Developing an Insolvency Regime for the FE Sector

In times of political chaos, perennial funding uncertainty and policy flux, the one constant phenomenon has been the resilience of colleges to reach out and meet the needs of their learners. That is underscored by the fact that the large majority of FE colleges are rated as having “satisfactory” financial health. There is, however, a significant minority of colleges which are rated as inadequate.
 
The Further and Higher Education Act 1992 makes no provision for the treatment of insolvent colleges.  The usual means of seeking to resolve the problem posed by financially-failing colleges is to effect a merger, which requires a willingness on the colleges’ part to merge.  In the absence of such willingness, it is not clear what process could be adopted, in particular because it is unclear whether colleges, which are statutory corporations,  fall within the definition of “unregistered company” under Section 220 of the Insolvency Act 1986 (IA1986) and therefore whether they can be wound-up. The Area Review process is regarded by the Government as a means of significantly reducing the potential for financial failure, but it cannot remove it.
 
The Government’s objective is to eliminate this uncertainty and to provide an orderly process for closure of insolvent colleges which will protect learners from disruption to their courses and enable colleges to be rescued, where possible. 
 
The consultation examines the possibility of creating a regime of insolvency procedures for colleges similar to that which exists for companies under IA1986, ranging from processes intended to rescue failing institutions, such as administration and voluntary arrangements, to formal closure routes of voluntary or compulsory liquidation.
 
The consultation proposes a Special Administration Regime (SAR) as a tool of last resort where a college is unable, or likely to become unable, to pay its debts. It would provide specific protection for continuity of learner provision, but could result in the winding up and dissolution of a college once the objective of continued provision has been met. The Secretary of State could initiate a SAR by application to the Court (or in the event a college or its creditors petitioning for another type of insolvency regime under IA1986). This will involve the appointment of an education administrator who could consider various options in order to secure continuity of provision for learners. Those options include rescuing the college as a going concern, arranging the transfer of provision to another provider or allowing learners either to transfer to another provider or to complete their courses before the college is wound up and dissolved.
 
The cost involved in setting up a new statutory insolvency regime for colleges will be significant and involve complex legal change with a potential impact on the availability of funding for colleges, as lenders may become risk-averse. The consultation paper therefore raises an option of doing nothing, the effect of which is to leave colleges at the risk of an uncertain future with potentially lengthy and costly litigation followed by a court-appointed liquidator.
 
The proposed application of insolvency law to colleges is likely to cause concern to governors who, notwithstanding their volunteer status, have over that last few years experienced, paradoxically, the challenge of increased freedom and increased regulation. Governors are charity trustees and have to discharge various fiduciary duties accordingly. If insolvency law is also applied, they will incur additional potential liability, for example for wrongful trading. Liability arises in that context where governors knew, or ought to have known, that their college had no reasonable prospect of avoiding insolvent administration or liquidation and did not take appropriate steps to protect creditors. If found liable, the court may order a governor to make an unlimited contribution to the assets of the college. 
 
The spectre of additional liability may cause current governors to review their commitment and make recruitment to college corporations more difficult. Currently, governors who have acted honestly and reasonably may apply for relief from liability incurred as a result of their membership of the corporation. That protection was afforded under the Learning Skills Act 2000, in an era before increased autonomy when state support for colleges was clear. Whether it will survive the new dawn of an SAR is a moot question. It is also proposed to bring principals who are not governors, as well as corporation clerks, within the scope of insolvency-law related liability. That compliance with existing charity law may be sufficient protection, as suggested in the consultation document, may be little consolation.
 
The proposals may also provide additional motivation for colleges to engage in, and comply with, the recommendations of their Area Reviews as a solution to financial frailty and to avoid a possible SAR process, which will be imposed on them instead. 
 
The consultation closes on 5 August 2016. The Government will then consider replies and publish its response setting out how it intends to proceed.
 
For further information see the link to the consultation on the BIS website.
 

Geraldine Swanton
Legal Director
Education Team
For and on behalf of SGH Martineau LLP
DD: 0800 763 1455
E: geraldine.swanton@sghmartineau.com
W: www.sghmartineau.com

and

Sean Moran
Partner
Restructuring, Recoveries and Insolvency
For and on behalf of SGH Martineau LLP
DD: 0116 257 4410
E: sean.moran@sghmartineau.com
W: www.sghmartineau.com

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