UK: Sector Focus: The Legislative Framework For NHS Trust Insolvency

Summary and implications

Many hospitals are facing insolvency as a result of a variety of complex factors. Yet it is vital, both politically and socially, that NHS services are maintained.

There are different regimes in force for insolvent NHS trusts and insolvent NHS foundation trusts. It is expected that rules for companies providing NHS-funded services will come into force in 2014.

In July 2012, Matthew Kershaw was appointed the first ever trust special administrator (TSA) over South London Healthcare NHS Trust. It was the first NHS trust to use the Regime for Unsustainable Providers.

More recently, Alan Bloom, Alan Hudson and Professor Hugo Mascie-Taylor were appointed TSAs over Mid-Staffordshire NHS Foundation Trust by Monitor. This represents the first use of the "special administration" regime for a foundation trust.

The Regime for Unsustainable Providers - NHS Trusts

Background to the Regime for Unsustainable Providers

The Department for Health assesses NHS trusts according to their performance against a set of financial and quality indicators. If clinical or financial performance is below the required standard and does not improve then the Regime for Unsustainable Providers may be triggered under Chapter 5A of the National Health Service Act 2006 (the 2006 Act). For ease of reference, legislative references throughout this article are references to the 2006 Act.

The Regime for Unsustainable Providers used to be the only way in which the Department of Health could take decisive action to deal with NHS trusts that were either unsustainable in their current form or significantly failing to make progress towards attaining foundation trust status. The regime has been extended by the Health and Social Care Act 2012 (the 2012 Act) to deal with foundation trusts. However, the following information relates to NHS trusts.

The regime is only intended to be used for organisations deemed to be unsustainable on a clinical, performance and/or financial basis and under exceptional circumstances. The framework is different from an ordinary administration under general insolvency legislation in that its main objective is to protect patients and staff from failing services and secure the continued provision of patient services (section 65DA(1)(a)).

The legal framework under the 2006 Act sets out requirements to ensure that the regime is completed within a maximum period of 120 days, although the Secretary of State for Health (Secretary of State) may extend the time periods if he thinks reasonable in the circumstances (section 65J(2)).

Appointment of a TSA to an NHS Trust

The 2006 Act confers a power on the Secretary of State to make an order authorising the appointment of a TSA to an NHS trust, if the Secretary of State considers it "appropriate in the interests of the health service" (section 65B(2)). The appointment of a TSA must take effect within five working days of the Secretary of State's order. Under this regime, a TSA need not be an insolvency practitioner.

The TSA's role is to develop recommendations on the future of the organisation, such as alternative service provision. He or she will exercise the functions of the chairman and directors of the trust, who will be suspended from office (section 65B(1) and 65C(1)).

Draft report and consultation

Following appointment, the TSA must consult with NHS staff and the local public on a draft report. This report must be published within 45 working days from when the TSA's appointment takes effect (section 65F(1)).

At the same time as publishing a draft report, the TSA must also publish a statement setting out the means by which he will seek responses to the draft report (section 65G(1)). This is known as the consultation period. The consultation period must start within five working days of publication of the draft report (section 65G(3)) and end after 30 working days (section 65G(2)). In undertaking the consultation process, the TSA must hold:

• at least one meeting to seek responses from staff of the trust (section 65H(4));
• at least one other meeting to seek responses from any person who wishes to attend (such as patients and the general public), by publishing a notice of the date, time and place of the meeting (section 65H(5)); and
• at least one meeting to seek responses from representatives of the board of directors (section 65H(9)).

Final report

Within 15 working days of the end of the consultation period, the TSA must provide a final report to the Secretary of State. This report will set out the recommended actions in relation to the trust (section 65I(1)). Possible outcomes include:

• a rescue allowing the NHS trust to leave administration and continue on its path to foundation trust status;

• acquisition by, or merger with, another NHS trust or foundation trust; Or
• dissolution of the trust and the transfer of services and staff to another NHS trust or foundation trust.

Within 20 working days of receiving the draft report, the Secretary of State must decide what action to take in relation to the trust (section 65K(1)). As soon as reasonably practicable thereafter, the Secretary of State must:

• publish a notice of the decision and the reasons for it; and
• lay a copy of the notice before Parliament (section 65K(2)).

Importantly, if the NHS trust is dissolved, the Secretary of State has an obligation to deal with all of the liabilities of the trust. This means that the Secretary of State must either transfer the property and liabilities to another NHS body, or to himself, so that creditors are safeguarded.

