The financial pressures on sixth form and further education college funding have been steadily building for a decade or more; indeed the Institute for Fiscal Studies has noted that, as a sector, it has “experienced larger cuts in the 1990s…and is currently experiencing the largest cuts”. This was reflected in the government’s area reviews, carried out in 2015 under the aegis of the Education Funding Agency (EFA), which identified that 17% of FE colleges were struggling financially and were given notice to improve. That exercise also highlighted the fact that there were no statutory arrangements in place should a college become insolvent, prompting a 2016 government consultation: ‘Developing an Insolvency Regime’. The resulting legislation, the Technical & Further Education Act 2017, contains insolvency provisions which are due to come into effect towards the end of 2018. These provisions were subject to a further consultation to which the government has just published its response.

What do the new insolvency provisions look like?

Normal company insolvency law will apply to sixth form and further education colleges. However, as the special objective of any insolvency arrangement will be to prioritise the learning needs of students (who take priority over creditors), a special administration regime is being introduced. This allows the Secretary of State [or Education to appoint an education administrator, along similar lines to the special administration schemes introduced to protect other public service entities (such as housing associations). An education administrator must be a licensed Insolvency Practitioner but no prior educational experience will be required on the basis that such an appointee would have access to specialist advice as and when required. The Secretary of State will have 14 days from an application for an insolvency order in which to place a college in special administration and a moratorium would remain in place throughout the entire period.

Checks and balances

The government has assumed that insolvency will be a last resort on the basis that there are already checks and balances in place to help prevent colleges reaching the point where an application for insolvency is the only route out of their financial difficulties:

  • Governing bodies are responsible for overseeing a college’s finances on an ongoing basis: they have to approve the budget at the beginning of the year and then the final accounts at the end of the year so, with the right professional support, they should be able to spot a problem before it becomes a crisis;
  • ESFA is responsible for assessing colleges’ financial health and will intervene if there is a risk of failure. ESFA’s financial reporting project will help colleges to understand, and act, on their financial position.
  • If ESFA intervenes, the [Further Education] FE Commissioner will assess the options open to a college which is subject to an improvement notice and will recommend suitable measures to mitigate the risk of failure. This could involve a restructuring exercise or a merger with another college.
  • A FE college experiencing severe financial difficulties can commission an Independent Business Review (IBR) in order to clarify its ongoing financial viability. The resulting report should detail the options available and recommend a course of action which might include an insolvency application

 If all of the above fail, the imposition of a statutory regime will enable the government to ‘facilitate an orderly process for creditors and to put in place a process that can protect the interests of learners’

Governors’ responsibility

Concerns were expressed by some respondents to the government’s latest consultation that the insolvency regime may deter potential governors from applying to join a governing board, or even encourage those in post to stand down. The government, acknowledging that the post of governor was voluntary, stated that it did not intend to impose additional obligations on governors on the basis that they are already obliged to follow good governance procedures. This includes taking professional advice before making key decisions such as signing off budgets or accounts.

However, the government agreed that it would be useful to update the College Governance Guide to include guidance on the implications of the insolvency regime, including more information around disqualification procedures and wrongful and fraudulent trading.  

Insolvency regime should lead to more clarity

The overriding imperative in the face of financial difficulty is to keep the college functioning until it has discharged its teaching responsibilities to the current cohort of students, hence the introduction of the special administration procedure. Some commentators (including the Association of Colleges) have expressed concern that colleges will become much more hawkish in the way in which they manage their finances, with greater cost cutting and controls on capital spending. In reality, given the checks and balances already in place to monitor and assist colleges in financial difficulty, the likelihood is that very few should face insolvency. If they do, at least their students’ education will be protected.

About the authors

Alison Pearce Solicitor

Alison is a Real Estate lawyer with specialist experience in the education sector advising schools and universities on real estate matters including freehold sales and acquisitions and leasehold matters.

Caroline Benfield Senior Associate

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.