Auditor criticises council for trading with dormant company, failing to get legal advice early enough

Herefordshire Council has been criticised by its external auditor for trading with a dormant company to which it paid substantial sums.

The report by auditor Grant Thornton said legal advice was not obtained early enough on the matter.

It said: “We consider the council’s contract appointment and management arrangements include a significant weakness, as it did not establish the validity of contracting and continuing to trade with a company that was dormant or otherwise non-trading from a formal perspective.”

Herefordshire found in January 2021 that Balfour Beatty Living Places (BBLP) was dormant but this was not reported to councillors and no action was taken or legal advice sought to understand the implications of this until auditors raised queries in March 2022.

Legal advice then highlighted “concerns over the validity of this arrangement” and the increased risk to which the council was exposed. The matter is now being resolved by officers.

The audit report said BBLP was dormant even when the original contract was awarded in 2013.

Grant Thornton said it reviewed the council’s contract procedure rules and found these “did not cover the evaluation of tenders and the range of due diligence required of potential suppliers”.

Its report noted: “In our experience, due diligence of potential suppliers would include a review of accounts held at Companies House and would have established if a potential supplier was operating through a dormant company.”

Grant Thornton recommended that the council should seek to regularise its contractual arrangements for its public realm contract with BBLP and ensure it:

• obtains further legal advice beyond that already obtained to clarify the validity of the current contract arrangements;
• fully understands the implications of contracting and paying a dormant company;
• undertakes appropriate due diligence before engaging in any major contracts; and 
• reviews existing contracts to ensure they are operating within appropriate legal standards and internal policies.

The contract includes highways, public rights of way, parks and open spaces, street cleaning and street lighting.

Balfour Beatty in 2013 stated that the 10-year contract was worth £200m.

A Herefordshire Council spokesperson said: “Balfour Beatty Living Places is an agency company for Balfour Beatty Group Limited. It tendered for and competitively won the Herefordshire Public Realm Contract on this basis. This contract is supported by a full parent company guarantee from Balfour Beatty Group Limited to protect the council’s position.

“The council pays Balfour Beatty group and not a dormant company and can confirm that the council are not fundamentally legally exposed and the contract is not invalidated by these arrangements.”

Mark Smulian