Draft Further Education Bodies (Insolvency) Regulations 2018

Debate between Stephen Timms and Anne Milton

Wednesday 31st October 2018 General Committees

[The Minister for Apprenticeships and Skills (Anne Milton)]

I beg to move,

That the Committee has considered the draft Further Education Bodies (Insolvency) Regulations 2018.

It is a pleasure to serve under your chairmanship, Mr Stringer. The regulations were laid before the House on 5 September. Along with the education administration rules that are due to be laid before Parliament next week, they are the final part of the legislation needed to bring into force the new insolvency regime for the further education sector. I shall set out the context of further education insolvency before we discuss the detail of the regulations.

Further education and sixth-form colleges are statutory corporations governed by the Further and Higher Education Act 1992. They are exempt charities, with the Secretary of State as principal regulator. They enjoy a high degree of operational autonomy and are independent of Government. They appoint their own governors; they make commercial decisions; and they can borrow, invest and set up companies. In this way, FE bodies can develop high-quality provision that best meets local needs for the area they serve, whether that is apprenticeships for local businesses, support for students struggling with maths and English, the new T-levels, or in future the national retraining scheme.

Three things are particularly important to the financial resilience of the FE sector. First, we need a sufficiently funded sector. I am very aware that there are challenges, but they are not the subject of the debate. Secondly, the sector should have outstanding leadership. There are some exceptional and committed governors and principals in the college sector and I pay tribute to their work. We want every college to have great leaders, both principals and governing bodies. We have been supporting the sector so that it can improve and so that all colleges benefit from the great leadership they need in difficult times. We want leaders to spread best practice and provide mentoring to weaker colleges to help them to improve and strengthen. We have a group of national leaders of further education and are recruiting a group of national leaders of governance—experienced governors and clerks who will help to build up the expertise of other governing bodies.

Thirdly, a resilient sector is structured and organised effectively. The area review process that began in 2015 made great strides towards achieving that. In some cases, the reviews led to recommendations for structural change, which are being implemented. We have provided significant financial support to help colleges implement the changes through the restructuring facility. Since 2016, we have made more than £330 million available through that route to support major college restructuring, supporting significant improvements to financial sustainability in the sector. The deadline for the restructuring facility has passed. We are considering the final applications and expect the final figure to rise significantly before the programme ends in March 2019.

[Stephen Timms (East Ham) (Lab)]

I am listening carefully to the Minister. Does she accept that college funding has not increased in cash terms since 2013, and that that has made the likelihood of insolvency, which the regulations address, much greater?

[Anne Milton]

I am very aware of the issue of college funding. We are doing a piece of work on the FE structure to make sure that it is sustainable in future. As I have said, we have put significant amounts of money into FE to make sure that we get the structure and college mix right. We want to make sure that each college has the opportunity to make an independent offer to young learners and prove its financial sustainability. I am sure that, like other Members, the right hon. Gentleman will continue to make representations to the Chancellor ahead of the spending review in 2020.

We wanted to make sure that, once the area reviews were completed and the restructuring facility had closed, there was a new robust set of arrangements in place that recognised college autonomy, enabled FE leaders to manage their college finances and provided support for students in the event that something went wrong. In particular, we wanted to avoid a chaotic failure in the event that a college ran out of money. That was why we announced in 2016 plans to introduce an insolvency regime for the sector. The main provisions for the regime are in the Technical and Further Education Act 2017 and were debated in both Houses when it went through Parliament.

The legislation was introduced to address uncertainty on whether insolvency law applied to FE bodies. The new regime puts in place an orderly process for managing a college insolvency. It delivers a special administration regime known as education administration, which prioritises the protection of learner provision in the unlikely event that a college becomes insolvent.

The regime will give the Secretary of State the power to apply to court for an education administration order. That could happen either in response to an FE body facing insolvency proceedings or if the Secretary of State is persuaded that the FE body is insolvent and that applying to court for an education administration order is the best course of action. At the heart of education administration is the special objective to avoid or minimise 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, which is beneficial for both students and creditors. That is what we mean by the protection of learner provision. In contrast, when a business becomes insolvent, the purpose is to get the best deal for the creditors.

The 2017 Act applied certain provisions of insolvency law to the FE sector, subject to modifications that were set out in the Act and that are specified in the regulations we are debating. The regulations modify insolvency provisions in the Insolvency Act 1986 and other legislation to make them work effectively for further education bodies. The regulations are necessary to ensure that the insolvency regime for the FE sector functions properly.

