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Comments from ACCA
May 2004

Executive Summary

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to provide comments to the Department of Health on the consultation document Consultation on proposals for secondary legislation to be made under the Health and Social Care (Community Health and Standards) Act 2003 to establish a failure regime for NHS Foundation Trusts. These comments have been developed in consultation with ACCA members who are employed as finance directors within the NHS.

We support the Department's aim of putting in place a failure regime which makes clear what the consequences will be, and what the rights and obligations of interested parties will be, in the event of a Trust �failing'. We consider, however, that in certain respects, the proposed regime could appear unattractive to trade creditors and may have implications for the willingness of small businesses to trade with Trusts. In commercial insolvency, a business which wishes to enter into a voluntary arrangement with its creditors knows that it has to make its proposal sufficiently attractive to those creditors or they will not support it. In the case of the proposed regime, creditors will be aware that if the proposed arrangement is not approved, the Trust's valuable assets will be transferred prior to its winding up. Further, the proposed timescale provided for in the consultation paper, for the approval of voluntary arrangements and moratoria, makes it possible that trade creditors could be left waiting to be paid for some months before a decision is made as to the Trust's future. There thus needs to be a better balance between safeguarding the core business of the Trust and respecting the rights of creditors.

We also consider that, in applying the provisions of the Insolvency Act to Foundation Trusts, the Department must make allowances for the �public benefit' nature of the Trust concept. We support the proposals to apply to Trusts the provisions of insolvency law regarding fraudulent conduct and recovery procedures, but would urge caution with respect to the provisions on wrongful trading. These provisions are based on the premise that directors of entities in financial difficulty owe their duties primarily to the entity's creditors rather than to any other stakeholder.

Responses to the Consultation Questions

Proposed application and modification of Part 1 of, and Schedule A1 to, the Insolvency Act 1986 � voluntary arrangements (with or without a moratorium)

Question 1. Do you agree with the proposal to apply the time limits in the Insolvency Act for companies seeking to obtain a moratorium and agree a voluntary arrangement to NHS Foundation Trusts?

ACCA agrees with the proposal to apply the time limits given in the Insolvency Act for companies seeking both to obtain a moratorium and to agree a voluntary arrangement to NHS Foundation Trusts.

The consultation document states that NHS Foundation Trusts will have 28 days to submit documents to the nominee from the day that they receive notice from the Regulator. This, in effect, gives them 28 days longer than is available to commercial organisations, making the timescale favourable to NHS Foundation Trusts.

Question 3. Is 28 days a reasonable time limit for directors to act following the issue of a notice under section 24 by the Regulator?

We believe that 28 days is a reasonable time limit for directors to act following the issue of a notice under section 24 by the Regulator.

The Regulator will have met with the directors prior to the issue of a notice in an attempt to avert the failure of the NHS Foundation Trust and therefore the directors' attention should already be focused on developing an action plan.

In addition, the need for business continuity requires fast action.

Question 5. Do you agree that the provisions of the Insolvency Act should be applied so that NHS Foundation Trusts which are subject to market contracts and public private partnerships should be ineligible for a moratorium?

We agree that the provisions of the Insolvency Act should be applied so that NHS Foundation Trusts which are subject to market contracts and public private partnerships should be ineligible for a moratorium. This exclusion is important to help protect small companies that contract with NHS Foundation Trusts.

Question 6. Do you agree that the chairman of the creditors' meetings should be required to report the outcome of meetings of the creditors to the Regulator?

Yes. This will enable the Regulator to carry out his duty of monitoring the NHS Foundation Trust.

Proposed requirements on the Independent Regulator to consult before steps are taken leading to the dissolution of a failed NHS Foundation Trust

Question 7. Are there any other bodies with whom the Regulator should be required to consult?

ACCA considers that the list of organisations to be consulted should be extended to include Independent Sector Providers. These might include organisations running Treatment Centres from an NHS Foundation Trust site or organisations providing support services to the NHS Foundation Trust.

We would also like further clarification over what is meant by �PCT commissioners significantly affected by the proposed transfer'. Does this mean lead commissioners or all PCTs with contracts above a particular value?

Question 8. Do you agree that the matters on which the Regulator should be required to consult should be which property and liabilities should be transferred to which body?

ACCA considers that the matters on which the Regulator should be required to consult should focus on which assets and liabilities (including rights and obligations) should be transferred to which body.

Question 9. Do you agree that the consultation should not be required to take place over a set time period, for the reasons set out in the document?

ACCA considers that there should be a clearly defined timescale for the consultation process. The timescale should be sufficient to enable all interested parties to be properly consulted but should not be so long that it threatens business continuity.

