Introduction

The government has commenced a consultation exercise on its proposals to introduce procedures for further education and sixth-form colleges which become insolvent.

The proposed regime would include a Special Administration Regime, aimed at protecting learners from disruption to their courses, helping the rehabilitation of a college where this is possible or providing an orderly wind-up procedure.

A key issue for Governors is the proposed application to them of the provisions relating to wrongful and fraudulent trading and the possibility of being disqualified from holding positions as a company director or trustee of a charity.

The consultation, issued by the Department for Business Innovation and Skills (BIS) shortly before its restructure, closes on 5 August 2016 and a link to the consultation document is here. BIS has also published proposed draft clauses and explanatory notes on those clauses.

Background

The Further and Higher Education Act 1992 does not set out any provisions in relation to dealing with insolvent colleges. Whilst such colleges can transfer their property, assets and liabilities to a willing party in order to dissolve, the Act does not set out what will happen if no party is willing to do this. In the consultation the government states that it is unclear whether insolvency legislation currently applies to further education and sixth form colleges, though in our view it probably does not as colleges are statutory corporations. The legislation only makes provision for colleges to be dissolved, not for them to be wound up or placed into administration.

In the updated guidance on area reviews issued in March 2016 the government stated that it was proposing to introduce an insolvency regime to ensure protection for learners and equitable treatment for creditors should a college reach an insolvent position after the review process was completed and this proposed regime has been set out in the consultation documentation.

Prior to issuing the consultation BIS officials carried out pre-consultation to discuss key elements of the proposals with a number of stakeholders including the Association of Colleges, the 157 Group, the Sixth Form Colleges Association and representatives of lenders, trade unions, insolvency practitioners and lawyers.

Whilst the proposed new insolvency regime would also apply to sixth form colleges, the guidance states that any sixth form college which becomes an academy would not be covered by the proposed new insolvency arrangements but would instead be subject to the Department for Education financial monitoring and management arrangements.

It is envisaged that the proposals will apply to institutions in England only but BIS is consulting with the Welsh government on whether the provisions could also to apply to colleges in Wales. BIS has said that it does not propose to legislate in relation to Scotland or Northern Ireland.

Proposals for the insolvency regime

The government is proposing an insolvency regime which would include:

Company Voluntary Arrangement;

  • Administration;
  • Compulsory Liquidation;
  • Creditors Voluntary Liquidation; and
  • A Special Administration Regime (SAR).

It is proposed that the SAR would sit alongside the other four options, although one of the questions being asked in the consultation is whether any of the other four insolvency measures should be available in the event of a college insolvency as well as a SAR.

The consultation contains details of the four other proposed regimes but spends the majority of its time setting out proposals for the SAR.

The Special Administration Regime

The idea behind the SAR is that it will provide specific protection for the continuity of learner provision in a similar way to that which it is used in other sectors such as rail, energy and water. However the guidance points out that the proposed SAR for colleges would differ from other SAR regimes which are intended to secure the continued provision of critical infrastructure whereas an education SAR may still result in the winding-up and dissolution of a college. The SAR would be used until a decision on the future of the college and its provision could be taken. There would be no time limit to a SAR as a longer period may be necessary than the 12 months which administrations typically take.

The SAR would only be used where a college is unable to pay its debts or is likely to become unable to pay its debts as defined in the normal definition of insolvency, in which case the Secretary of State could apply to the court for the appointment of an “education administrator” to develop a proposal.

In addition to the powers of the Secretary of State to apply for a SAR order, where a college or its creditors petition the court for another type of insolvency order under the Insolvency Act 1986 then the Secretary of State can use the statutory period to decide whether to initiate a SAR and apply for a SAR order. The proposal is that the statutory period be set at 14 days.

The education administrator may consider a number of options to secure continuity of provision for learners as follows:

  • rescuing the college as a going concern;
  • arranging for the transfer of provision to another provider; or
  • allowing learners to either transfer to another provider or complete their courses before the college is wound up and dissolved.

