Insolvency and Health Special Administration - Pinsent Masons

Health and Social Care Bill 2011
Insolvency and Health Special Administration –
Failure in the NHS
Introduction
The Health and Social Care Bill introduces substantial changes to
the way that failing entities within the NHS will be dealt with.
A new Health Special Administration regime is introduced,
which is similar to the special regimes that are in place for
other essential public services. All other entities are subject
to normal insolvency law.
Directors will therefore need to be aware of which regime
applies to their organisation.
Health Special Administration
The introduction of the Health Special Administration regime
is designed to ensure that certain "Designated Services" are
protected. Whether a service is "Designated" will be
determined by Monitor on the basis of how essential they are.
The regime is similar to those in place in the rail, energy,
banking and public private partnership sectors where
continuity of service is of particular public interest. Special
administration regimes are rarely used. A high profile example
was in 2001 when the then Secretary of State for Transport,
Stephen Byers, petitioned the courts to place Railtrack Plc into
"railway administration".
If a supplier of designated services was deemed to be failing,
Monitor will have the ability to seek an order from the court
for that entity to be placed into Health Special Administration.
The Health Special Administrator will have specific statutory
objectives (primarily to ensure the continuity of the provision
of the Designated Services). This could be achieved by either
rescuing the entity as a going concern or transferring
designated services to an alternative provider.
Whilst doing this the Health Special Administrator will also
have to ensure that the entity continues to comply with the
requirements of the Care Quality Commission.
The Health Special Administrator will also have a duty to
protect the interest of creditors as a whole. It may prove
difficult for the Health Special Administrator to ensure
continuity of service whilst protecting the interests of
creditors as a whole. Ensuring continuity of service may
require additional funding or borrowing whilst suppliers are
sourced for continuing services. Normally an administrator
requires good reason to borrow and would only do so where it
would be for the benefit of the creditors as a whole. The
Health Special Administrator will have to decide which of
these duties prevails.
Non-Designated Services
All other entities that provide services to the NHS would be
subject to normal insolvency law, whether they are an NHS
body or a non-private company or entity.
Normal insolvency processes include company voluntary
arrangements, administration, liquidation and schemes of
arrangement.
The explanatory notes to the Health and Social Care Bill
explain that it will only be appropriate to deal with the failure
of NHS Foundation Trust using normal insolvency law where
that foundation trust is providing wholly non-designated
services.
Also raises a number of grey areas for providers. It is not clear
when or which services will be deemed to be Designated
Services. It is therefore unclear to the NHS, directors, and
creditors which insolvency procedure will be applicable to a
particular entity. This could result in uncertainty where a
supplier is of doubtful solvency and could lead to creditors
being unnecessarily reluctant to supply to it.
Monitor will have the ability to step in where a trade creditor
takes action against the provider (for example issues a
winding-up petition) and to apply for a Special Health
Administration Order. Again, this leaves the petitioning
creditor in a difficult position as it will not know whether
there is any merit in issuing a winding-up petition and
incurring the cost of doing so.
Considerations for Directors
Directors of Service Providers to the NHS will need to be
aware of their duties in both solvent and insolvent situations.
Where a company is insolvent its directors' overriding duty is
to act in the best interest of the creditors of the organisation.
If the company is a Designated Service Provider, this duty has
to be balanced against ensuring the confirmed provision of
Designated Services. In this situation, providers should seek
legal advice and engage Monitor to establish at an early stage,
whether they are a provider of Designated Services.
continued on reverse

However, if those directors are directors of an organisation
that supplies Designated Services, and the Health Special
Administration Regime will apply to it, should the directors
also ensure that there is a continuity of service?
In order for a director to be able to fully understand the
position of the organisation where it is of doubtful solvency
and to be able to act in accordance with his duties, it is
advisable for directors, as soon as they have concerns over
their organisation, to take both legal advice and also to engage
with Monitor to establish at an early stage whether their
organisation does provide designated services.
Directors will be subject to full glare of UK companies and
insolvency regulation. They will need to deal with their
statutory and common law duties and the consequences of
failure to act in accordance with these duties. Directors will
also need to be aware of their financial duties and the
penalties they may be subject to (both criminal and civil) for
failure to discharge them.
Should you wish to discuss any of the matters arising from the Health and Social Care Bill 2011 and how they might
affect your organisation please contact:
Barry Francis
Partner
T: 020 7418 7340
E: barry.francis@pinsentmasons.com
Michael Boyd
Partner
T: 0113 294 5207
E: michael.boyd@pinsentmasons.com
Carly Caton
Associate
T: 020 7418 7137
E: carly.caton@pinsentmasons.com
© Pinsent Masons LLP 2011
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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