11 October 2018

Insolvency regime for further education and sixth-form colleges

Background

The Further and Higher Education Act 1992 (FE 1992) introduced much of the current law regarding the funding and administration in the further and higher education sectors. One of the most memorable changes was the conversion of several polytechnics into universities. The majority of further and higher education bodies, including sixth form colleges, were incorporated under the FE 1992 as ‘further education corporations’ who are not currently required to register with Companies House.

The FE 1992 failed, however, to make provision for the insolvency of such corporations which has resulted in uncertainty over whether standard corporate insolvency procedures can apply to FE bodies.

This issue has been highlighted in recent years due to the funding squeeze on the further education sector and the competition created within the sector as a result of a rise in on-the-job training and apprenticeships.

TEFA 2017

The Technical and Further Education Act 2017 (TEFA 2017) addresses this issue by establishing a separate insolvency regime for FE bodies in England and Wales. It is not yet in force but it is anticipated that it will be by the end of 2018.
TEFA 2017 applies the familiar corporate insolvency regimes (including CVAs, administrations and compulsory and voluntary liquidations as well as fixed charge receiverships) to further education bodies (as defined below), subject to certain limitations which are discussed in further detail later.

‘Further education bodies’ are defined in TEFA 2017 as any of the following (in England):

• a further education corporation
• a sixth form college corporation
• a company conducting a designated further education institution.

The main features of TEFA 2017 include:

• the introduction of a special administration regime, known as education administration;
• restrictions on the enforcement of fixed charge security by requiring the charge holder to give 14 days’ notice to the Appropriate National Authority (ANA), (in England, the Secretary of State) of their intention to enforce
• application of the wrongful and fraudulent trading provisions in the Insolvency Act 1986 (IA 1986) to governors of FE bodies
• the application of a disqualification regime to governors of FE bodies under the Company Directors Disqualification Act 1986
• the possibility to introduce regulations regarding the filing of documents by insolvent FE bodies at Companies House.

Education Administration

This special administration regime draws on similar regimes in other regulated sectors. An ordinary administration order or appointment cannot be made without first giving 14 days’ notice to the ANA. During that time, the ANA has the discretion to apply for an education administration order under the education administration regime.

The main features of the regime are set out in section 15 of TEFA 2017 as follows:

• it can be used where a further education body is unable to pay its debts or is likely to become unable to pay its debts
• the court appoints an education administrator on the application of the ANA
• the education administrator manages the body’s affairs, business and property with a view to avoiding or minimising disruption to the studies of existing students.

The overall objectives of the education administration regime are to minimise disruption to the studies of existing students (known as learner protection) and to ensure that the FE body does not remain in education administration.

The means by which the objectives can be met are set out in section 16 of TEFA 2017 as follows:

• rescuing the FE body as a going concern
• arranging the transfer of all or some of its undertaking to another provider
• keeping the FE body going until existing students have completed their studies
• allowing existing students to transfer to another FE body to complete their courses.

The education administration process does not automatically expire after one year as in an ordinary administration – this is because the administration process may need to continue until the courses are complete if new providers cannot be found for students. Also, should funding be provided from the Education and Skills Funding Agency (ESFA) to support an FE body in distress to the end of the academic year, this debt will be given super-priority in the realisation of the estate of the FE body.

The government intends to appoint a panel of specialist insolvency practitioners who can take appointments as education administrators under the regime, and TEFA 2017 provides ESFA with the power to provide an indemnity to the education administrator (or their firm) if he/she suffers loss or damage carrying out their functions.

Summary

In summary, TEFA 2017 has been welcomed by many in the insolvency and legal profession for the certainty which it brings around the application of established insolvency processes in this area and it will be interesting to see how the new education administration regime will work in practice. In particular, whether the introduction of restrictions on fixed security holders’ ability to enforce their security will have an impact on the attractiveness to funders of lending into the sector and whether the introduction of personal liability for members of governing bodies (who could be volunteers) could deter skilled volunteers and disadvantage the sector as a result. For more information and advice, contact Paul Grundy at pgrundy@hcrlaw.com or on 01242 246412.

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About the Author
Paul Grundy, Senior Associate Solicitor
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