Derbyshire County Council edge closer to “bankruptcy”

Derbyshire County Council look set to follow in the foot steps of the Woking, Birmingham and Nottingham Council who have all in the past year filed s.114 Notices under the Local Government Finance Act 1988.

s.114 Notices
Technically local authorities cannot go bankrupt or be subject to the Insolvency Act 1986 in the same way individuals are declared bankrupt or companies enter liquidation. However, if a council is on the verge of incurring expenditure which is unlawful under the Local Government Finance Act 1988 then it is required to issue a s.114 Notice. The law and in particular s.114 (2) requires the Chief Finance Officer (CFO) of a local authority to make a report if it appears to him that the council “has made or is about to make a decision which involves or would involve the authority incurring expenditure which is unlawful”. A report also needs to be made if action is taken by the authority which is unlawful and likely to cause a loss or deficiency to that authority.

There are additional grounds under which the CFO is required to make a report including “if it appears to him that the expenditure of the authority incurred (including expenditure it proposes to incur) in a financial year is likely to exceed the resources (including sums borrowed) available to it to meet that expenditure”.

If a council issues a s.114 Notice it’s councillors must meet within 21 days to discuss how to bring their expenditure in line with funding and is not permitted to incur new spending unless authorised by the CFO.  The result of the s.114 Notice involves council’s often having to implement spending cuts, reallocating budgets, council tax rises (the flavour of the month) or government intervening.

Between 2000 and 2018 there had only been one s.114 Notice filed and between 2018 and 2024 there were 13 notices, with Derbyshire look set to issue one shortly. In a recent report the Derbyshire Council look likely to overspend its overall budget by more than £28million taking its overall forecasted budget to £769million.  This forecast includes using £21million form its general reserves. Whilst the council has a remaining £35million in reserves it is feared this could drastically fall to £7.3 million which represents one per cent of the authority’s overall annual budget.

“Clearly unacceptable”
The council directors, Mark Kenyon and Emma Alexander recognise the severity of the issue and have called the position “clearly unacceptable” adding that the council “needs to take corrective action”. Whilst the council has not commented on whether there will be job losses, it looks likely that their response will include the suspension of recruitment, reviewing the need for agency staff and reducing spending on procurement instead focussing on essentials only.

The council stated “The forecast overspend has increased significantly since quarter one. This is mainly due to additional forecast expenditure on placements in children’s social care, and expenditure on special educational needs (SEN) and home to school transport is increasing as a result of continued growth in numbers of Education Health and Care Plans (EHCPs).” 

Whilst the Derbyshire County Council is committed to ensuring it sets a balanced budget, it looks inevitable that it will join the list of other councils who have issued s.114 Notices in recent times with the trend set to continue.