Further Education Bodies (Insolvency) Regulations 2018

Lord Agnew of Oulton Excerpts

Tuesday 30th October 2018 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Further Education Bodies (Insolvency) Regulations 2018.

[The Parliamentary Under-Secretary of State, Department for Education (Lord Agnew of Oulton) (Con)]

My Lords, these regulations were laid before the House on 5 September. In the Technical and Further Education Act 2017 we introduced a special administration regime for the further education sector. This included provisions for insolvency in the rare instances that it might be needed. It has been some time since we have discussed further education insolvency in this place and it is worth taking the time to set out some context for the benefit of those less familiar with this regime and the primary legislation.

Colleges are statutory corporations but operate independently of government. They have the ability to raise debt funding in the same way as a commercial body, through bank or other lending, although they are not for profit. A financially resilient further education sector requires strong leadership and an efficient structure to operate in. Since 2015, we have been working with the sector to strengthen that leadership.

Additionally, through a programme of area reviews, we have supported the restructuring of the sector so that colleges can meet the needs of learners and employers in their area as efficiently as possible. The Government have supported the sector to share best practice and to help weaker colleges to improve and raise standards. Coupled with the FE strategic leadership programme offered by the Education and Training Foundation, the aim is to drive up professional standards in the sector to help colleges to improve quality and become better equipped to deliver sustainable provision serving local needs. The Government also provided access to a restructuring facility, set up in 2016, to support the implementation of recommendations that came out of the area reviews. As that work is coming to an end, the restructuring facility closed to new bids at the end of last month.

Although we are seeing merged colleges and more robust arrangements developing as a result of the area reviews, we cannot guarantee that no college will fail in the future. We recognised that we needed a suitable mechanism in place to deal with colleges in an orderly manner if they should fail in the future. Therefore, in 2016 the Government announced that they would develop an insolvency regime for the sector. This includes a special administration regime with the objective of avoiding or minimising disruption to the studies of existing students of the FE body as a whole, while ensuring that the education administration is no longer than it needs to be—thus it benefits both students and creditors of an insolvent college.

The main provisions for the regime are in the Technical and Further Education Act 2017. The legislation provided clarity on whether and how insolvency law applies to FE bodies. The new regime ensures that there is an orderly process in place for managing a college insolvency. It also introduces, in the unlikely event that a college should become insolvent, a special administration regime known as education administration, which prioritises the protection of learner provision. Once commenced, the regime will give the Secretary of State the power to apply to court for an education administration order, appointing an education administrator. This could happen as a result of a creditor taking insolvency action of its own, in which case the Secretary of State can use his powers to put in place a different form of insolvency proceeding to protect provision for learners. Alternatively, he may be persuaded that the FE body is insolvent and that an application to court for an education administration order is the best course of action.

The 2017 Act applied certain provisions of insolvency law to the FE sector subject to modifications set out in the Act and specified in the regulations that we are considering today. These regulations modify insolvency legislation as it applies to FE bodies, both in the Insolvency Act 1986 and in wider legislation that concerns insolvency, to make it work effectively for further education bodies.

I also draw the Committee’s attention to the fact that there will need to be another piece of secondary legislation enacted before the special administration regime can be commenced. This will be a statutory instrument setting out the rules that apply to the education administrator’s conduct of an education administration. That instrument will follow the negative procedure. The insolvency regime provides the framework for insolvency practitioners to work within when dealing with the further education sector and specifies how education administration can be used to protect provision for existing learners at a college in financial distress. It is not the purpose of this legislation to seek to close colleges. It is a necessary tool to deal with the worst-case scenario, as the hard edge of a broader intervention system providing a structured and measured approach to preventing and responding to failure.

Colleges enjoy a high degree of financial independence, and it is right that they should be responsible for the decisions they take. This wider intervention system will start with the monitoring of colleges that are experiencing difficulty. If things get worse, then there will be a wide range of intervention tools. The insolvency regime is the mechanism of last resort, and we would expect it to be used only rarely. I wish to be clear that, where a college becomes insolvent, it will not necessarily lead to provision being closed. The aim would be to deliver the best scenario for the local area in the manner that is least disruptive for the learners at the college.

