Restructuring plans should be tool of choice for adult social care operators

Out-Law Analysis | 30 Sep 2022 | 3:52 pm | 2 min. read

Restructuring plans may be the solution to the problems faces by the UK’s beleaguered adult social care sector, which faces a widespread catastrophe caused by soaring energy prices that threaten to drive many providers into insolvency.

Care England, which has previously called for government intervention, welcomed last week’s Energy Bill Relief Scheme announcement, which it said would “provide much-needed reassurance to care services across the country”. The scheme will provide a discount for six months from 1 October on wholesale gas and electricity prices for all non-domestic customers.

Care England, however, insisted that “more is required” to tackle the increased costs faced by providers, which it said will “render the sector unsustainable” without further action. The representative body for independent providers of adult social care in England estimates that the impact of rising energy prices over the last year has cost the sector over £2 billion per year.

It has been particularly critical of the government’s “failure to oversee the National Grid and its approach to energy generation”, noting that “unlike other businesses, care providers cannot reduce opening hours, turn off the lights, or switch off the heating or cooling, they house and care for some of society’s most vulnerable”. As a result, 45% of care home operators are thought to be considering exiting the market.

Long-running issues

The health care sector, and particularly adult social care, has faced significant headwinds over the past few years. Increased regulation by the Care Quality Commission (CQC), rising staff costs and shortages – especially after Brexit – coupled with pressure on local authority funding has meant that, even before Covid-19, many operators were working within extremely tight margins.

Portrait of Steven Cottee

Steven Cottee

Partner

A restructuring plan could potentially allow a care home operator to lower its rents down to market rates, allow an orderly closure of any underperforming homes, and potentially enable them to right-size any secured debt while still preserving the regulated entity and ensuring continuation of service for residents

The pandemic only compounded the problem. The price of personal protective equipment (PPE) rose, while increased levels of staff sickness meant operators had to turn to costly agency workers. The energy crisis now looks set to exacerbate the situation further.

Restructuring plan

A restructuring plan could be the perfect solution for forward-thinking care home operators, allowing them to restructure their debts and businesses, preserve the regulated entity and protect residents. Such plans have already been used successfully by Virgin Active and Pizza Express in recent years, and similar plans are likely to appear in the highly regulated care sector in coming months.

The relatively new restructuring plan was introduced by the government in 2020 under the Corporate Insolvency and Governance Act, and was initially intended to provide a tool for business facing financial crisis as a result of lockdown measures. While it is similar to a scheme of arrangement, a restructuring plan allows the courts to bind dissenting classes of creditors using the “cross-class cram down” mechanism – the first of its kind in the UK. The process is also a debtor-led rather than creditor led-process, similar to the Chapter 11 process in the United States, leaving the care home operator in control of the process.

A restructuring plan could potentially allow a care home operator to lower its rents down to market rates, allow an orderly closure of any underperforming homes, and potentially enable them to right-size any secured debt while still preserving the regulated entity and ensuring continuation of service for residents.

Both lenders and landlords are likely to be receptive to this type of restructure rather than face the risk of a care home group failing – an alternative that could force residents to move out to other homes in the local area. Unlike an administration, a restructuring plan would let the care home avoid the stigma of insolvency and allow it to continue to operate under its current CQC registration without a purchaser needing to obtain a new registration. Key contracts can also be kept in place.

Recent cases involving Amicus Finance and Houst show that restructuring plans can be used successfully in the mid-market, a fact that has been reinforced by the Insolvency Service. In its interim report into the Corporate Insolvency and Governance Act 2022, published in June 2022, it heralded the success of the restructuring plan so far. A restructuring plan should be the restructuring tool of choice for care home operators, allowing them to preserve their business and protect residents while mitigating the massive headwinds they are currently facing.

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