South London Healthcare NHS Trust

South London Healthcare NHS Trust (the Trust) was formed on 1 April 2009 by merging Bromley Hospitals NHS Trust, Queen Mary Sidcup NHS Trust and Queen Elizabeth Hospital NHS Trust. At the time of the merger, the Trust had a combined deficit of £21.3m. By 2011/12, its deficit had increased to £153m. In addition, six PFI schemes were operating across the three main hospital sites, which were contributing to its financial difficulties.

As a result of these financial difficulties, the Trust was judged by the Department of Health to be "not financially viable in its current form". Consequently, Matthew Kershaw (the Director of Provider Delivery at the Department of Health) was appointed the first ever TSA with effect from 16 July 2012. At that time, the Trust had the largest deficit in the NHS. On 1 February 2013, the Secretary of State, Jeremy Hunt, made his final decision on the future of the Trust, following on from the final report issued by the TSA. It was decided that the Trust will be dissolved by 1 October 2013 and its services managed by new organisations. The Secretary of State also accepted the following recommendations from the TSA's report:

• each of the Trust's hospitals will be taken over by a neighbouring hospital trust. These mergers are subject to approval from the relevant regulators;
• all three hospitals within the Trust (Queen Elizabeth Hospital in Woolwich, Queen Mary's in Sidcup and the Princess Royal in Bromley), will be required to make the full £74.9m of efficiencies identified by the TSA;
• all vacant or poorly utilised premises will be vacated and sold where possible;
• the Department of Health will pay for the excess costs of the PFI buildings at the Queen Elizabeth and Princess Royal Hospitals and write-off the accumulated debt of the Trust so that the new organisations are not saddled with historic debts. It will also negotiate an appropriate level of transitional funding to cover implementation.

On 1 April 2013, Caroline Taylor (formerly the Chief Executive of NHS North Central London) took over the role of TSA from Matthew Kershaw. Caroline will be the TSA until the Trust is dissolved in accordance with the Secretary of State's final decision.

The Health and Social Care Act 2012: Trust Special Administration - NHS Foundation Trusts

Background to trust special administrations for NHS foundation trusts

Chapter 5A of the 2006 Act (as amended by Part 4 of the 2012 Act) sets out the provisions for the trust special administration regime for NHS foundation trusts. If Monitor is satisfied that the trust "is, or is likely to become, unable to pay its debts", it has the power to appoint a TSA (section 65D(1)). This provision places responsibility on appointing a TSA on Monitor (rather than the Secretary of State as in the case of NHS trusts). After the order is made, the Care Quality Commission must provide Monitor with a report on the quality and safety of the services provided by the foundation trust.

This regime only applies to foundation trusts, and it is the Government's intention that all NHS trusts will achieve that status or be taken over by an existing foundation trust by 2014. The timetable to be followed in respect of foundation trusts is similar to the procedure outlined above for NHS trusts although it reflects the greater autonomy of foundation trusts. To recap and expand:

Appointment of TSA and draft report

The appointment of a TSA must take effect within five working days of Monitor's order (section 65D(5)). The TSA must provide a draft report proposing a course of action to Monitor within 45 working days of appointment (sections 65F(1) and 65F(4)).

Earlier this year, Monitor placed a notice in the Official Journal of the European Union (an OJEU Notice), in order to draw up a shortlist of TSAs who could be called upon to carry out the trust special administration process. It is expected that the framework agreement will commence in June 2013.

Consultation period

A consultation period will run for 30 working days (section 65G(2)). The first day of the consultation period is to start within five working days of the publication of the draft report (section 65G(3)). During the consultation period, the TSA must hold at least:

• one meeting to seek responses from staff of the trust (section 65H(4));
• one other meeting to seek responses from any person who wishes to attend (section 65H(5)) (such as the general public); and
• one meeting to seek responses from representatives of the board of directors (section 65H(9)).

Final report

Within 15 working days of the end of the consultation period, the TSA must issue a final report to Monitor with recommended actions (sections 65I(1) and 65I(4)). Nevertheless, Monitor may extend the periods to:

• provide a draft report;
• consult; or
• issue a final report, if it thinks reasonable (sections 65J(2) and 65J(5)).

Once Monitor has received the final report, it has 20 working days to decide whether it is satisfied:

• that the action recommended in the final report achieves the objectives of the trust special administration; and
• that the TSA has carried out the administration duties (section 65KA(1)).

