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Diane Gilhooley and David O’Hara at Eversheds look at the government’s response to the consultation on developing an insolvency regime for further education and sixth form colleges.
In our briefing of 21 July 2016, we set out details of the government consultation exercise on its proposals to introduce procedures for further education and sixth form colleges which become insolvent. The proposed regime would include a Special Administration Regime (SAR), aimed at protecting learners from disruption to their courses, helping the rehabilitation of the college where this is possible or providing an orderly wind-up procedure.
On 27 October 2016 the government has now published its response to the consultation.
A total of 63 responses were received during the consultation exercise including from the Association of Colleges, 157 Group and the Sixth Form Colleges Association. There were also responses from individual colleges, education staff and student unions, local government pension scheme managers, local authorities and the main lenders to the sector.
Having considered the responses to the consultation the government intends to proceed with the introduction of a statutory insolvency framework for the further education and sixth form college sector, including the introduction of a SAR. The government says it will bring forward the necessary legislation as soon as Parliamentary time allows and that much of the process underpinning the new regime will be set out in rules and regulations which the government will consult on in due course. It is the intention that the new regime should be in place around the start of the 2018/19 academic year.
Among the questions raised in the consultation exercise, a key one concerned the proposed introduction of the SAR to provide specific protection for the continuity of learner provision and which was consistent with the special objective. It was proposed that the special objective would require the education administrator to avoid or minimise disruption of the studies of the existing students and ensure that it became unnecessary for the education body to remain in education administration for that purpose.
While most of the respondents who addressed this question were supportive of the need and ambition of the special objective, almost two-thirds did not see the proposal as drafted as sufficient for the intended purpose. The main concerns expressed related to the negative effect that a special objective biased towards learners could have on creditors, with one lender suggesting that colleges, creditors and learners could be better served if a SAR was not introduced and ordinary corporate regimes were supplemented, if necessary, by a duty on administrators to seek to protect existing learners.
The government’s response recognises that in introducing a special objective that puts the protection of learners ahead of the rights of creditors, there is a risk that creditors may be less willing to lend to the sector, or may change the basis on which they do so. However, the government’s view is that the priority given to the proposed special objective in a SAR is critical to enabling learners to be protected and that the interest of creditors are recognised in the SAR proposal on the basis that the education administrator would have a duty to carry out their functions so as to achieve the best result for the college’s creditors as a whole, so far as is consistent with the special objective. The government has also said that it needs to be kept in mind that a very substantial commitment of public funds and other support is currently made available by it to the sector through its programme of Area Reviews, including the restructuring facility, and that it therefore expects that while the SAR will provide a necessary safety net for colleges and their learners, its use will be exceptional.
The government says it is also addressing an omission from the draft clauses it published for consultation as it is adapting a standard insolvency provision which allows a creditor to challenge the administrator in an ordinary administration. In a SAR this would allow interested parties to apply to the court to challenge the education administrator on the basis they are not carrying out their functions in accordance with the special objective or the subsidiary objective relating to achieve in the best outcome for creditors.
Another question was whether the proposed insolvency regime should also include, in addition to the SAR, company voluntary arrangement, administration, compulsory liquidation and creditors voluntary liquidation. The government has stated that its intention is that ‘a full suite of tools’ should be available to deal with a college that becomes insolvent and that these will therefore be options, albeit administration, compulsory liquidation and creditors voluntary liquidation would only be available if the Secretary of State did not apply for a SAR.
In the consultation document the government stated that its intention in introducing an insolvency regime for further education and sixth form colleges was to follow the principles of a company insolvency, which means potential liability for wrongful and fraudulent trading would apply to governors. The government asked for views on these proposals and of those who responded to this question over half supported the inclusion of governors liability within the insolvency regime but those who responded negatively cited potential difficulties in recruiting or retaining governors, particularly with professional expertise, if the perceived risks of being a college governor were felt to have increased. There was also a call for guidance on governors duties.
The government’s response is that provisions setting out the full extent of governors liabilities will be a matter for secondary legislation and that the government will ensure that when this is developed it will be clear on who the duties fall. The government intends, however, that any governor or member of college staff who was knowingly party to activity intended to defraud creditors may be subject to the charge of fraudulent trading. Furthermore, the intention is that governors should be liable for wrongful trading and that principals should fall within the scope of this liability even in the unusual case that they are not a governor. In unusual circumstances, liability may also extend to shadow governors and de facto governors - which could include the Chief Financial Officer.
The government says it will consult on the detail of its proposals in due course and that it will ensure that clear guidance on governors duties and liabilities under insolvency law will be provided ahead of the insolvency regime coming into force.
In the original consultation it was envisaged that the proposals would apply to institutions in England only but that the government was consulting with the Welsh Government on whether the provisions could also apply to colleges in Wales. There is no intention to legislate in relation to Scotland or Northern Ireland.
The government has now said that although the application of the regime to colleges in Wales was not specifically addressed in the consultation questions, the government has sought the views of Ministers in the Welsh Assembly who want the provisions of the insolvency regime to extend to colleges in Wales as well as England. The government says that the new regime will give Welsh Ministers the power to make operational decisions on whether or not to apply to the court for a SAR to be ordered for an insolvent college in Wales and to make further operational decisions relating to an SAR for an insolvent college in Wales.
Following its response to the consultation, the government has published the Technical and Further Education Bill and the first reading of the Bill (which is the formal introduction of a Bill to the House of Commons) took place on 27 October 2016. There is as yet no date for the second reading of the Bill (which will be the first opportunity for the Bill to be debated).
Part 2 of the Bill states that normal insolvency proceedings (namely company voluntary arrangement, administration, compulsory liquidation and creditors voluntary liquidation) will apply to further education and sixth form corporations in England and Wales and sets out provisions for how the SAR (education administration) will operate.
Only the Secretary of State or, for bodies in Wales, Welsh Ministers can apply to court for an education administration order and the court may make such an order only if it is satisfied that that the further education body is unable, or is likely to become unable, to pay its debts. If the application for the order is granted, the court will appoint an education administrator, who must be qualified to act as an insolvency practitioner in relation to the further education body. If more than one education administrator is appointed the order must set out which of the functions are to be carried out jointly and which by a particular appointee acting alone.
Where an education administration order is in force in relation to a further education body, the body’s affairs, business and property are to be managed by the education administrator and they must carry out their functions for the purpose, if possible, of achieving the special objective as defined in clause 14(1)(a) of the Bill (avoiding or minimising disruption to the studies of the existing students of the further education body and ensuring that it becomes unnecessary for the body to remain in education administration for that purpose).
In pursuing the special objective the education administrator must, in particular, take into account the needs of existing students who have special educational needs and must, so far as is consistent with the special objective, carry out their functions in a way that achieves the best result for the further education body’s creditors as a whole.
The Bill also contains a clause giving the Secretary of State power to introduce regulations that will have the same or similar effect to the Company Directors Disqualification Act 1986 and therefore provide that governors of further education and sixth form corporations can be disqualified from office.
The outcome of the consultation exercise is that the government’s proposals will continue broadly as set out back in July. However it is important to note that more details will be forthcoming over future months and this will be of particular relevance to governors concerned about the application of fraudulent and wrongful trading and interested in the promised guidance on their duties and liabilities under the regime. We will provide an update once further information is available.
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First published on LexisPSL Restructuring and Insolvency
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