Since 1 April 2012 further education corporations (FEC) and sixth form corporations (SFC) in England have had the power to dissolve themselves and to transfer their assets and liabilities to a “prescribed body”, which would normally be another college or an HEI.

Prior to that date, the provisions of the Further and Higher Education Act 1992 (FHEA) gave the Secretary of State the power to make an Order, by way of Statutory Instrument, to dissolve an FEC/SFC and to effectively vest its assets and liabilities in a “body corporate established for purposes which include the provision of educational facilities or services”.

That was the way in which colleges merged. There was no need for any agreement between the dissolving FEC/SFC and the acquiring body. The Statutory Instrument itself transferred the assets and liabilities and it was, for example, accepted by the Land Registry as evidence of the transfer of any freehold or leasehold land owned by the dissolving corporation.

The power of dissolution no longer rests with the Secretary of State. It is the corporation of an FEC/SFC which has the power to dissolve the college and to transfer its assets and liabilities to a prescribed body. That all sounds very simple and straightforward, but is it?

The new provisions of FHEA require an FEC/SFC proposing to dissolve itself to publish details of that proposal and to consult in accordance with regulations. Having done that, the corporation resolves to be dissolved on the specified date and it is then dissolved on that date.

That is the easy bit. What is not quite so simple is what happens to the assets and liabilities of the dissolved FEC/SFC. It has, after all, ceased to exist and cannot have assets or liabilities.

The revised wording of FHEA seeks to address that issue. It states as follows:

“At any time before the dissolution date, the corporation may transfer any of their property, rights or liabilities to such person or body, or a person or body of such description, as may be prescribed”.

The consent of the prescribed person or body is required, and the transfer itself then has effect on the dissolution date, being the date set out in the resolution to dissolve.

The question then arises as to whether it is necessary for there to be a written agreement between the corporation which is proposing to dissolve and the body to which its assets and liabilities are to be transferred. There was no need for any such agreement when the Secretary of State had the power to dissolve an FEC/SFC and to transfer its assets and liabilities to another body. The Statutory Instrument did that. Why should there need to be one now?

The answer is that the resolution to dissolve does not itself deal with the transfer of any assets or liabilities. The legislation gives the dissolving FEC/SFC the power to transfer its assets and liabilities to a third party, but that transfer has to be effected by other additional actions on the part of the dissolving corporation and the body to which the assets and liabilities are to be transferred.

On the face of it, this could be done by an extremely simple agreement between the two bodies, saying nothing more than “the transferring corporation transfers all of its property, rights and liabilities to the prescribed body and that the prescribed body accepts that transfer”.

What would happen if not all of the assets or all of the liabilities were transferred? The FEC/SFC itself immediately dissolves and is unable to hold assets or to be held accountable for the discharge of any liabilities.

Although the wording of FHEA appears to be permissive in that it provides that “the dissolving FEC/SFC may transfer any of their property, rights or liabilities …”, it makes no sense unless all such property, rights and liabilities are transferred. It must be the case that all of the assets and all of the liabilities must transfer, as they did when the Secretary of State had the power of dissolution. There might, in exceptional circumstances, be reasons why a particularly onerous liability could be “carved out” and perhaps assumed by the relevant funding body. It would have to go somewhere. Also, if the governors of the dissolving FEC/SFC do not make proper provision for the transfer of liabilities, could they possibly incur personal liability? It appears to be quite simple to provide for all liabilities to transfer, and if the agreement fails to achieve this, might the governors or, possibly, their legal advisers be held to be at fault?

We think that the basic agreement is as simple as that set out above. There is no need to go to great lengths to describe the nature of the assets or of the liabilities. The word “all” covers everything. The same simplicity applies to property and rights. They should all transfer.

We have seen agreements which go into great detail as to the assets, liabilities and obligations which are to transfer. That is usual in a commercial business transfer agreement where the parties have a choice as to what is being transferred. Frequently, the “seller” will retain some assets and continue to be responsible for the discharge of some liabilities. The danger with following that approach here is that something will be missed. Detailing the assets and liabilities may well help to focus the mind on what is happening, but those details should not be exhaustive and the word “all” should have overriding effect.

However, that is not the end of the story. There are certain types of assets which need to be specifically transferred by an agreement in writing, particularly where it is necessary to register the receiving body as the owner or holder of those assets. So, it appears that, for example, a form of transfer will have to be executed by the dissolving FEC/SFC in order to transfer any freehold or leasehold land to the acquiring body. Also, there may be the need for specific assignments of intellectual property rights and other assets which do not “pass by delivery”.

The question then arises as to what happens to any assets which have not been properly transferred before the FEC/SFC dissolves? It no longer exists and can no longer do anything, including executing documents.

We think that the solution to this problem is for the agreement to contain an obligation on the part of the dissolving FEC/SFC to execute such documents as are necessary to effectively transfer all of its assets to the acquiring body. The dissolving corporation would then give the acquiring body a power of attorney to execute documents in its name. Properly drafted, such a power of attorney would survive the dissolution of the corporation and enable the acquiring body to execute documents in the name of the FEC/SFC even after it has dissolved.

Now, what about the liabilities? It is very unusual for anybody to have the right to transfer liabilities to another person without the consent of the person to whom those liabilities are owed. However, it does appear that third parties have no right to object to the transfer of a dissolving FEC/SFC’s liabilities to another person or body. That was the case when the Secretary of State had the power of dissolution and the Statutory Instrument transferred liabilities without any reference to any third party consents.

So, does that mean that third parties can be ignored? Probably not. It may well be that their agreements with the dissolving FEC/SFC contain provisions whereby a “change of control” gives the third party certain rights, possibly rights to terminate the agreement. It therefore continues to be necessary to try to identify those agreements which could give third parties those rights. The provisions of the FHEA give the dissolving FEC/SFC the power to transfer liabilities and there does not appear to be anything which a third party can do about that. What it can do, however, is to exercise its rights under the agreement against the acquiring body. So, if there are rights of termination, those rights remain and there is a risk that the third party could terminate the agreement.

One of the areas which needs to be very carefully considered is that of the dissolving FEC/SFC’s arrangements with its bankers. It may well have significant loans secured on its assets. The bank will almost certainly have provision in its facility letters entitling it to demand repayment of any loans where there is a transfer from the existing borrower, the dissolving corporation, to another body. The acquiring body would almost certainly be faced with a demand from the bank for repayment of the loan and that would be a liability which would transfer to the acquiring body.

It is therefore important that third parties, such as banks, are approached prior to the transfer, so as to ensure that their approval is obtained for the transfer and that they are prepared to continue to contract with the acquiring body.

And finally, don’t forget TUPE. That still applies and the affected employees must be properly informed and consulted. Also, there could be significant pensions issues which need to be carefully considered well ahead of the merger date.

It will be interesting to see how mergers effected under the new procedures turn out.