What has the special administration regime for further education organisations got to do with charities?

Over the last few years, financial distress has been prevalent in the Further Education (“FE”) sector as dwindling government funding and reducing student numbers have taken their toll. One in every nine colleges is in a poor enough financial state to merit some sort of financial intervention by the Government.

As a majority of the FE providers – many of which are exempt charities regulated by the Department for Education as principal regulator for charity law purposes, instead of the Charity Commission – are statutory corporations rather than companies, solutions under the insolvency legislation are limited and the problems have so far been dealt with by mergers in the hope that critical mass can overcome financial distress.

From the end of January, however, various provisions of the Technical and Further Education Act 2017 (“TFEA”) came into force.

TFEA

TFEA introduces a special administration regime for FE operators as well as applying corporate insolvency processes to statutory FE colleges, subject to restrictions. It also places some limit on the enforcement of fixed charge security and applies the wrongful and fraudulent trading provisions to governors, as well as applying a disqualification regime.

The restrictions include that an administration order or appointment cannot be made without the Appropriate National Authority (in England that is the Secretary of State) first being given 14 days’ notice of any hearing or intended appointment; The 14 day period is intended to allow the option of the regulator stepping in.

Special Administration Regime

Only the Secretary of State can apply for an education administration order appointing an administrator whose objective is to manage the affairs, business and property with a view to avoiding or minimising disruption to the studies of existing students.

The focus of the administration is not just the creditors, but also the students and this is reflected in the administrator’s statutory functions, which require them to take into account the needs of existing students who have special educational needs.

What prompted the change?

It is felt that the introduction of TFEA has been motivated by a lack of appropriate corporate governance in respect of certain FE entities, some of which have charitable status, and the Government’s desire to have more control over entities it is expected to fund. Similar provisions in higher education may follow.

As far as charities generally are concerned, it will be interesting to see how TFEA will work, for a sector that is even now often operated by non-corporates.

Future changes to insolvency laws for non-corporate charities?

Could we see a regime similar to the corporate insolvency regimes and directors’ duties on insolvency applied to charity trustees of unincorporated charities more generally in due course?

The Law Commission, in its report on technical issues in charity law last year, suggested “there might be scope for a wider review of insolvency law, including consideration of the availability of trust property on insolvency”, and that this might be suitable for a future Law Commission project.

The prospect seems therefore remote at this point, but even if reform in this area should be introduced in due course, we would anticipate that these provisions should be no more onerous than current trustees’ duties.

Having said that, charities may want to look at their corporate governance and structures, not necessarily in anticipation that such a change may be on the way, but simply because good financial management of a charity, including knowing what steps to take if a charity is facing financial difficulties, is a key charity trustee duty, and in these uncertain times more essential than ever.

Posted on behalf of Neil Smyth, Partner

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