All companies incorporated under the Companies Act (and corresponding State Companies Codes), by section 67, have the legal capacity of a natural person. Consequently, all companies can enter into swap agreements without fear of the agreements being challenged by outsiders on the ground that they are outside the relevant company’s power. The situation is different for statutory corporations, public authorities, local councils, and other public bodies which invariably do not have the legal capacity of a natural person.

The powers of such public bodies are usually enumerated in their incorporating legislation. Often they will be given a power to raise money by borrowing, subject to conditions, together with either an express or implied incidental power. There is some doubt, in the absence of a specific power, whether a statutory body can enter into a swap agreement. A swap transaction is usually an agreement by two parties to pay each other on certain days amounts calculated by reference to interest which would have accrued over a given period on the same notional principal sum assuming different rates of interest are payable in each case. Swaps are often employed as a device of minimising exposure to adverse interest rate fluctuations payable on loans. Since a swap transaction is not a borrowing, a question arises, in the absence of specific power, as to whether swap transactions are incidental to borrowing.

Recently in the English case of Hazellv. Hammersmith & Fulham London Borough Council & Ors1 the Queen’s Bench Court of Appeal, reviewing a decision of the Divisional Court, examined the scope of the powers of a local council in relation to the entering into of swap agreements.