I turn to the purpose of this legislation. The draft regulations before the Committee today are quite technical. Their main purpose is to modify provisions of the Insolvency Act 1986 and to have legislation made under those provisions apply effectively to college statutory corporations. This not only ensures that a regime works technically, it also deals with practical issues to allow for the fact that FE bodies are autonomous and will have different provisions within their instrument and articles of governance. Therefore the regulations make provisions to manage insolvency proceedings in a standard way. These regulations also set out provisions for filing documents with Companies House, so that insolvency procedures are transparent for further education corporations, as they are for companies.

The role that the governors play in the UK education system is a crucial and well-established one. They bring a wealth of outside experience and knowledge to the sector. They are, rightly, already subject to important duties and liabilities as trustees of a charity and should already be well used to the responsibility that these duties bring. Governors should respect good practice, following proper process and ensuring that they take and carefully consider appropriate professional advice before taking key decisions.

The regulations have been drafted purposely to exempt student governors from certain offences and duties normally contained within insolvency legislation. The Government took the view that there would be some situations where student governors could not possibly have a meaningful say in decisions that gave rise to particular offences. It follows that it would not be right to expose them to liability for those offences. It is common for student governors under the age of 18 to be excluded from voting on decisions by the board that have financial outcomes. We have taken the view that if they cannot have a say in financial decisions, they should not be liable for offences linked to those decisions. Equally, student governors should not have to prepare a statement of the affairs of the college corporation, which includes a summary of the corporation’s assets and liabilities and details of its creditors—details that they might not be expected to be privy to. However, let me be clear that there is an onus on all governors—student members, staff members and other governors alike—to co-operate with the insolvency practitioner appointed by the court. This includes not making false statements when they are required to supply evidence of events.

I turn to the more technical detail of the regulations that we are considering today. Part 3 of the regulations modifies provisions of the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 as they apply to FE bodies that are statutory corporations. Part 4 of the regulations applies provisions of other legislation relating to insolvency to FE bodies, subject to modifications. For example, the Land Registration Rules 2003 need to be modified to enable the Land Registry to make an entry in the register that an administrator or liquidator has been appointed over a statutory corporation. Part 5 modifies provisions of the Companies Act 2006, applied to statutory corporations by Regulation 3, to ensure that they work effectively for FE bodies that are statutory corporations. This is to facilitate the correct filing of key insolvency documentation.

We carried out consultation on the position adopted in the regulations with insolvency practitioners, lenders, colleges and organisations that represent the sector. This included the Association of Colleges and the Sixth Form Colleges Association. The department has also worked hand in hand with Companies House and the Insolvency Service to ensure that these regulations work effectively for their intended purpose. The regulations apply to FE bodies and companies conducting designated further education institutions in England and Wales, and Welsh Ministers are fully supportive of the approach taken in the development of this legislation. I commend these regulations to the Committee.

[Lord Watson of Invergowrie (Lab)]

My Lords, I thank the Minister for introducing these regulations, which will bring a new college insolvency regime into effect by the end of the year. We believe that they are necessary and will not be opposing them, although we have some caveats that I shall bring to the Minister’s attention.

The Government are right to regulate in this area to bring more legal certainty, but we believe they should use the new powers only in exceptional circumstances because of the risk that they could damage confidence in an important sector. As I argued in Committee on what was then the Technical and Further Education Bill—before the noble Lord, Lord Agnew, was in your Lordships’ House—there is a danger that highlighting the need for a statutory insolvency regime that has not hitherto existed may alarm governors, banks, employers, international partners and others whose support is necessary to ensure that colleges provide the education and skills that the country needs. That is even more important now that the country is about to leave the EU and faces an uncertain economic future into the 2020s.

