At the end of November Nottingham City Council issued a ‘section 114 report’ pursuant to the Local Government Finance Act 1988, declaring that it would be unable to meet its statutory requirement to deliver a balanced budget for 2023 / 2024.  The fate of Nottingham City Council is not unique, with other councils also taking the same action.  Worryingly, a recent report released by the Local Government Association (LGA) hints at a systemic issue across the country, with almost one in five council leaders and chief executives in England surveyed reporting that it is very or fairly likely that their bodies would face this outcome either this year or next.

Whilst the underlying pressures facing councils (such as inflation and rising demand for services) have been well-documented, less attention has been given to the impact that these financial challenges are having on businesses that are dependent on local government funding.  In situations where a section 114 report has been issued the consequences for suppliers and counterparties can be immediate and substantial, with the affected council being likely to impose tight financial controls and review existing commitments in an effort to mitigate the forecast overspend.  However, with the LGA estimating that councils in England face a £4 billion funding gap over the next two years just to keep services standing still, it’s hardly surprising that even those in less acute difficulty are closely reviewing their spending.

Given the precarious state of local government finances, directors of businesses that are reliant on this funding source will need to act prudently and keep their exposure under close review.  Where a business is itself exposed to financial distress as a result of these challenges, its directors should obtain specialist advice on their duties and options at the earliest possible opportunity.

If you would like to discuss any of the issues in this article please contact a member of our specialist Corporate Restructuring and Insolvency team.