Just over a year ago, I wrote about why the higher education sector needed a special administration regime. Much has happened since then, but it now appears that such a regime will not be implemented.
I will endeavour to explain below how this has come about – and why I think it is missed opportunity.
Last summer, the House of Commons Education Committee called for evidence on financial distress in the HE sector and my firm gave written evidence. I also gave oral evidence to the committee in October on why a special administration regime was required.
At the end of November, the Minister for Skills gave evidence to the committee and suggested that a HE provider could trade through a compulsory liquidation.
The committee queried that and wrote to the minister, asking her to clarify her comments. The minister’s response has recently been published.
In the response it is suggested that an HE provider, assuming that they are not a company, could be traded through compulsory liquidation, in combination with the appointment of a special manager (usually an accountant), as has happened in insolvency processes of national importance like Carillion, Thomas Cook, British Steel and, more recently, Liberty Steel.
The price of support
However, this still leaves the other areas where a special administration regime, akin to that in the FE sector, could benefit the HE sector, as I set out in my original article.
In a compulsory liquidation, the insolvency legislation currently offers no additional protection or priority to students, above and beyond their claims as unsecured creditors.
In the minister’s oral evidence to the committee, she said that the government would support students in respect of the insolvency process of a HE provider – but stopped short of saying that it would support the organisation itself.
On a previous assignment we acted on a couple of years ago, a conservative value was put on claims of £50,000 per student on a disorderly close down of a HE provider, for the inconvenience of a shut down, the need to find another course with another provider, probably having to restart their course, and lost time in the job market. That is a total cost of £500m for a provider with 10,000 students.
It remains to be seen, because it has never been done, whether compulsory liquidation and appointment of special managers, in respect of a HE provider, can avoid a disorderly shut down.
Strengthening governance
The government’s white paper majors on governance, and recent events in the sector have demonstrated the need for good and strong governance in financially distressed situations. Trustees need the legislation to help them meet these requirements.
As I have said previously, the vast majority of HE providers are not companies, and therefore it is not clear whether the Companies and Insolvency legislation apply to them. It is possible that a university could be wound up by the court as an unregistered company and, if so, then these pieces of legislation would apply. In those circumstances, the trustees could be personally liable if they fail to act in the best interest of creditors and/or do not have a reasonable belief that the HE provider could avoid an insolvency process.
Such lack of clarity is the last thing trustees need in a financially distressed situation where personal liability may be an issue.
A special administration regime, applying the Companies and Insolvency legislation to all HE providers, regardless of their constitution or whether they are incorporated, would allow trustees to have a much clearer idea of the risks that they are taking, and the approach that they should follow to protect stakeholders.
Using the compulsory liquidation/special manager route does not achieve that clarity, without the introduction of further legislation.
A missed opportunity
In addition to there being no viable insolvency process for the majority of HE providers, there is also no viable enforcement route for secured lenders. That is a bad thing because, if secured lenders have no route to recovering their money, then they are not going to be incentivised to lend more into the sector.
As I observed to the committee, there is no appetite by lenders to instigate an insolvency process against a HE provider – but knowing they could, I believe, will encourage lenders to lend into the sector.
There is an attempt in the sector to argue that an insolvency process, for those HE providers that are not companies, is not required. I think that that is a very optimistic view, because it relies on two large assumptions.
Firstly, that underperforming providers can merge with other providers to cut their overhead costs and avoid an insolvency process, and secondly, whether in respect of a merger or otherwise, someone will fund substantial amounts of money to avoid a provider insolvency process. The minister has already confirmed that that will not be the DfE/Treasury.
Another argument against special administration is that it will result in a number of HE insolvency processes. There is no evidence to support that, and the experience in the FE sector is the exact opposite.
Compulsory liquidation/special manager may be the new administration for HE providers, but, as set out above, there is so much more that a special administration regime could achieve, and I believe that a failure to implement such legislation will be a missed opportunity.