The High Court on in-house arrangements and Teckal

When is an in-house arrangement a Teckal company? David Hansom looks at an important High Court ruling involving a council and an ALMO.

As more and more new types of structures and delivery models come into the public sector market, it is vitally important to ensure that models are procurement compliant. This may include seeking to structure the arrangement as a so-called Teckal company. Provided all of the conditions are met, this allows the company to be awarded services contracts from its sponsor authority/ies without a procurement process.

The High Court has provided some new helpful (and pro-authority) guidance on Teckal companies in Tachie v Welwyn Hatfield Borough Council [2013].

This case related to an Arms Length Management Company (ALMO) set up by Welwyn Hatfield Borough Council to manage its council housing stock.

ALMOs often also provide wider services alongside the management role back to the authority. Here, the council wanted to outsource its homelessness functions to the ALMO. This was done without a procurement process, justified on the basis that the ALMO was a Teckal company. This classification was challenged as part of a wider claim.

The prevailing opinion prior to the Parking Brixen case (C458/03) was that ALMOs comply with the Teckal exemption ie where the two tests of 'control' and 'function' are met, the law says this simply amounts to an internal reorganisation of how the services are delivered and no contract is awarded between the authority and the Teckal company.

Typically, an ALMO is a company limited by guarantee, with its sole owner being the local authority with a management agreement between the ALMO and the authority.

However, by their very nature, ALMOs (being "arms length") necessarily have a degree of independence from the authority. In particular, often there is a mix of directors on the board including tenants, local authority nominees and independents. Indeed, local authority nominees typically only make up a minority of the board. Whilst this is recognised in the original Government guidance and consultations on ALMOs from as long ago as 2000, it left open the possibility that the control test may not be met in every case.

Here, the Court said that the ALMO met both of the control and function tests. These cases always turn on the detail of the company structure and constitutional documents but, in this case, the Court noted that important factors on control were:

The Council had the power to issue directions to the ALMO on "strategic matters or important issues of policy".

Although, the Articles of the ALMO said that non-authority board members could be appointed, the council retained the express right to remove any such directors at any time.

The authority must have the power to exert control over the ALMO. The Court said that it did not matter that the council had in fact chosen to not exercise this power. This is perhaps at odds with the narrower interpretation in Parking Brixen, where the Court said that for Teckal to apply the local authority must exercise “control similar to that which it exercises over its own departments” over the entity. This point may well be looked at again in future cases.

That the local authority holds all of the share capital in the company will usually (but not always) be indicative of control. The Court said that the same principle applies when one organisation is the sole member of a company limited by guarantee.

Comment

This case provides more helpful guidance on the sometimes tricky issue of Teckal companies. The detailed drafting of the structural documents such as the articles is key, as these will be looked at purposively by the Court in the event of a challenge. The outcome of each case will depend on its own facts.

The forthcoming new procurement Directive will seek to codify the rules on Teckal, which should provide further helpful guidance. The classification of the entity as being outside the procurement rules remains a self assessment on procurement risk, with significant impacts if incorrect.

David Hansom is a partner and head of public sector at Veale Wasbrough Vizards. He can be contacted on 0207 665 0808 orThis email address is being protected from spambots. You need JavaScript enabled to view it..