The E11 BID Co. and its debts: the evidence

Over recent years, the E11 BID Co. has regularly been in the news, mainly for the wrong reasons.

The latest, and most unsavoury episode, saw LBWF, operating on behalf of the E11 BID Co., take local Leytonstone businesses to court, gain a successful adjudication, and then call in the bailiffs, with the Waltham Forest Guardian reporting as follows:

http://www.guardian-series.co.uk/news/13506732.Bailiffs_try_to_remove_chairs_and_tables_from_popular_restaurant_in_battle_over_E11_Bid_fees/

This post and its successor look at some of the background.

Briefly, for those who don’t follow these things, the E11 BID Co. is a private business set up with the support of LBWF to improve the trading environment in Leytonstone (BID stands for ‘Business Improvement District’); finances its activities by a levy on all the other shops and businesses in the area; and has the levy collected for it by LBWF.

The other important points to note are that BID Cos must by law seek a fresh mandate from levy payers every five years; and for the E11 BID Co. specifically this meant that, since it had been launched in 2007, it needed to re-ballot in 2012.

Turning to the events that led up to the court case, much of the story is fairly well known. A re-ballot duly occurred in 2012, and the E11 BID Co. received the necessary support for a second term. However, as the months passed, more and more new information about the E11 BID Co.’s dubious past operations and precarious current financial situation seeped into the public domain, and this led to a substantial number of traders refusing to pay the levy, on the grounds that since the E11 BID Company had racked up large debts in its first five years of operation, any new levy payments were very likely to be eaten up settling these debts rather than improving the locality. This it was, in turn, that persuaded LBWF to use the law, and in particular seek court orders to make the refusniks pay up.

When the hearing occurred, the presiding magistrate decided to focus only on the narrow issue of whether LBWF had a legal right to collect the levy, rather than on the wider issue of whether those administering the BID had acted responsibly; and starting from this premise – as he explained – gave him no choice but to grant the orders.

Such a decision may have settled the immediate point of law, but it left many other questions open. Indeed, the defendants’ case was largely unexamined.

To stimulate public debate, I am publishing – in its original form – the following document which summarises one of the latter’s key arguments, together with the supporting evidence.

Argument One: The E11 BID Co. had ‘insufficient finances to meet its liabilities’ in 2012-14, and thus LBWF should have closed it down

A. The legislation

1. The Business Improvement Districts (England) Regulations 2004 include the following:

‘Termination of BID arrangements. (18)(1) The relevant billing authority may terminate BID arrangements where (a) in the opinion of the authority, the BID body will have insufficient finances to meet its liabilities for the current chargeable period and the authority has (i) offered the BID body a reasonable opportunity to arrange for financing the shortfall or for a reduction in the works or services under the BID arrangements which is sufficient to offset the shortfall; and (ii) given those persons who are liable to the BID levy an opportunity, at a public meeting, to make representations in relation to the termination of the BID arrangements…’.

2. The following paragraphs demonstrate that these conditions were fully met in the period 2012-14, and that as a consequence termination should have occurred.

B. E11 BID Co. finances 2012-13

3. In 2012, the E11 BID Co. Board began discussing in detail how it would approach the re-ballot that was necessary to gain a further five-year term.

4. Fawaad Sheikh (E11 BID Co. Board chair) estimated that the cost of the re-ballot would be ‘approx.10k’. [1]

5. At the March 2012 E11 BID Co. Board Meeting, Mr. Sheikh stated: ‘the company does not have funding to cover the renewal costs, and he had been liaising with the relevant council officers to secure a possible loan to be used to fund the renewal costs.’ The Board then agreed ‘to formally submit a letter of funding request with a breakdown of the costs to the LBWF and the WFBB [Waltham Forest Business Board]’. [2]

6. Directly after this meeting, Waltham Forest Business Board adviser Gary Ince, who had attended as an observer, e-mailed the E11 BID Co. directors summarising what he perceived as their concerns:

‘That some directors have received notices at their private addresses of CCJ’s [County Court Judgements] served upon the company. That the accounts to 31 March 2011 have not been completed nor audited despite these now being overdue for filing. That there appears to be financial records unavailable that the accountant requires to complete the accounts in preparation for audit. That the company has not been able to honor all of its commitments as they fall due.That the company does not appear to have the resources to fund a renewal ballot, which is due this year, and is necessary for the company’s future’.

