Terence Davies has spent most of his adult life on a crusade to get his films made. The grand tally? Six in 25 years. This is a miserable score for one of the most talented directors the British Film Institute has produced. Embarrassing, in fact. Davies is the Philip Larkin of northern cinema: repressed, technically brilliant, and scathingly funny. His pitch-black comedies about growing up in Liverpool are classics to rival anything by his spiritual contemporaries, Ken Loach or Mike Leigh.

In short, Davies is the genuine article. The 63-year-old director has a unique, lyrical style that he refuses to compromise. He is one of the few auteurs we have left with the skills to picklock a major festival. He is revered by critics, adored all over Europe. Yet Davies has been forgotten in his own country for eight years.

He slipped off the map in 2000 when his adaptation of Edith Wharton's novel The House of Mirth stalled at the box office after a mauling that it really didn't deserve. His career had already started to crumble after the mess he made of John Kennedy Toole's The Neon Bible in 1995. The money dried up. No one returned his phone calls.

The neglect hurt Davies deeply. Yet he wears it surprisingly lightly. When he opens the door of his beautiful terrace cottage in Mistley, Essex, on a rainy morning, he is full of easy, impish charm. A polite stoop, slippers and Bunter glasses make him look slightly vicarish. He is blessed with the softest of Liverpool accents, and he can gossip for Britain. “A cup of tea dear boy? And what should I do about this ridiculous £300 bill I've been landed with for a bespoke Jermyn Street suit that I never ordered?” “Good God, Terence, that's a steal.”

“I don't have the cash,” chuckles Davies. I believe him, but he surely won't be out of pocket for long.

Davies is enjoying one of the most spectacular comebacks by a British arthouse director in the history of cinema. His latest film, Of Time and the City, was a five-star sensation at Cannes, and a total surprise. It is a withering history of Liverpool's town planners; a pernickety documentary about bricks; and a stunning montage of newsreel images that flow from bombed-out streets in 1945 to the fascist towers of City Hall.

The black magic is how Davies manages to bend this semi-autobiographical history of his youth into a camp and stinging satire about England and the Royal Family. The grainy footage of new sink estates being erected before our eyes is accompanied by a voiceover of Davies reading tabloid scandals about royals with sly venom. It's a terrific piece of irreverence. But the inspired narrative belies eight months of serious fights that Davies waged against blinkered executives at Digital Departures - the financial muscle behind the film.

“The reason I wanted to make the film was to contrast the Liverpool I knew between 1945 and 1973 with the present day,” explains Davies. “It was inspired by photographs of my mother taken by my producer Sol Papadopoulos 20 years ago. The financiers couldn't understand why it had to be this personal. They didn't get the film grammar, and kept thinking I'd just peed all over their chips.”

“One of them said to me: ‘You know, you don't take criticism remotely well.' I said: ‘Yes. You know why? Because I'm celibate. I put all my life into my work. And when silly criticism is given to me by idiots, I can't help but get angry.'”

Davies is visibly simmering on his plump leather sofa. He taught himself about film. “Because, you know, I had to.” He left school at 15, and read vast quantities of books, plays and film magazines while working in a shipping office. His life took off when he joined drama school to write scripts.

One of them reached the BBC. By some clerical fluke he was unexpectedly gifted £8,500 in 1973 to turn it into a film. The result is The Terence Davies Trilogy, a marvellous trio of black-and-white shorts about a young Catholic homosexual boy growing up in Liverpool. They are lyrical sketches of Davies's own life, and making them was a baptism of fire.

“Apart from the cameraman everyone involved with The Trilogy hated me,” says Davies. But the film attracted an enormous amount of attention.

“No one had seen anything quite like it. The reception in San Francisco, where I thought everyone was glad to be gay, was ferocious. The hostility was extraordinary. A man jumped up during a Q&A for the film and shouted: ‘This just isn't true.' I said: ‘How dare you say that. You're not English. You have not been part of a large working-class family in an industrial northern city. And you're very good looking. No doubt they queue up for you. But have you ever thought what it's like when you are not good looking? When you don't have a good body? Has that ever occurred to you?' And he sat down. I was shaking with fury. If you're not part of that gay enclave of exceptionally beautiful men what do you do?”

You buy the magazines? I suggest.

