I have sought information from Department of Internal Affairs about the relevant provisions of the Local Government Act....
"...The information I require relates to decisions that led to the development of the Section 117 (Protected Transactions) provisions of the Local Government Act 2002. I require DIA reports, copies of any relevant submissions, Cabinet papers and minutes prepared in 2002, that relate to the matter of Protected Transactions. (For the avoidance of doubt, I note that the Local Government Bill which was introduced into Parliament 18 December 2001 addressed similar matters in Section 236. Following submissions and policy review work and cabinet decisions these matters came to be addressed in Section 95A in the Local Government Bill at its Second Reading in Parliament towards the end of 2002.)..."
Relevant official information has since been provided to me.
I felt the need to seek this information after exploring Hansard and Cabinet papers that are readily available and that relate to debates around the Local Government Bill while it was being considered by Parliament before it was passed into law in December 2002.
The Local Government Bill was introduced into Parliament on the 18th December 2001. It had its second reading on the 18th December 2002, and its final reading just before Christmas on the 20th December 2002.
There is a DIA report containing changes between when the Local Government Bill was introduced, and as it was reported back from the Select Committee.
This shows that the Bill, as introduced, contained a section 236 titled: “Dealings between local authority and other persons”. This no longer exists in the Bill as reported. Instead a new set of sections 95A – D have been added, respectively entitled: Protected transactions; Certificate of compliance; Good faith in relation to protected transactions; Saving provision in respect of power of court.
In fact these new Sections 95A were renumbered s.117 in the final Act that we have today.
What is significant is that there was no mention of protected transactions in the Local Government Bill as introduced. Section 236 of the Local Govt Bill as introduced was quite draconian in its own peculiar way. The following are extracts:
The relevance of this last little note will become apparent later on in this post. It turns out that S122ZG from the 1974 Act was quite important to banks.
236 Dealings between local authority and other persons
(1) A local authority may not assert against a person dealing with that local authority, or with a person who has acquired property, rights, or interests from that local authority, that—
(a) this Act was not complied with or that the local authority’s action was contrary to this Act; or
(b) the local authority’s action was outside its capacity, rights, or powers, or was for a purpose not authorised by this Act or any other Act; or
(c) a person held out by the local authority as a member, employee, or agent of that local authority—
(i) was not validly appointed; or
(ii) was not expressly or impliedly authorised; or
(d) a document issued (or purporting to be issued) on behalf of the local authority by a person with actual or usual authority (or who held out as having that authority) to issue the document is not valid or genuine. (
2) _ _ applies even though a person referred to in _ __ acts fraudulently or forges a document that appears to have been signed on behalf of the local authority unless the person dealing with the local authority, or with a person who has acquired property, rights, or interests from the local authority, has actual knowledge of the fraud or forgery.
(3) _ _ does not apply if the person dealing with the local authority has, or ought to have (by virtue of that person’s position with, or relationship to, the local authority), knowledge of the matters referred to in _ _
Compare: 1974 No 66 s 122ZG
Interestingly, the DIA comment with the change (where S236 was deleted and replaced with S95A - which became S117) is: “New clauses to continue provision for protected transactions (from former clause 236)”.
Official Information Request
Various items were provided. Of interest is the extract from a submission to the Bill from Palmerston North Residents Association Incorporated dated 22 February.
This submission was about Section 236 (quoted above) and states:
"...The purpose of this clause appears to be to protect innocent people. Together with the wide general powers given to local government in this Act, however, it appears to almost totally demolish the doctrine of ultra vires in relation to the actions of local government. As such it could have been expected that there would be considerable publicity and a detailed legal explanation of the DIA's legal advice which supported the insertion of such a clause.
Not only does it mean that any "person who has acquired property, rights, or interests" need not worry about whether the council or its employees are acting within their powers, it also means that "any person dealing with a local authority" need not worry.
Under subsection (2) - (see above in s.236) it does not matter even if a council employee or agent acts fraudulently or forges a document, the rights of those dealing with the local authority are protected.
This may be very well for the innocent, but this section could, and possibly will have very important effects upon the working practices of local authorities. If nothing is illegal, documents selling local authority assets can be signed, consents given, actions taken without authorisation from the council itself and a myriad of other actions, without fear that legal action will be taken against the local authority for acting beyond its powers..."
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is characterised in law as intra vires (literally "within the powers"; standard legal translation and substitute, "within power"). If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed "valid" and those that are ultra vires "invalid"....
Another key item provided to me under the OIA is an extract from a submission to the Local Government and Select Committee prepared by Simpson Grierson on behalf of submitters, and dated 19 February 2002.
The submitters are named as: The Society of Local Government Managers, Auckland City Council, Porirua City Council, Western Bay of Plenty District Council, Tauranga District Council, Masterton District Council, Hamilton City Council and Hutt City Council and relates to clause 236 of the LG Bill.
This submission noted that the Local Government Bill would replace Section 122ZG(3) of the old Local Government Act, with clause 236. It notes that Section 122ZG(3) said this:
"a certificate signed... by the principal administrative officers of the local authority to the effect that the local authority has complied with the Act in connection with a protected transaction shall be conclusive proof for all purposes that the local authority has so complied..."
The submission from all of these local authorities notes that this certificate provision: "is extensively relied on by lenders..."
