Medicolegal: Residents’ Rights in Aged Care

With the Berrington group going into voluntary administration, Special Counsel David McMullen explores what safeguards residents have.

On 4 July 2019, Berrington Care Group Pty Ltd and Berrington Group Pty Ltd went into voluntary administration. Berrington is a well-known provider of residential aged care to the premium end of the Perth market, and its voluntary administration has attracted considerable public interest.

Special Counsel David McMullen
Special Counsel David McMullen

Far from being a poor not-for-profit, Berrington is reported to have collected about $120-134 million from residents for their accommodation.

The Berrington situation is a springboard for a broader discussion about what happens when an aged care facility goes into administration (voluntary or otherwise). Many readers will have dealings with aged care facilities – either in a professional or personal capacity.

Among the refinancing, legal responses, media coverage and regulatory activity that ensues when an aged care provider encounters financial difficulty, there are vulnerable elderly residents relying on the provider for their care needs.

When Berrington’s Administrators were appointed, they acknowledged the uncertainty that their appointment might cause, and they undertook to work closely with the companies’ senior management team, secured creditors, suppliers and the Commonwealth Department of Health to ensure that quality of care was maintained and the health and wellbeing of residents was protected.

While on an operational level it may be business as usual for now, detailed assessment of the finances and business of the companies is going on in the background. In the Administrators’ words:

‘The Administrators are immediately seeking a sale of the business as a going concern or restructuring of the company through a Deed of Company Arrangement.

The future of Berrington is likely to involve either:

  1. Berrington being sold to an alternative aged care provider.
  2. Berrington continuing under its existing or alternative ownership structure through a Deed of Company Arrangement.
  3. Berrington’s operations are wound up’.

The outcome remains to be seen but Berrington’s voluntary administration will not be the only one likely to affect the aged care sector in the foreseeable future. Industry analysis suggests that for the three months to 31 March 2019, more than 45% of aged care facilities operated at a loss before tax.

What about the residents?

The Administrators’ apt summary of the main options – sell, refinance and/or restructure, or wind up operations – offers a way out of a difficult situation for the owners, but what of the residents caught in the middle? What happens to them?

There are some outcomes that could be relatively seamless from a resident’s perspective. For example:

  • The provider could refinance (even if that involved bringing in a new part-owner as an additional source of capital) and continue operations.
  • The business could be sold as a going concern to another provider, with assets and liabilities – as well as all operations and responsibility for residents – passing from one owner to the next.

However, the commercial reality could be different. An approved provider might ultimately find themselves having to wind up, putting residents in a precarious situation. While residents do enjoy security of tenure at law, there are a limited number of circumstances in which they may be asked to leave a care service. These specifically include where the service is closing.

Fortunately, although a facility closure would certainly be disruptive and distressing, the practical reality is that residents might not necessarily be left searching for a new home. There are least three reasons:

Firstly, part of security of tenure means a provider must not take action to make the care recipient leave the residential care service, or imply that the person must leave, before suitable, affordable alternative accommodation is found.

Secondly, each residential aged care place has a certain monetary value. There is in fact a market for the buying and selling of these places. Buyers may be new entrants to the aged care industry, or existing providers looking to upscale or expand into a new region.

The transfer process is prescribed in the Aged Care Act, with resident care and wellbeing very much at the forefront. In summary:

  • An approved provider may give the Secretary of the Department a transfer notice, in order to transfer an allocated place to another person who is (or who is to become) an approved provider.
  • On receiving a transfer notice, the Secretary will consider matters such as the suitability of the transferee; their financial viability; suitability of their premises; adequacy of the standard of care, accommodation and other services; adequacy of proposals to ensure that care needs are appropriately met; and any evidence of past satisfactory conduct and compliance.
  • The transferor must give such records as are necessary to ensure the transferee can provide care in respect of the places being transferred.
  • The Secretary retains a right of veto. (So long as the transferee is an approved provider on the transfer day and the transfer has not been vetoed, the places are allocated to the transferee.)

Thirdly, there would be significant political pressure to ensure all residents were safely relocated. This was achieved in the recent example of Earle Haven – a co-located campus with a big retirement village and an aged care facility in Nerang, Queensland. The facility abruptly closed on 11 July 2019, forcing 68 elderly residents to relocate to other residential facilities and hospitals.

