A conjuring trick

College companies, designed to let FE innovate, will be muzzled under changes to the law purporting to give them greater freedom, explains John Hall

The treatment of college companies in the new legislation is the latest twist in a long saga. The doctrine established under Victorian statutes is that companies cannot exercise powers that go beyond the law, since they do not enjoy the legal capacity of a "natural person". If a company does exceed its powers, the courts can declare the transaction invalid or, in legal jargon, ultra vires.

This outdated rule used to be justified as a check against the abuse of investors' funds. In reality, it caused such commercial uncertainty and hazard to third parties that in 1985 Parliament relaxed its application - but only for businesses registered under the Companies Acts.

And here is the rub: the relaxation of the law did not benefit all those colleges set up as statutory corporations. The pernicious doctrine of ultra vires still makes colleges especially vulnerable to the slings and arrows of politics.

Which brings us to the roll-call of universities and colleges criticised by the National Audit Office for failing to control the activities of their companies and overseas joint ventures, in particular ensuring that supervisory arrangements exist so that public monies are not misused in support of private enterprises.

The Funding and Quality Assurance agencies issued guidance and codes of practice based on sound common sense. The FEFC went further and in April 1999 (Circular 9914) required colleges to strengthen the responsibilities of governors and managers for college companies and joint ventures. The circular was prompted more by higher education - Swansea Institute, Glasgow Caledonian University and Southampton Institute - than by college scandals. But then the debacles of Halton and Bilston unfolded.

Enter the politicians. Ministers decided that all college companies should be curbed - and the best way was to revive the antiquated doctrine of ultra vires. The Learningand Skills Bill has provided them with the perfect opportunity.

The Bill's Schedule 8 follows a good news-bad news formula. The good news is to introduce an explicit power for college corporations to form companies to clarify the law, and so avoid the possible consequences of the ultra vires rule - the establishment of college companies and joint ventures that might be invalid.

This would be good news, but the implied powers of college corporations are already broad enough to allow them to set up companies without the need for any express statutory bolster. It is, therefore, something of a conjuring trick, enabling the Government to introduce the statutory curbs on the use of college companies - the bad news - which were always its main objective.

The proposed curbs would explicitly exclude the power to form companies to conduct an educational institution, but also to provide any publicly funded education and training. As Lord Bach explained, what the Government wishes to stop is the creation of self-financing companies to provide education for students registered on courses that are publicly funded and thereby "evade the accountability framework".

But here the Government's argument runs into difficulty. Regulations already exist for the Learning and Skills Council to make governing bodies more accountable. This was the approach adopted by the FEFC in Circular 9914.

There is a danger that Schedule 8 will discourage college corporations from entering into the innovative partnerships and joint ventures, which other provisions in the Bill are designed to promote, and from using companies to diversify their income so that they become less dependent on the public purse.

The irony is that the Government would hardly contemplate placing this restriction on higher education. Hard cases make bad law. The Government may rue the day that, in dealing with a few cases of abuse, it was persuaded to muzzle colleges with a Victorian law.

John Hall is head of education law at Eversheds, solicitors, London EC4

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