Directors of the special purpose vehicles created for PFI projects should be aware of the steps they need to take ahead of project expiry
Almost 70 of the 500 PFI contracts will end in the next four years and generally involve the assets reverting back into public hands. Typically, PFI deals are structured with a special purpose vehicle (SPV) established to deliver the project, existing solely for the specific project contract.
Managing arrangements for expiry requires early planning, and consideration of the SPV's financial position is critical. When the project contract expires and the project is handed back to the public sector (the authority), the SPV's revenue stream will cease. What are the key practical considerations for SPV directors when the project nears the end of its contractual life?
SPV's financial position
Given the unitary charge/service payments will stop, it is most likely that a SPV will be wound down through a solvent liquidation procedure, known as a members' voluntary liquidation (MVL).
To place the SPV into MVL, its directors are required to make a statutory declaration of solvency that the company will be able to pay all its remaining debts plus interest at the statutory rate (8%) within 12 months. The directors are not required to assert that the company itself is, or will be, "solvent". If the directors have a firm commitment from a third party that it will meet any liabilities that the company cannot discharge from its own resources, they may well be justified in making a declaration and allowing the liquidation to proceed as an MVL.
As a first step, the directors will need to undertake an analysis of the company's financial and contractual position. Steps need to be taken ahead of the expiry of the PFI contract to inquire about the business, dealing and affairs of the SPV and whether it can make such statutory declaration.
Practical issues to consider
When conducting their analysis, the directors should consider the following:
- Identify the SPV's assets, their value and the likely costs of realisation. This should involve a careful review of the financial information available to the SPV and a full inquiry into the dealings of the entity, as well as engagement with the contracts to determine what assets return to the authority for nil value.
- Compile a full list of the SPV's creditors and the amounts owing to them (including amounts not yet due but that will or may fall due in the future, together with any interest).
- Determine what contractual liabilities arise (including contingent ones) in addition to hand back obligations and liabilities such as warranty claims; potential environmental claims; any indemnities given by the SPV; employee claims; liabilities under property leases (including any contingent liabilities as original tenant); or liabilities under any equipment or finance leases. The directors should consider whether it might be possible to agree waivers with any counterparties and seek early termination of agreements.
- Consider whether there is any outstanding litigation against the SPV, or potentially valuable claims against any third parties. The parties can reach a settlement on hand back obligations and financial liabilities. However, the public sector party may need to consider whether or not there is any procurement risk in not upholding the original position in the contract.
- Identify any significant ongoing contracts to which the SPV is a party. Ordinarily these should be novated if the SPV is to be left "clean" at the end of the wind-down. However, for the majority of projects, following expiry of the contract the parties may still have a residual liability for any breach of obligation to be performed before the expiry date of up to six or twelve years.
Tax advice, which is outside of the scope of this Insight, is also very important in MVLs and should be sought as soon as possible when planning one.
Key risks for directors
A director who makes the statutory declaration referred to above without having reasonable grounds for doing so is liable to imprisonment or a fine, or both.
If the debts are not paid or provided for in full within the relevant period and the SPV is subsequently wound up on an insolvent basis, there will be a presumption that the grounds for making the statutory declaration of solvency were unreasonable, which could have adverse implications for the directors.
Directors would be expected to work with the SPV's various advisors, including the proposed liquidator, to form the necessary reasonable opinion as to the firm's affairs. Where the directors have made a thorough, careful and conscientious enquiry, and taken professional advice, they should not expect to be criticised if, for reasons that could not have reasonably been foreseen, the declaration of solvency proves to be incorrect.
Importantly, directors should consider whether the SPV has sufficient cash reserves to fund an orderly run-down, or whether any funds need to be reserved or advanced (and if so, by whom on the basis that the PFI lenders are highly likely to have been paid out well in advance of the expiry date).
To achieve a solvent liquidation where uncertainty remains over the existence of outstanding obligations/liabilities, a holding company (or another entity) may need to provide an indemnity to the SPV and liquidator to cover the liabilities (actual, contingent and otherwise) relating to the SPV, to include contractual obligations. Statutory declarations can be (and commonly are) sworn on the basis that third-party guarantors will meet any late or unascertained claims, or indeed any claims which the company cannot meet. There can be a risk of personal liability on directors should the SPV become insolvent and it is found that the directors did not prepare properly for contingent liabilities.
Unless the company's directors are certain that there are no liabilities (contingent or otherwise), nor any liabilities for which provision has not been made (by indemnity, advances or reserves), the SPV is likely to need to be placed into an insolvent liquidation procedure, known as a creditors' voluntary liquidation (CVL).
Unlike in an MVL, a liquidator appointed in a CVL is under a statutory obligation to investigate and report on the conduct of directors of the company to the Department for Business and Trade, and disqualification proceedings may be taken against any director with an "unfit" report.
Osborne Clarke comment
These issues are relevant to directors of any type of company, but are particularly acute in the context of PFI and the SPV structure given the cliff-edge nature of the contracts and the cessation of the SPV's revenue stream.
With the bulk of PFI contracts expiring from 2025 onwards, preparing for and delivering contract expiry has, understandably, focused on handover and any post-expiry arrangements. For directors, dealing appropriately with the winding-up of the SPV at the end of its life is critical, and early planning alongside professional advisers is key to mitigating risk for directors in that process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.