FE colleges facing insolvency – what do you need to know?

18th March 2021

If you are facing financial difficulties, it is advisable to seek advice from a specialist lawyer or accountant at the earliest stage possible. As a charity trustee or a director- depending on your FE establishment’s (FEE) corporate structure – you have statutory duties under the Charities Act 2011 or the Companies Act 2006 respectively to apply the company’s/charity’s assets appropriately, to act with care and skill, in a manner that furthers the objects of the company/charity, complies with its governing documents and its statutory filing obligations, and that you do not place yourself in a position of conflict and maintain propriety (amongst others).

It is also worth noting the DfE ‘Further education bodies: insolvency guidance’ updated in January 2020 sets out best practice, including for financial management; the guidance suggests that cashflow is robustly monitored on a monthly basis and the position cannot be properly assessed by the year-end financial statements.

It also suggests that a qualified finance professional is recruited to the board, and whether or not that is practical, that the board should establish suitable financial risk assessments and monitoring of compliance with any financial KPIs and/or banking covenants.

If you have implemented any reasonable measures to reduce costs and exhausted all readily available sources of finance or extended borrowing from banks and alternative lenders, you should very carefully consider your FEE’s position, and whether it is able to continue to trade or must undergo an insolvency process.

That judgement is one that you can make with your advisors, and it is often the case that the board of the FEE or a secured creditor will commission an independent business review (IBR) in cases of distress, which will establish precisely what the issues are and whether there is a solvent solution to them.

Continuing to trade past the ‘point of no return’ or when the charity/company is patently insolvent can have consequences in terms of personal liability, if you are deemed to have committed misfeasance or wrongful trading and potentially disqualification (albeit there is a temporary relaxation of section 214 of the Insolvency Act 1986 for wrongful trading until 30 April 2021 where it will be assumed that the director was not responsible).

Broadly speaking, insolvency law applies to FEEs in much the same way as to ordinary commercial companies; a FEE is capable of entering administration or liquidation. A consequence of undertaking either of these is that you must give notice of that intention to the DfE and in turn the Secretary of State may intervene and apply for an Education Administration Order (EAO). The Technical and Further Education Act 2017 provides that only the Secretary of State may apply for an EAO; usually this would be done in order to safeguard the interests of students. If you require further detail of this, please contact us.

It is also worth mentioning the Higher Education Restructuring Regime, implemented in July 2020 by the government in response to Covid-19, to assist higher education (HE) providers in England at risk of failing due to Covid-19. HE providers may apply for financial support to the DfE, who will consider cases for financial support on a case by case basis. However, funding and restructuring support will likely only be granted where it is necessary to protect the welfare of students and the closure of the FEE would have a significantly detrimental impact on regional and local economies.

To get funding it must be shown that the FEE’s financial difficulties are as a result of (and did not exist prior to) the start of the Covid-19 pandemic, and all other sources of alternative finance have been exhausted. The DfE will also require the FEE to work with a suitably qualified accountant or insolvency practitioner to undertake an IBR and prepare a restructuring plan. Only once this has happened will the DfE make a decision on whether to grant a loan, and if so on what terms it will be repayable.

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