Neil Merrick 10 January 2019

Is bankruptcy an option?

Can a local authority go bankrupt? With Northamptonshire having issued two section 114 notices and other councils warning they could run out of money, it would not be a huge surprise if this was a question on the lips of many councillors and officers.

The short answer is no. A council cannot go bankrupt in the same way as a private company or individual and may only be wound up by Parliament. Local authorities that run up debts as a result of commercial activities may still in theory encounter judges and receivers but, ultimately, they will not face the same consequences.

First and foremost, local authorities are required to set balanced budgets. A section 114 notice, issued under the Local Government Act 1988, is in effect a final warning - a statement informing councillors (and the public) that the council is entering ‘last chance saloon’ when it comes to expenditure.

Simon Goacher, head of local government at solicitors Weightmans, points out that section 114 notices, prohibiting councils from incurring further expenditure, are the first of four safety mechanisms.

In addition, auditors can issue advisory notices warning councils of the implications of not making cuts or savings. There are also the options of intervention by the secretary of state, and local government reorganisation, as is due to happen in Northamptonshire in 2020.

A council must continue to provide statutory services, including schools and adult care. ‘Northamptonshire has demonstrated that the stresses and strains are such that local authorities are going to struggle to provide anything beyond statutory services,’ says Goacher.

Serious consequences can stem from the Local Government Act 2003, which covers borrowing in relation to commercial activities. Christian Wall, a financial consultant and former local authority officer, says the High Court may appoint a receiver if a council is on the point of defaulting over an interest payment, or principle payment, worth £10,000 or more, for two months or longer.

Not that this has ever happened. Mr Wall, director of PFM UK, an American-owned consultancy that advises local authorities over debt, stresses that the appointment of a receiver would not necessarily mean a council is insolvent.

It was in the United States that, five years ago, the City of Detroit filed for bankruptcy having run up liabilities of $19bn. In the UK, says Mr Wall, the receiver would have powers to collect money owed to the council, including council tax.

‘It’s a very broad power,’ he says. ‘Local authorities can go into receivership but it’s not equivalent to a private sector liquidation or receivership. Only parliament can dissolve a local authority.’

So, are we facing a scenario where councils no longer look like councils as we know them? Jonathan Carr-West, chief executive of the Local Government Information Unit, says we are entering new territory when it comes to assessing the ability of councils to function and provide services.

‘Is there a point where a local authority is not a local authority in a meaningful sense?’ he says. ‘You can cut back to a bare statutory minimum. We don’t know what looks like, but it’s very grim.

This feature first appeared in Local Government News magazine - register here for your own free copy.

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