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Further Education Bodies (Insolvency) Regulations 2018

Volume 793: debated on Tuesday 30 October 2018

Considered in Grand Committee

Moved by

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.

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.

Just as the vast majority of companies and charities never come into contact with a normal insolvency practitioner, so almost all colleges will be unaffected by the existence of a special administrator. Given that there are four players in the game, the possibility of overlap clearly exists, so can the Minister explain how the various bodies I listed will interact to avoid any confusion or duplication?

The regulations clarify issues associated with the statutory process, the position of colleges that are also companies—a handful of adult learning institutes—and the fact that student governors will not be covered by director disqualification rules. The bigger issue is that the circumstances have changed considerably since spring 2016 when the Government drafted the legislation for these changes. Despite widespread agreement that education and skills matter for the country’s future and the Government making noises that suggest they agree, the financial outlook for the 266 colleges in England has further deteriorated in the past 12 months.

I refer to the Explanatory Memorandum that accompanies the regulations; it is towards the end of the bundle of documents. On page 3, using wording that would do Sir Humphrey proud, the first sentence of paragraph 7.1 reads as follows:

“A proportion of FE colleges have fallen into financial difficulty for a variety of reasons”.

That is an understatement. I read on, interested to see whether any of these reasons were listed; there was not a word. That is all the document says, with no attempt to specify what the reasons are. That is, at best, unfortunate. It may not be the role of the Explanatory Memorandum but drawing attention to the issue then casting it aside as if it is of only relatively minor importance is not very helpful.

However, it fits to some extent with the fact that the Government remain in denial about the serious underfunding of the college sector. The cost of recruiting and retaining the staff needed for high-quality academic and technical education is rising but the Government refuse to acknowledge inflation in their funding decisions. The funding rates paid to colleges have been fixed in cash terms since 2013. The hope that apprenticeships would provide more income has not been realised because of their falling numbers, although the one ray of light for colleges to emerge from yesterday’s Budget was that the co-investment rate for smaller, non-levy-paying employers will be cut from 10% to 5%, which hopefully will have an effect on those hitherto prevented from participating.

Despite the mergers that have resulted from the area review process, some colleges remain in a financially fragile state. The Minister may question my raising funding in the context of these regulations but I believe their relevance should be clear. Over the past 10 years, colleges have had to deal with an average funding cut of 30% while, at the same time, costs have increased dramatically. Further education is the only part of the education budget to have had year-on-year cuts since 2010, with funding for students aged 16 to 18 suffering an 8% cut in real terms since 2010. Funding for adult education has had a cut of 62%, so it is little surprise that the past 10 years has seen total enrolment for adults drop from more than 5 million to less than 2 million. That explains why banks are removing or withholding investment from the sector, leaving some colleges exposed in terms of cash flow.

I finish with a word of caution to the Government. Given the chilly financial climate that their policies have created for colleges and the uncertain future to which I referred, they should be very careful about using the new rules contained in these regulations without considering the consequences.

My Lords, I too thank the Minister for introducing the regulations. It is always somewhat frustrating that discussion of regulations offers no chance to amend, but of course it gives us an opportunity to challenge and seek clarification from the Government on rationale, detail or implementation.

We on these Benches found the Technical and Further Education Act a deeply depressing piece of legislation. Our further education sector makes an enormous contribution to education and the economy but continues to be overtasked, underfunded and underappreciated. The Bill was largely about potential insolvency in further education—hardly a resounding message of support. Of course, it introduced the baffling T-levels, which were not sought by the sector and continue to be baffling months after their inception. They risk undermining the highly regarded vocational qualifications that have served this country well for generations, but we will keep the perplexities of T-levels for another debate.

I declare an interest as a vice-president of City & Guilds, an organisation I worked with for some 20 years. For more than 140 years, it has been an immense source of employment skills for the nation. City & Guilds has always worked with FE colleges, which play a crucial part in delivering world-class qualifications that are highly regarded in the UK and overseas by employers across the whole range of work-related skills.