These regulations are technical and take a sensible approach to fitting out the structure of the legislation. The continuing underfunding of further education and the growing financial weakness of some colleges heightens concerns that the Government could unintentionally force a college into insolvency, with the serious consequences that that would bring. The new statutory college insolvency scheme can be traced back to early 2016, when the Government were overseeing the rationalisation of the sector through the national area review programme. No clear rules currently exist as to what happens should a college run out of money and the Government did not effectively indemnify it. When colleges were taken out of local government in 1992, a new type of statutory corporation was created to run them but no rules were ever established to apply in circumstances where colleges simply ran out of money. Instead, to protect a college’s students, courses and assets, central government—through a succession of funding agencies—has ended up being the funder of last resort. This has meant that the banks have always been paid in full or been able to replace an old loan with a new one.

The Government’s post-16 area review was designed to put all colleges on a sustainable financial footing and has resulted in more than 50 mergers since 2015, the majority of which have been self-funded by colleges. The process of restructuring colleges has proved to be more complicated than was anticipated when the area reviews started. Colleges have found that it takes more time than expected to satisfy their banks, resolve pension issues and navigate rules devised by Ofsted, the Home Office and the Education and Skills Funding Agency. We understand that the Treasury insisted on a college insolvency regime as a price for providing its restructuring loans, and this is what was legislated for in the Technical and Further Education Act. These regulations will put this into effect and are intended to provide clarity about what happens when a college gets into severe financial problems. The law creates a special administration regime for colleges akin to that put in place in recent years for energy companies, train operating companies and housing associations—strange comparators, noble Lords may feel. But it is to be welcomed that the special administrator will have duties to protect learners, as well as creditors, in a situation where a college has run out of money.

The new college insolvency regime has been described as a last resort rather than a normal route to secure change. Once the new arrangements come into force, there will be several lines of control in place: the governing bodies will of course have a duty to ensure the solvency and viability of colleges; the ESFA will have financial oversight; the Further Education Commissioner will intervene where the college has a notice to improve; and there is the independent business review, a new pre-statutory process that will apply for colleges in severe financial distress. Only if and when all the above fail to resolve matters will the new college insolvency regime apply.

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[Lord Storey (LD)]

My Lords, I preface my remarks by saying that we value further education. It will go through a renaissance and the need for vocational courses, skills development and apprenticeships will help it to blossom. This instrument is technical but it is absolutely right that we should agree it.

However, I have a number of concerns. We have had the area reviews, of course, but why do we allow a further education or sixth-form college to become insolvent? One would think that further down the line we would take strong and robust action to ensure that that does not happen. If a college closes down the effect on the local community and economy can be devastating. If we allowed a further education college in, say, Northumberland to close down because we had not kept our finger on the pulse, imagine the effect that that would have in a predominantly rural area.

It is important that we understand the mechanisms for ensuring that this does not happen. I see in the document that 37 further education colleges published notices to improve financial health. What do the Government do to make sure that that support is given?

I agree with the comments of the noble Lord, Lord Watson, about cuts, but it is not always about cuts; it is about management as well. An institution might not have all the resources it needs but it might be so well managed that it thrives nevertheless. It is about the management of the college as well as its finances.

I have three further questions. First, the Minister said that insolvency will not always mean closure. Will he expand on that and say what other actions can be taken? Secondly, do these regulations apply to university technical colleges? Thirdly, if we want to create the level playing that the Minister talked about, should we not ensure that all sixth-form colleges are treated equally and that those that have to pay VAT will no longer have to do so? Will he perhaps explain why sixth-form colleges that are not in a multi-academy trust have to pay VAT?

[Lord Agnew of Oulton]

My Lords, I thank noble Lords for the interesting points they have raised. There have also been a number of questions which I will certainly try to address.

I say to the noble Lord, Lord Watson, that we are adamant that this provision is for exceptional circumstances. I made that clear in my opening comments. In answer to noble Lords who raised questions about our commitment to this sector, it might be worth summarising the extent of that commitment. In the current academic year, 2018-2019, we expect to spend some £7 billion, which includes apprenticeships. That gives a sense of the proportion of our public spending that we are putting into this age group.

