Education Administration Orders

New rules relating to insolvencies specific to further education colleges, sixth form colleges and companies carrying out further education provision come into force on 31st January 2019.

Traditionally most colleges are Statutory organisations or Charities and the normal rules for Administration have not applied.

Why is the new law needed?

Colleges are suffering from falling student numbers and a reduction in government funding (especially to sixth form colleges). Recent headlines about a college which required an emergency loan from the Education and Skills Funding Agency (ESFA) of £1million to pay staff salaries highlighted the very real problems in the sector. For Further Education colleges the fall off in overseas student numbers because of uncertainty over Brexit (in the case of EU students) and tighter Home Office controls on Student Visas (for non-EU students) combined with more and more UK students being worried about the level of student debt have led to falling student numbers and therefore a reduction in income. Changes to sixth form funding have led to reduced income for sixth form colleges.

New process of Education Administration Orders

Normal insolvency processes are now available to Statutory organisations, but 14 days prior notice of any impending insolvency MUST be given to the Secretary of State at the Department of Education. In addition, if a secured lender wishes to enforce their security then must also give 14 days’ notice of their intention to do so to the Secretary of State. If the Secretary of State decides within that 14 days, he (and only he) can apply for the newly created Education Administration Order to be applied for at court. If an application by the Secretary of State is made any other proposed insolvency process is superseded.

If an Education Administration Order is made, then Insolvency Practitioners take office but the objective they then work under is different to normal Administration objectives.

An Education Administrator must work towards the following two objectives:

  1. To avoid or minimise disruption to the studies of existing students:
  2. To ensure that it become unnecessary for the body to remain in Administration.

This means that the Administrator must either

  • Continue to offer courses until either the end of an academic year or a term
  • Organise for the students to be moved over to another further education or six form college providers
  • Allow for courses to continue in either scenario until such time as college can be closed

The obvious problem this raises is who funds the losses that an insolvent college will incur during the period of the Education Administration Order? The Act includes provision for ESFA to provide funding and to be given super priority above existing secured lenders to recover those funds from any subsequent sale of the college or its assets. This is the first time super priority funding has been enshrined in UK insolvency law.

Case Study

In February 2018 (prior to this new Act being published) we were appointed Administrators in a traditional Administration scenario over a company which provided university degree courses in the performing arts arena. The college had embarked on an ambitious project some months earlier to improve their classrooms and performing studios. They had identified that they needed top class facilities to attract students. Unfortunately, the costs of the improvements overran both in terms of time and cost and they needed to approach a secured funder to cover their cash flow position. The problems were not helped by the timing of receipt of monies from the Student Loan Company. To try and solve their problems the company sought to sell the college to another provider, but negotiations broke down and Administrators were appointed. Luckily the appointment was made in the holiday period, so we had a short window of opportunity to consider options.

One option considered was to move students to another college. This would not have provided any return for the creditors. A second option was to seek funding for a term of teaching to enable a proper marketing exercise to be carried out. This proved difficult as (prior to this new Act) no super priority funding existed and the secured lender did not wish to increase their exposure. We therefore entered into urgent negotiations with the college that had previously been in sale negotiations and we were able to sell the assets just prior to the students returning to college for the next term of teaching thus minimising any disruption to their courses.

If the new Education Administration process had been available, we would have pressed hard for the Secretary of State to have used his power to appoint and we would have liaised with ESFA to ensure that an orderly migration of students or sale could have taken place over a term or possibly over a period of two terms.

Conclusion

In conclusion the new Act will hopefully only be used as a last resort as colleges will try to merge or transfer students prior to insolvency but the new regime will allow for a controlled process to take place to ensure minimal disruption. What the new Act will not do, however, is solve the major challenges being faced by the sector in terms of funding and falling student numbers.

We are happy to offer a free meeting with governors or bursars of colleges if you feel that you need to understand more about the process or the other options available to colleges. Please give me a call on
0207 186 1142.

Author: Nick O'Reilly

 

 

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