Annex
THE LONDON FILM COMMISSION
OPINION
1. I am instructed on behalf of the Film
Office which is a firm carrying on business in London within the
film industry. It represents a number of London boroughs and its
role is to liaise with film-makers on behalf of the boroughs which
it represents so as to enable and facilitate film-making within
those boroughs. One of those boroughs is the London Borough of
Hackney, which the Film Office has represented since 1996. However,
the Film Office recently re-tendered for its contract with Hackney,
but was disappointed to learn that that contract was not to be
renewed and that instead the Borough was appointing the London
Film Commission (LFC) to take on the role previously undertaken
by the Film Office.
2. The LFC is a company limited by guarantee,
the principal objects of which are to support, encourage, promote
and market film, television and audio-visual production of all
kinds in London. It was incorporated in October 1995 and has been
largely financed by government funding, through the Department
of Trade and Industry and the Department for Culture, Media and
Sport, as well as, I understand, by other donations and sponsorship.
As I understand it, up until recently its activities were restricted
to promoting and supporting filming in London in accordance with
its main and other detailed objects. However, I am instructed
that within the last 12 months or so it has sought to generate
its own income by representing local authorities upon commercial
terms in order to facilitate film-making in the same sort of way
as the Film Office has done.
3. It appears that the Film Offices contract
with Hackney is the first which it has lost to the LFC, but it
obviously fears that its other contracts might also be vulnerable.
The Film Office obviously accepts that it must face competition
from commercial rivals (of which I understand there is at present
at least one), just like anyone else, but it does not regard competition
from the LFC as legitimate commercial competition. The LFC is
a publicly funded quango, with a role to play on behalf of the
London film industry as a whole, promoting such filming for the
benefit of film-makers, but, also promoting London as a location
for film-making in order to bring economic benefit to the capital.
Its role gives it obvious advantages over independent, commercial
concerns, such as the Film Office, and the Film Office considers
that, as a publicly funded quango, the LFC has misinterpreted
its role in engaging in these activities, which it ought to leave
to the genuine commercial sector.
4. In these circumstances I have been asked
by the Film Office to advise whether the LFC has the capacity
under its Memorandum of Association to act for boroughs (or other
clients) on the commercial basis described above. In my view it
does not, for the reasons set out below.
5. I must firstly summarise and interpret
the objects clause in the LFC's Memorandum (clause 3), read with
its non-profit making status under clause 4, which I do as follows:
(1) Clause 3 commences by setting out the
LFCs principal objects in the general terms summarised at the
beginning of paragraph 2 above. This goes on to provide that the
purpose of its support, encouragement and promotion of film-making
and audio-visual production is to attract producers, directors,
production managers, technicians, authors, writers and designers
to exercise their skills and talents to initiate and carry out
production within the London area and to employ or make use of
studios, facilities, personnel and locations within the London
area.
(2) These are accordingly clearly the principal
objects of the company. Clause 3 thereafter contains a number
of further specific powers, but all of these are introduced by
the words "In furtherance of such objects (ie its principal
objects as already described—but not further or otherwise".
There is no "independent objects clause", so that all
of what follows are expressly ancillary to the principal objects.
(3) The first of these specific objects at
sub-paragraph (A) is significant. It provides that the LFC has
power to enter into various types of funding arrangements to finance
its objects and then to employ or expend such funds in furtherance
of such objects. Such a clause is unusual, and would certainly
be so for a standard commercial company. It immediately introduces
a very strong non-commercial flavour. It does not of course expressly
provide at this stage that this is to be the only source of the
company's funds, but the inclusion of this clause at the outset
certainly envisages such funding arrangements as the source of
the company's finances to carry out its activities, rather than
that any of those activities should themselves generate such funds.
