Tackling finance leases

School building Stock 000007464497XSmall 146x219Mis-sold finance leases for IT equipment and the like can leave schools with huge debts. Alex Kynoch sets out what they and local authorities can do about the problem.

BBC’s Panorama recently reported on the mis-selling of IT equipment to schools throughout the country by unscrupulous suppliers. Schools are encouraged to enter into lease agreements at prices significantly in excess of the equipment’s true value (often 10 to 20 times the true value) but the supplier agrees to assist the school with repayments.

The counterparties for the leases are finance companies rather than the suppliers, so when suppliers stop trading or refuse to make the promised contributions schools are left owing significant sums (sometimes hundreds of thousands of pounds) to finance companies.

To compound the issue, in some cases suppliers will convince schools to ‘roll up’ existing leases into new leases. Suppliers will offer to settle the outstanding sums and consolidate the debt into the new lease arrangement. Whilst usually the pre-existing debts would be settled we have experienced situations where they were not and schools find themselves liable for repayments under both the old and new leases.

The level of debt often means that schools are unable to meet the payments without the supplier’s contribution. When maintained schools are unable to repay their debts this leaves the local authority with little choice but to step in to resolve the issue. Even if only a small number of schools succumb to these schemes local authorities can find themselves owing millions of pounds to finance companies. Given that these companies are often willing to litigate to recover outstanding repayments this represents a significant risk.

So what options are open to schools and local authorities who find themselves in this situation?

Public law

As public bodies, maintained schools and local authorities are often able to rely on a number of public law arguments. Chief among these is that entering into the leases was ultra vires – i.e. outside the school’s power. If these leases are ultra vires then it is as if they have never been entered into and thus they are void and the sums paid by the school may be repayable, subject to a deduction for the fair use of the equipment. Most local authorities’ financial schemes of delegation prohibit schools from entering into high value contracts without obtaining a number of quotes or running a full procurement exercise through the local authority. A failure to comply with these requirements may render the lease ultra vires.

A further argument is that the cashback arrangements entered into by the school constitute borrowing without approval (prohibited by the Education Act 2002). Again this may render the leases ultra vires, particularly if the supplier is acting as agent of the finance company.

Finally it is arguable that the schools’ actions were ultra vires as the terms of the leases were so onerous that no reasonable public body would have entered into them and thus the Governing Body has acted in a way which is Wednesbury unreasonable.

Private law

One approach is to argue that the suppliers’ explanations of the scheme amounted to a fraudulent or negligent misrepresentation which induced the schools to enter into the contracts, which may allow the contracts to be rescinded. Unfortunately the suppliers involved in these arrangements had a tendency to make their proposals verbally rather than in writing, making it difficult to prove exactly what was said.

Another approach is to sue the supplier for the cashback repayments promised, although clearly this does not remove any repayment liabilities. Unfortunately this can be difficult in practice for two reasons. The first is that cashback offers were rarely made in writing. The second is that the suppliers rarely have sufficient assets to meet their financial obligations. A common approach we have seen is for suppliers to make cashback payments in respect of existing leases using the money received from finance companies for new leases. In effect, the money from new schemes is being used to fund existing schemes in a similar manner to a Ponzi investment scheme. It is common for supplier companies to enter liquidation once the cashback liabilities outstrip their incomes, making it very difficult for schools or authorities to recover the sums due.

Clearly local authorities and maintained schools have a number of arguments which can be raised to challenge the validity of these leases. The first stage is identifying which leases entered into by schools are genuine and which are open to challenge. Schools should not be reluctant to seek assistance from their local authorities as the cost of these leases can be ruinous. We have worked with schools who have been forced into making redundancies, clearly impacting the educational provision for pupils. Local authorities should review schools’ spending and look out for any significant quarterly payments or cash deposits. There are still likely to be schools unaware of the risk these leases represent should cashback payments cease. Intervention at an early stage minimises the payments already made under the lease.

The situation is potentially much more serious for academies (who do not have a maintained school’s financial ‘safety net’) where the lease arrangements were entered into after conversion. In such cases the public law arguments are likely to be more difficult to sustain, although much will depend on the facts of the case.

Ultimately these lease arrangements are extremely damaging. Even if liability under the leases can be avoided a vast amount of time and expense will be invested in extracting schools from such arrangements. Local authorities should ensure that schools always take advice on contractual arrangements which look too good to be true - in these cases they were.

Alex Kynoch is a Solicitor at Browne Jacobson LLP. He can be contacted on 0115 976 6511 or by This email address is being protected from spambots. You need JavaScript enabled to view it.