The New Insolvency Regime for the Further Education Sector

The Technical and Further Education Act 2017 (“2017 Act”) introduced a new statutory insolvency regime for further education and sixth form colleges (“FE bodies”) proposing similar arrangements to those implemented for other public service providers.

Background

The 2017 Act:

• Clarified that the insolvency procedures under the Insolvency Act  1986 would apply to FE bodies (with some modifications);
• Introduced a special administration regime known as Education Administration;
• Introduced a requirement for an insolvent FE body to make a filing at Companies House;
• Modified the Company Directors Disqualification Act 1986 to apply to governors of FE bodies.

However, the implementation of most of the above requires the introduction of secondary legislation. To outline the proposals for the technical detail of the regime and proposals for how colleges at risk of insolvency will be dealt with in practice, a consultation was launched by the Department for Education and this recently closed on 12 February 2018.

Key Points of the Consultation

Modifying the Insolvency Act 1986

The following insolvency procedures will apply to FE bodies but will be modified as necessary to apply appropriately to FE bodies:

• Company Voluntary Arrangement
• Administration
• Creditors’ voluntary winding up
• Winding up by the court
• Receivership – fixed charge receivership only (subject to the Secretary of States power to apply for an education administration order) as FE bodies cannot create floating charges

To prevent these insolvency procedures interfering with the new education administration process, it is proposed that a restriction is implemented requiring 14 days’ notice of the use of these procedures to be given to the appropriate national authority to allow it to decide whether or not to instigate an education administration instead.

Once an education administration application has been made, a moratorium will take effect, preventing creditors from enforcing their security without the permission of the court or the consent of the education administrator. Where an education administration order is in force, the court must dismiss any ordinary administration applications made by creditors.

Education Administration

The ‘special objective’ of education administration is to avoid or minimise disruption to existing students and to ensure that the FE body does not remain in education administration. The education administration can achieve this by:

• Rescuing the FE body as a going concern;
• Transferring some or all of its undertaking to another FE body;
• Keeping the FE body going until the existing students have completed their studies;
• Arranging for students to complete their studies at another FE body.

Only the appropriate national authority can apply to the court for an education administration order. This may be a result of the national authority deciding that the college is insolvent (or likely to become so) or as a response to an ordinary insolvency application. Once an order is made, the court will appoint an education administrator who must be a licensed insolvency practitioner. It is the intention that a procurement exercise will be carried out to create a panel of insolvency practitioners who can be proposed as education administrators.

The proposed transfer scheme is of particular interest to lenders as it would allow for some third party rights to be overridden to facilitate the transfer of the assets of the FE body without the consent of third parties. This would represent a significant reduction of power to lenders whose right to restrict the transfer of secured assets could be overridden.

Companies House Filings

While FE bodies who are statutory corporations are not required to register with Companies House, the 2017 Act allows for the introduction of regulations and rules regarding the filing and record keeping of insolvent FE bodies. This proposal will not require solvent FE bodies to register with Companies House as it will only apply as part of an insolvency procedure. The intention is for the filing process of an insolvent FE body to reflect the current system in place for companies but it is not yet clear how Companies House intend to display these insolvency papers on the public register.

Guidance for Disqualification of Governors

The 2017 Act modified the Company Directors Disqualification Act 1986 to apply it to governors of FE bodies. This means that governors found responsible of wrongdoing in respect of the management of a FE body may be disqualified from acting in that capacity or as a company director. Please note that the insolvency of a company or FE body does not automatically result in disqualification.

The intention is that this modification will act as a deterrent and ensure that FE bodies are managed in a financially prudent way.

Looking Ahead

The government had initially aimed to implement the new insolvency regime ahead of the 2018/2019 academic year but given that the responses to the consultation will not be published until the Spring and the introduction of the required secondary legislation will be dependent on the Parliamentary timetable, it appears unlikely that the regime will be fully implemented ahead of the 2018/2019 academic year as initially intended.

We will keep you informed as implementation of the regime develops. In the meantime, if you have any queries in relation to this note or how the new regime may affect you, please get in touch with a member of our Banking & Finance team.