The new college insolvency regime
Tim Brock, qualified accountant and restructuring professional at Mitchell Charlesworth explains what collages need to know about the new insolvency regime.
Colleges will be allowed to fail
Further education funding challenges have been well documented over recent years with funding down and costs / competition up.
Should a college run out of money it can apply to the Education and Skills Funding Agency for exceptional financial support (EFS) and gain access to a government backed loan. From 1 April 19 this will no longer be the case.
The Technical and Further Education Act 2017, effective 31 Jan 2019, removes the EFS rescue option and introduces an ‘Education Administration’. Colleges will be allowed to fail.
New rules surrounding ESFA support are being worked on and will be released shortly – it is likely these will factor in the new insolvency law.
Increased use of independent business reviews
If a college is at risk of failure it should arrange for an independent business review (IBR) to be carried by a qualified restructuring professional.
The IBR will confirm the viability of ongoing trade; the options available and recommend next steps. The IBR could help prevent insolvency and reduce the risk of wrongful trading (see below).
Education administration and insolvency
Should the IBR conclude that the college is insolvent it will be subject to both corporate insolvency law and potentially an ‘education administration’. An education administration is designed to protect the service while a rescue plan is implemented.
Education administrators must be qualified insolvency practitioners. They will seek to:
- Rescue the college as a going concern, failing this;
- transfer the college’s business to another institution, failing this;
- allow existing students to complete their courses, wind down and close the college – with the college liquidated thereafter.
Investigation of the college leadership and governors
Should a college enter an insolvency process, the administrators will investigate both the senior leadership team’s and governors’ actions prior to insolvency. Matters to consider include whether the leadership and governors are guilty of wrongful trading.
Wrongful trading is a civil offence and takes place where an individual knew or ‘ought to have known’ that insolvency was unavoidable and action was not taken to avoid loss to creditors.
If found guilty of wrongful trading, leaders and governors could be held personally liable and ordered to make ‘such contribution as the court sees fit’. They could also be disqualified from being a director / governor.
Greater responsibility placed on college leaders and governors
The government have placed far greater responsibility on a college’s long term future with the senior leadership team and governing body. To manage the risk of insolvency it is critical that colleges are proactive in managing their financial and strategic position.
A greater emphasis needs to be placed on strong financial controls and commercial awareness. Colleges should have a qualified accountant review their financials regularly to identify signs of distress early on and recommend how challenges can be overcome.