The new FE insolvency regime is designed to improve the sustainability of the FE sector, says Stephanie Mason, who explains what colleges need to know
On 31 January 2019 the further education insolvency regime comes into force, meaning that for the first time it will be possible for colleges to fail and be placed into an insolvency process. The new legislation, which is similar to the measures introduced last year for private registered providers of social housing, will apply aspects of corporate insolvency law to colleges that are statutory corporations. There will also be a new special administration regime known as education administration, with a special objective to protect learner provision for existing students at an insolvent college.
Under the new framework education administrators would first seek to rescue the college as a going concern; but failing this the education administrators would seek to transfer the business to another institution. In the event that this is not possible the education administrator would keep the college operating until students have completed their study, or transfer students to an alternative provider. At the same time the education administrator will also balance the needs and rights of lenders and other creditors and realise assets for their benefit.
This regime was established to provide clarity within the law
This regime was established to provide clarity within the law on what would happen in the unlikely event of a further education or sixth form college becoming insolvent and to provide orderly winding-up provisions similar to those available to companies and other organisations in the UK. Strategically, the intention is to improve the financial resilience and sustainability of the FE sector and eliminate the need for the government to ‘bail out’ uneconomic institutions.
However, what has been less widely addressed is the potential implications for the governors and officers of these organisations which arise as a result of the administration regime; in particular the powers of the education administrator and the statutory obligations they must abide by. This includes a requirement for the administrator to submit a conduct return pursuant to the Company Directors Disqualification Act 1986 (CDDA) to the Secretary of State.
So, for the first time, the conduct of governors at FE colleges for the three years prior to making the administration order could be put under the microscope. The CDDA aims to maintain the integrity of the trading environment; increase compliance and accountability; and ensure governors carry out their duties honestly, responsibly, and with the proper regard for key stakeholders including creditors, customers, employees and students.
As part of their investigation work the education administrator will consider a range of factors such as trading while insolvent to the detriment of creditors, fraudulent behaviour, poor reporting and non-compliance.
So, if it was found that a governor continued to trade despite knowing (or they ought to have known) that there was no reasonable prospect that the college would avoid insolvency and did nothing to minimise creditor losses then an education administrator could bring wrongful trading actions against those governors. If a successful action is pursued by the education administrators, a court can impose personal liability for debts on the governors – highlighting financial and reputational risk for individual governors, and in some cases disqualification as a director. This means that if a governor is, for example, a director of the company in their non-college life they would no longer be permitted to carry out that director role if disqualified.
College governors must review their governance framework
Within the FE sector, the vast majority of governors will carry out their work diligently and competently and take appropriate professional advice. In particular there is far greater scrutiny and more regulation applied to the FE sector than to many other purely commercial businesses.
But could such a situation arise? As more colleges face financial pressures and look to diversify into areas which carry greater commercial and financial risk, it is more important than ever that governors and officers have up-to-date management accounts, and robust short and long term financial and strategic plans.
Ultimately, there may be scenarios where an FE provider has to continue trading to ensure continuity of service until the end of an academic year, adding further complexity and highlighting a fine line between student welfare and wrongful trading – emphasising the importance of having accurate information to facilitate appropriate decision making.
College governors must review their governance framework; governor and officer liability policies; the FE insolvency governor guidance issued by the government; and ultimately the make-up of the board to ensure they have the right skill set in place to drive forward a profitable, sustainable business plan.