Client Alert

New UK Insolvency Regime for Universities and Colleges

16 Jan 2019

The introduction of a special insolvency regime for university education and sixth form colleges in England and Wales (“Colleges”) is timely in light of growing concerns about debt-heavy Colleges. The new insolvency regime will provide for broadly familiar insolvency procedures for Colleges, some of which are not companies amenable to the current insolvency system. The aim of these insolvency procedures is to ensure that students’ education continues uninterrupted and that the potential liability of a company director for wrongful trading and the sanctions under the Companies Directors Disqualification Act 1986 applies to failing directors of Colleges.

The Technical and Further Education Act 2017 (“TFEA 2017”) establishes a statutory insolvency regime. This regime will enable Colleges to use modified corporate insolvency procedures. However, the chapters that relate to the insolvency regime are not yet in force.

A government consultation on the insolvency regime established by the TFEA 2017 took place between 18 December 2017 and 12 February 2018. The conclusion of the consultation led to creation and publication of secondary legislation in the form of the Education and Administration Rules 2018 (SI 2018/1135) (“EAR 2018”). EAR 2018 provides detailed procedures for, and rules in relation to, the new insolvency processes, in particular, education administration. The rules are due to come into force on 31 January 2019.

What does the TFEA 2017 do?

The special insolvency regime will allow Colleges to use corporate insolvency procedures; in particular, modified as necessary: company voluntary arrangements, administration, creditors’ voluntary liquidation, compulsory liquidation and fixed charge receivership (collectively, “Insolvency Procedures”). The regime establishes an administration procedure, known as “education administration” and applies the Company Directors Disqualification Act 1986 to governors of Colleges. Accordingly, a governor found liable for wrongful trading may be disqualified from acting as a governor or a company director.

Education administration: what is it and how is it different from regular administration?

Education administration has at its core the protection of College students; it aims to prevent or minimise disruption to students at College (known as the ‘special objective’). This objective may be achieved in a number of ways, including:

  1. allowing the College in question to be rescued as a going concern;

  2. transferring some or all of the College’s undertaking to another College;

  3. continuing the College until current students have finished their studies; or

  4. arranging for students to finish their studies at another College.

Education administration, unlike regular administration, will end when the special objective has been achieved. Before an Insolvency Procedure can begin, the relevant national authority (the Secretary of State for Education or the Welsh Minister) must be given 14 days’ notice. During this notice period, the national authority will deliberate whether education administration should be initiated as an alternative to the proposed Insolvency Procedure. Only the national authority can apply to the High Court for an education administration order. If an order is made, an education administrator will be appointed by the court from a group of approved licensed insolvency practitioners. A moratorium will follow an application for education administration. The effect of the moratorium is to stop creditors from enforcing security and exercising their rights against the College without permission from the education administrator the court. A court must dismiss any application for regular administration by creditors once education administration is in force.

Education administration will sit alongside other similar special administration regimes, for example, regimes relating to the railways, healthcare, postal and energy supply industries. The key objective of special administration regimes is to maintain the continuity of services for consumers in order to safeguard their interests, regardless of the financial indebtedness of the institution providing the service. In the case of education administration, the purpose of the special objective is to ensure that students continue have access to education, regardless of a College’s financial state.

Jai Mudhar, London Trainee Solicitor, contributed to the drafting of this alert.

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