A further piece of legislation will be needed before the special administration regime can be enacted—a statutory instrument setting out the rules that apply to the education administrator’s conduct of an education administration. That legislation will follow the negative procedure. I would be very happy to meet the hon. Member for Blackpool South to discuss the details in further depth.

The insolvency regime is designed to provide certainty to creditors and to the further education sector. It is not certain under the existing legislation what would happen if a college became insolvent. This regime clears that up. It includes the special administration regime to protect provision for existing learners at a college in financial distress. It will not exist as a mechanism to summarily close colleges. Rather, it will be a device to deal with extreme circumstances.

The insolvency regime will sit within a wider financial intervention system, providing a structured and measured approach to preventing and responding to failure. Leaders that manage their colleges effectively will be key to preventing financial distress. This wider system will start with the monitoring of colleges that are experiencing difficulty. If things get worse, 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. However, it will be used if necessary for an orderly process to manage financial distress and protect learner provision. It is important to stress that, when a college becomes insolvent, it will not necessarily lead to provision being closed. Indeed, in some cases, students may barely realise that there has been a change, but our hope would be that they ended up in a more financially resilient college.

The regulations modify provisions in the Insolvency Act 1986 and legislation made under those provisions so that they apply effectively to college corporations. That not only ensures that the regime works technically, but deals with practical issues. For example, as autonomous entities, FE bodies have the power to amend their instruments and articles—it is a bit like a company’s articles of association—following incorporation to better suit their operational needs. The regulations make provisions that might not be contained in those instruments and articles but that are necessary for managing insolvency proceedings. For example, if there is no provision for meetings of governors as required by insolvency legislation, the regulations provide it to ensure that insolvency proceedings can run smoothly.

The 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. I have stressed the importance of strong leadership to improve financial resilience. Governors, as charity trustees, have responsibilities for good financial management and prudence in the colleges that they run. We are finalising the preparation of guidance for governors on their duties and liabilities, reminding them, through revised general guidance, of their responsibilities, and explaining the position on insolvency so that they are clear about how the legislation affects them and staff in the college.

Support is available through the Inspiring FE Governance service to help colleges to find people with the right skills to join their governing bodies, including chairs of finance committees. We are extending investment in leadership and governance development programmes, including working with the Education and Training Foundation on a tiered programme of development for governors. That will include support on financial management duties and insolvency.

The regulations exempt student governors from certain offences and from duties that will be required of other college governors so that insolvency proceedings work effectively. It would be unlikely that student governors would have a meaningful say in decisions that gave rise to the offence, so it would not be right to expose them to liability.

More often than not, college articles exclude student governors under the age of 18 from voting on decisions about spending money and contracts. If they cannot have a say in financial decisions, they should not be liable for offences linked to those decisions. It would also be unreasonable to expect student governors to comply with some duties expected of other governors—for example, to prepare a statement of the affairs of the college corporation for an administrator or liquidator that included a summary of the corporation’s assets, liabilities and details of its creditors. However, all governors, including student members, will be expected not to make false statements when they make returns, and all governors are expected to co-operate with the insolvency practitioner to allow insolvency proceedings to be concluded efficiently.

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 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 in their application to FE bodies to allow references to “company” to include references to “statutory corporations”, which means that the provisions will operate correctly. That will enable the Land Registry to make an entry in the register that an administrator or liquidator has been appointed over a statutory corporation.

Similarly, 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, allowing registration of key insolvency documentation with the registrar of companies.

Let me provide assurances about the process we have taken to get to this point. We carried out consultation on the policy adopted in the regulations to be certain that the insolvency regime delivers for the sector. We spoke to insolvency practitioners, lenders, colleges and organisations that represent the sector, including the Association of Colleges and the Sixth Form Colleges Association. We consulted in summer 2016 prior to the introduction of the Technical and Further Education Act 2017, and again as I described earlier. We have also worked closely with both Companies House and the Insolvency Service to ensure that the regulations are fit for purpose and that they do not depart from the standard approach to insolvency proceedings. The regulations apply to FE bodies and companies conducting designated further education institutions in England and Wales. Welsh Ministers are fully supportive of the approach taken in the development of this legislation.

The regulations contain the technical detail necessary to bring into force the FE insolvency regime, including education administration. They are required to deliver much needed protection of learner provision effectively in the unlikely event of an FE body becoming insolvent, and I commend them to the Committee.