Debt-hit Croydon Council has effectively declared itself bankrupt by issuing a Section 114 notice due to its “severe and ongoing” financial difficulties, including owing around £1.5 billion.

The notice means no new funds can be spent by the council, except to safeguard vulnerable people and provide statutory services, until an emergency budget is drawn up.

Why Croydon is in chaos…
While bankruptcy came suddenly, the financial crisis of the council dates back many years. Dreams of Croydon becoming a major housing developer have led to loans and risky property investments.

An audit report published in October the council was heavily criticised for ignoring over three years of warnings on its financial situation. Massive overspends could be seen from 2017 and onwards, including a £545m loan for housing and commercial property investments, yet the budget gap has never been properly addressed.  

The Council said in a statement: “Croydon Council has today issued a Section 114 notice due to the severe ongoing financial challenges facing the authority … Despite all efforts to do so the council cannot now balance its budget this year.”

It is in talks with the government about receiving additional financial support to balance the budget and “has set in train a number of improvement and savings programmes to help put it back on a stable financial footing”, the statement added.

Chris Philp, Conservative MP for Croydon South, tweeted his reaction.

Croydon’s crisis comes as it was disclosed that Lewisham council is also facing severe financial difficulties and warned of a series of cuts to deal with a £25m deficit.

Under the Local Government Finance Act 1988, a Section 114 notice must be issued by the chief finance officer of a local authority if in their opinion its spending has outstripped the resources available in the next year. Croydon is the first local authority to trigger Section 114 since Northamptonshire County Council in 2018.

Leader of the council, Hamida Ali, said in a statement today: “The Covid-19 crisis and a decade of austerity have had a major impact on our finances but it’s clear the council has also made mistakes, and I am committed to fixing that.”

She added: “We’re not going to fix these problems overnight and there will be difficult decisions ahead but I want to reassure local people that the council will still be here to support you. My priority is rebuilding a financially sustainable organisation, which provides the value for money and high-quality services that residents deserve.”

The Labour-run Croydon Council has been in severe financial difficulty for some time. Rumours of impending bankruptcy have swirled since August when it asked for financial help from the government after the first lockdown. A government taskforce was sent in last week to oversee its operations, after a damning report by auditors Grant Thornton revealed a spending gap of around £60 million.

It included an overspend of £32.9 million on adult and children social care as well as £542 million borrowed to invest in property and housing developments. Those included hotel and shopping centre investments as well as £200m loaned to housing provider Brick by Brick in 2016, from which the council has seen no return.

Cllr Jason Cummings, Finance Spokesman for Croydon Conservatives told ELL: ‘[Hamida Ali’s] scathing report laid the blame firmly at the feet of the Labour Administration and it will be the local residents who suffer the most. I expect even more damning revelations around their decisions to lend hundreds of millions of pounds to their failed development company, Brick by Brick, and to invest in dodgy property deals.

“Labour were warned repeatedly over the last few years but ploughed on anyway. They must take full responsibility for the damage they have caused.”

The council’s last leader Tony Newman stepped down just under a month ago over its financial troubles. He was replaced by Labour councillor Hamida Ali.

Reporting by Fiona Holland and Clara Murray