The insolvency regime for the further education and sixth-form sector

Posted by Tom Beard on
  • On 6 July 2016, the Department for Business Innovation and Skills ("BIS") published consultation paper BIS/16/320 Developing an insolvency regime for the further education and sixth-from sector – consultation document ("BIS/16/320")
  • BIS/16/320 seeks comments on proposals to introduce procedures for further education and sixth form colleges which become insolvent. The proposals include a Special Administration Regime ("SAR") which would give extra protection to ensure continuity of service.
  • The insolvency regime would be designed to;

3.1.   Protect learners from disruption to their courses;
3.2.   Help the rehabilitation of the college, where possible; and
3.3.   Provide an orderly winding up procedure if a college becomes insolvent.

Proposals

  1. BIS/16/320 proposes to introduce a full set of insolvency arrangements for colleges, broadly in line with those afforded to companies under the Insolvency Act 1986 ("IA86") and would be provided through new primary and secondary legislation.
  1. Company Voluntary Arrangement ("CVA")

A CVA would provide for an arrangement on debts between the collages and its creditors to allow the colleges to avoid liquidation by entering an agreement binding at least on all unsecured creditors.

  1. Administration

Administration provides for a number of possible outcomes: the college could be reorganised (including via a CVA), it could be sold as a going concern in its entirety or in part, or the administrator could decide to put the college into liquidation.

  1. Compulsory Liquidation

Compulsory Liquidation, also known as winding up by the court is where a petition is made to the court that the college is wound up. There could be a number of possible applicants including the college itself, currently in the vast majority of cases of compulsory liquidation of companies, the petitioner will be a creditor for an unpaid debt.

  1. Creditor's Voluntary Liquidation ("CVL")

In the case of companies, a CVL is a procedure whereby the company directors voluntarily bring the business to an end by appointing a liquidator. The liquidator is appointed at a creditors’ meeting. This is different from a compulsory liquidation which is forced upon an insolvent company by the Court via a winding up order. In the case of applying a CVL to colleges, the governors (whom the proposed regime would treat as equivalent to a company’s members) could resolve to wind the college up and where the college is insolvent13, this would be in the form of a creditors’ voluntary liquidation.

  1. SAR

In addition to ordinary administration, it is proposed the Secretary of State should be able to initiate a SAR. A SAR would provide specific protection for continuity of learner provision. SARs are already used in other sectors (such as energy and postal services) to protect an overriding public policy objective such as continuing to provide an essential service. The proposed 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 section 123 IA86. The special objective for the education SAR would be to guide the administrator in all the actions, avoiding or minimising disruption to the studies of the existing students of the further education body as a whole, and ensure that it becomes unnecessary for the body to remain in education administration for that purpose.

  1. Both a SAR and the ordinary insolvency procedures provide a range of possible outcomes for the colleges, which will yield both protection for learners and an orderly outcome for creditors. The benefit of a SAR is to protect learner provision and therefore provide more time than normal insolvency procedures to mitigate the risk that a college is wound up quickly and in a way which, by focusing only on creditors, would be likely to damage learners.

Cost

  1. All college SARs would require funding to pay for the insolvency practitioner and other associated costs. These costs may be met by the creditors, whether in the form of additional funding, or from the realisation of the assets. In SARs, administrators would have the high level special objective set out in legislation, which may result in additional costs above and beyond those of a normal administration. This is likely to be the case in an education SAR, for example, because the administrator may need to run the college beyond the statutory 12 month period for an ordinary administration in order to “teach-out” the students.
  2. Responses to the questions raised in BIS/16/320 were due by 5 August 2016.

Responses

  1. The Department for Education ("DfE") published a summary of the responses received to BIS/16/320, along with the Government’s response outlining the next steps on 27 October 2016 
  2. The Government intends to proceed with its plan to introduce a full suite of tools (in line with current company insolvency procedures) to deal with a college that becomes insolvent.
  3. Having considered the responses to the consultation, the Government intends to proceed with the introduction of a statutory insolvency framework for the further education and sixth form college sector, including the introduction of a SAR. However, the Government has recognised that a SAR regime should only apply to designated institutions which are run by companies. Any charitable trusts which are running educational institutions designated under section 28 of the Further and Higher Education Act 1992
  4. will not be subject to SAR. A charitable trust cannot technically become insolvent as they have no legal identity separate to their trustees. This means that any liability of the charity is the liability of its trustees. It is not therefore possible to apply insolvency law or the special administration regime to a charitable trust.
  5. The Government recognises that, in introducing a special objective that puts the protection of learners ahead of the rights of creditors, there is a risk that creditors may be less willing to lend to the sector, or may change the basis on which they do so. However, in their view, the priority given to the proposed special objective in a SAR is critical to enabling learners to be protected.
  6. The Government recognises the need for new funding for SAR's. However, there remains uncertainty around how the funding will be generated, the Government unwilling to commit to supporting this funding. It does however, recognise, that in practice, this funding may come from the Government.

NEXT STEPS

  1. As with company insolvency, much of the process underpinning the new education SAR will be set out in rules and regulations. The Government will consult on the detail of the new regime in due course, and will lay the necessary legislation once the primary provisions have come into force.
  2. The Government intends that the new regime should be in place around the start of the 2018/19 academic year.

About the Author

Tom is a solicitor in the Litigation & Dispute Resolution team in Cardiff specialising in contractual disputes, and public law matters.

Tom Beard
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