7. At the April 2012 E11 BID Co. Board Meeting, it was reported that (a) the directors had decided ‘to delay the ballot to allow the company’s cash flow to support financially the whole [renewal] process’; and (b) the E11 BID Co. could expect help from the Waltham Forest Business Board in lobbying LBWF ‘to contribute towards the costs of the renewal process’. [3]

8. At the May 2012 E11 BID Co. Finance Meeting, Alan Ray, the E11 BID Co. accountant, presented a draft balance sheet for 2011-12, showing current assets of £66,899 against liabilities of £90,769, and it was noted that ‘the company at the end of its first 5 years term might have a loss of approx. £40,000’, with Mr.Ray adding: ‘there is still a possibility that the company is insolvent’ [emphasis added]. [4]

9. At the May 2012 E11 BID Co. Management Board Meeting, the E11 BID Co. Coordinator summarised the company’s unpaid bills and balance sheet as of 31 May; claimed that the company was due £91,500 (including ‘up to £20K’ from the ‘Exporting Success’ programme, and ‘approx. £17K + vat’ from the Worknet programme) but had liabilities of £102,000; and estimated that on a worse case scenario, ‘the company is to be £30k short by the end of the 5 years term’. [5]

10. At the July 2012 E11 BID Co. Directors Meeting, it was noted that the ‘approx. £17K + vat’ owed to the company from the Worknet programme had not been paid nor was likely to be, observed that legal action to recover it was too expensive, and agreed it would be written off. [6]

11. At the July 2012 E11 BID Co. Board Management Meeting, Mr.Sheikh reported that he had met LBWF Deputy Chief Executive Shifa Mustafa to discuss the re-ballot, and the latter had ‘confirmed that no more financial support is planned for the BID’, a decision that was formally conveyed by letter. [7]

12. In October 2012, the E11 BID Co. re-balloted and successfully won a second term, and then contacted LBWF to negotiate new baseline and operating agreements.

13. At the November 2012 Board Management Meeting, it was announced that as the coordinating body responsible for the ‘Exporting Success’ programme was closing down, ‘it is very unlikely that claims submitted will be paid’.  [8]

14. At the December 2012 E11 BID Co. Finance Meeting, it was announced that ‘FS has managed to negotiate a repayment plan for the PAYE and NI backlog with HMRC with current year payments being paid as they fall due’; and it was agreed to pursue a similar repayment plan in relation to unpaid VAT. [9]

15. When they were finally filed at Companies House, in January and April 2013, respectively, the 2010-11 and 2011-12 E11 BID Co. accounts showed the following precarious position:

16. At the May 2013 E11 BID Co. Board Management Meeting, it was reported that: ‘Due to the baseline and operating agreements not being signed, the company has not received the first quarter BID levy worth £15,000…At the moment, the company has only £900 in its account and can barely meet its liabilities. The staff’s wages will not be paid by the end of the month’. [10]

17. At the June 2013 E11 Board Management Meeting, Mr.Sheikh reported that, after negotiations, LBWF had taken some functions out of the new baseline agreement and offered to waive only the first year of collection fees, rather than the five years worth he had envisaged; and as a result of that he had told LBWF the company was ‘not in a position sign’. [11]

18. On 12 June 2013, Ms.Mustafa wrote to Mr.Sheikh expressing her disappointment at his refusal to sign; continued ‘In your latest letter dated 6 June 2013, you have stated that the E11BID is “already beyond some of its liabilities and technically insolvent”. Further, the letter attached from HMRC Debt Management team requesting immediate settlement of outstanding tax liabilities, has raised significant concern in relation to the financial viability of the E11BID’; and ended by requesting management accounts, full disclosure of the extent of liability to HMRC, broken down by year, full disclosure of any other outstanding debts, and details of any payments due.

