Currently, six local councils have issued this notice of bankruptcy with 13 more at risk of having to do so and many in high levels of debt for the size of the council, revealed analysis by Grant Thornton.

A section 114 notice must be issued when a local council’s cash reserves fall below 5% of their new revenue expenditure.

So far six councils have issued a notice, including Croydon, Slough, Thurrock, Woking, Birmingham and Nottingham.

Birmingham City Council suffered due to a backlog of equal pay claims due to the changeover of its IT system, with the 114 notice being issued in August 2023. This resulted in a £87m shortfall and the cost of the claims rising to £766m. It has paid out £1.1bn in the last ten years.

Woking Borough Council had reached debts of £2.6bn and issued the 114 notice in June 2023 after the construction of a new shopping centre and high-rise buildings. The Lib Dem leader Anne-Marie Barker said the council ‘had got used to living beyond its means.’

For Croydon Council this is the third time since 2020 a 114 notice has been issued after debts had risen to £1.3bn, paying back a total of £47m a year. To be able to pay back these debts effectively the Council would have to make £130m of cuts. The council issued its first 114 notice in 2020, mostly due to poor investment in property and overspending on social care.

Councils facing serious financial problems are Somerset, Southampton, Hastings, Medway, Havering, North Northamptonshire, Leicester, Warwick, Dudley, Stoke, Cheshire East, Bradford and Middlesborough.

Without additional income or any further spending cuts, there is a risk one in five councils could be issuing the same notice in the next 12 months, increasing further to one in four by the end of 2025.

Previous analysis from Grant Thronton in 2022 found that one in six councils were at risk of bankruptcy within the year.

Phillip Woolley, head of public services consulting at Grant Thornton said: ‘Local councils face an unprecedented financial crisis. Funding for key services like social care, homelessness and special educational needs has not kept pace with growing demand.

‘This shortfall has seen some councils make risky commercial decisions and many divert funds from other local services, which can in turn create a continuous cycle of service decline and further demand.

‘This stark reality poses significant challenges to local governance and the provision of essential services. Although the sector must learn from past failures to mitigate some future risks, without more fundamental reform in local government finance, these efforts may only offer limited relief.

‘There have been calls for councils to use reserves to plug budget gaps but this is not a sustainable solution – reserves can only be used once and are intended to be a safety net, used only in exceptional circumstances.’

Local councils have a combined reserve of £23bn but this is not evenly distributed, leaving councils with the least access to the funds at most risk. Grant Thornton also warned that councils face a £9bn black hole in budgets over the next five years.

 Woolley added: ‘The financial crisis in the sector has become increasingly evident over the past few years, with more councils declaring financial distress in this time than over the past 20 years.

‘It is critical that a more comprehensive overhaul of both local government finance and models for social care is undertaken to address local councils’ deep-rooted financial challenges.’

Tim Symes, insolvency and asset recovery partner at law firm Stewarts said: ‘The impact of more and more councils declaring a financial emergency in light of their desperate finances will be felt far and wide, not only with people facing higher council tax bills they can ill afford, but also suppliers to councils facing brutal procurement cuts.

'The effects of both may ultimately feed into increased insolvency numbers at a time when they are already breaking records.’