Jo Wright

The Government recently introduced a new statutory insolvency regime for the Further Education sector (The Technical and Further Education Act 2017). Although intended for implementation ahead of the 2018/19 academic year, this could be delayed if the Rules and Regulations required to support the process are not in force. The Act offers a clear insolvency framework as an option for colleges facing financial difficulties. It also recognises the needs of a complex and delicate stakeholder balance between the interests of creditors and the duty to provide for and protect learners, as well as the need to reduce the taxpayer burden and prove value for money for ongoing investment.

The new insolvency regime is closely aligned to the Insolvency Act available to corporate entities. However, it specifically provides for the making of an education administration order by the court, on application by the Secretary of State. Therefore, although the more traditional insolvency processes such as Administration and CVA will also available, in practical terms, the new Special Administration Order route  (SEA) will prevail. Crucially, the “special” objective of the SEA is to protect students by minimising disruption to studies should a college enter formal insolvency.

On one hand, having a clear insolvency regime for FE colleges and 6th forms is a positive, but it leaves some big unanswered questions. Firstly, what will be the impact for governors now that the company director disqualification act applies to them? Some will consider this an alarming risk, particularly given the voluntary capacity in which they act, unlike company directors. It remains to be seen how the ability to recruit quality governors in the future will be affected by this. Our experience at De Novo is that this area is becoming increasingly problematic to address, and at a time when lenders and funders also have rising expectations about the quality of leadership and governance, as a key ingredient to forward support.

Another key unknown is the effect of the legislation on lender appetite. The regime reduces their power and control, for example enabling their property, rights and liabilities to be transferred to another FE provider, without their consent.  De Novo has regular dialogue with FE lenders as part of our stakeholder management remit on an array of assignments. No lender wants to potentially find itself in a worse position, and undoubtedly this is a risk that is being actively considered across lender portfolios.

Finally, the position of pensions remains unclear, which given the potentially huge claims that could crystallise in an insolvency, adds further to the uncertainty.

The Government has made it clear that learning protection is the priority when dealing with FE insolvency. It is not the first time that Government has created a special administration regime, similar arrangements exist where the need to manage the financial health of an organisation is balanced with the provision of a public service such as the NHS.

In a nutshell, the longer-term consequences of this new regime on lender appetite and the ability to attract and retain quality Governors is unknown. The current lack of visibility on the rules and regulations underpinning the regime, adds further to the uncertainties.

Colleges are already facing strong headwinds and financial scrutiny as the sector funding crisis and ongoing reforms continue to impact. The FE sector makes an important contribution to increasing opportunities for young people, businesses and the future economic success of the UK, and therefore early engagement with specialist advisers experienced in managing the delicate and complex stakeholder matrix, is paramount to ensuring a more efficient and resilient future.

We want to hear from you if you have concerns about the financial health of your college. We will never judge your circumstances – some organisations undergo restructuring through choice and others out of necessity – some are simply under-resourced and need support in planning for and effecting transformation. At De Novo, our priority is finding and delivering a practical solution that offers the best possible outcome. For more information please contact us.

As the nation takes stock of Britain’s EU referendum result, businesses are under growing pressure to understand, plan and evolve during this period of intense ambiguity. This challenge is amplified by the early signs of post-referendum economic stress as evidenced by recent business polls, Forex and a further reduction of interest rates. The long-term economic outcomes will depend upon negotiations with the rest of the EU, but in the meantime, the only certainty is uncertainty.

While the full effects of Brexit remain to be seen, UK management teams are faced with a growing list of questions, from the immediate risks to future opportunities in a post-Brexit world.  “The ability to equip a business and its stakeholders to adapt and respond in a rapidly changing environment lies at the heart of turnaround leadership,” Managing Director of De Novo Advisory, Jo Wright explains. “Even a financially healthy and stable business could benefit from the support of a turnaround and business transformation expert to prepare for Brexit, potentially using Brexit as a catalyst to transform business strategy in pursuit of growth,” she continues.

Management teams are under constant pressure to respond to growing leadership, technical, compliance and financial demands – a Brexit strategy will be high priority but in reality few businesses have surplus capacity and skills, alongside the day job.

A turnaround or business transformation expert would work alongside a management team to safeguard financial vigour, streamline operations, challenge business strategy and improve stakeholder management. Even those businesses that have steered themselves through challenging times in the past can benefit from specialised resource to help assess the impact, create a credible plan, and if appropriate, to weather any storm.

Importantly, there is no need for a knee-jerk reaction, nor will a ‘do nothing’ approach yield benefits. Management teams should use this time to consider the following:

Know your lending financial position – When are facilities due for renewal? Will existing covenants be challenging? What are lender expectations? Is the funding structure correct? Is there sufficient flexibility?

Cash remains king: Even if cash flow is generally stable, it could start to get tight, as orders could slow and payment terms are stretched.  How much cushion is there to weather any difficulties?  Is there sufficient headroom taking account of foreign exchange risk and interest volatility?

Structure the business to support future strategy: Is it the right shape for now / future?  Is there a plan in place to adopt optimal structure?

Supply chain & commercial issues:  Consider potential supply chain implications and other commercial issues, from direct costs such as import / export tariffs and exchange rate volatility,  through to the impact of EU workers and changes re EU grants.  Scenario  planning can never be too early.

Business plan and plan again: Is the plan agile? Can it be refreshed as the position becomes clearer? Consider short term (next 3 months), medium term (2 year Brexit negotiation period) and longer term (post exit).

Don’t underestimate the stakeholder matrix: Is there a clear and credible plan that will help secure confidence, particularly amongst incumbent lenders?  What will help support renegotiations?  What are the alternative funding options?  Has the full matrix been identified?

“Management teams must take stock and evaluate the opportunities arising from Brexit, whilst also being alert to the fact that volatility also brings with it risks.  The challenge is there are many unknowns, and such unpredictably will inevitably create spikes which management teams will need to skillfully manage.  I believe that by embracing Brexit and adopting a positive mind set, these challenges can be effectively tackled head on,” continues Jo.

Brexit could deliver a wealth of opportunities, but to benefit from them when they come, businesses must stay strong in the meantime and not be weakened by slow growth and the uncertainty that currently prevails.

De Novo Advisory has a wealth of expertise in supporting businesses through uncertain times, specifically in stakeholder management.  Competing demands can often appear overwhelming, but managing what can often be a complex stakeholder mix is absolutely crucial to success.  With our deep knowledge of the lending market and strong relationships with funders, we can also assess the adequacy of existing funding arrangements and potential challenges come renewal, as well as advise on alternative funding options.

Jo concludes, “By adopting the right business structure, optimal funding platform and a credible plan, businesses will be able to look to the future and leverage opportunities, and avoid getting bogged down in the Brexit unknowns. De Novo’s expertise in supporting businesses through periods of uncertainty can be invaluable, and can be the difference between a successful transformation and a rapid demise.”