Birmingham City Council (the Council) has recently hit the news following the issue of its Section 114 notice under the Local Government Act 1988 (the Act). It is the latest in a string of local authorities that have issued notices under the Act. And it may well not be the last. A recent survey of 47 councils in northern England, the Midlands and on the south coast indicated that over half of them are in difficulty.
For those that have contracted with, or are in the process of contracting with, the Council, will no doubt be considering what the implications of this news are on those arrangements.
Here are the key points to note:
- A Section 114 Notice is an acknowledgement that, in the view of the relevant authority’s chief financial officer (CFO), the authority’s expenditure in the current financial year is likely to exceed the resources available to it (including borrowed funds) available to it to meet that expenditure (in other words, a forecasted deficit).
- It is not a statement that it is insolvent; rather it is the trigger point for the relevant authority to determine a course of action to address (and resolve) the forecasted deficit. Actions may include the authority deciding to cut back on forecasted (but uncommitted) expenditure and /or to increase its revenues (i.e by increasing Council Tax);
- The authority is required to meet and consider the Section 114 Notice within 21 days;
- An immediate consequence of a Section 114 Notice is that it legally suspends the incurring of expenditure in relation to new commitments by the authority without the prior approval of the CFO until the authority has agreed the course of action required to deal with the forecasted deficit. This is referred to in the Act as the “prohibition period”. A commitment made in breach of this obligation is unlawful; and
- It does not, however, release the authority from any existing obligations. The authority is expected to fulfil those commitments.
What does this mean in practice for those that have contracted with the Council or for those that are involved in negotiations with the Council?
For those already under contract:
- The Council is bound to comply with its obligations under the contract;
- It is unusual, but it would be worth checking, whether there are any clauses in the contract to the effect that the issuing of a Section 114 Notice entitles either party to terminate the contract - notably, the Homes England and GLA contracts include such a right for the grant provider;
- It would also be worth checking what unilateral rights of termination the Council has and what compensation is payable in those circumstances. The s114 Notice does not mean the Council is bound to exercise this right – but it will likely be looking at all areas where it can cut back;
- Where the contract includes a right for the Council to accept a further obligation, the exercise of that right will be constrained by the Section 114 Notice. Whilst the exercise of that right may seem unlikely in the current circumstances, where it does occur the Council will need to be asked to confirm that the exercise of that right has been authorised by the CFO in accordance with Section 114.
For those in negotiations with the Council:
- Recognise the constraints imposed on the Council to enter in to new commitments.
- There are only a limited set of circumstances, during the prohibition period, that the CFO can authorise the entry in to new commitments. In practice, therefore, it is highly likely that arrangements will not be entered into until the Council has settled on the course of action for resolving the forecasted deficit.