19. On 17 June 2013, Mr.Ray e-mailed Mr.Sheikh: ‘My concern for you is that the Council will see the numbers and decide that the company isn’t viable (which at the current time and without LBWF immediate assistance we would probably all agree is the case) and therefore refuse to fund it’.

20. At the June 2013 E11 BID Co. Board Meeting, it was recorded: ‘Directors were disappointed that the BID’s tax liabilities for earlier years had not been paid as due and that fines, penalties and interest had all accrued to the point where the question of insolvency was raised’. [12]

21. On 1 July 2013, Mr.Sheikh forwarded Ms.Mustafa the material she had requested. This showed that as of 30 June 2013 the E11 BID Co. had made a loss of £17,315.05 on the previous year; owed HMRC £30,475.67; and had negative net assets of £30,475.67. [13]

22. At the August 2013 E11 BID Co. Board Management Meeting, it was reported that the company owed its Coordinator £5,460 in unpaid salary. [14]

C. LBWF actions and subsequent revelations, 2013-14

23. Having received the material requested in July 2013, as noted, LBWF wrote to the E11 BID Co. directors and asked them to provide a recovery plan.

24. In response, the E11 BID Co. submitted two such plans, but LBWF judged these both to be error strewn, and not ‘a viable solution to the present financial issues’. [15]

25. In mid-October 2013, LBWF noted that the E11 BID Co. had still not submitted ‘a suitably robust recovery plan’, and as a consequence announced that it planned to trigger BID Regulations clause 18 (1) (ii) and hold ‘a public meeting of all E11 BID levy payers to examine the situation and the way forward’. [16]

26. This public meeting duly occurred on 30 October 2013, and was summarised by LBWF as follows:

‘The vast majority of comments made did not in the opinion of officers tend to support the continuation of the BID. The only clear objection to termination came from the chair of the Company Board and one other business…At the meeting, two other Board members present declared or confirmed their intention to resign from the Company Board. There were no other Board members present and it is fair to say that most of the contributors objected to the levy money being spent on paying off prior debt notwithstanding the non-collection and payment of the levy’. [17]

27. Reporting to Cabinet a few days later, officers noted that their ‘current view’ was that the Council should consider using its powers to terminate the E11 BID Co., on the grounds that the Company had ‘insufficient finances for the current chargeable period to meet both its historic debt financial liabilities and the costs of its 2013-14 BID duties’ – with the latter being specified in an itemised list, based upon what the E11 BID Co. was mandated to deliver at renewal. Responding, Cabinet agreed to leave the final decision to Ms.Mustafa, in order to allow ‘the Company a final opportunity…to demonstrate the financial viability of the BID’. [18]

28. In March 2014, LBWF published Ms.Mustafa’s executive decision about the E11 BID Co.’s future, together with the executive summary of a report by auditors Wilkins Kennedy. [19]

29. In its investigation, Wilkins Kennedy fully documented the chaotic and reckless way that the E11 BID Co. had been run in its first term (not least its failure to pay taxes), before turning to make the following observations about its current and future finances:

 (a) Income

 The likely future income of the company from the levy was £56,950 p.a. (being 85 per cent recovery of the total possible, £67,000).

(b) Liabilities

The liabilities of the company were £60,695 at the time of renewal in 2012, and £86,925 at 31 January 2014.

(c) Expected future expenditure

The BID Co. renewal document promised project expenditure from 2013 to 2018 totaling at least £335,000, equivalent to £67,000 p.a.. [20]

30. Based upon these figures, Wilkins Kennedy concluded, ‘approximately 18 months of levy will be required to cover current liabilities’ [21] – an unambiguous confirmation that the E11 BID Co. could only function going forward by spending the levy on satisfying historic liabilities.

31. Against this background, Ms. Mustafa’s executive decision was very surprising. Wilkins Kennedy’s findings, she asserted, did not ‘currently give the Council grounds for termination in accordance with BID Regulation 18’, [22] and instead, her recommendation was

 ‘(i) To agree not to terminate the BID at this time and to undertake a review of this decision in six month’s time;

 (ii) To commence collection of the BID levy backdated to 1 January 2013 and to waive up until end March 2015 the charge to the E11 BID Company for the collection of the levy by the Council.

