By Matt Jarram, Local Democracy Reporter
Nottingham City Council has been served with an extremely rare legal Section 114 notice for ‘unlawfully’ spending more than £15m on the wrong services.
The order has only been handed to a select group of councils in the past.
The Labour authority has been found to have made a ‘serious’ breach in terms of finance law.
It means it must now take steps to correct the breach and find out how it occurred.
An investigation was announced earlier this month after funds to the tune of £15.86m from the council’s Housing Revenue Account – which should have been spent on things such as housing repairs – were incorrectly credited to the General Fund for all council services.
The Housing Revenue Account is strictly ring-fenced and cannot be used for other purposes. The council said the sum involved has accumulated since 2014/15.
The leader of Nottingham City Council, Cllr David Mellen (Lab) said he was “mystified’ on how this had occurred for such a sustained period of time without being flagged and called for an urgent investigation.
Concerns were raised by opposition council leaders that housing tenants had missed out as a result and there was not enough money in the general reserves account, sitting at £12m, to pay back the money spent.
Now, it has been announced that a Section 114 order has been issued by the council’s chief finance officer on Wednesday, December 15.
Section 114s are very rare and are normally issued when councils run out of money – with any spending that is not essential being postponed.
But this order has not been issued as a result of that.
This part of the order has been issued because the council has acted ‘unlawfully’ and is in breach of council finance law.
The council says this is not illegal or indicative of a criminal offence.
But the order is formal notice of a serious breach of regulations and it must now look into what has happened and correct it.
A management action plan is also prohibiting the council entering into new agreements and spending commitments with Nottingham City Homes unless expressly approved in writing by the chief financial officer.
The notice also says additional issues have come to light which raise further questions about more breaches which could further threaten the integrity of the HRA ring-fence and which will be the subject of further investigations.
It comes while the council is already under the watchful eye of Government.
The authority was accused of ‘institutional blindness’ over the setting up of a failed company, Robin Hood Energy, which collapsed into administration in January 2021.
The company set up to compete with the ‘big six’ including British Gas left taxpayers having to pick up an anticipated bill of £38m.
An Improvement and Assurance Board was later set up by the Government calling on the authority to make significant changes in the way it operates.
This included providing ‘financial resilience’ and creating a culture change across the whole organisation.
The council, which is already nearly £1bn in debt, needs to also find £38m of savings over a four year period – £28m of which need to be found next year.
Former government ombudsman and chair of the board, Sir Tony Redmond, has to report back to the Government quarterly on the progress made.
He told councillors in November that while some improvements had been made, the authority was ‘falling short in some areas’ and gave Labour councillors a March deadline to sort their finances out.
If the council fails, then Government commissioners could be called in to run the Labour-run authority.
But only weeks after he set the March deadline, a new revelation came to light – that more than £15m had been spent inappropriately.
Money which should have been spent on council housing tenants had been used for other council purposes.
Following news of the notice on Wednesday, the Government says it is now considering how it will respond. Only a handful of councils have been served with a section 114 in the past.
Council Leader David Mellen (Lab) said: “Since I was elected leader in May 2019, I have been carrying out a number of measures to bring about financial stability to the council and have overseen the council’s Recovery and Improvement Plan to date.
“This has rightly looked at ways we can set about balancing our budget whilst continuing to deliver the vital services we know people across the city need and rely on.
“Clearly, politicians are elected to set the policy and vision for the city, however officers manage the day-to-day running of the council.
“Despite having the council’s budget and accounts externally audited every year by independent experts, it was the council’s most senior finance officer who rightly alerted me to the accounting irregularity with the Housing Revenue Account and I supported seeking external advice from the Chartered Institute of Public Finance and Accountancy (CIPFA) to review the issue.
“Having reported their recommendations to me last week, I am committed to acting without delay to ensure that the money is accounted for correctly.
“This will not directly affect the council’s revenue budget for day to day services but will put further pressure on our General Fund reserves and steps are now being taken to immediately refund the Housing Revenue Account from the council’s General Fund by the full amount.
“I am absolutely committed to making sure that the council continues to deliver vital services whilst ensuring that issues such as this are discovered and dealt with immediately.
“As leader of the council, I am determined that an investigation is carried out without delay to understand how this happened and will absolutely ensure that measures are put in place so that something like this cannot happen again.
“The fact that this continued unchecked for a number of years is clearly disappointing and whilst we understand how this could have happened, it is only right that issues such as this are unearthed and dealt with transparently.”
Cllr Kevin Clarke, leader of the opposition Independent Group at Nottingham City Council, said: “It will not sit well with the improvement and assurance board.
“It could be the straw that broke the camel’s back and commissioners could be brought in now – and it is most likely.
“I think they will if you look at previous Section 114s that have been issued [to other councils].
“The council has £12m in General Reserves and £15.9m that needs paying back. That shows a shortfall of £3m, so where are they getting that money from?
“It absolutely stinks. It is a very serious offence in council terms. It does not get more serious. I can’t see how they will survive this. How can the government not step in after this?”
Mel Barrett, the council’s Chief Executive, said: “This is clearly a setback for the council in the context of the significant improvement journey under way, however it is positive that the matter has been identified and is being addressed quickly under the current arrangements we now have in place.
“Following legal advice that the use of funds was unlawful, the council is required to issue what’s known as a Section 114 Notice under the Local Government Finance Act 1988 in relation to this activity only. The matter will be brought to a special meeting of the Full Council in the New Year.”
