Insolvency goes back to School – An Update | Mayo Wynne Baxter
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Insolvency goes back to School – An Update

This article is an update to the article dated 19 September 2016 entitled Insolvency Goes Back to School. At that stage the government had launched a consultation regarding the development of an insolvency regime for further education. The government set out its proposals in a consultation published 6 July 2016 which ran until 5 August.  In total 63 responses were received.  The government have reported that most respondents recognise that there was a case for introducing a clear legal framework so that an “insolvent” can be dealt with in an ordered way, in line with existing company insolvency practice, as well as a special administration regime (SAR) which would be designed to protect the interests of learners in the event of a college becoming insolvent.

The government response to consultees makes it clear that ordinary administration, compulsory liquidation and creditors’ voluntary liquidation would only be available if the Secretary of State did not apply for a SAR in the case of an insolvent college.

Having considered the responses that were received the government has now decided to proceed with the introduction of a statutory insolvency framework, including a special administration regime, for further education and sixth form college corporations. The intention is that the new regime should be in place for the start of the 2018/19 academic year.

The Department for Education has now tabled a Technical and Further Education Bill. Whilst the bill is launched as setting out plans for technical education which is “fit for the workforce of tomorrow” the bill also includes plans for a new insolvency regime.  The measures in the bill are intended to establish a clear and well understood insolvency framework which will benefit learners, colleges and taxpayers with the procedures of colleges broadly in line with those afforded for companies under the Insolvency Act 1986.  These procedures include administration and voluntary arrangements which will enable colleges to restructure and be rescued from possible terminal insolvency procedures such as compulsory or voluntary liquidation.

In the original consultation document issued by the government it was stated as their intention to introduce an insolvency regime for further education and sixth form colleges to allow the principles of company insolvency to apply, it also included the potential liability of governors for wrongful and fraudulent trading. The government sought the views of interested parties on this particular proposal. The majority of those who did respond to this question supported the inclusion of governor’s liability.  Those who did not support this proposal referred to the fact that it would have a negative impact on recruiting and retaining governors, particularly those with professional expertise if the risks of being a college governor were felt to have increased.  There was also a call for guidance on governors’ duties.

The government have said that it would be a matter for secondary legislation to set out the full extent of governors’ liabilities but that they would want these to be developed in such a way that it is clear as to whom the duties fall upon. It is the government’s intention that any governor or member of college staff who was knowingly party to activity intended to defraud creditors will subjected to a charge of fraudulent trading.  Furthermore, the intention is that governors should be liable for wrongful trading and that principals should fall within the scope of this liability even in the unusual case that they are not a governor.  This potential liability may also extend to shadow governors and de facto governors just as it does to shadow and de facto directors.  In practice this could mean that a chief financial officer could also be caught by the future legislation.

The bill is now at the report stage and it is anticipated that the government proposals set out in its consultation document will be pursued with further announcements and details being given in the months to come.

If the above has raised any issues or concerns for you please feel free to contact Darren Stone, Head of Insolvency on 01273 775533.

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