Roger Pearson previews an important test for local authority loan guarantees

Judgment is pending in a case with wide implications for the future of local authority private sector borrowing.

Credit Suisse is appealing High Court rulings on 6 May and 2 November 1994 that Allerdale Borough Council and the London Borough of Waltham need not repay the millions loaned to them.

In the Allerdale case, repayment of a loan of £4.8 million plus interest was sought under guarantees the council gave to the Allerdale Development Company, which it set up in 1985 to carry out an ambitious leisure project. The scheme aimed to build a swimming pool and time share holiday lodges at Keswick's Grade II-listed Victorian railway station.

The project failed to keep up with revenue forecasts and Allerdale Development Company went into liquidation in November 1990.

The council ceased repayments on the loans after being advised by Cumbria's district auditor that the original guarantee was probably illegal.

The Waltham Forest fight is over a High Court order that the council should repay more than £4.4 million plus interest in respect of guarantees given to the North London Property Company (NELP), which was set up to buy and then lease properties to the council to house the homeless.

In a signpost High Court decision in the Allerdale case, watched closely by authorities which have made similar guarantees, Mr Justice Colman dismissed Credit Suisse's claim for repayment of money. He said the council was not liable to repay the company because it had no statutory power to give the guarantees it had.

He held that the provision of time share accommodation was outside the council's statutory functions and its decision to give the guarantees was partly based on "irrelevant and impermissible considerations" including the wish to avoid the strict borrowing limits imposed by law on local authorities.

In its appeal, Credit Suisse argued the judge was wrong and that both councils were in a position to give the guarantees and can be held to them.

The court has been told the effect of the High Court rulings would be to enable public bodies to avoid liability under commercial contracts which they had freely entered into, and this would be "offensive to any normal concept of justice" and would stifle movement in the public sector lending market.