What does the full force of insolvency law mean for foundation trusts? Dickinson Dees partner in public services Tim Care looks at some of the challenges that come with new freedoms.

Foundation trusts are proposed significantly greater freedom under the Health and Social Care Bill. They will find themselves on “an even playing field as corporate providers” – this is particularly the case when it comes to the new corporate insolvency procedures.

This will spell out greater accountability and responsibility for trusts, but there may be other, less desirable effects too – not only for the trusts themselves, but also for the directors.

Under the proposed regime, trusts in financial difficulty will no longer be protected by the state. Instead, they will fall under one of two regimes: those that provide “designated services” and those that do not. It is currently uncertain what constitutes a designated service but it is likely that the focus will be on whether the provider, that is, the trust, is “the only one or one of very few” in an area.

Once this grey area has been clarified, trusts providing designated services will fall under the favourable health service administration regime.  

If this type of trust fails then there is some hope, as the regulator Monitor will be able to apply for a health service administration order. This will protect services and rescue the trust from insolvency. If a complete rescue is not possible the administrators will be able to sell off the services to other providers.

While the health service administration regime will ensure continued funding of services, the bill proposes financial assistance be funded by the providers and commissioners of designated services themselves, as opposed to the state. Designated service providers ought to be aware that they could be required to make a significant financial contribution.

Of course it remains to be seen whether Monitor will protect services that are not designated and do not fall under the health service administration regime. If it does not, the trusts providing those services will be subject to the same insolvency rules and regulations as private providers.

As a result, they will be able to reach a compromise with their creditors through a voluntary arrangement, be put into administration or, alternatively, be liquidated by the directors, the creditors, the court or the secretary of state. While an administration will seek to rescue the business, the emphasis will be on getting the best deal for the creditors rather than maintaining the services.

Where services have to be sold off, there will be a great deal of pressure from the creditors to sell to the highest bidder, regardless of whether the service is continued or not and almost certainly it will be in the administrators’ power to do so. There could be serious repercussions of this, such as the shutting down of health and care services. Consequently, it will be important for trusts to better understand the effect that their financial failure could have on their communities.

Senior managers

The proposed changes would also have personal implications for the trusts’ directors.  Whereas previously they were protected from accountability, many will become subject to the same statutory duties as apply to company directors in a normal insolvency situation.

They could face disqualification orders and become personally liable to creditors. For example, where they have allowed the trust to continue to trade and incur unaffordable credit when they knew, or ought to have known, that it was unlikely to be able to pay its creditors in full.

Although health service administrations may ensure that the phoenix will rise again for designated services there is nothing to suggest that other services will be saved.

Undoubtedly foundation trusts face many changes at the moment. If we were to fast-forward to just five years from now, I believe we could witness a dramatically different landscape, particularly given the insolvency measures in place.

A typical trust will not be able to shy away from competitive pressures. To survive and flourish, trusts will need to look at ways to grow – perhaps even integrating with community services following successful re-tenders. The psyche of a trust will need to focus on constantly building on its expertise in specialist areas. This could be via entering into joint ventures and partnerships with both third and private sectors to plug gaps.

The resulting trust would be a diverse business, comprising designated services which would be protected from insolvency, but also many non-designated services. The board of directors would be acutely aware that if the trust were to suffer fiscal difficulties, its non-designated services may not be protected and the business could well be broken up.

To survive and thrive, the board would have to learn to take a different approach to decision making. Each new service or service development would be examined robustly to ensure it was self-funding and would not adversely impact on the finances of the trust as a whole.

Business flexibility

The board would need to have a flexible business model in place allowing it to make swift changes when financial pressures are identified, including the shutting down of loss-making services and redeployment of resources. This would require careful consultation with staff and a move to more flexible employment contracts would undoubtedly follow.

Of course, the designated services would be ringfenced to a certain extent, but even then a trust would not be able to allow itself to be in a position where other services are subsidising the designated services.

It is also possible that a trust might be given the opportunity to take over the assets of another trust where Monitor has successfully applied for a health service administration order.

The regulator might want to find a new home for the designated services and many others also, but a potentially big drawback could be the existence of a private finance initiative contract relating to the main hospital site.

In this instance, a trust might ask Monitor to facilitate a conversation with the PFI contractor, the funders and the Department of Health (which would still hold its obligations under the deed of safeguard that was issued when the PFI contract was initially signed).

The trust might consider that in order to provide value for money, the PFI contract would only be salvaged if the unitary charge was slashed.

However, the scope for simply cutting the specification of a contract could be limited so a deal might not be able to go ahead.

In this case, a trust might cherry-pick a handful of services, together with the appropriate staff, equipment and one or two properties, but it might not be possible for the business of the failing trust as a whole to be taken over.

In this situation, a trust could default on its PFI scheme and the administrator might be forced to turn to the DH to help pay off the contractor and its funders – potentially a very expensive end to a contract.

Rewind back to 2011 and the crucial thing for trusts is to embrace all the changes.

For those that take on the new responsibilities with the right entrepreneurial mindset, it will be a case of flourishing not floundering in the years to come.