Insolvency legislation “permits continued trading” if a university enters compulsory liquidation. How so?

One of the standout lines from skills minister Jacqui Smith’s appearance at the House of Commons Education Committee a fortnight ago came in response to a question about what would happen if a university entered insolvency, and what would happen to students and staff.

It’s worth quoting in full:

I think we have worked hard in the Department to understand the interrelationship between the legal status of higher education providers and the nature of the insolvency process.

For example, were an organisation to enter into compulsory liquidation, we believe that insolvency legislation permits continued trading during that period of compulsory liquidation. It would mean, therefore, that we would be able, as I have described, to support students, to support research and the important capacity of that provider during the period of liquidation, and to make sure particularly that students had the opportunity to be supported through a teach-out of their course, to be supported to move elsewhere, and to have their records and their achievements protected.

Those would be the things that we would want to make sure would happen in that case. To reiterate it once again, we do not think there is a university in that position at this moment.

It shows us that the department has been seeking advice on the question. But the position as stated seems confusing – almost by definition, liquidation means that continued trading is prohibited. So what’s going on?

The education committee is now after answers, writing to the minister to point out that this turn of phrase appears to be “markedly and significantly at variance with the evidence we have heard,” and pursuing an explanation in writing.

The committee highlights submissions from trade union Unite, lawyers Mills & Reeve, the Cathedrals Group, the OIA and others.

To quote a few extracts, Unite said:

If your institution was established by statute – a Higher Education Corporation, in other words – there does not appear to be an easy way to declare the provider itself insolvent, though it would be possible for a secured creditor to appoint a receiver to liquidate charged property assets.

Mills & Reeve:

The vast majority of entities operating as HEIs are not able to go into an insolvency process, save possibly for liquidation. This is because they are mostly incorporated by Royal Charter or are HECs, and are not therefore companies under the insolvency legislation.

We believe that such entities could be wound up by the Court as unregistered companies and, to the extent they have granted fixed charges to lenders, those lenders could enforce that security by the appointment of fixed charge receivers (FCRs).

However, both liquidation and the appointment of FCRs are terminal procedures that are entirely inappropriate to enable a HEI to trade, teach out and/or transfer students or merge with another provider.

The Cathedrals Group:

University structures are varied and include universities founded by Royal Charter, as Higher Education Corporations (HEC) and as companies limited by guarantee. Established universities are also charities and the Directors are charity trustees. Given the complexities of these structures, insolvency legislation would be difficult to apply. While liquidation might be an option in respect of a Royal Charter or a HEC, this would prevent ‘teach out’ and, in any case, would be an extremely undesirable outcome.

OIA:

The absence of a clear, student-focused insolvency framework has led to inconsistent and reactive responses when providers close. Change is needed particularly where an administration process is not an option. This is the case where providers are created by Royal Charter or are a Higher Education Corporation, or for companies where administration is not deemed viable by an Insolvency Practitioner.

The ombuds’ recent report with SUMS went into some of the issues in more detail.

But Jacqui Smith wasn’t persuaded, saying “I do not necessarily agree with some of the evidence that has been received around the suddenness or the terminal nature of insolvency or, in fact, of compulsory liquidation.”

Her department has apparently come to the conclusion that some kind of ongoing operation will be possible were a university to enter liquidation, no matter in what way it is incorporated. This will allow both students and research to be “protected” – in the case of students, via teach-out, transfer, and the protection of records (an issue the Office for Students was not confident could be secured during a disorderly exit, in its evidence to the committee). In the case of research, there’s even less detail on what this would mean.

As we noted following the committee’s earlier hearing, this represents something of a U-turn on the part of the government, which was previously exploring taking measures including but not limited to legislating for a special administration regime. Universities UK has also moved away from advocating for the creation of more formal processes.

The exact mechanism by which the government believes it can maintain the operations of an insolvent university will remain unclear until the committee gets an answer (it has set a deadline of next Thursday) – Wonkhe had already asked the department for clarification over the minister’s comments, without having received a response at time of writing.

But it appears likely that what’s under consideration is some kind of insolvency regime plus a “special manager”, of the same kind used recently in the steel industry (and further back with Thomas Cook). This would involve pumping government money in, and would not come cheap, especially given the commitments the government is, on paper at least, making around student protection and research support – though the minister did also note the taxpayer interest as well, a point where it’s hard not to read between the lines as an indicator that support would only go so far.

Whether such an approach would end up cheaper or with better outcomes than more formal processes is probably an argument not worth having until the department clarifies what it is intending. But while this kind of uncertainty brings with it a degree of political efficacy, possibly for the sector as well as the government, it provides little clarity for governors, potentially makes the sector a more confusing investment prospect for lenders, doesn’t speak to the government’s existing stake in institutions, and leaves students in the dark about the extent to which they would be legally protected and the extent to which it would rely on the government’s goodwill.