The use of companies can give local authorities a range of useful opportunities, such as income generation, diverse ways of delivering services and access to additional resources. However, participation in companies should not be at the expense of local authorities fulfilling their roles as public bodies meeting the needs of their communities and should not compromise the ability of individual members and officers to fulfil their responsibilities.
Local authorities which participate in companies will need to nominate individuals to take roles such as company directors. Those individuals will be subject to directors’ duties under the Companies Act 2006 and will also be subject to codes of conduct and will have duties in their capacity as members and officers. This requires understanding of their different roles and careful balance of their duties.
If they achieve an appropriate balance, they will help their local authorities to use companies effectively. If they do not, they risk exposing themselves to sanctions and their local authorities to the risk of challenges over their decision-making.
Local authority officers and members need to take care over a range of issues when they are involved in companies.
• Conflicts of interest. A company director will have a duty to act in the best interests of the company. It would be expected that on many occasions the interests of a company and a local authority participating in it would be compatible. However, directors should be alert to the possibility of conflicts between the company on which they serve and the local authority that nominated them and their own personal interests. They should take steps to avoid any such conflicts arising.
• Local authority decision making. Individuals involved in local authority companies must ensure that their company roles do not compromise their local authority’s potential to take reasonable decisions within its powers. Even if a decision-maker does not have a conflict of interests relating to a particular matter, he or she should consider whether their connection with the company might prevent them approaching a decision with an open mind. In that situation, the decision would be vulnerable to challenge for predetermination.
• Use of information. Local authority members and officers should be aware of the capacity in which they receive information from their local authorities and what this means for their use and disclosure of the information. A lot of local authority information will be available to the public at large because local authorities are expected to be transparent and they have statutory obligations to disclose information on request. However, they have rights to withhold public access to some confidential information. In those circumstances, a local authority might make information available to particular members and officers but subject to particular constraints and restrictions. Anyone who has access to information in such circumstances must ensure that they do not compromise the confidentiality of the information by disclosing it to persons within a company or to others outside the local authority.
• Compliance with codes of conduct. Members and officers must not allow their roles in companies to cause them to act in breach of the codes of conduct of their local authorities when acting in the capacity of members and officers. They should also be aware that codes of conduct are subject to compliance with other legal obligations. They could not use their obligations under the codes of conduct of their authorities as a justification for breaching company law.
These are examples of some of the common issues that arise when local authority member and officers take on roles in companies but there is potential for many issues to arise. Attention to the risks involved with the various issues should enable members and officers to achieve an appropriate balance between their roles.
Tiffany Cloynes is partner and Martyn Davies is senior associate at Geldards.