College insolvency regime: 7 things we learned from DfE's new guidance

Two days before the college insolvency regime comes into effect, meaning that colleges will be able to go bust for the first time, the Department for Education has released guidance for governors on the new law and their responsibilities.

FE Week has picked out seven key points:

 

  1. Early identification of financial difficulties is vital – so don’t ‘rely solely’ on ESFA ratings

College governors are being urged to “liaise with their bank and the ESFA” as “soon as signs of financial difficulty emerge”.

“It will be more straightforward to identify appropriate support and intervention if colleges tell the ESFA immediately if they judge that they may be running into difficulties,” the guidance said.

Governors are warned not to “rely solely” on the college’s ESFA financial health rating as “such ratings do not necessarily take into account all aspects of financial management and the cashflow position can vary quickly and should be assessed monthly”.

 

  1. Colleges should have a qualified accountant on their board

College corporations would be “advised” to “recruit a qualified accountant onto their board”, and to also ensure that a finance director of “sufficient seniority” who is “capable of renegotiating covenants and lending facilities and driving through change” is appointed.

Governors without a background in finance “are not expected to become experts” but “they should familiarise themselves with financial planning and accounting guidance” and be prepared to “ask questions” about finance papers, and “undertake training if required”.

During an interview with FE Week in November last year the FE commissioner said it was “staggering” that there were still colleges that didn’t have any financially qualified board members.

 

  1. An independent business review could help ‘head off’ insolvency situation

An independent business review is the first stage in the insolvency process – and could actually “head off” a college going bust “if conducted early enough”.

The IBR involves “assessing the financial and strategic future of the college” to identify a range of options for its future.

It’s usually commissioned “where an undertaking is either exhibiting signs of financial distress, has breached covenants on financing facilities or where there is a material additional financing need caused by operational difficulties”, but does “not automatically result in insolvency proceedings of any kind”.

In the case of the college insolvency regime, it’s most likely to be commissioned by the DfE, a secured creditor, or the college board.

 

  1. Governors have a number of duties under insolvency law – and penalties if they don’t comply

If the outcome of the IBR is that the college is insolvent, the DfE will appoint an education administrator to oversee the insolvency process.

Governors have a “statutory duty to co-operate with an administrator, education administrator or liquidator”, according to today’s guidance.

Actions that governors might be required to do include “make out and submit a statement as to the affairs of the statutory corporation, setting out the particulars of the corporation’s assets, debts and liabilities” and “lay a statement of affairs before creditors”.

Related to this, the FE Bodies (Insolvency) Regulations 2019 lists a number of offences that governors can be guilty of, including “material omissions from statements relating to the college’s affairs”, “falsification of the college’s books” and “false representations”.

In each case the penalty could be a fine or a prison term, or both.

 

  1. Student governors won’t be treated the same as other governors

The legislation around the FE insolvency regime “deliberately” includes “allowances” for student governors.

“Student governors must take their responsibilities as governors and duties as charity trustees seriously, and these still apply,” today’s guidance says.

“However, it was judged that they might be likely to have less knowledge of the college’s financial affairs than other governors of the college and that it would be unfair to put them in a position where they could potentially be fined for not being able to be involved in preparing and submitting statements of affairs about the college.”

Student governors also don’t have the power to appoint an administrator.

But in “circumstances where student members give false statements” in relation to other offences they can be held responsible, as “these matters are within their control”.

 

  1. All governors could be guilty of wrongful trading

Wrongful trading is a civil offence that occurs – in this case – where governors have allowed a college to continue to operate when they knew that insolvency was unavoidable, and they didn’t do everything they could to avoid loss to its creditors.

“Governors must act reasonably and responsibly in the time preceding insolvency to recognise the prospect of insolvency and act on it, making every effort to minimise loss to creditors,” the guidance said.

If a claim of wrongful trading is successful, the court “can order a governor to make such contribution to the FE body’s assets as the court thinks fit”.

 

  1. We still don’t know what the ESFA’s monitoring and intervention arrangements will be

Today’s guidance “does not provide comprehensive guidance on the financial monitoring and intervention arrangements for colleges, which are being redeveloped in the light of the introduction of the insolvency regime”.

More details will be published “later in spring of 2019”.

As previously reported by FE Week, “exceptional financial support will no longer be available from April 2019” but a “range of support will continue to be available” from both the ESFA and the FE commissioner’s team, today’s guidance said.