Further Education Insolvency Regime

When further education colleges transferred out of local government in 1992, the government did not make any rules about what would happen if a college ran out of money. Central government became the funder of last resort. However, with financial pressures rising to a crescendo in recent years, coupled with an increasing number of financial notices to improve being triggered, this brought into sharp focus the fact that there were no statutory arrangements in place should a college become insolvent. This prompted the 2016 government consultation “Developing an Insolvency Regime”, which ended in the enactment of the Technical and Further Education Act 2017 (the Act), and the resulting insolvency regime for further education colleges.

When will the regime go live?

The insolvency regime is intended to apply from 31 January 2019.There had been mixed messages coming out of Government as to the exact timing. It was at one point expected to be April, but of equal importance was the timing of the end of the long term Exceptional Financial Support regime and the closure of the Restructuring Facility administered by the Transactions Unit in connection with the nationwide programme of Area Reviews. Both of these have been confirmed as April 2019.

How exactly will the insolvency regime work?

The insolvency regime is essentially a special administration regime for colleges, akin to the arrangements put in place in recent years for energy companies and housing associations with the aim of protecting a public service while creating an orderly process to deal with a situation where the organisation providing that service has run out of money. The normal insolvency procedures of voluntary arrangements, administration, creditors voluntary winding up and winding up by the court will be available in relation to further education bodies in England and Wales, but the Act introduces the special administration regime which would allow a court to appoint an education administrator to manage the institution’s affairs, business and property with a view to avoiding or minimising disruption to the studies of existing students. The application for the appointment of an education administrator can only be made by the Secretary of State (in relation to institutions in England) or a Welsh Minister (in relation to institutions in Wales). As well as protecting the interests of creditors, if an education administrator is appointed their objective is to avoid (or minimise) disruption to the studies of existing students and to ensure that it becomes unnecessary for the institution to remain in education administration for that purpose.

The means by which this objective can be achieved includes:

1. rescuing the institution as a going concern;
2. transferring some or all of its undertaking to another body;
3. keeping it going until existing students have completed their studies; or
4. making arrangements for existing students to complete their studies at another institution.

The government has made public announcements that it intends for the regime to be used as a last resort on the basis that there should already be appropriate checks and balances in place to help prevent colleges reaching the point where the regime is their only route out of financial difficulty. These checks and balances include the governors’ existing responsibilities to approve and continually monitor the college’s budget (spotting and tackling problems before they become acute and taking appropriate and timely professional advice), the ESFA’s role in monitoring and assessing the financial health of colleges and the role of the FE Commissioner in enforcing the government’s intervention policy - which may result in the Commissioner recommending changes such as mergers and restructuring where it is not too late to avoid insolvency.

What implications does the regime have for college governors?

Governors will understandably be concerned about what the introduction of the insolvency regime could mean for them in relation to personal liability. Concerns have also been expressed that the insolvency regime may cause a governor retention and recruitment crisis.

Responding to their concerns, the government acknowledged the voluntary post of the college governor, and that it did not intend to impose additional obligations on governors on the basis that they are already obliged to follow good governance procedures. Although this reassurance was welcomed by colleges, and indeed the pursuit of charity trustees is rare and reserved for the most serious of circumstances, it is important to note that the legislation extends the Company Director Disqualification Act to colleges. Although the conduct of governors must be sufficiently poor to warrant a referral to the Insolvency Service (such as fraud, criminal activity, personal enrichment), a failure to seek and act upon professional advice could trigger a referral, so governors do need to fully appraise their options and seek and carefully consider acting on appropriate professional advice.

What view do the banks have on the new regime?

Since the enactment of the legislation, we have seen a significant hardening of the position of all banks to protect their position. This process had already started, tracing its roots perhaps back to the Education Act 2011 and the then Skills Funding Agency becoming more of a mere funder, but since the insolvency regime was first proposed banks have looking much more closely at any risk they are exposed to with their college borrowers. Banks are more actively managing their loans, including taking security (which would put them higher up the creditor queue). Another unfortunate by-product of the insolvency regime is a reduction in new lending to colleges, reducing their ability to invest in new facilities and to meet the future growing skills needs, compounding the sectors problems even further.

Will there be any more cash injections from the ESFA to help struggling colleges?

It seems that colleges may still be able to access some short term funding support once the insolvency regime goes live. This was revealed in a recent letter from Peter Mucklow, which detailed the post 16 funding arrangements for next year. The letter can be accessed here, but the fine detail of what shape this will take remains unclear.

What’s ahead?

Some are predicting that there will be more mergers and restructuring of colleges in the forthcoming years, meeting the government’s aim of having fewer, more financially resilient specialist colleges across the country. What is certain is that we are already seeing heightened use of the existing intervention regime with a refreshed, more proactive, regime to be launched shortly.