“You stay at home,” says Davies. “Or you walk up and down Old Compton Street, which really is the Castro [San Francisco's gay village] on the cheap,” he says, with comic contempt. “I remember two particular gay clones I kept seeing there when I had to see my agent. All they appeared to do was shop, cruise and eat. Is that a life?”

Davies's ironic exposé of British attitudes to sex, and his comic demolition of the Royal Family, is the lucrative pleasure of Of Time and the City. It is the most stunning visual montage Davies has assembled. The brutal cement blocks that we see replacing square miles of Dickensian streets are raw, menacing and weirdly alien.

“Everyone thought that the 1970s tower blocks were the New Jerusalem. We really did. We embraced these monsters. They were so badly designed they became slums withinfive years. Just down the road from the block we were moved to they designed an estate based on a Cornish fishing village. It was insane. The council had to rip it up ten years later.”

Davies has never escaped his rich past. The stigma of being gay, and the fear of discovery, is a staple theme in his most accomplished films. It is not a vein of nostalgia with instant popcorn appeal. His most famous picture, Distant Voices, Still Lives (1988), is a searing piece about a brutal father and the damage that he inflicts on a large, splintered family.

It is a harrowing portrait of the director's own sexually repressed youth. Davies was the youngest of ten children. He grew up in a street where it was common for families to have 15 kids, where contraception was as alien as Mars. He has great memories of his mother. His father is the source of his darkest recollections. Davies is candid about the sudden bouts of violence.

“My father was rough, alcoholic and utterly callous. He sold toffee apples before I was born, then worked as a chimney sweep. He sent three of my sisters and two brothers out to sell apples and firewood during the Liverpool bombings of 1940. They survived by hiding in a coal cellar. You can't imagine that cruelty now.”

The scars have never healed. “When he died we had to scrape together £100 for the funeral costs. The body stayed in the house for ten days because we couldn't afford a chapel of rest. I'll never forget the smell.” The matchless skill with which Davies filters poetry from these memories has won him enormous critical respect. But the stony distance between each rare film is an eloquent reminder of just how hard these labours of love have been to assemble.

The lukewarm response to The House of Mirth cost him dear. How did Davies struggle through the past eight, empty years? With difficulty. Scraping the money together for Of Time and the City was a sapping marathon. According to concerned neighbours, Davies could sometimes be heard howling in despair.

This is the long-distance reality of a genuine auteur. There's something awesome and quite scary about the discipline. Lesser mortals crumble, or take the Hollywood shilling. Davies has clung to his visions and principles like a monk. He has chosen a celibate lifestyle to conserve the emotional energy that he needs for his films. A disparaging sense of humour keeps him sane, while a lively circle of friends takes the edge off the loneliness.

Davies has plenty of good reasons to feel cynical about the British film industry. With the honourable exception of the BFI, the industry hasn't exactly thrown bags of money at his films. Nor has it cherished him in the way that France freely indulges auteurs such as Truffaut or Godard.

“What's happened here is that we have been taken over by American culture. We have swallowed its politics and values. What we try to do over here is Hollywood on the cheap. We can't do it. We never have.

“Now the British film industry seems to be run by 25-year-olds with a media degree. The level of ignorance and arrogance is extraordinary. They think cinema started with Quentin Tarantino. They really do. They've done a Robert McKee course and they know everything.

“So when you are in the area of film-making that is not in the mainstream, problems arise,” he says. “I can't tell you the number of times I was asked before shooting House of Mirth ‘Why does the heroine have to die?' I'd say: ‘Well, have you read the book? That might give you a clue.'”

Indeed, Davies has had better receptions at international festivals such as Cannes, to which he has been officially invited on three occasions. “I first went with Distant Voices, Still Lives, which was highly acclaimed. They booed The Neon Bible, but it's an awful film. So I know what it's like being on either end.

“To be honest with you, I'm glad Of Time and the City wasn't in the main competition. There's enough professional jealousy in the arts without that kind of pernicious grief. And, of course, awards don't prove a damn thing. Look at the Oscars - does anyone remember them a week later?”

Still, Davies must feel vindicated by the plaudits that Of Time and the City has attracted. The sceptics at Digital Departures must be embarrassed.

“To a certain extent I hope so,” admits Davies. “But that's the role of people who put money in. Of course they have a right to worry, and £250,000 is a great deal of money. At some point you always end up having to fight people to get the film made. I suspect I will always have to fight.”

Of Time and the City is on selected release from Oct 31 and previews at the LFF on Oct 18 & 21

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