New insolvency regime for Further Education and Sixth Form Colleges

Overview

The Government has confirmed that a new statutory insolvency regime will be implemented within the further education (FE) and sixth form college sector. The new regime intends to introduce a Special Administration Regime (SAR) which is aimed at protecting the interests of learners should a college become insolvent. The Government is to bring forward the necessary legislation as soon as Parliamentary time allows. It is intended to be in place for the start of the 2018/19 academic year.

What is the regime?

The insolvency arrangements for colleges should closely mirror those available to companies under the Insolvency Act 1986. This will include: CVA’s; Administration; Compulsory Liquidation; and Creditor’s Voluntary Liquidation. The SAR is known as education administration and will be applied for by way of an education administration order. It will sit alongside these insolvency options.

Special Administration Regime

The objective of the SAR will be to avoid or minimise disruption to the students’ studies.

Arguably, this objective could put the protection of learners ahead of the rights of creditors. It is therefore possible that creditors may be less willing to lend to the sector. However creditors interests are recognised in the SAR proposal.

Only the Secretary of State can apply to the court for an education administration order. The court will only grant this it is satisfied the college is unable, or is likely to become unable to pay its debts. If the court grants an order, an education administrator (who must be a qualified insolvency practitioner) will be appointed. They will be responsible for managing the college’s affairs, business and property and must carry out their functions to achieve the special objective.

Governor’s liability

Under the proposals, governors may be liable for wrongful and fraudulent trading. Applying these offences to governors (the majority of whom are volunteers) as if they are directors of a company could overlook that the function of a governor is not the same as that of a director. In addition, there are already mechanisms available through claims which can be pursued against trustees of a charity.

Equally, it is clear that those controlling colleges who intend to defraud creditors should be held accountable for their actions. This reflects the position of companies.
As to what these liabilities will be, the Government has stated this will be a matter for secondary legislation.

Technical and Further Education Bill

Following the consultation, the Government has published the Technical and Further Education Bill. The first reading of the Bill took place on 10 January 2017. The second reading is scheduled for 1 February 2017.

Conclusion

The Government has made it clear that learner protection is the priority when dealing with insolvency within the FE and sixth form sector. The new proposals will provide a “full suite of tools” when dealing with a college that becomes insolvent, mirroring insolvency provisions for companies.