The submission goes on to describe the issues of concern:
....the reason for the inclusion of section 122ZG in the LGA 1996 was to provide a level of comfort to those entering into financial transactions with local authorities that if a certificate is provided there would be no question of a local authority being released from its obligations because it had not properly entered into the transaction. In other words, a local authority could not back out of a transaction because it had acted ultra vires....
The section 122ZG(3) mechanism has proved very successful and has avoided a significant level of borrowing costs for local authorities.
We note that it is clear under section 122ZG(3) that if a certificate is granted under that section it is "conclusive proof for all purposes that a local authority has so complied" and that no person can question the validity of the local authority's action in entering and performing the transaction. It appears that clause 236 is seeking to provide comfort to those contracting with a local authority in similar terms as section 122ZG however the wording of clause 236 is not as wide. We are concerned that the wording of the clause leaves open room for doubt as to what would happen if a third party (such as a ratepayer) challenged the local authority's power and capacity to enter into a transaction and a court found that the local authority had acted ultra vires. In terms of clause 236, it is not clear whether the local authority would still be obliged to perform its obligations in the transaction.
The result of such a doubt arising in respect of financial transactions such as those which were specifically protected under section 122ZG will be either that lenders will not wish to lend to local authorities, or more likely will charge higher interest rates for the perceived additional risk or require the local authority to pay for legal advice as to enforceability.
The submissions go on to request that the old provisions of section 122ZG be retained and incorporated into the new Local Government Act.
Another interesting and helpful submission came from Kenneth Palmer, Associate Professor of Law, University of Auckland. He submitted in regard to clause 236:
...this clause expands the existing LGA Section 122ZG, which is limited to dealing with validity of a "protected transaction". Clause 236 is of a general application and complements the proposal to abolish ultra vires rule and confer a power general competence.
This is a useful summary account of what was going on in the Local Government Act. Previously local authorities were permitted to undertake specific activities, anything else was "ultra vires". However the idea of "general competence" did away with that regime. This is where Palmer's submission gets interesting...
...further, clause 236(2) gives wide protection to a person dealing with a local authority where the transaction is implemented by fraudulent action... this provision is similar to the legal position relating to land transactions but not necessarily identical. For example it could appear to allow a fraudulent person to forge a transfer of a local authority reserve, and the purchaser would acquire the property unless a knowing party to the forgery...
Palmer goes on to submit that a new clause should be added: "..this section is subject to provisions of the Land Transfer Act 1952 and the Reserves Act 1977...", so that the outcomes relating to fraudulent dealing with land to be consistent with the legal position applying to land dealings generally.
It turns out that DIA Officials took on board what the Councils and Professor Palmer wanted. They report that in oral submissions mention was made that interest rates could increase by as much as 1.5% if such protection provisions were not continued in the Local Government Act. Financial transactions would be protected as they had been under Section 122ZG.
Much of the thrust of clause 236 was dropped. Protections proposed for others sorts of transactions were dropped. I note - in passing - that the sentiment of Professor Palmer's comments about land transactions could have also been applied to financial transactions. There needed to be sanctions or penalties or compensations when the loan transaction risked natural justice - ie something along the lines that parties to bank loans are all named (including ratepayers buying into it by virtue of being consulted - like the US local authority Bond Issue vote equivalent) and have rights of redress when things turn to custard. But they were not.
And to entertain yourself, read here what Judith Collins et al had to say about clause 95A this Bill when it was debated in Parliament in December 2002.
What does it all mean?
This is the $64,000 question.
It is likely that when section 122ZG was adopted way back in 1974 nobody was talking about powers of general competence. And at the time Councils had very low debt levels. Most activities were funded out of rates revenues. The rare need for borrowings must have generated the prudential provision for s 122ZG. At the time nobody could have foreseen the scale and amount of bank borrowing that local authorities would resort to - to fund infrastructure and to defer the need to raise rates.
I well remember as Councillor the gleeful look that would appear in councillor's eyes when they saw they could have their pet projects funded in their term of office by loans - without raising rates....
What does it all mean in the case of Kaipara District Council, and its bank borrowings to fund EcoCare sewage scheme, and whether they were lawful or not, and whether it is lawful or not for KDC to try and rate ratepayers to pay back a loan ratepayers were never consulted about...?
Setting aside the irritating question of why the Audit Office gave KDC a clean bill of health, year after year, despite detailed warning letters from ratepayers, what will the High Court make of it all?
Well, looked at simply, there seem to be two possible outcomes. The Court could decide, after hearing all the evidence and the background to what the Local Government Act means and what its purpose is (democratic decision-making and transparency), that the law, as it stands, means that a Council can raise a bank loan for a project without consultation and force ratepayers to pay consequent bank charges.
If that is what the Court finds, then clearly the law must be changed. Because it gives local authorities the power to act in ways which are self-evidently not democratic and not transparent. It gives councils the power to avoid the purpose and principles of the Local Government Act. Such an internal contradiction cannot be tolerated in a rational society.
The other outcome is for the Court to find that KDC is acting illegally, and that it cannot rate ratepayers for illegally transacted loans. If that is what the Court finds, then banks will take fright, and again the law must be changed to sort out the problem.
Either way the law is an ass and it needs to be fixed.
This is a test case. Mangawhai Ratepayers should not be having to carry the can for it.
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