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Insolvency regime leaves big questions unanswered

New law will protect students’ learning if a college fails, but it could also dampen lender appetite and hinder the recruitment of quality governors, warns Jo Wright

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New law will protect students’ learning if a college fails, but it could also dampen lender appetite and hinder the recruitment of quality governors, warns Jo Wright

Shortly before the general election, the government introduced a new statutory insolvency regime for the FE sector, in the shape of the Technical and Further Education Act 2017. Although intended for implementation ahead of the 2018-19 academic year, the process could be delayed if the rules and regulations required to support it do not come into force in time.

The act offers a clear insolvency framework as an option for colleges facing financial difficulty. It also recognises the complex and delicate stakeholder balance between the interests of creditors and the duty to provide for and protect learners, as well as the need to reduce the taxpayer burden and prove value for money for ongoing investment.

The new insolvency regime is closely aligned with the Insolvency Act, applicable to corporate entities. However, it specifically provides for the making of an education administration order by the court, on application by the secretary of state. Therefore, although the more traditional insolvency processes, such as administration and company voluntary arrangement, will also be available, in practical terms the new special education administration (SEA) order route will prevail. Crucially, the “special” objective of the SEA is to protect students by minimising disruption to studies, should a college enter formal insolvency.

On one hand, having a clear insolvency regime for FE colleges and sixth forms is a positive, but it leaves some big unanswered questions. Firstly, what will be the impact for governors now that the Company Directors Disqualification Act applies to them? Some will consider this an alarming risk, particularly given the voluntary capacity in which they act, unlike company directors.

It remains to be seen how the ability to recruit quality governors in the future will be affected by this. Our experience at De Novo Advisory is that this area is becoming increasingly problematic, at a time when lenders and funders also have rising expectations about the quality of leadership and governance, as a key ingredient to forward support.

Loss of appetite?

Another key unknown is the effect of the legislation on lender appetite. The insolvency regime reduces their power and control; for example, enabling their property, rights and liabilities to be transferred to another FE provider without their consent.

My company has regular dialogue with FE lenders as part of its stakeholder management remit on an array of assignments. No lender wants to find itself in a worse position, and undoubtedly this is a risk that is actively being considered across lender portfolios.

Finally, the position of pensions remains unclear, which, given the potentially huge claims that could crystallise in an insolvency, adds to the uncertainty.

The government has made it clear that learning protection is the priority when dealing with FE insolvency. It is not the first time that government has created a special administration regime; similar arrangements exist where the need to manage the financial health of an organisation is balanced with the provision of a public service, such as the NHS.

In a nutshell, the longer-term consequences of this new regime for lender appetite and colleges’ ability to attract and retain quality governors is unknown.

The current lack of visibility on the rules and regulations underpinning the regime adds to the uncertainties. Colleges are already facing strong headwinds and financial scrutiny, as the sector funding crisis and ongoing reforms continue to have an impact.

The FE sector makes a vital contribution to increasing opportunities for young people, businesses and the future economic success of the UK. Clarity over what happens next is the least it deserves.

Jo Wright is managing director of public and private sector consultancy De Novo Advisory

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