(4) The remaining specific objects can, I
think, be divided into the following three classes:
(i) Firstly, there are objects directly
describing the type of promotional activity which the company
was incorporated to conduct. These include sub-clauses (B) (commissioning
of various types of publication), (C) (promotion of exhibitions
and seminars etc), (D) (undertaking research in respect of any
aspect of the company's objects and disseminating the results),
(K) and (L) (making charitable donations and establishing and
supporting charitable associations or purposes in furtherance
of the company's objects), (M) (subscribing to, supporting or
associating with other non-profit organisations with similar objects
to those of the company) and (N) (acquiring the property and undertaking
the engagements of bodies having similar objects to those of the
company).
(ii) Secondly, there are objects further
directed at the raising of funds. These include sub-clauses (F)
(in part) (soliciting various forms of financial assistance, endowments
and sponsorship etc) and (G) (issuing appeals and holding public
meetings to raise further donations, subscriptions or other funding).
(iii) Thirdly, there are various objects
which may be described as administrative. These include sub-clauses
(E) (liaising and entering into arrangements with public authorities),
(F) (in part) (acquiring and disposing of money and property),
(H) (drawing cheques etc. and operating bank accounts), (I) (raising
money on securities), (J) (investing monies not immediately required),
(O) and (P) (engaging and renumerating lecturers and others and
employing other personnel) and (Q), (R) and (S) (arranging insurance
cover and indemnity against liabilities for its personnel, providing
pensions for its officers or servants and paying its formation
expenses).
(5) There is a further sweep-up provision
at sub-clause (T) which empowers the company to do all such other
lawful things as shall further the above objects or any of them.
However, as already explained, this is truly ancillary in view
of the introductory words to the ancillary objects ("In furtherance
of such objects but not further or otherwise"). Finally,
clause 4 contains provisions for the company to be a non-profit
making organisation which cannot pay any profits to its members
or salaries to its directors subject to the provisos set out (which
provide for proper remuneration for goods or services provided,
professional charges, out-of- pocket expenses etc.). This obviously
emphasises the non-commercial nature of the company, but clearly
on its own does not prevent the carrying out of any commercial
activities to provide funding for the company's objects.
(6) Standing on their own, the principal
objects set out at the beginning of clause 3 do not, perhaps,
preclude commercial activity. But, read in the context of the
ancillary powers, this certainly appears to me to be intended.
For present purposes, the central thrust of the ancillary powers
is that the company should enter into funding arrangements in
order to raise funds to carry out its promotional and supportive
activity. True it is. however, that, in carrying out its promotional
and supportive activity, the company is not obliged to do so without
receiving particular types of payment to add to its funds. Thus
under sub-clause (B) it may issue and disseminate material "gratuitously
or otherwise"—and under sub-clause (D) it may disseminate
or make available the results of its research "commercially
or otherwise". However, it seems to me that it is one thing
to permit the company to receive commercial consideration in the
course of carrying out its promotional activities by disseminating
publications and research material. It may be that it would also
have power to make charges to participants at exhibitions, sales
and training courses etc. under sub-clause (C), although (unlike
(B) and (D)) this is not specifically provided for. However, it
is quite another thing for the company to enter into commercial
activity generally. Indeed (subject, perhaps, to argument in the
case of sub-clause (C)), it could be argued that when the company
is intended to be permitted to receive commercial consideration,
that is specifically provided for, so that it cannot do so outside
such circumstances.
(7) Moreover, it seems to me that this interpretation
is given considerable support by the proviso to sub-clause (I).
Having provided for the company to be able to borrow funds on
security this subclause finishes with the words "provided
that the Company shall not undertake any permanent trading activities
in raising funds for the objects of the Company". This is
perhaps a somewhat odd provision to include in these terms as
a proviso to this sub-clause. As a proviso, it appears to mean
that the company can borrow money upon security, but not for the
purposes of engaging in permanent trading activities to raise
funds for the companys objects (still less, of course, simply
to make a profit). However, the proviso is quite general—the
company may not undertake permanent trading activities in order
to raise funds for its objects—and that clearly appears
to accord with the general thrust of clause 3 as a whole. An alternative
way of looking at it is that the draftsman took it as read from
the rest of the objects that the company could not undertake such
permanent trading activities, so that he was here simply making
this clear in the context of permitting the borrowing of funds
on security of its property under sub-clause (I).
