,589 688,584 Property (501,233) (452,598) 509,863 88,370 (353,407) (709,005) ECTC Total (405,810) (305,330) 663,922 248,615 (221,818) (20,421) *estimates, based on published accounts The existence of risk within a business is a normal part of the operation of commercial activity and also one that enables growth and creativity. It is, however, important that such risk is managed in a manner that minimises the risk to Council tax payers. The governance of such companies needs to be robust and capable of demonstrating a true arms-length position. Advice provided by Anthony Collins Solicitor states that “councils should be conscious of the need to make arrangements with their companies on an arm’s length basis to protect against the risks of appearing anti-competitive and attracting the attentions of the Competition and Markets Authority, or breaching State aid rules.”Grant Thornton also advise that “When allocating board directorships to elected members it is important to ensure that their duties to the council and to the company are clear and that any conflicts of interest are identified. For example, a member may sit on the board of a housing company that may require planning consents that may not be aligned to council priorities.” They also advise that “The local authority is the shareholder in the trading company – and therefore should not have an operational lead role. This can be challenging if the company needs support in its early stages, but freedom and agility are key to allow the company to act commercially and thrive in this environment.” The case of Chandler v Cape plc demonstrates how it is possible to hold the parent to account for issues arising in the subsidiary where the parent company has knowledge. Such knowledge can be acquired from the parent company’s direct interaction with the subsidiary’s operations on site, or by its control of the subsidiary itself. The court created a test to assist future cases. A parent company could be found liable for the acts of its subsidiary if: • The parent and subsidiary share the same business; • The parent knew or ought to have had ‘superior’ knowledge of the dangers of certain practices; • The parent knew or ought to have known the subsidiary’s practices were unsafe; • The parent knew or ought to have foreseen that the subsidiary or its employees would rely on that ‘superior’ knowledge to protect the employees. Separate legal entities may not therefore be as separate as envisaged and parent companies should be aware of the extent to which they interact or control their subsidiaries. In the case of ECTC, we see that some of the directors and proposed board observers have significant conflicts of interest: ECTC ECDC CPCA John Hill Managing Director and Board Member* Chief Executive Joint Chief Executive Emma Grima Director, Board Member* and Company Secretary Director Commercial Project Director Cllr Anna Bailey FORMER Board Member* and proposed Board Observer Leader of the Council Board Member Cllr David Ambrose Smith FORMER Board Member* Chair of Operational Services Committee Cllr David Brown Proposed Board Observer Chair of Finance and Assets Committee *‘Board Member’ is recorded at Companies House as Directors of ECTC

The above table includes changes to be proposed at the Full Council meeting on 17th October 2019 along with publicised resignations, which have not currently been lodged with Companies House. We note that these proposed changes would remove Councillors from the Board but appoint them as observers who can speak but not vote. Rather than removing any conflicts, this would make possible conflicts even more difficult to manage, as the observer roles are not clearly defined. We are concerned that the above could be perceived as demonstrating a lack of independence. We are also concerned that this places the perception of the independence of the Directors and of ECDC at risk due to these conflicts: • CPCA and ECDC are dependent on the success of ECTC to repay loans they have advanced. • ECTC is failing to make money from its property trading activities, the activities for which the loans were advanced. • ECDC is dependent on the success of ECTC to meet its Medium Term Financial Strategy. • ECTC is dependent on the success of developments such as the Kennett CLT. • ECDC may not be seen to be independent in the planning process due to its dependence on the success of ECTC. In view of these issues we request that a detailed examination of the financial affairs of ECTC is carried out as a matter of urgency and that independent legal advice is taken on whether the current structures provide sufficient independence. These reports to be provided to the Finance & Assets Committee by 21 November at the latest, so that they can be considered at the meeting on 28 November. We further request that consideration of the Business Plan and Accounts for ECTC is deferred until these reports are available. The Liberal Democrat Group has been raising concerns since the formation of the first Trading Company. Unfortunately, we do not see evidence that these concerns have been properly addressed. ECTC needs structures and financial management which allow it to deliver high quality affordable and commercial housing which is environmentally sustainable and to deliver an income to ECDC. Yours faithfully Cllr Lorna Dupré on behalf of East Cambridgeshire District Council Liberal Democrat Group

 


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