Navigating insolvency risks: directors’ duties for care home professionals
Operating a care home is becoming increasingly challenging as providers navigate economic pressures, stringent regulatory requirements, and the growing demands of an ageing population.
The sector faces mounting financial risks that could jeopardise operations and, ultimately, impact patient safety.
Setting the scene - rising demand and sector pressures
According to the Office for National Statistics (ONS), the UK population is expected to reach 70 million by mid-2026, with the number of people aged 85 and over projected to rise by one million over the next 15 years. This demographic shift will place significant pressure on care homes, increasing demand for quality services and further stretching already limited resources.
Further, whilst we expand more on the reasons below, the care home sector is facing significant increased costs and financial pressure. Care England reports "Recent findings highlight a growing shortfall, with a £2.24bn gap between the average MSIF rates for 2024/25 and the forecasted Fair Cost of Care (FCoC) and increase in the last 12 months of circa £400m, indicating an alarming trend where care providers are increasingly unable to cover the actual costs of delivering essential care services."
In a welcome move, in January, the government announced that it was launching an independent commission with a view to transforming adult social care. Unfortunately it appears that initial recommendations will not be announced until 2026 with final proposals not likely until 2028. Whilst the announcement comes with promises of immediate investment in the social care sector, such a protracted timeline for reforms is not ideal with the sector already under immense strain: waiting years for recommendations could leave care homes vulnerable to financial instability, workforce shortages, and declining care standards.
Director duties
As most directors will know, they must adhere to directors' duties set out in the Companies Act 2006. These duties include acting in the company’s best interests, promoting the success of the business, and exercising reasonable care, skill, and diligence.
However, when a company is insolvent or approaches insolvency, these duties shift, and directors must consider the Company's creditors. This duty operates on a "sliding scale," meaning that as the likelihood of insolvency grows, directors must place greater emphasis on creditor interests. Once insolvency becomes inevitable, the interests of shareholders no longer hold any significance. Failing to do so can result in personal liability and other serious consequences. As a result, directors must take steps to minimise the potential losses to creditors, such as suppliers, staff, residents, and local authorities.
Further, directors may be held personally liable for "wrongful trading" if they continue to operate the business when they knew, or ought to have known, there was no reasonable prospect of avoiding insolvency. Failure to meet your legal duties could also result in disqualification from acting as a director, which could affect your involvement in another business.
Potential financial trigger points
Given the above, as care providers grapple with continuing financial challenges, sustainability remains a key concern.
To assist, we set out below a non - exhaustive list of examples of warning signs to look out for that, if not properly managed, could lead to financial difficulties:
Rising staff costs
- Increased employers' national insurance contributions (NICs): Rising NIC rates add to overall staffing expenses.
- Minimum wage increases: The continual rise in the national living wage significantly impacts payroll expenses.
- Recruitment and retention challenges: Post-Brexit restrictions have limited the availability of skilled care workers, increasing hiring costs.
- Agency worker dependency: The high cost of temporary staffing solutions strains financial sustainability.
Rising operational costs
- Energy price volatility: The substantial increase in energy costs places additional strain on operational budgets.
- Food and medical supply inflation: Rising costs for essential supplies directly impact service provision.
- Increased insurance premiums: which can be impacted by poor CQC ratings.
Property and maintenance costs
- Ageing infrastructure: Many care homes operate in older buildings requiring modernisation as a substantial investment, particularly to meet fire safety standards.
- Rental costs: Leasehold care homes are particularly vulnerable to rising rents and property-related costs.
Funding gaps and Local Authority budget constraints
- Insufficient local authority fees: Many care homes rely on local authority-funded residents, yet council payments often fall short of actual care costs.
- Delayed payments: Late payments from local authorities or NHS Continuing Healthcare can strain cash flow.
Regulatory compliance and legal costs
- Stricter regulatory requirements: The cost of meeting evolving care standards and health & safety regulations is increasing.
- Litigation risks: Legal claims from residents, families, or employees can result in financial cost and reputational damage.
Impact of health crises and outbreaks
- COVID-19 and ongoing health risks: The pandemic heightened costs related to PPE, infection control, and temporary staffing and the threat of future pandemics and epidemics remains a concern.
- Seasonal illness outbreaks: Norovirus, flu, and other infections can lead to temporary closures and lost revenue.
Impact of CQC Ratings
Poor CQC ratings can deter potential residents, affect recruitment and retention and ultimately a care home's funding streams.
Practical tips
As set out above, directors should be alive to financial pressures and be able to establish if and when insolvency is becoming inevitable in order to seek the appropriate advice. In order to do this, directors should take the following action:
- Keep accurate financial records: ensure that the company maintains proper records, including detailed accounts of debts, assets, and liabilities.
- Review corporate governance: ensure governance processes are robust. This includes clear decision-making processes, regular board meetings, and documentation of decisions, especially those related to regulatory and financial matters.
- Monitor financial health:
- Regularly review cash flow forecasts, profit-and-loss statements, and balance sheets to determine the solvency of the business.
- Conduct stress tests to anticipate the impact of potential downturns.
A regular review of the above in respect of the care home's liabilities, should help directors to quickly identify areas of strength and concern and enable them to make decisions which may assist the future outlook such as whether they seek to increase the cost of personal care packages given the planned cap on care costs has been removed and/ or seek to try and secure a funding uplift form commissioning authorities.
As the situation can be complex, particularly in terms of identifying insolvency, we would suggest that if your care home faces financial difficulties, directors should engage insolvency professionals and/ or take legal advice at the earliest sign of distress.
This article provides an overview of key issues surrounding insolvency and directors’ duties for care home professionals but should be seen as general guidance only and not formal advice. It is important to seek specific legal advice tailored to individual circumstances if financial distress arises.