Protection of residents’ money

Since 1 July 2014, residential aged care accommodation has been payable by way of a Refundable Accommodation Deposit (RAD), a Daily Accommodation Payment (DAP) or a combination of both, replacing the previous accommodation bond and charge arrangements. As their name suggests, RADs are refundable when a resident leaves an aged care facility (subject to deduction of any applicable costs and charges).

Where an aged care provider goes into administration, thoughts will quickly turn to resident funds held by the provider. RADs are not quarantined or held on trust like a residential tenancy bond, for example.

RADs can in fact be applied to a range of permissible uses under the Aged Care Act such as capital works, making loans or even investment in financial products. They are in essence an interest-free source of funds to a provider for the duration of a resident’s time at a facility. (RADs are discussed further here: https://www.pmlawyers.com.au/articles/news/permitted-use-of-refundable-accommodation-deposits/ )

Residential care recipients who pay for their accommodation (in whole or in part) by way of a RAD may, however, have protection under:

  • Australian consumer law;
  • contract law (specifically, the terms of their agreement with the aged care provider);
  • the Corporations Act;
  • provisions of the Aged Care Act and related principles relating to the payment, management, permitted use and refunding of RADs.

The last line of defence is the Commonwealth Accommodation Payment Guarantee Scheme under the Aged Care (Accommodation Payment Security) Act 2006. The Guarantee Scheme covers all residents of Australian Government subsidised aged care services who have paid a RAD to an approved provider.

The Guarantee Scheme is necessary because RADs do not have special priority in the administration process. They cannot simply be paid out on demand by administrators because they must compete with other debts and liabilities owed by an aged care provider.

In short, the Guarantee Scheme protects a resident’s right to be repaid a RAD, but it is important to understand the nature of this protection:

  • The Guarantee Scheme is not automatically triggered when an aged care provider encounters mere financial difficulty.
  • The Guarantee Scheme is triggered when an ‘insolvency event’ occurs and the repayment of at least one RAD balance is overdue. In brief, an insolvency event as defined in the legislation would usually occur by the winding up of a company. Involuntary administration such as Berrington’s is not an insolvency event.
  • As soon as practicable after becoming aware of an insolvency event and there being at least one outstanding RAD balance, the Secretary of the Department must make a default event declaration. As soon as practicable after determining the amount of any outstanding RAD balance, the Secretary must then make a refund declaration (declaring the amount that is to be repaid, with interest). The Commonwealth then pays the refund amount within 14 days after making the refund declaration.

So there is a statutory process to follow where the Guarantee Scheme is to be enlivened but this process takes time.

Berrington’s Administrators, for example, have successfully obtained an extension from the Supreme Court of Western Australia to hold a second creditors meeting by early November 2019, which will be almost four months after the companies went into voluntary administration.

So, while the Guarantee Scheme may ultimately protect a RAD, if monies were needed in an emergency, there may not be any assurances as to how quickly this would occur.

Note also that the Guarantee Scheme does not cover every type of sum that aged care providers collect from their residents.

On our reading of the terms of the Guarantee Scheme, the Commonwealth would not be obliged to cover fees paid on a daily basis (for example DAPs, or other fees payable for care and services in addition to a RAD or DAPs). It is not uncommon for such fees to be paid monthly in advance, which in the aggregate can amount to significant balances being left unprotected by the Guarantee Scheme.

Other implications

Despite all these protections, if a care provider goes into administration (or worse), one might still anticipate:

  • problems between the aged care provider and their suppliers and contractors, where security of payment is in issue;
  • anguish for residents and their loved ones at the prospect of relocation – even if this never eventuates;
  • concern at the potential loss of sums paid to the provider (even if RADs are covered by the Guarantee Scheme);
  • concerns around ongoing quality of care, particularly where a provider is straining to cut costs and achieve efficiencies; and
  • decreased staff motivation and morale.

An administrator’s duties are not necessarily incompatible with the smooth operation of a residential aged care facility. In Berrington’s case, we are not aware of any concerns reported by the Department in relation to a decline in quality of care attributable to the voluntary administration. Nevertheless, at times, the priorities of an aged care provider will inevitably diverge from those of an administrator.

While there may not be cause for immediate panic when these circumstances arise, it is important to understand the potential impacts – and the safeguards – for residents.

ED: David McMullen is Special Counsel at Panetta McGrath Lawyers and has a particular focus on retirement villages, health and aged care.

Disclaimer: The content of this article is intended to provide a general overview and guide to the subject matter. Specialist advice should be sought about your specific circumstances.