The education administrator is to be guided by the special objective (see below) but importantly will also be required to have regard to the interests of creditors as a whole. In addition, the education administrator will need to consider how best to accommodate any learners with special educational needs and/or disability, or other high needs.

The consultation proposes that the special objective of an education administration would be firstly to avoid or minimise disruption to the studies of the existing students of the further education body as a whole, and secondly to ensure it becomes unnecessary for the body to remain in education administration for that purpose. It is anticipated that “existing students” will be any person who is a student at the college when the administration begins, or has accepted a place on a course at the college when the administration begins.

Governors liabilities and duties

The government’s intention in introducing an insolvency regime for further education and sixth form colleges is to follow the principles of company insolvency which will mean potential liability for wrongful and fraudulent trading. Whilst the government understands that Governors may be concerned about the introduction of a new burden, the guidance states that Governors of colleges are also trustees of the charity and that for the most part the wrongful and fraudulent trading provisions are consistent with their existing duties as charity trustees.

Despite these comments, however, it is likely that the introduction of the principles of fraudulent and wrongful trading will increase the risk of Governors being held personally liable. Currently, Governors duties are as trustees of charitable bodies, where the principal duty is to deliver the charitable purpose. Governors do have a duty to ensure the financial viability of the college. However, the Insolvency Act provisions relating to wrongful trading set the test as to Governors conduct at a more specific level, with very clear provisions as to how the Governors should act when the solvency of the college is in question. In our view, the introduction of the wrongful trading provisions in the context of colleges does heighten the risk for Governors as it makes it explicit that the duty to act in the interests of the creditors is a higher priority than the delivery of the charitable purpose.

In addition, under the Learning and Skills Act 200, a Governor is able to apply to court to be relieved of liability where any act or omission is honest and reasonable. The Insolvency Act duty to “take all steps to minimise the losses to creditors” is much harder to satisfy and has the potential to reduce the ability of Governors to justify their conduct.

The guidance points out that a Principal of a college is normally also a Governor, but if they are not the current proposal is that they should be liable for wrongful trading where they had acted unlawfully.

The consultation also considers the position of Chief Finance Officers and Clerks of colleges but concludes that they should not be liable for wrongful trading unless they were acting as a ‘de facto’ governor.

Finally, the government are considering whether to apply the disqualification regime under the Company Directors Disqualification Act 1986 (CDDA) to Governors found liable of fraudulent or wrongful trading. This would mean that any governor disqualified under the CDDA would also be disqualified from acting in similar positions, including as a company director and trustee of a charity.

Pensions

Any change to the insolvency position of colleges may have implications for pension fund contributions and liabilities especially in relation to LGPS, as if the college was transferred to another employer outside the scheme or was liquidated and wound up the pension deficit would crystallise. This deficit to the fund would have to be met through a claim against the existing assets as an unsecured creditor or through an increase in contributions from the remaining scheme members.

Conclusion

For further education and sixth form colleges, the proposed regime would have the advantage of introducing some certainty into the sector and provide further options for enabling colleges to be rescued than is currently the case. The introduction of the SAR would also put the interests of the existing students at the forefront of this regime.

Nevertheless, the introduction of the proposed regime is likely to lead to creditors initiating insolvency proceedings against further education colleges and sixth form colleges in order to recover debts owing to them and increases the risk of colleges ultimately being made insolvent. This in turn may lead colleges to aim for higher surpluses and to conserve cash reserves.

Creditors, particularly larger creditors such as banks, are likely to welcome the introduction of the regime as it will give them a process that they can be in control of, subject to the Secretary of State being able to intervene even if the creditors have petitioned the Court for another type of insolvency order.

Governors will also be concerned about the proposed application of the provisions relating to fraudulent and wrongful trading which is likely to involve a greater risk of personal liability than is currently the case for them. This increases the importance of Governors taking appropriate advice prior to decisions relating to the financial wellbeing of the college.