I can reassure all noble Lords that this instrument is designed as an exceptional mechanism. The main reason for it is that under traditional insolvency arrangements, the lenders take control of the process. The provisions in these regulations make sure that learners are given more priority. That is the overarching principle of why this is being done.

On the specific question that the noble Lord, Lord Watson, asked about how the various bodies involved in the sector would interact with one another, we are still developing intervention systems so that we can respond effectively to the early signals of poor financial health to focus on preventing colleges from getting into positions of insolvency. This allows the FE commissioner and his team to go into colleges at an early stage, work with principals and governors and share best practice on better financial management to help college boards develop sustainable plans for financial resilience. College boards may need to make tough decisions to make to become more resilient. We will rely on their engaging with us early on, as soon as they know there is a problem. That goes somewhat to the point that the noble Lord, Lord Storey, made about the quality of management and governance. That is very much what we are pushing for, to ensure that when the canary in the coalmine sings, it is listened to and early action is taken.

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[Baroness Garden of Frognal]

There is no objection to the fact that young people are helped by being able to read, write and add up. The point is that GCSEs are very academically focused and the content of those syllabuses is completely inappropriate for many people who have technical skills and could happily do a functional test paper but not the academic papers of GCSE; it is the GCSE exam that is the bugbear, not the fact that people need to be able to read, write and add up.

[Lord Agnew of Oulton (Con)]

I will certainly take the noble Baroness’s views back to the department and reiterate them; I understand exactly what she is staying. She also raised a question about providing guidance to governors. We are committed to providing clear guidance, particularly on their duties and liabilities under insolvency law. The general College Governance guide, last published in 2014, will be updated. Both sets of guidance have been drafted and are being developed with the stakeholders—the Insolvency Service, the Association of Colleges and the Sixth Form Colleges Association—ready for publication in, we hope, the next few weeks.

The noble Lord, Lord Jones, asked whether I have any specific examples of colleges that have become insolvent. The short answer is no, as they have so far resolved their issues. In 2016 we created the restructuring facility, a fund from which some £330 million has been drawn across the sector. That has been used specifically to help them carry out the restructurings and some of the mergers to which other noble Lords referred, so there has been a period of consolidation over the last two years.

The noble Lord also asked about sixth-form colleges. There is a provision—this also addresses the point made by the noble Baroness, Lady Garden—for sixth-form colleges to convert to academy status. If they do that, they get the benefit of VAT recovery. The question was: why cannot everybody do that? The reason is that it is a complicated process. It is an option that we have offered to sixth-form colleges but not all of them have taken it up.

[Lord Storey (LD)]

There are all sorts of reasons. If a sixth-form college chooses not to become an academy or part of a multi-academy trust, it is penalised by having to pay VAT; but if it chooses to go down that route, it gets the reward of not having to pay VAT. Is that what the Minister is saying?

[Lord Agnew of Oulton]

That is, in essence, correct. However, one of the advantages of the FE sector is that colleges are allowed to borrow money commercially. If that is a route they want to take or have taken, that can be a barrier to conversion to academy status.

The noble Baroness, Lady Garden, asked about the role of private providers in subcontracting. These regulations are specifically designed simply for the further education sector, not for independent subcontractors. If a further education college were to become insolvent, a subcontractor could become one of the creditors.

I hope I have answered all the questions that have been raised.

[Lord Storey]

There was the question of university technical colleges.

[Lord Agnew of Oulton]

These regulations do not apply to university technical colleges. A UTC is framed under the academies legislation and has a funding agreement in the same way as an academy has, but UTCs are a separate legal entity.

As I have outlined, these regulations make necessary modifications to insolvency law so that it effectively applies to FE bodies and can bring the further education insolvency regime into effect. Cases of insolvency are rare and will continue to be so, but we cannot afford to be complacent. It is essential that this legislation is put in place for the FE sector to provide legal certainty and, most importantly, to ensure that learners are protected in the event of financial failure.

Motion agreed.