(8) Read with the remainder of the ancillary
objects it seems to me that a sensible and reasonably certain
meaning can be given to the expression "permanent trading
activities" under sub-clause (I). It seems to me to make
sense that the draftsman was here distinguishing between the receipt
of commercial consideration from time to time in the course of
carrying out the company's main ancillary objects, such as selling
its published material or the results of its research under sub-clauses
(B) or (D), as such publications are disseminated, and the engaging
in trading activities outside these objects for the purpose of
raising funds for the company's objects.
6. In the light of this summary and interpretation,
I would analyse the question of LEG's capacity to enter into contracts
with London boroughs to provide the sorts of services which the
Film Office has done as follows:
(1) It seems clear to me that the LFC would
at the least not have capacity to enter into commercial activities
which are not themselves directly a means of achieving the principal
objects under the opening words of clause 3 or are incidental
to its other main ancillary objects such as those contained in
sub-clauses (B) and (D).
(2) Clearly the representation of boroughs
on a commercial basis to deal with film-makers in order to facilitate
and enable film-making in those boroughs does not come within
any of the specified ancillary objects (in particular those at
(B) to (D)). (I deal with (B) separately below). However, could
LFC argue that this is simply a means of supporting, encouraging,
promoting and marketing film production in London within the meaning
of the main objects under the opening words of clause 3, so that
the entering into of this sort of commercial arrangement with
a London Borough should be seen as no different to selling a book
or research material under sub-clauses (B) or (D)? I do not think
so, for the following reasons:
(i) Firstly, although the ancillary powers
under the specified sub-clauses cannot strictly limit the general
words at the beginning of clause 3, nevertheless I think those
general words must be read in the context of these specific powers.
So read, it would. I think, be very odd if the LFC had power to
enter into such a commercial arrangement generally, when its powers
to enter into incidental activities which could be construed as
commercial (such as selling promotional or research material)
are so carefully provided for.
(ii) It seems to me, moreover, that entering
into the sort of commercial arrangements with London boroughs
under consideration differs in kind from the sale of such promotional
or research material. The production of such material is of the
essence of what the company is set up to do, and sub-clauses (B)
and (D) simply make clear that in the course of doing that the
LFC may sell such publications. That seems to me to be different
in kind from entering into a contract to provide services for
a local authority to represent it in dealing with film-makers
for the purposes of facilitating and enabling film-making. There,
it seems to me, the commercial arrangement comes first, and is
on an altogether different scale, and the support, encouragement,
promotion and marketing of film production would, at most, be
an incidental by-product of this.
(iii) To put it in another way, this
would be a permanent trading activity of the type prohibited by
sub-clause (I), or which sub-clause (I) assumes is already prohibited
generally, as distinct from the incidental sale of promotional
material which is expressly permitted. It seems to me, moreover,
that sub-clause (I) prohibits, or assumes is already prohibited,
the undertaking by the company of permanent trading activities
even as a means of achieving the general words at the beginning
of clause 3. If this were not so, the clause would surely so provide
(eg "shall not undertake any permanent trading activities
outside its main objects").
(3) There are also, it seems to me, further
considerations as follows:
(i) The central thrust of the LFC's objects
are to support, encourage, promote and market film (television
and audio-visual) production in London. Although the purpose of
doing this would appear to be to create and encourage such economic
activity and consequential employment and greater prosperity in
London, nevertheless what appears to be envisaged is that the
LEG will direct its activities towards encouraging and promoting
such film-making and those involved in it. In acting for the local
authorities and representing them in their dealings with film-makers,
in order to facilitate and enable film-making, doubtless the LFC
would argue that it is indirectly supporting, encouraging and
promoting such film-making. However, it would structurally be
doing this by representing those with whom film-makers deal, not
by directly assisting the film-makers. True the purpose of the
role, as I understand it, is indirectly to assist film-makers
by representing the borough for the purposes of facilitating film-making,
but nevertheless in any conflict LEG's client would still be the
borough rather than the film-maker. As John Hardy of the Film
Office put it in a letter to Mr York of the London Borough of
Hackney of 28 March 2002, the LEG "are in effect a film industry
lobby group and part of their funding comes from the film industry
companies". I accordingly think it at least open to question
whether the main object could be achieved by such a manner.
