1.66 Although the Armouries recognised that the Bank of Scotland's position was critical to the outcome of the joint venture and that there was a need for discussions with the Bank about the financial difficulties facing the museum, there was no formal direct communication between the Armouries and the Bank until a meeting between the two in May 1999. The Bank then insisted that RAI should attend any subsequent meetings, if held, as the Bank's contractual relationship was with RAI and not the Armouries itself. RAI's attendance at these subsequent meetings would have meant that discussion of any option which did not involve a continuing role for RAI in the museum would have been difficult. The Armouries, however, could not insist on meeting the Bank without RAI as the Armouries had no contractual relationship with the Bank under the terms of the 1993 deal.
1.67 The Armouries had the right, under the project agreement, to terminate its agreement with RAI in the event of its financial failure. However the Armouries could not exercise this right for a period of two years after the appointment of a Receiver or Administrator nor at any time after this whilst the Receiver or Administrator continued to substantially perform RAI's obligations under the PFI contract and its sub-lease of the museum. In addition, although the Armouries could take ownership of the museum in certain circumstances, under the terms of RAI's sub-lease the Armouries could not exercise this right while a Receiver or Administrator was in place if it sought to take possession because of RAI's financial failure itself. The Department received advice from the Armouries' legal advisers, Irwin Mitchell, in 1999 that, because of these provisions, during this moratorium period the Armouries would not be able to operate the museum itself without the consent of RAI and any insolvency practitioners concerned. In the event of RAI's receivership therefore the museum's operations would become subject to severe disruption, substantial uncertainty for possibly at least a year, and in all likelihood a severe falling off in standards. To avoid this, the Armouries would have to reach a deal with RAI's creditors, in this instance the Bank of Scotland.
1.68 The legal advice also warned of the possibility of the museum's closure in the event of RAI's receivership. The Receiver's objective would be to reduce the financial exposure of the creditors. The Receiver would therefore only continue to keep the museum open if there was a realistic prospect of paying the museum's overheads on a going concern basis, or of selling the business. Given the museum's poor financial performance, neither of these was likely. It was therefore possible that the museum would be closed by the Receiver for an extended period, despite a restrictive covenant in RAI's sub-lease of the museum that the museum be kept open at all reasonable times, and that the Armouries would be unable to gain access to keep it open because of the moratorium period.
1.69 The moratorium period only applied if the Armouries sought to terminate the PFI contract and gain access to the building because of RAI's insolvency. The Armouries could have terminated the contract if RAI were in fundamental breach of this, and taken possession of the museum almost immediately if the PFI contract had been terminated or RAI were in material breach of the sub-lease. In our opinion any closure of the museum by the Receiver would be likely to have been a significant breach of both the PFI contract and the covenant in RAI's sub-lease that the museum be kept open at all reasonable times. The Armouries could therefore reasonably expect to be able to terminate the PFI contract and take over the museum, subject to giving the Receiver notice of this, allowing a reasonable period for the correction of the breach, and then, if necessary, obtaining an appropriate court order. In Irwin Mitchell's view, the obtaining of such an order would have taken up to at least three months and possibly longer. In our opinion these provisions meant that, if the Receiver were to have closed the museum, the period of closure would not necessarily have been indefinite or for a period which was unacceptably long as it would have been a significant breach of the contract. RAI's receivership would still, of course, have entailed disruption and uncertainty.