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Can I avoid being stung after joining a federation?

As highlighted by the recent story of a failed federation that led to GPs losing £20,000, you need to understand your financial obligations and exposures when federating. Here is some advice that can help lessen the risks.

Limited companies can reduce risk

A federation can just be a loose association of practices, in effect a large partnership, with the resulting liability for the federation’s debts. To protect against this risk, you should consider restructuring the federation as a limited company. However, participating practices will need to contribute some funding to set up the company, which they will lose if the company never manages to operate profitably.

Directors of the company need to take their responsibilities seriously, as they put themselves at serious financial risk if they are negligent. Directors are normally elected from the member practices, and are often partners or practice managers.

GPs who take up a directorship should remember that limited liability does not absolve them of their duties of care. Even those who have taken out a directors and officers insurance policy will not be covered for being negligent in their responsibilities and could be held financially accountable for losses and banned from being a director for a period.

Make sure the federation’s contracts cover costs

If you are not a director, the only risk you face is doing work for the federation that you don’t get paid for. For example, when a federation wins a contract, it may then subcontract to individual practices in the federation. The federation invoices the commissioner of the service and is in turn invoiced by the subcontracted practices for the delivery of the service. There should be a margin between what the commissioner is charged and what the practices are paid, for the federation’s running costs.

Problems arise if contracts are not renewed and the margins on remaining contracts are not sufficient to cover the federation’s running costs. If such a situation continues for too long and the federation ceases to trade, practices within the federation could find themselves saddled with several months of unpaid invoices.

In theory, this should not happen because the directors of a limited company have a legal obligation not to allow a company to continue to trade if it is unable to pay its debts in full. If the federation does find itself unable to pay its debts, the directors should plan a controlled close-down, probably taking advice from an insolvency practitioner.

But if the directors carry on regardless, the company will fail and the creditors can sue the directors personally for their losses. Negligence of directors, though, is often difficult to prove and you should not bank on it being successful.

Bob Senior is head of healthcare at RSM UK Tax and Accounting Limited and chairman of the Association of Independent Specialist Medical Accountants