In February, the Department of Education revealed that 12 colleges received government bailouts totalling £11 million. This raised the question of what happens to the institution and its board when a college is considered no longer financially viable.
The Technical and Further Education Act 2017 – the “Act” – will apply to further education and sixth form colleges from the 2018/2019 academic year.
One of the Act’s primary aims will be to avoid or minimise disruption to students’ studies, in cases of college insolvency, and ensure that it becomes unnecessary for the body to remain in administration for that purpose.
The Act introduces Educational Administration Orders (EAO), which can only be applied for by the Secretary of State and, if granted, will place the further education body into educational administration.
A college being subject to an EAO will have a direct impact on its creditors, as they will have no control over the timing or conduct of the administration.
Unlike insolvency proceedings for private companies, paying creditors will not be treated as the overriding priority. Instead, students’ welfare will be the administrator’s primary concern. As a result of this, it is predicted that the shift in focus from creditors to students could result in creditors becoming overly cautious in providing lending to educational bodies and insisting on higher interest margins and tougher covenants to balance out the risk – although the value of such covenants must also be queried.
The Act also highlights the issue of governors’ liability and including whether they will be treated in the same manner as company directors.
Since colleges became statutory corporations in the 1990s, there has been no court ruling on the question of a governor’s liability, and the Learning and Skills Act 2000 allows a governor who acted reasonably and honestly, but is party to civil proceedings, to apply to court for an order to extinguish any liability.
The DfE has indicated that secondary legislation will allow the governors of insolvent college to be found liable for wrongful or fraudulent trading.
The Insolvency Act 1986 provides definitions of both, although it is wrongful trading that is more likely to be of concern to governors. Wrongful trading takes place when a governor knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation and requires no intent to defraud, resulting in a risk that honest governors could become personally liable. This liability will extend to shadow governors and de facto governors, and could therefore affect senior leaders, such as principals. The government is undertaking a consultation process on the new rules and has advised that guidance for governors on their liability will be produced in due course.
The Act provides that the Company Directors Disqualification Act of 1986 will apply to further education bodies, meaning that governors found to have committed wrongful or fraudulent trading might be also disqualified as directors, which would have serious implications for them.
The prospect of a regime treating governors in the same manner as directors of commercial companies is one that has been welcomed in some quarters, but which might unsettle some governors. It is important to note that the normal responsibilities and duties of a governor have not been changed, and that by taking professional advice and acting on it, particularly on financial and legal issues, governors should remain in a strong position.
It will be interesting to see the developments around the Act as we come closer to the 2018/19 academic year.
Will governors be as keen to protect students’ interests if their actions could put them to be personally liable? Can colleges who are in precarious financial situations stop their governors from walking away rather than taking a personal risk? What is clear, is that the Act intends to place student welfare at the heart of the insolvency procedure. The worry is that the methods used to ensure protection of student welfare and shore up the position of struggling colleges could, unless used very carefully, have a chilling effect on lenders, governors and others exposed to the fortunes which remain very dependent on government funds.
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