​A right pickle

iangunn Aug 3rd, 2018

According to TripAdvisor, a website, the #1 thing to do in Bulwick, a village in Northamptonshire, is pay a visit to “The Pickled Village”, a tea room. In case you are interested in paying a visit, the church comes in at #2 and a spa treatment is #3 of 3 attractions. To be fair, nobody has bothered to rate any attractions on TripAdvisor in the place where I live.

Anyway, Northamptonshire County Council might deserve the rating #1 “Pickled County”. It is now in special measures to curtail spending, and at risk of running out of money before 31st March 2019.The National Audit Office has warned that as many as 10% of larger local authorities in England with responsibility for social care are draining their reserves, and will have exhausted them completely in three years unless something changes: 20% would run out within five years.

This is of specific interest to us because there are PI claims against local authorities: by nature they are claims from people injured during their employment, or whilst in a place for which the authority had a duty of care. This means, if there is any insurance indemnity, it will be capped, and may be insufficient to meet a lifetime of periodical payments. The question therefore comes up, with some regularity, whether a local authority can go bust. If so, the continuity of periodical payments cannot be reasonably secure.

Perhaps surprisingly, the answer to that question is to be found by examining cash flows rather than scrutinising legislation.

The starting point is to consider the position of central government, which can create and borrow money, i.e. one that has an independent currency and a central bank. Government uses the central bank to create money, enabling spending to happen before tax revenues are received (effectively to cancel the money created). Theoretically, this process can continue ad infinitum. Practically, such a central government cannot go bust, but it can get itself into a mess if it borrows too much and depreciates the value of its currency.

Local government is in an altogether different position: it has neither an independent currency nor a central bank. It must raise revenue before it can be spent. Herein lies the answer: if goods and services are provided to local government on credit terms, and/or there are statutory obligations to incur expenses, and there is not enough cash to meet the outstanding liabilities, insolvency is the inevitable outcome.

So the answer is that a local authority can go bust. But, would central government allow it to happen? Privately owned banks and care homes have been bailed out by central government because they were ‘too big to fail’. On the other hand, central government was willing to use Carillion to outsource public sector contracts and allow private contractors to suffer the losses on its insolvency.

Either way, if you have a claim against any public body that is not a central government or NHS body and periodical payments are contemplated, you need some advice to stop you, or your client, getting into a right pickle.