Navigating The Storm: Strategies For Care Homes Facing Insolvency Risks
By Adrian Slater partner and solicitor at Nelsons (www.nelsonslaw.co.uk)
The UK care sector is facing a significant surge in insolvencies and restructuring activity, as a perfect storm of escalating operational costs and insufficient funding pushes providers to the brink. Adrian Slater, specialising in insolvency, discusses the importance of early intervention and how care providers can prepare as financial pressures increase.
A recent survey by the Care Provider Alliance paints a grim picture: a staggering 22% of care providers are contemplating outright closure, 77% are being forced to deplete their reserves, and 64% anticipate staff redundancies. These figures highlight the severe distress within the sector, which is grappling with a multitude of challenges.
While the long-standing issues of underfunding and workforce shortages persist, the 2024 Autumn Budget has significantly intensified the pressure with increased business costs, particularly through Employer National Insurance Contributions (NICs) and National Living Wage uplifts. For a sector where many employees are on minimum wage, these uplifts translate directly into substantial increases in salary costs.
Feeling the squeeze
Beyond salary hikes, care providers are contending with a broad spectrum of rising operational expenses, ranging from energy bills and inflation of food and supplies to legacy debts that have made it even harder to absorb the current wave of cost increases.
The sector’s woes are compounded by factors beyond direct financial outlays, with recruitment also taking a hit. Between 2022/23 and 2023/24, the social care vacancy rate fell from 9.9% to 8.3% and the number of vacancies fell from 152,000 to 131,000. However, this remains higher than the overall unemployment rate of 4.6% currently.
Care homes heavily rely on international recruits to fill vacancies, and the inability to access this talent pool means providers are having to pay more for staff they simply can’t find.
Occupancy levels, which haven’t fully recovered since the COVID-19 pandemic, are also a significant concern, which makes it incredibly difficult for care homes to achieve profitability.
Furthermore, the relationship with local authorities, who often commission a significant portion of care, presents its own set of challenges as many also face cashflow challenges.
The age of many care facilities presents a hidden cost as well; those built some time ago require ongoing maintenance and investment, but without the means to fund these essential upgrades, facilities can deteriorate, leading to further problems and regulatory scrutiny.
Warning signs
The Care Provider Alliance survey figures are clear indicators of a sector in distress, particularly the widespread reliance on reserves and anticipated redundancies. While redundancy is a legitimate tool to reduce overheads and not necessarily a ‘red flag’ in isolation, when combined with other factors, it can point towards an organisation heading for insolvency.
Drawing on reserves, while not immediately signalling insolvency in the strictest sense (as the business can still pay its debts), indicates a concerning trend. Unless income can be increased, fully utilising those reserves will quickly become a major problem.
The critical message for care providers is early intervention; the earlier a business owner seeks advice – even when just contemplating redundancies or drawing on reserves – the better. It’s far more effective to seek advice from an insolvency specialist at that stage rather than trying to solve the problem in isolation. Doing so dramatically increases the chances of exploring restructuring or rescue options, rather than facing terminal insolvency like liquidation.
It’s expected and certainly recommended that care providers should undertake regular financial monitoring, no less than monthly, to spot potential problems straightaway. Similarly, this will help forecast financial projections, six to 12 months in the future ahead, if not further ahead, which can pinpoint any chance of cash shortages.
If a care provider is struggling to pay creditors when required, this is a clear issue that requires a conversation, perhaps to lengthen the terms, but it is also a good point to speak to an insolvency professional. The alternative, which is unfortunately a common route for some business owners, is trying to deal with the problem with personal money or high-interest borrowing – these rarely solve the underlying issue and can put the situation in a worse state.
There is a widespread myth that insolvency practitioners are seen as the ‘undertakers’, but the vast majority would much rather rescue a business and save jobs than put it into liquidation. Early engagement opens up many more options.
Restructuring and rescue
When a company is faced with financial distress, a variety of formal insolvency procedures are available.
These include:
• Company Voluntary Arrangement (CVA): This allows incumbent directors to remain in charge while repaying creditors over time under the supervision of an insolvency practitioner. However, viability for the care sector might be limited as it creates a sphere of insolvency around the business, which might deter new residents.
• Administration: More commonly used in the care sector, the primary aim of administration is to rescue the business as a ‘going concern’. An insolvency practitioner will often seek a buyer pre-appointment. Early advice is key here, as an administrator may be able to trade the business for a short period to maximise its value on the open market.
• Restructuring plans: These are designed to save a viable business and maintain continuity of care for residents and employees, though it may result in creditors being left out of pocket. However, in reality, most insolvencies leave unsecured creditors with nothing anyway, with HMRC often being a preferential creditor and with secured creditors in the main being afforded priority over the unsecured creditors.
• Liquidation: This is the final insolvency process when nothing else is viable. The business ceases trading, employees will be let go and residents must be removed. This necessitates crucial conversations with stakeholders to find alternative provision.
Given the imperative to maintain continuity of care, administration and restructuring plans are often the most suitable options for care providers, as they prioritise the sale or reorganisation of the business to ensure ongoing service delivery.
Weathering the storm
While the challenges are formidable, care providers can take proactive steps to mitigate risks and improve resilience.
Providers must rigorously review and renegotiate contracts with suppliers and local authorities to maintain control of costs and cash flow management. Exploring energy efficiency measures, optimising procurement strategies, and adopting technology to streamline operations are also crucial.
This also feeds into staff optimisation and managing these costs without compromising care, quality, or morale. This may involve investing in training, implementing retention incentives, and carefully managing reliance on agency staff. Exploring how AI and other technologies can be utilised to improve services and reduce costs is an essential consideration for the future.
Ultimately, the fundamental message is clear: seek professional advice early. There’s a reluctance to speak to insolvency practitioners due to perceived costs, but the benefits of early intervention for all parties involved are immense, and could save money, jobs and the business in the long run.
The longer you delay, the more limited your options become.
