The college insolvency plans (25 January 2017)

What is happening The government plans to introduce a college insolvency regime in 2018. The legislation to make this happen are set out in the Technical and Further Education Bill which is currently before Parliament. Documents and debates relating to the bill are on the Parliament website AoC's position The original consultation on the bill was published in July 2016. Here is AoC's reponse: AoC Response to Insolvency Consultation Final.pdf AoC Response to Insolvency Consultation Final.pdf (PDF,146.54 KB) Our briefing to MPs for the second reading of the bill in November 2016: Briefing for MPs - Technical & Further Education Bill 14 November 2016.pdf Briefing for MPs - Technical & Further Education Bill 14 November 2016.pdf (PDF,240.2 KB) We agree with government that the current situation is unclear (creating a risk of disorderly insolvency if government did not act) and that there may be benefits in creating a clear legal framework in the small number of cases where colleges find themselves in a serious financial position but we express a number of areas of concerns: the new insolvency regime is making lenders more cautious and may limit investment the regime was introduced alongside a restructuring fund but the proess for distributing this is slow and complex. the arrangements for financial regulation are now very complex because there are already four different arms of government with this oversight (the Education Funding Agency (EFA), Skills Funding Agency (SFA), FE Commissioner and the Transaction Unit) college higher education students will be doubly protected by these provisions and by the HE bill which means the regulatory burden will be higher How the college insolvency regime will work The legislation involves the following provisions: the colleges will in future be covered by normal commercial insolvency rules (which also apply to registered charities). the Secretary of State will have the power to overturn an insolvency petititon and appoint a special administrator. the special administrator will have a duty towards the college's creditors‎ but will also have a duty to "avoid or minimise disruption to the studies of existing students as a whole". The duty is to the group (not to an individual student) and students for this purpose will include someone who has "accepted a place on a course at the college when the administration begins Effectively a special administration would delay recovery action by a bank (which, these days, is likely to be first in the queue) or other people owed money (eg HMRC). The wider picture There is a case that these proposals are 20 years overdue. When the Conservative Government transferred colleges out of local government in 1992, it created a new type of statutory corporation but it did not make any rules for cases where a college ran out of money. Instead central government (via a succession of funding agencies) has ended up being the funder of last resort - to protect the college's students, courses and assets. This has been quite an expensive process in some cases though it is important not to exaggerate the financial problems in colleges. The vast majority of colleges have strong financial management and leadership that responds to changing circumstances in an appropriate way. Nevertheless there are occassional difficulties and the Government's plans will bring more legal certainty in cases where colleges run out of money. This is not the first time that Government has established a special administration regime. Similar arrangements exist in energy, railways, housing and for the post office. Common factors are a desire to protect a public service while creating a financial framework to govern the independent organisations that provide them. The service continues. The service provider may not. Looked at this way, it is odd that the Department of Business Innovation and Skills has forgotten about universities in its plans. Some universities are companies and registered charities but most are statutory corporations. The insolvency arrangements for universities may seem a theoretical possibility given their substantial assets and the large surpluses that many of them make but it could happen and the arrangements are unclear. The Higher Education and Research Bill suggests a duty on universities to guarantee student protection but doesn't really clarify what would happen if this failed. This, perhaps, is an issue for Parliament to consider when it debates that bill. Consequences The government's plans are designed to change behaviour among college leaders and lenders but it is worth understanding what this will mean. Colleges will be forced to aim for bigger surpluses, to conserve cash, to control staff costs and cut capital spending. At a point where the country faces difficult economic times ahead, this isn't really the response anyone wants from colleges. Demand from young people for education will rise as will business need for skilled staff. There is also a risk that it may make some people less wiling to become or stay as college governors. Government could help here by clarifying the circumstances where it thinks wrongful trading might exist and take other measures to help colleges maintain high governance standards. For further enquiries please contact Julian Gravatt.