Select Committee on Public Accounts Fourth Report



43. The Department had set themselves the objective, when faced with RAI's insolvency in July 1999, of delivering a solution which kept the museum open while minimising the requirement for additional grant. The Department had considered that, should RAI go into receivership because of their financial difficulties, the museum would have closed and been lost. They had therefore sought to avoid RAI's receivership.[48] They disagreed with the National Audit Office's judgement that the museum's closure had only been a possibility. RAI and their bankers had both told the Department that RAI's receivership would mean the closure of the museum. Its closure would have entailed uncertainty and cost. There would have been a severe risk of loss of staff and deterioration of the product and an unknown cost to re-open the museum. The Department's legal advice had been clear that, if RAI had gone into receivership, the bank would have been most likely to have kept the museum closed for two years. The alternative would have been for the bank to keep the museum open and carry on losing £3 million a year. Neither the liquidator nor the bank would have been keen to do this.[49]

44. The Comptroller and Auditor General was asked about the Department's disagreement with the National Audit Office in this area. He told us that there was no difference with the Department on the facts of the matter but only on an opinion and recommendation. In the Department's view there was a two-year period of uncertainty during which the museum might have closed.[50] In the National Audit Office's view, however, failure by RAI would arguably be a fundamental breach of the contract. In this case the two-year moratorium would not have applied, giving the Department and Royal Armouries a lever which could have been used to get a better deal. It was therefore a question of judgement about what could have been achieved in negotiation.[51] The Department told us that it had not taken any advice from insolvency recovery specialists but possibly should have done so.[52]


45. The Department's objective was to avoid the museum's closure. Based on legal advice and statements from RAI and their bankers, the Department considered that, if RAI had become insolvent, there would have been a two-year moratorium on the Royal Armouries' ability to get back the museum and the museum would have closed. There is room for doubt, however, as to whether that view took full account of the Royal Armouries' rights in the event of fundamental breach of the contract by RAI, where no such moratorium would have applied. Faced with similar situations, departments should be clear both about their legal rights and the strength of their commercial position, and be prepared to use those rights and powers aggressively in negotiations.

46. In negotiating the deal to save the museum the Royal Armouries and Department commissioned only legal advice. They did not seek appropriate commercial advice from an insolvency practitioner, although they were faced with a threatened insolvency. Departments should ensure that their negotiation team includes people with previous experience of commercial negotiations and that they are supported by appropriate commercial advice.

48  C&AG's report, paras 1.68, 1.71, 1.76-1.77, 1.81 Back

49  Qs 13-14 Back

50  C&AG's report, para 15 Back

51  Q182 Back

52  Qs 15-16 Back

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Prepared 12 December 2001