(iii) To instruct officers to undertake a reassessment of the financial viability of the E11 BID Company in September 2014 and report back their findings before the end of October 2014’.

32. In April 2014, the E11 BID Co. completed its 2012-13 accounts, and though these were unaudited, they again demonstrated its precarious position:

33. The same month, a Scrutiny hearing on Ms.Mustafa’s decision was abruptly closed to public and press, while five months later, Ms.Mustafa left the Council’s employment with a pay off of £140,000.

34. As to the March 2014 instruction to officers to reassess the financial viability of the E11 BID Co., the stated timetable has not been respected, with a mid-March 2015 Freedom of Information Act deposition admitting: ‘the Council is currently in the process of procuring this assessment but a report has not yet been produced…We still aim to procure this report but this is unlikely to be before the end of this financial year’. [23]  

D. Our conclusions

35. It is our contention that this history conclusively demonstrates:

(a) that in 2012-14, the E11 BID Co. had ‘insufficient finances to meet its liabilities for the current chargeable period’, and this fact was well recognised by all the parties concerned, including the Council;

(b) that clauses (i) and (ii) were met but provided no mitigation; and

(c) that accordingly, the grounds for termination were adequately established.

36. Based upon these facts, we reasonably conclude that by continuing its arrangements with the E11 Bid Co., as it did, LBWF acted perversely and contrary to both the evidence, and its clear obligations under the BID Regulations.

37. We note that the experienced councillors who petitioned for the Scrutiny hearing (see paragraph 32) concur with this conclusion, describing Ms.Mustafa’s executive decision as a ‘volte face’ that was unsubstantiated.

38. We can only speculate as to why the Council acted in this way, but perhaps political factors rather than its legal obligations were uppermost in its thinking.

39. Finally, we note that though the use of the word ‘may’ in the first sentence of paragraph 18(1) (‘The relevant billing authority may terminate BID arrangements’) might be adduced as providing the Council with some flexibility in its actions, such an argument ultimately fails because it overlooks the latter’s clear overriding duty to the BID levy payers to act responsibly, and in particular safeguard ring-fenced monies from invalid uses – in this case, the expenditure of current levies to settle the unwise and unforced racking up of past debts.

25/03/15

[1] E11 BID Co. Management Board Meeting, 31 May 2012, 3.

[2] E11 BID Co. Management Board Meeting, 15 March 2012, 3.

[3] E11 BID Co. Management Board Meeting, 19 April 2012, 3.

[4] E11 BID Co. Finance Meeting, 21 May 2012, 2.

[5] E11 Management Board Meeting, 31 May 2012, 3.

[6] E11 BID Co. Directors Meeting, 12 July 2012, 3.

[7] E11 BID Co. Board Management Meeting, 12 July 2012, 2.

[8] E11 BID Co. Board Management Meeting, 22 November 2012, 2.

[9] E11 BID Co. Finance Meeting, 10 December 2012, 6.

[10] E11 BID Co. Board Management Meeting, 9 May 2013, 5.

[11] E11 BID Co. Board Management Meeting, 6 June 2013, 3.

[12] E11 BID Co. Board Meeting, 27 June 2013, 4.

[13] Letter Sheikh-Mustafa, 1 July 2013.

[14] E11 BID Co. Board Management Meeting, 12 August 2013, 3.

[15] Letter Mustafa-Board, 27 August 2013.

[16] Letter Mustafa-Sheikh, 16 October 2013

[17] Clem Smith, ‘The future of the E11 BID’, paper presented to Cabinet, 3 December 2013, 3.25 and 3.26

[18] Ibid, 3.15, 3.16, and 3.8.

[19] Clem Smith, ‘The future of the E11 BID’, 17 March 2014.

[20] Wilkins Kennedy, ‘Financial Review Report: E11 Bid Company Ltd.’ (February 2014), pp.9, 6 and 10, and 16.

[21] Ibid., p.3.

[22] Smith, ‘The future of the E11 BID’, 17 March 2014, 3.2, and 2.1.

[23] Freedom of Information Act deposition, 18 March 2015.