22 January 2007
Debate about the controversial issue of public sector insolvency is increasing. The growing tendency of the state to subcontract its obligations to the private sector raises some fundamental issues about the role of restructuring and insolvency law and the protection of the public, who become 'involuntary creditors' when services are not delivered. Hardly a week goes by without reports of vast sums of money being paid to consultants to turn around public sector organisations, but if these projects fail how can an insolvent body continue to fulfil its statutory duties? In particular, to what extent, if at all, should the state underwrite the private sector's insolvency risk in relation to the provision of public services?
During the Insolvency Lawyers' Association's annual dinner last November, Jonathan Crow QC noted in his lecture that governments of any political complexion are normally looking for ways to spend less money and, in relatively recent times, this has involved an increasing level of alignment between the public and private sectors. Accordingly, we are beginning to see the encroachment of insolvency law into the public sector, particularly in the railways and the health service.
Resolution of insolvency issues between a private sector provider and the Government is further complicated by the fact that the provider does not want to lose its main client and the Government does not want to fall out with one of a handful of suitable suppliers, so it is often not possible to bring an unhappy marriage to an end. This may result in an increasing use of public law principles in what would otherwise be ordinary insolvency cases.
David Blunkett MP highlighted the importance of preserving a risk-taking culture in business, including in relation to the provision of public services. He stressed, however, the importance of ensuring that those providing services realise that the Government does not exist to "refinance the unrefinancible" and that there must accordingly be real accountability in the provision of public sector services. This means that there must be the possibility of failure, albeit that this needs to be contained within an appropriate regulatory regime in order to preserve the delivery of key services.
There is a balance to be struck and Blunkett said the Pension Protection Fund provides an example of how this could work in practice. Appropriate legal advice from the insolvency profession also provides an important means of managing the risk.
The conundrum of how an insolvent body can continue to discharge statutory duties is clearly a very difficult one, but it also seems that you cannot normally solve what is essentially the political problem of discharging legal and moral obligations by agreeing to provide public services simply by transferring the service provider to the private sector.
While these issues may already have been considered in complex PFI and similar financing transactions, they are all pervasive, and it is perhaps, the more mundane activities undertaken by government where the implications are least appreciated.
Take education, for example. The state accepts a duty to educate every child; the UK and other signatories are obliged to do so under the terms of the European Convention on Human Rights (ECHR). What, then, is the position when a private school goes into a formal insolvency procedure?No doubt many practitioners will have encountered this situation. For example, in the case of Newlands School in Eastbourne the administration led to a reported case on the valuation of landlords' claims in a company voluntary arrangement. It also threw up many other issues, not least the extent to which administrators of a charitable school company should take into account the pupils' welfare when exercising their discretion. This could be as mundane as ensuring that pupils' coursework is protected and they are able to take examinations, and in this respect it should be noted that administrators are officers of the court and, like trustees in bankruptcy, are arguably a 'public authority' for the purposes of the Human Rights Act 1998, and therefore are under a duty to observe ECHR rights; this includes the right to an education. There may, however, be real costs to the creditors of performing these public duties.
If a school fails even after taking into account any direct or indirect contribution that is secured from stakeholders to underwrite its public service obligations, it is not open to the state to stand idly by as pupils go uneducated, and nobody would argue that the state could refuse a school place to a pupil just because they previously decided to opt out to join a (now failed) private school.
The state is therefore to some extent underwriting the private sector's insolvency risk. The valuation of this obligation to intervene and the extent to which it can or should be reflected on the balance sheet of a company that provides a public service is not at all straightforward.
What is true in relation to the provision of education is arguably even more so in relation to the provision of healthcare. Here it may be necessary to balance the right to life against the need to preserve the solvency of the healthcare provider.
This issue has been canvassed extensively in the media, the Herceptin breast cancer drug providing a recent example, with health trusts claiming that they cannot afford to provide new and expensive drugs from existing budgets, only to find in a number of cases that their decision are overruled by the court.
In holding that the health authority's refusal to provide the drug is unlawful, the court effectively poses an additional, and generally unbudgeted, financial burden. This might very well mean that many health trusts have to be treated as 'insolvent', even if they are one of the increasing few that remain solvent at an operational level.
The interaction between public law duties and private law consequences has been little explored until now. As with many of these challenges, there seems to be no easy answer; but exploration of the issue will continue as the profession rises to the undoubted challenges that lie ahead.
Victor Tettmar is managing partner of Bond Pearce and president of the Insolvency Lawyers' Association