Loan to Wholly Owned Company

I've noticed in some Council reports that

- Companies wholly owned by the council are being set up
- That councils are loaning £Xm to the company at a market rate
- That the councils are borrowing from PWLB to fund this loan to the company

CIPFA's guidance on this suggests that a council [u]can't[/u] borrow to lend on to the company:

[i]The council can invest by providing finance to a company, but a council does not have power to borrow for this kind of investment. It must therefore finance this investment from general fund reserves. Borrowing powers are in Section 1 of the Local Government Act 2003.[/i]

If the council is able to do this through PWLB borrowing is it also the case that the repayment of the loan by the company must be recognised as a capital receipt?

  • Depends on the purpose for the initial loan, i.e. is the company using it for revenue or capital purposes? If capital then the council issuing the loan would classify the loan as capital expenditure (per capital finance regs) and any repayments would be capital receipts. If revenue (e.g. a cashflow type loan) then repayments would just write down the loan debtor.

    What CIPFA guidance are you quoting? If some councils have lent money to their wholly owned companies I would have assumed they had sought legal guidance to confirm they could do this.
  • What if the loan is to a joint venture can PWLB borrowing be used for that?