We note that a number of FE colleges have fallen into financial difficulties. Can the Minister tell us how many of them have actually become insolvent? I note that the Explanatory Memorandum indicates that,

“in reality we expect that FE colleges entering insolvency would be a very rare event”.

One wonders why, in that case, so much of the Act was devoted to such insolvency. We gather too that:

“The Department will publish two sets of guidance before the instrument comes into force”.

Will the Minister say when we can expect these sets of guidance? Apparently there is to be no monitoring to assess whether there are,

“any unexpected burdens or tensions within the FE sector”.

Any legislation that imposes additional burdens and tensions on an overburdened sector should surely be dismissed instantly. Would it not be prudent to have some sort of review?

Will the Minister also say what part in those financial difficulties has been played by the unwelcome and damaging burden of providing GCSE resits in maths and English? If ever a policy was designed to reinforce failure in learners, these resits are that policy. Young people who may have brilliant workplace skills are forced into taking exams again and again which have little, if any, relevance to the work they wish to do, and they fail time and again. This is hardly encouragement for the future. Colleges have been tasked with this depressing and resource-intensive duty. When will the Government realise the negative and counterproductive impact of their obsession with academic qualifications, regardless of the talents of young people or the relevance of those qualifications to the things that young people actually want to do? Can the Minister say if and when the Government have plans to review the GCSE resit policy?

I share the concerns of the noble Lord, Lord Watson, over the drop in funding for FE, which is surely unacceptable with all the pressures put on it.

Can the Minister say what provision has been made for private providers? What progress has been made in developing comparable safeguards for apprentices and other learners who are with private providers, especially in view of the collapse of 3aaa? What about the looming collapse of learndirect? Do these regulations have any implications for protecting learners if there are subcontracting arrangements, for instance? We know that colleges and private providers are entangled in highly complex subcontractors. The Minister may have an answer on this, but if he does not, perhaps he could write to me.

We do not seek to challenge these regulations, but we express again our deep concerns over government policies towards vocational, or even technical, education. We hope that wise heads will appreciate that it is in the national interest, and in the interest of learners, to give every possible support and status to those who seek to acquire the work skills the country so desperately needs. I look forward to the Minister’s reply.

My Lords, I thank the Minister for his cogent introduction and my noble friend for his eloquent steer in a debate such as this. My remarks will be very brief. The regulations refer to Section 124A of the Insolvency Act, which is headed “Petition for winding up on grounds of public interest”. Will the Minister expand on how he perceives the public interest in the context of this sphere of education? The matter is complicated, and obviously the provision is necessary, but can he give a recent instance of where a specific further education establishment has been perceived to be insolvent? Has that happened? Does he know of a sixth-form college that has been wound up? Has that happened?

Paragraph 7 of the Explanatory Memorandum on the policy background is helpful. Does the Minister know whether exceptional financial support has been given to one of these institutions? Like others in this debate, I think the further education sector is crucial to the future of Britain’s economy. In particular, FE colleges might help us save what remains of our manufacturing base.

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?

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.

I turn now to the question asked by the noble Baroness, Lady Garden. First, I pay tribute to the great work of City & Guilds, which is a vital part of the framework for education post 16. She asked specifically about the numbers we expect to become insolvent. I cannot give a number on that, but I restate what I said a moment ago—that we see this as a last resort. On her question about resits, I know that this is a matter of some emotion for people. It is worth saying that employers value the fact that young people have to face up to the basics of English and maths; they appreciate it. I understand that this can be demoralising. I come from a family of seven children. Only two of us passed maths O-level, so I know what it is like to be in a family of low-achievers. However, most jobs today include a high level of technical involvement. Not grasping the basics of good English comprehension or basic maths skills will put young people at a disadvantage for the rest of their lives.

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.

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.

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?

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.

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.