Health and Social Care Act: The new Foundation Trust failure regime

The Health and Social Care Act has led to an overhaul in the failure regime for NHS Foundation Trusts. The Act repeals the de-authorisation provisions in the NHS Act and establishes a Trust Special Administration regime for FTs. The proposal during the passage of the Bill for insolvency law to apply to FTs has been dropped and the role of Monitor in the administration process has been enhanced. This article explores the key features of the new regime and its implications for NHS FTs.

25/05/2012

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David Owens

Partner

The implications of failure

The Health and Social Care Act has led to an overhaul in the failure regime for NHS Foundation Trusts. The Act repeals the de-authorisation provisions in the NHS Act and establishes a Trust Special Administration regime for FTs. The proposal during the passage of the Bill for insolvency law to apply to FTs has been dropped and the role of Monitor in the administration process has been enhanced. This article explores the key features of the new regime and its implications for NHS FTs.

The provisions of the Act remain to be brought into force by commencement orders (except for a limited few which are not relevant to this briefing note). We will be tracking the commencement orders and producing updates when the provisions come into force.

De-authorisation repealed

Under the old regime an unsustainable FT could be 'de-authorised'. The consequence of de-authorisation meant that a FT reverted to being an NHS Trust. Such a position is clearly inconsistent with the policy for all NHS Trusts to achieve FT status. These provisions have therefore been repealed allowing a failing FT to continue to exist as a FT, during a period of special administration. 

Key features of the new regime

The new regime enables Monitor to appoint a special administrator who will assess the position and make recommendations for the continuation of NHS services in the event that the FT is unable to continue as a going concern. If the failure is incapable of being resolved, subject to a veto by the Secretary of State, Monitor has the power to order the dissolution of the FT and transfer its assets and liabilities. The process is outlined below:

  • Monitor triggers the special administration process on the basis of being satisfied that the FT is, or is likely to become clinically or financially unsustainable in its current form.
  • Monitor makes an order appointing a special administrator whose function is to secure the continuation of NHS services in line with the requirements determined by Commissioners.
  • In making the order Monitor must have regard to whether ceasing to provide the service would, in the absence of alternative arrangements, have a significant adverse impact on the health of persons, on health inequalities, or cause a failure to prevent or ameliorate the impact.
  • As soon as reasonably practicable after Monitor makes such an order, the Care Quality Commission must report to Monitor on the quality and safety of the services provided.
  • The special administrator will exercise the functions of the chairman, directors and governors of the FT. He will publish a draft report setting out recommendations that Monitor should take for the FT to come out of special administration. The draft should be agreed with Commissioners, or if they cannot agree, the NCB.
  • The report must be approved by the Secretary of State who retains a veto, and ultimately can overrule the special administrator and impose his own solution. The solution may be the dissolution of the FT.

 
Dissolution

Monitor is given the discretion to make an order: 

(a) dissolving the trust, and
(b) transferring or providing for the transfer of, the property and liabilities of the trust –
(i) to another NHS foundation trust or the Secretary of State, or
(ii) between another NHS foundation trust and the Secretary of State.

If the conclusion of the special administration process determined the FT is not viable as a going concern, it is likely that Monitor will use this discretion and order the dissolution of the FT, unless the Secretary of State uses its veto. The question is, if such an order is made, is it a requirement for Monitor to not only dissolve the FT, but to also provide for the transfer of staff, property and liabilities of the failed FT? We suspect that this is the intention but it is a point that needs to be clarified to avoid argument and potential challenges.

What does this mean?

FTs are facing a difficult period of financial austerity. This is at a time when patients are demanding a greater number of services and improved quality of those services. With the repeal of the de-authorisation procedure, failed FTs will no longer revert to an NHS Trust but instead face possible dissolution. FTs will therefore need to have robust internal governance, management and audit processes in place to ensure that they remain both financially viable and clinically safe.

In the event an FT is facing serious financial or clinical difficulties, they will need to report to Monitor under the licence requirements. However, by holding early discussions with its advisors and commissioners and putting in place a robust turnaround plan, an FT can hope to avoid the appointment of a special administrator and the ensuing consequences.

The new regime is likely to create uncertainty in the market around Monitor's discretion in the transfer and dissolution process. Subsequently, this uncertainty may have an adverse impact on FTs seeking to raise capital for future projects. Lenders will be reconsidering their appetite to lend and, even if they are willing to lend, they will be mulling over the lending terms.

 

How can we help?

Our commercial team has a wealth of experience in advising FTs including situations where they are facing clinical or financial failure or interventions from Monitor. We can provide advice on the strategic reviews and internal auditing which FTs should implement to prevent future failure. We can also assist in formulating actions plans on the outcome of such reviews.

In addition, we would be happy to assist you with understanding the reforms and the implications that the Health and Social Care Act will have for your organisation.

We can also provide training and development support for Foundation Trust Boards of Directors and Councils of Governors to help prepare for the new failure regime as well as the changing regulatory, compliance and governance landscapes.

Our expertise includes advising banks and other creditors who are transacting with financially troubled FTs. In particular, we can advise on the options available for accessing finance.

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