Further education: In distress

The Technical and Further Education 2017 Act (TFEA) was passed on 27 April 2017 following a period of consultation last summer. The explanatory notes to the TFEA inform us it is intended to support the aim of financial resilience in the FE sector, and to build on the area-based review regime which was implemented in 2015.

The crucial rules which will provide the detail to the TFEA have yet to be consulted on, so the TFEA is not yet in force. The consultation document hoped the TFEA would be in force by October 2018.

Why enact it?

The TFEA is intended to serve two purposes:

  1. To alter the regulation of apprenticeships, creating a new statutory regulatory body and increase employer engagement; and
  2. To enable FE corporations and sixth form corporations in England and Wales to be subject to existing insolvency processes (or a newly-created Education Administration regime).

This article focuses on the second purpose.

Until now FE corporations and sixth form colleges (College) could not be wound down when facing cash flow pressure. Instead, when found to be facing financial difficulties/falling standards, in Area Reviews, they faced the prospect of re-financing/selling assets, forced merger (to maximise economies of scale) or, as a last resort, applying for Exceptional Financial Support (EFS) loans from the Department for Education.

Appetite to prop up cash-strapped colleges has waned, and it is intended that EFS support will be withdrawn following the implementation of Area Reviews. Until the TFEA comes into force, there is no process for formally compromising College debt, or orderly winding down its affairs. Nor is there clear process by which a creditor could commence insolvency proceedings against a debtor College. The TFEA, once in force, will mean a college can go ‘bust’.

What does the TFEA do?

  • The TFEA will allow colleges to be placed into one of four insolvency processes, under the Insolvency Act 1986: Voluntary Liquidation; the court driven Compulsory Liquidation, a Voluntary Arrangement; or the newly-developed Education Administration.

If liquidated, a College would close its doors, its assets would be sold, and creditors would be paid as far as possible from the value realised from the assets. A voluntary liquidation is usually started internally, upon the realisation that the establishment cannot meet its ongoing liabilities. In contrast, the compulsory process can be started by a creditor.

The Voluntary Arrangement, is a contract proposed by the College (with a qualified insolvency practitioner) to creditors by which the creditors accept payment on compromised terms (in value or time).

Education Administration is unique to Colleges. It is aimed at minimising disruption to students’ studies by (a)  rescuing the College as a viable entity, (b) enabling the transfer of all or part of its offering (and its students) to another service provider or (c) as a last resort, operating the College until the enrolled students have completed their courses.

The process can be commenced by the College executive, a secured lender (with a qualifying charge) or the Secretary of State; and can be used to prevent a creditor liquidating the College. Within the process, the College is controlled by an independent qualified insolvency practitioner.

  • It expands the duties of the principal and executive body (including the governors), and potentially their personal liability by:
    • Requiring them to comply with the fiduciary duties imposed on directors of companies;
    • Enabling insolvency practitioners to makes claims against members of the College board (including governors) for wrongful (or indeed) fraudulent trading. A wrongful trading claim can be brought where a College traded beyond the point at which insolvent liquidation was inevitable; and
    • Exposing them to risk of director disqualification proceedings.

(We will consider these aspects of personal liability in the next article).

What is insolvency?

There are two tests applied in insolvency law to ascertain whether an establishment is insolvent, and therefore should enter an insolvency process:

  • The balance sheet test: whether the assets exceed the current prospective and contingent liabilities; and
  • The cash flow test: whether the College can pay its debts as they fall due.

Why does the TFEA matter?

College funding is notoriously complex. It is has been frozen since 2014, and to a large extent is paid by reference to student numbers two years prior. Put simply, the funding is not representative of the current year needs of the College; and Colleges will no longer be able to rely on ESF as a tool of last resort. The inevitable consequence is that some Colleges will face significant financial pressures and being forced into an insolvency process for the first time) and ceasing to trade. This could impact on the College board (in terms of their responsibilities and potential liabilities), the staff and the wider community.

Whilst the TFEA has been passed by Parliament, its provisions are not anticipated to be effective and enforceable until 2018. If you would like to discuss the implications of the TFEA, or how it might impact on colleges and their management teams, please contact Melissa George in Thrings’ Restructuring and Insolvency team.

Related Articles