(ii) Indeed, what of London boroughs
not represented by LEG? Its objects are to support, encourage
and promote film-making in London generally, but, once it represents
particular boroughs, it would owe contractual duties to promote
their interests rather than the interests of London film-making
generally.
It accordingly seems to me at least doubtful
(quite apart from the question of commercial trading) that the
LEG's objects permit it to enter into the production arena in
this way, as opposed to remaining a body supporting London film-making
as a whole by more generalised promotional activities
7. There is one further argument with which
I should deal. By letter dated 14 May 2002 my instructing solicitors
wrote to the Hackney Borough solicitor seeking his views as to
whether he regarded the contract awarded to the LEG by the Borough
as a trading activity within the meaning of clause 3(I), which
the LEG was accordingly by its own objects prohibited from undertaking.
By his letter of 2l May Mr Sullivan-Gould replied that he was
content that any arrangement between the London Borough of Hackney
and the LFC would be within the ambit of the powers listed at
3(E) of the Memorandum, and that he did not think that the clause
3(I) restriction would have any relevance to any arrangement that
the LEG might have with the Borough. For the reasons I have given,
I do think that clause 3(I) does contain a restriction against
commercial activities, or assumes that such activities are generally
prohibited, which is relevant to the proposed arrangement between
the Borough and the LEG. Moreover, in my view Mr Sullivan-Gould
(who, in fairness, clearly did not consider the matter at length
and, indeed, wondered why his view was sought at all and only
put it forward "for what it is worth") has taken clause
3(E) out of context. In my view, this clause on its own clearly
could not give the LFC capacity to enter into this sort of commercial
arrangement if (as I have concluded) it could not otherwise do
so within its objects clause. This would simply permit the LFC
to enter generally into arrangements with public authorities,
national, local or otherwise, in order to support, encourage promote
and market film, television and audio-visual production in London,
since it is clearly ancillary to its principal objects. For the
reasons I have given I do not think that the entering into of
this sort of commercial arrangement is a permitted mode of the
LFC carrying out its principal objects.
8. It remains the duty of a company's directors
to observe any limitations on their powers flowing from the company's
Memorandum (section 3 5(3)) and, while the LEC is governed by
its existing Memorandum, in my view it would accordingly be a
breach of the duties of the directors of LFC for them to enter
into this proposed contract. Should they do so, and the company
suffer a loss, the company could accordingly sue the directors
for such loss. Moreover, a member of a company may bring proceedings
to restrain the doing of an act which but for section 35(1) would
be beyond the company's capacity (section 35(2)).
9. Should the LFC go into liquidation, the
directors could then be vulnerable. In any event, as directors
of a publicly funded quango, if it is pointed out to them that
the entering into by the LFC of such contracts would be a breach
of their duties, one would clearly not expect the directors of
the LFC to do this. Nor would one expect the London Borough of
Hackney, or any other borough, to enter into such contracts with
the LFC in such circumstances.
10. Further, I can only assume that it is
and remains of some importance to those who fund the LFC, including
government departments, that it should remain a non-commercial,
representative body conducting only the activities permitted by
its Memorandum of Association. If this is so, then I would assume
that such funders would make it clear to LFC that they could only
continue to support it if it continued to adhere to its Memorandum.
I can only advise that in my view entering into the type of contracts
here under consideration does not come within LFC's existing Memorandum,
so that its directors should accordingly not enter into them.
17 June 2002
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