College oversight in the era of insolvency

On 22 May 2019 Hadlow College became the first College to be placed into Education Administration following an application by the Secretary of State. Hadlow’s perils present a timely opportunity to review the provisions for the oversight of Colleges as set out in “College Oversight: Support and Intervention” published by the DfE on 1 April 2019. The strengthened regime builds on current arrangements whilst taking into account: the end of Exceptional Financial Support from March 2019; the end of the Restructuring Facility, which closed to new applications in September 2018; and the new college insolvency regime, which came into force in January 2019.

The DfE says it will aim to prevent Colleges from getting into financial difficulty by “continuously improving our engagement with all colleges using a range of data, indicators and intelligence” and by improving the data and information it collects. College leaders are urged to seek external help if they think the college may be heading towards difficulties, whether around finance or quality (including contacting the ESFA as early as possible) to ensure they receive support. Should colleges not come forward the ESFA will go to them if it thinks there are reasons for concern, asking for more information where necessary to understand the situation fully and decide what, if any, further support is required to bring about improvements. It is emphasised that the monthly cash flow position of a college is as important as the year end position and that the college executive should undertake robust and comprehensive monthly cash flow forecasting.

Where prevention efforts are not proving effective the matter will move to early intervention. Whilst each college’s position will be considered on a case by case basis, the triggers which will prompt the ESFA to consider whether to move a college into early intervention are: financial health/management/control concerns; two consecutive ‘Requires Improvement’ for overall effectiveness grades from Ofsted; escalation by an ESFA case manager; apprenticeship Grade 4 (‘Inadequate’) assessment where the overall assessment is ‘Requires Improvement’ or better; or poor/declining education performance data.

Should a college meet the triggers for formal intervention the ESFA will issue a Notice to Improve. Formal intervention has been strengthened by the addition of new criteria/triggers as follows: “inadequate” assessment of financial health assessed by the ESFA on financial plans or accounts; cash related concerns; one or more qualified audit opinion on a funding audit, qualified accounts, a modified regularity report; upheld investigations related to college financial management and governance and/or funding audits and/or significant fraud or fraud practice; evidence of financial practice/action taken by an accounting officer and/or governors that is not in the best interests of value for money, the protection of public funds, the effective delivery of service for learners or does not meet the public benefit test; subcontracting where in the ESFA’s assessment there has been a significant/material non-compliance with subcontracting rules; failure to submit financial accounts within 30 days of the published deadline or 30 days of any agreed deadline beyond the published date; escalation by the FEC from a diagnostic assessment; or escalation by the ESFA if a college fails to demonstrate sufficient progress in resolving issues that have triggered early intervention.

The FEC will undertake an intervention assessment of the capacity and capability of the governance and leadership team to “deliver rapid and sustainable improvement”. The FEC will consider recommendations such as: changes to governance and/or leadership; conditions or restrictions on funding; new or revisions to existing recovery plans, curriculum reviews and quality improvement plans; further activity to determine the most appropriate way forward that is in the best interest of local learners and employers - this could take the form of escalation into consideration of restructure or exit; and placing the college into Supervised College Status.

Where support and intervention are not enough a “structural solution” will be required. This could be: a restructure of the existing institution; a merger with another institution; the disaggregation of the existing institution, which could result in a smaller core institution; and/or the complete dissolution of the board/closure. The policy states that colleges should consult with their ESFA case manager on potential options and should also ensure suitable professional advice, such as financial due diligence, business change support, estates advice and legal advice, is received on all major decisions.

The policy also sets out a number of tools that might assist with assessing the options which might include an Independent Business Review, a Structure and Prospects Appraisal and/or a FEC local provision review.

Emergency funding can be provided where a college is otherwise likely to run out of money but this will only be provided for the time it takes to make a decision on the future of the college, and will be the minimum to keep the college solvent during that period. Funding may also be available to support the restructuring of a college or changes to a college’s provision or operations. This will be considered on a case by case basis and is provided in exceptional circumstances and at the DfE’s discretion.

The Secretary of State continues to have powers under sections 56A and 56E of the Further and Higher Education Act 1992, in appropriate circumstances, to remove all or any of the members of the governing body; appoint new members if there are vacancies (however arising); and/or give directions to the college related to the exercise of its powers and performance of its duties.

Having reminded colleges of the relevant provisions of the new regime and the DfE’s previously published guidance the policy document goes on to state that the aim is to lower the risk of a college entering insolvency through early identification of issues and taking appropriate action early to enable a turnaround where possible. The document also points out, however, that Governors have duties as charity trustees to ensure the good financial management of college corporations and that these are all the more important in the event that a college corporation encounters financial difficulty that could result in insolvency.

Comment

Our assessment of the new regime is that financial awareness will be paramount. The emphasis on monthly monitoring of cash flows should be taken seriously. The FECs office has also flagged the need for financial forecasting to be realistic rather than aspirational with any hint of the latter being likely to trigger intervention processes.

Author: Ben Wood, Partner at Eversheds Sutherland LLP. Eversheds Sutherland are a supplier on a number of lots for the Legal Services framework

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.