Winding Up a PFI Project’s Special Purpose Vehicle: Important Considerations and Practical Guidance

Preparation for winding up and handback preparation can be seen as working in tandem.

There are a number of critical aspects that need to be approached in the right way when managing the expiry of a PFI contract. We have explored some of these in our previous blogs looking at  managing a portfolio of Projects through the process and getting the crucial surveys in the closing period of a Project right. In this piece we are going to look at another crucial component of managing an efficient, equitable and effective (‘E3’) handback; the winding up of a Project’s Special Purpose Vehicle (SPV, or Project Co). 

The Structure of a PFI Deal

Private Finance Initiative (PFI) contracts are almost always signed between a public sector entity and an SPV, that is created specifically for the PFI project and exists for the duration of the Project Agreement, usually without any employees. At the end of the PFI Contract, the cash flows will end, as the amounts that were being paid by the public sector entity stop, requiring the winding up of Project Co at the end of its intended life. 

The challenge

As the SPV will typically be solvent at the time of winding down, this is a choice to liquidate rather than an imposed situation, necessitating the use of the Members Voluntary Liquidation (MVL) procedure. 

This can only be done if the company directors are satisfied there are no outstanding liabilities. If the processes around handback are not robust, however, there is a very real risk that latent issues remain undiscovered and potentially the director or directors are then accused of having made a false statutory declaration. This in turn means they could face personal legal consequences under the Insolvency Act 1986, in the event that after using the MVL procedure there is:

• A Subsequent defaulting on debts; or 

• the company is eventually wound up on an insolvent basis. 

To reduce the likelihood of this risk materialising, these practical considerations are key for SPV directors to bear in mind:

1. Understand asset condition

SPV directors should plan lifecycle works in a way that means minimal Handback Works identified by the contractually required Handback Survey. This will include ensuring any residual life requirements are factored in and can be evidenced as being met by the asset management strategy and the asset condition data in the Project’s CAFM system. This reduces the likelihood that more works are identified than can be completed in the timeframe between the Handback Survey and the contract’s expiry, or that disputes arise over a significant cash figure that the Survey quantifies as the cost of delivering the required works.

2. Assess handback preparedness and the likelihood of expiry-related disputes

The greatest vulnerability to the SPV and its directors pre and post PFI-expiry are long-running liabilities that may exhaust cash reserves. As the senior debt has typically been paid out in the immediate years preceding handback, any future demands for cash are likely to stem from issues on Project and disputes between the SPV and the public sector entity that is party to the PFI contract. Consequently, managing handback effectively to reduce this risk is key. This process should initially consolidate all relevant clauses in the Project Agreements and other contracts to understand the default position on Handback and to get to grips with the key commercial considerations. This document review should be complemented by conversations with public sector partners to ascertain the Contracting Authority’s intention for future use of the estate, in addition to building lines of communication that will be vital in handling service transition at expiry.

3. Determine which obligations survive the expiry of the contract and the likelihood of any matters not being resolved prior to expiry, so that you can plan for adequate cash reserves

The best time to prepare for winding up is now. It is essential to move beyond considering whether Project Co has sufficient cash reserves on the balance sheet right now, but instead the likelihood of the need for readily available funds arising, in consideration of all the above, and acting accordingly over a sustained period of time if required to ensure any material financial impact is smoothed over a longer period. 

This entails actively planning and building a contingency plan and cash reserves. Establishing sufficient cash reserves requires consideration of the risks described above, in addition to building a contingency fund to address any alternative significant scenarios. Although directors are unlikely to be deemed as having made a false statutory declaration in the event of any risks or events that could not reasonably have been foreseen (having taken into account necessary advice), building a significant contingency fund negates this as a possibility by reducing the overall risk of the SPV being declared insolvent in the first place. 

In short, preparation for winding up and handback preparation can be seen as working in tandem. Putting the Project in the best possible position operationally protects the SPV and, in turn, the directors and, most importantly, delivers an equitable and effective outcome for all parties. 

Conclusion

Addressing all these considerations, ensuring effective operational performance, and developing a sound plan, preferably years in advance and in concert with a Project’s Contracting Authority, will allow for the development of a smoother profile, both in terms of maintaining good asset condition and protecting the Project’s financial position. This procedure avoids the events that are most likely to push the project into financial distress i.e. (service delivery failures, long standing issues on project resulting in drawn out and costly disputes, and material levels of deductions), maintaining cash reserves and compliance with both the Project Agreement and broader company law on winding up in the long run.

If you are interested in finding out more about how best to minimise risk arising from the potential legal implications of winding up of a Project’s SPV, book a consultation with the Curshaw Commercial Physical Infrastructure team by contacting hello@curshaw.com.