Southern Cross Crisis - Implications for local authorities and PCTs

Local authorities, and PCTs commissioning Continuing Health Care, will need to keep a close eye on developments at Southern Cross.  As the Group provides care for in the region of 37,000 residents (approximately 31,000 in the elderly care category) across over 750 care homes, the uncertainty over its continuing trading is likely to impact upon the vast majority (if not all) of local authorities and PCTs. Exposure will be greater in some regions than others but, particularly with out of area placements, there are unlikely to be any commissioning authorities who are completely untouched by the events. For some, the crisis potentially jeopardises the placements of hundreds of vulnerable adults for whom they are responsible.

At present, there is great uncertainty as to how the Group’s financial crisis will be resolved. Much will depend upon the Group’s investors, who have been called to a meeting on 12 July 2011, and the landlords who have been requested to accept a 30% rent reduction over the next four months. However, even this reduction, if accepted, may be insufficient to see the Group survive another quarter. The same could be true of the reported 3000 job cuts which it is proposing by October.

There are reports in the press of the possibility of a Government bail out, but if this is not forthcoming the main insolvency options for the Group are as follows:

Administration

This is a procedure where a company may be rescued or reorganised or its assets realised under the protection of a statutory moratorium preventing action being taken against it.  This may result in the business continuing but in a restructured format (such as with the loss of a number of ‘loss-making’ homes) and under new ownership.

Administrative Receivership

This is not an insolvency proceeding in the strict sense but rather a remedy for a secured creditor to allow for the realisation of a company asset subject to security, such as property.

Company Voluntary Arrangement

This is where a company and its creditors come to an agreement, usually involving a suspension of payment or a reduced payment, which is implemented and supervised by an insolvency practitioner and binds all creditors.

Liquidation

This is an alternative to the rescue mechanisms where a company is wound up.  This involves the appointment of a liquidator who collects in and distributes the company’s assets and dissolves the company.

Whatever steps are taken, there will be a number of commissioning and contractual issues which will arise.

Commissioning issues

Latest reports suggest the Group may ‘shed’ in the region of 180 of its homes. It appears that any such reduction would be achieved by either the closure of some homes (30 is the reported number), or, in the majority of cases, transfer to alternative providers. In some cases, the landlords such as Four Seasons and Bondcare are care providers who may be willing to take over the running of the homes. In many other cases, new providers may need to be found or residents may need to be transferred to other Southern Cross homes. Whilst this is a national problem, the practical ramifications and solutions will vary depending upon local issues.

Local authorities and PCTs need to have contingency plans in place. Commissioners should:

• scope the potential scale of risk by clarifying the numbers of placements they have with Southern Cross homes whether locally or out of area
• develop contingency plans to respond to the potential closure of Southern Cross homes in their areas
• liaise with host authorities for any out of area placements regarding their contingency plans for the ongoing provision of care to residents in any ‘at risk’ homes
• review the availability of suitable alternative placements in the local economy
• consider their response to any proposals to transfer residents to other Southern Cross homes or new providers, this may include putting in place arrangements to consult with the residents and/or their families in relation to Human Rights issues *
• consider how they will want staffing issues to be dealt with by the new providers – are they to be required to take on the placements together with the staff employed on a TUPE basis? What are the costs implications of that? Are there industrial relations implications if an alternative approach is adopted?
• satisfy themselves that they are happy with any suggested new providers. This will include ensuring they have appropriate registration with the Care Quality Commission (CQC) in place
• managing press and public relations around these issues.

In the event that there is insufficient capacity in terms of alternative placements, commissioners may be able to take on responsibility for running the homes themselves. In such instances, local authorities would need to consider:

• renegotiating the lease or an assignment of the existing lease
• employment issues – in particular the application of TUPE and the important consultative obligations associated with that as well as the cost implications both in terms of possible redundancies and pensions issues
• possible joint working arrangements with the local health commissioners
• the need for appropriate registration with CQC.

Contractual issues

Commissioners will need to review existing contracts to understand their contractual obligations in the light of any insolvency arrangements.  Factors commissioning authorities might consider, for instance, in the event of an administration include:

• their potential entitlement to terminate existing agreements
• their options where the administrators refuse to perform Southern Cross’ obligations under any contracts or the contracts of others that impact on Southern Cross’ service
• any express provisions in contracts with Southern Cross which may entitle them to withhold payment following administration
• whether it is necessary to make any payments in advance and if so the basis on which such payments should be made.

*   In relation to local authority funded residents, Southern Cross has its own duties under the Human Rights Act

Our in-depth knowledge of the sector coupled with our insolvency and regulatory experience means that we are well placed to advise on the implications of any insolvency arrangements or commissioning issues relating to any proposed cessation and/or disposal of Southern Cross’ services.