We are concerned that the length of the list of organisations to be consulted may make it difficult to reach agreement within a reasonable time frame. As the list of organisations to be consulted splits into three groups: parties interested in ensuring service continuity; organisations representing the general public; and direct creditors, we would suggest tailoring the consultation process to each of their needs.

Question 11. Do you agree that the Regulator should be required to draw up a schedule for the transfer order?

Since the Regulator's office will have coordinated the consultation process, the Regulator should also then draw up the schedule for the transfer order. The Regulator should, however, do this in conjunction with the successor body.

Proposals relating to the transfer of assets and liabilities of a failed NHS Foundation Trust by order of the Secretary of State

Question 13. Do you agree that assets should be valued at open market valuation rather than book value as is proposed in paragraph 5.10 of the document?

ACCA agrees with the proposal that assets should be valued at open market value at a specified date.

Creditors will be interested in the break up value of an asset and this may differ significantly from the book value of an asset that has been calculated according to the NHS capital accounting manual.

Proposed application and modification of Part IV of the Insolvency Act 1986 � winding up procedures

Question 14. Do you agree that the provisions in the Insolvency Act relating to establishing a liquidation committee should be applied to winding-up procedures involving NHS Foundation Trusts?

We agree that, in principle, creditors should be given the opportunity to establish a liquidation committee. However, further clarification is needed about where a liquidation committee would fit with the consultation process and who would chair the committee.

Question 15. Do you agree that the provisions in the Insolvency Act relating to penalties for fraudulent actions relating to companies should be applied to winding-up procedures involving NHS Foundation Trusts?

ACCA considers that, in general, it is appropriate for the penalties for non-compliance with the Act to be applied to directors of NHS Foundation Trusts who engage in fraudulent activity.

It is important, however, that the new legislation acknowledges the fundamentally different objects and purposes of Foundation Trusts on the one hand and commercial organisations on the other � differences which have implications for what the responsibilities of Trust directors should be. It must be borne in mind that many of the provisions in insolvency law, as they affect directors, are based on the premise that directors of insolvent companies owe a duty of care to their companies' creditors, rather than to the companies' other stakeholders, including shareholders. We query whether the government really expects the directors of Foundation Trusts which are in financial difficulties to put the interests of Trust creditors above the interests of all other stakeholders, and to make the directors personally liable for the Trust's debts if they do not do so.

The primary obligation of the directors of NHS Foundation Trusts is to provide health care and, in certain circumstances, this may mean taking action that creates a financial risk. For example, in the case of a significant outbreak of infection at a hospital the directors may take the decision to close part of the hospital. This would temporarily stem income flows, putting the organisation at financial risk, but the decision would have been out of the necessity to safeguard public interests. An additional factor that needs to be considered is staff and director recruitment. If the provisions of the Insolvency Act are not amended to acknowledge the obligations of directors of public sector organisations then recruitment of senior staff may prove difficult and expensive in organisations with a history of problems.

We therefore consider that the provisions of the Insolvency Act should be amended to recognise the crucial differences between the position of directors of Trusts, as public benefit corporations, and that of the directors of limited companies.

Question 16. Are there any provisions of Part IV of the Insolvency Act 1986 which you do not think should be applied?

ACCA considers that the standard provisions should be applied subject to the amendments proposed in question 15 regarding the duties of NHS Foundation Trust directors.

Other Comments

Question 17. Do you have any other comments on the proposals set out in this document?

First, with regard to the procedures under sections 24 and 25 of the Act, the proposals appear to be weighted in favour of NHS Foundation Trusts. While we understand the need to safeguard NHS services, we are concerned that the proposals may not offer sufficient protection for creditors. Small companies, in particular, may suffer and this could jeopardise future service provision if suppliers become reluctant to trade with the NHS.

Secondly, section 24 suggests that the Regulator can direct NHS Foundation Trusts to take steps to achieve either a moratorium or a voluntary arrangement. This is not consistent with the Insolvency Act, which only provides for a moratorium in the context of an application for a voluntary arrangement. Further, only small companies with a turnover of less than £5.6m may apply for a moratorium in the context of a voluntary arrangement application. Under the proposals, a moratorium could, in some cases, be extended to three months � this could create problems for small companies.

Lastly, the consultation document does not address the situation whereby an NHS Foundation Trust enters into a voluntary arrangement but then fails to comply with it. There needs to be a clear understanding of what constitutes failure of an arrangement and what is to be done in that situation.

Question 18. Do you consider that the proposals outlined in the document will mean that, in the event of the failure of an NHS Foundation Trust, the mandatory goods and services, and the property needed to provide those goods and services, will be secured?

Yes. ACCA considers that, with the Regulator being responsible for drawing up the transfer order and the Secretary of State having the final say over the process, the proposals will ensure the continuation of services.

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