Extra government funding for the higher education sector in England means the debate about the prospect of an HE provider facing insolvency and a special administration regime has gone away, right?
Unfortunately not. There is no additional government funding; in fact the additional financial support facilitated by the new Labour government so far is an increase to tuition fees for the next academic year for those students that universities can apply this to. It is estimated that the tuition cost per student is in excess of £14K per year, so the funding gap has not been closed. Add in increased National Insurance contributions and many HE providers will find themselves back where they are right now.
It is a problem that there is no viable insolvency process for universities. But a special administration regime is not solely about “universities going bust.” In fact, such a regime, based on the existing FE special administration legislation, is much more about providing legal clarity for providers, stakeholders and students, than it is about an insolvency process for universities.
Managing insolvency and market exit
The vast majority of HE providers are not companies. This means that there is a lack of clarity as to whether current Companies and Insolvency legislation applies to those providers. For providers, that means that they cannot avail themselves of many insolvency processes that companies can, namely administration, company voluntary arrangements and voluntary liquidation. It is debatable whether they can propose a restructuring plan or be wound up by the court, but a fixed charge holder can appoint receivers over assets.
Of these processes, the one most likely to assist a provider is administration, as it allows insolvency practitioners to trade an entity to maximise recoveries from creditors, usually through a business and asset sale.
At best therefore, an HE provider might be able to be wound up by the court or have receivers appointed over its buildings. Neither of these two processes allows continued trading. Unlike administration, neither of these processes provides moratorium protection against creditor enforcement either. They are not therefore conducive to a distressed merger, teach out or transfer of students on an orderly basis.
Whilst it is unlikely that special administration would enable survival of an institution, due to adverse PR in the market, it would provide a structure for a more orderly market exit, that does not currently exist for most providers.
Protections for lenders
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.
If government funding is insufficient to plug funding gaps, providers will need alternative sources of finance. The most logical starting point is to ask their existing lenders. Yes, giving lenders more enforcement rights could lead to more enforcements, but those high street lenders in the sector are broadly supportive of the sector, and giving lenders the right to do something is empowering and does not necessarily mean that they will action this right.
Lenders are not courting the negative press that would be generated by enforcing against a provider and most probably forcing a disorderly market exit. They are however looking for a clearer line to recovery, which, in turn, will hopefully result in a clearer line to funding for providers.
Protections for students
Students are obviously what HE providers are all about, but, if you are short of sleep and scour the Companies and Insolvency legislation, you will find no mention of them. If an HE provider gets into financial distress, then our advice is that the trustees should act in the best interest of all creditors. Students may well be creditors in respect of claims relating to potential termination of courses and/or having to move to another provider, potentially missing a year and waiting longer to enter the job market.
However, the duty is to all creditors, not just some, and under the insolvency legislation, students have no better protection than any other creditor. Special administration would change that. The regime in the FE sector specifically provides for a predominant duty to act in the best interest of students and would enable the trustees to put students at the forefront of their minds in a time of financial distress.
A special administration regime would therefore help trustees focus on the interest of students in a financially distressed situation, aligning them with the purposes of the OfS and charitable objects, where relevant.
Protections for trustees
Lastly, and probably most forcefully, a special administration regime would assist trustees of an HE provider in navigating a path for their institution in financial distress. As touched on above, it is not clear, for the vast majority of HE providers, whether the Companies and Insolvency legislation applies.
It is possible that a university could be wound up by the court as an unregistered company. If it were, then the Companies and Insolvency 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.
Joining a meeting of trustees to tell them that they could be personally liable, but it is not legally clear, is a very unsatisfactory experience; trust me, this is not a message they want to hear from their advisors.
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.
In the event a special administration was to be brought in, we would hope it would not need to be applied to a market exit situation. Its real value, however, is in bringing greater legal clarity for lenders and trustees and more protection for students, in the current financial circumstances that HE providers find themselves in.