If it is satisfied, Monitor must provide a copy of the final report to the Secretary of State, together with the report issued by the Care Quality Commission (section 65KA(3)). If Monitor is not satisfied, it must give notice of its decision to the TSA as soon as reasonably practicable (section 65KA(4)).

If Monitor is satisfied and the report is provided to the Secretary of State, the Secretary of State has 30 working days to decide whether:

• the persons to which the NHS foundation trust provides services have discharged their functions;
• the TSA has carried out the administration duties;
• Monitor (as regulator) has discharged its functions;
• the action recommended in the final report would secure the continued provision of the services;
• the recommended action would secure the provision of services that are of sufficient safety and quality; and
• the recommended action would provide good value for money (section 65KB(1)).

If the Secretary of State is not satisfied, he must as soon as reasonably practicable:

• give the TSA a notice of the decision and the reasons for it;
• give a copy of the notice to Monitor;
• publish the notice; and
• lay a copy before Parliament (section 65KB(2)).

If the Secretary of State is not satisfied, the TSA has 20 working days to submit a revised report to the Secretary of State (section 65KC(1)). The Secretary of State then has 30 working days to decide whether he is satisfied with the revised report (section 65KD(1)). If he is not satisfied, he has a period of 60 working days to decide what action to take in relation to the trust (section 65KD(9)).

Mid-Staffordshire NHS Foundation Trust

On 16 April 2013, Monitor appointed Alan Bloom and Alan Hudson (both from Ernst & Young LLP) and Professor Hugo Mascie-Taylor (a clinician), as TSAs over Mid-Staffordshire NHS Foundation Trust. This is the first "special administration" regime for a foundation trust.

There will be staff and public meetings over the coming weeks to explain the trust special administration process and a full public consultation on the draft recommendations will commence in June 2013.

Health and Social Care Act 2012: Health Special Administration - Companies

Background to health special administration regime

Before the 2012 Act, there was no provision for the failure of companies providing NHS-funded services, other than the general rules for company failure under the Insolvency Act 1986.

Sections 128 to 133 of the 2012 Act seek to address this issue by introducing the concept of a separate health special administration regime for relevant providers of NHS services, including registered and unregistered companies and community interest companies (i.e. companies subject to Monitor's licence conditions). These provisions will mean that, regardless of the type of provider, patients will receive uninterrupted services if the provider becomes insolvent.

The health special administration regime does not apply to NHS trusts or NHS foundation trusts. However, the regime draws from:

• the ordinary administration process, set out in Schedule B1 of the Insolvency Act 1986;
• existing special administration regimes (i.e. the Regime for Unsustainable Providers); and
• the updated trust special administration regime for foundation trusts.

If a health special administrator (HSA) is appointed, he may recommend:

• the transfer of the provider as a going concern; and/or
• the transfer of some or all of its assets to another licensed provider.

The regime is designed to be as flexible as ordinary administration proceedings. For example, the HSA will be required to be a licensed insolvency practitioner.

The detail of the regime is to be set out in regulations (please see below). The main aim of the health special administration regime is to provide an alternative corporate insolvency procedure for companies that secure the continued provision of certain NHS-funded services.

Draft regulations

As stated above, the 2012 Act introduces the health special administration regime but more detailed regulations on the process need to be implemented. As currently proposed in the consultation document, the regulations provide for the following (amongst other things):

• Monitor may apply to court for an order appointing a HSA:

• A moratorium will be put in place to ensure that no order or resolution can be made for the winding up of the company and further, creditors cannot take action against the company or its property without the agreement of the HSA or permission of the court.
• Commissioners are to decide which NHS-funded services must be protected, based on criteria in the regulations and guidance from Monitor. Monitor is to also maintain a list of providers at risk of becoming unsustainable.
• Monitor may levy providers to create a fund to pay the costs associated with ensuring service continuity. The HSA will be able to tap into this fund by requesting financial assistance from Monitor to keep the provider's services running until a long-term solution is found. It should be noted that the regulations are not due to come into effect before April 2014.

Comment

The NHS is undergoing sweeping change, with NHS trusts soon to be abolished in favour of NHS foundation trusts. The provisions introduced in the 2012 Act have attempted to deal with the potential failure of the different organisations providing NHS services; this has resulted in three relatively complex regimes for healthcare providers (public and private) in distress.

With the ongoing austerity programmes, there is an underlying feeling that there may well be more casualties in the NHS in the future. Hopefully the technicalities of the unsustainable provider/special administration regimes played out at South London NHS Trust and Mid-Staffordshire NHS Foundation Trust will bring some clarity to this unique area of law.

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