Insolvency regime leaves big questions unanswered

Questions unanswered

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.

@the_ift @LendingStdBrd Plenty of practical and constructive tips, highlighting the importance of engaging the rig… https://t.co/fLwTqjXN7R