Care providers in the UK are under considerable financial strain. Costs of care continue to rise. The fees from local authorities have failed to keep pace with the actual cost of delivering care despite the growing demand for care and for such care to meet the expected fundamental standards. It is therefore not surprising that some care providers are buckling under the strain. What should the directors of a provider do if the provider is buckling under the strain?

Where a company is insolvent, the directors must take every step to minimise potential loss to creditors. If they conclude that the company cannot continue to trade, they must implement one of the insolvency procedures, such as liquidation or administration. Making the decision is not easy and fraught with risks and issues for directors.

The directors need to know what they can and can’t do to keep the company in business without committing an offence or incurring personal liability, at what stage they must decide to cease trading and if they decide to cease trading, which insolvency procedures the company should enter into.

Making decisions at this difficult time is not easy. It is therefore important that the directors get professional advice as soon as directors are aware that a company is in financial difficulty and they do so before any major decisions are taken by the company.

Avoiding the risk of liability for wrongful trading

As a director, do you understand your responsibilities as a director of a company in financial difficulties? If you don’t, you could expose yourself to personal liability. For example, if the company continues to trade when it is insolvent, directors can be liable for wrongful trading.

The financial position of the company will need to be constantly monitored and decisions on its position taken the by the board collectively. There should therefore be regular board meetings attended by all directors followed immediately by board minutes circulated to all directors to ensure a clear record of the decisions but also that the whole board is aware of the company's financial status.

Having a clear plan and timetable that the directors stick to for when key financial milestones have to be achieved will help in monitoring the company’s financial position and ensuring that the directors can identify a particular point that they have to take the difficult decision that there is no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration. The plan and timetable should factor in up-to-date financial information at all times and identify for close monitoring, compliance with any financial covenants contained in arrangements with lenders.

The directors should be looking at and considering all possible sources of funding for the company. A written record should be kept of the decisions taken by the directors on whether or not to pursue such funding. At some point the directors may need to provide evidence of when they came to the decision that the company no longer had any reasonable prospect of avoiding insolvent liquidation to avoid liability for wrongful trading.

The board minutes should capture the essence of the board discussions and decisions. However a director should also keep his own written record of all discussions and meetings. Such a record is particularly useful where a director disagrees with a board decision that has been taken.

It would be easy with all the pressures to take an ostrich approach by burying heads in the sand. This will only make the situation worse.

As soon as a director is aware there is no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration, or fears that this is the case, he must raise the problem with the rest of the board so it can take immediate legal and financial advice.

Before the directors take a decision to incur any new substantial liabilities they must be absolutely clear how such liabilities will be paid and take advice An exception may be if the board considers any such liabilities are essential and in the best interests of the company and its creditors.

Transactions between the company and parties connected to the company might be a reviewable transaction if the company later goes into insolvency. These include preferences and transactions at an undervalue. Such transactions can be set aside and the directors can be disqualified for allowing them (and disqualification can lead to a director being ordered to pay compensation).

If a company is well run and managed, a winding-up petition will not be the first alert of the company’s financial problems. Signs such as the company filing its accounts late or judgments being entered against the company or creditors putting pressure on the company should all be taken seriously by the directors and an indication of insolvency, which a reasonable director should have known about.

Minimising impact on people’s wellbeing

In the case of a care provider, as well as managing the above risks, the provider will also be concerned to ensure that decisions taken do not impact on people’s wellbeing. The regulatory position of the company will therefore also need to be constantly monitored and decisions on its position taken by the board collectively. This means working closely with stakeholders such as its lenders, CQC, local authorities, the NHS, the service users and their families and suppliers.

The approach needed with the stakeholders for protecting people’s wellbeing may depend on which insolvency procedure the provider is entering into.

If the insolvency results in administrators being appointed, the first objective of any administration is to rescue the company (as opposed to the business that the company carries on) so that it can continue trading as a going concern. If the rescue of the company is impossible, the administrator must aim to achieve a better result for the company's creditors as a whole than would be likely if the company were put into liquidation. If the administrator cannot achieve a better result for creditors as a whole, the purpose of the administration is to realise the company's property to make a distribution to the company's secured or preferential creditors.

The administrator’s work will therefore typically involve restructuring the provider’s debt and examining the selling off of assets such as surplus property or relinquishing onerous contracts. The administrator’s engagement with all the relevant stakeholders will be key to achieving the objective of the administration as well as managing the impact of the insolvency on people’s wellbeing.

Where the provider’s failure results in a service not carrying on, the insolvency will result in a liquidator being appointed. Where a service is not carrying on, the local authorities or in the case of service users consisting of people in receipt of NHS Continuing Healthcare, have a temporary duty to ensure care needs are met. The duty is to ensure needs are met which might range from providing information on alternative providers, to arranging care and support itself. However, where the failed provider’s service users consists of people in receipt of NHS Continuing Healthcare, the duty to meet needs falls on the NHS, not the local authority.

Making decisions when your business is in financial difficulties is not easy. It is a difficult and challenging time. However ensuring that you have the right advisers on board at the outset can ease some of those decisions and challenges to manage the risks to the directors, the service users’ wellbeing and proper engagement with the stakeholders.