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The authority to close a university or bail it out?

Dennis Farrington looks at the legal position on university bailouts and closures
This article is more than 5 years old

Dennis Farrington is a Visiting Fellow of OxCHEPS, New College, University of Oxford and co-author of The Law of Higher Education.

There has been much discussion recently on university finances, speculation over whether the regulator or government might step in to help with grant funding or a loan, and if not which authority might close a university.

When delivering his message on bailouts a few weeks ago, Michael Barber was keen to remind universities that they are autonomous. This may have been more of a legal point than a political one.

Legal autonomy

The UK sits at the pinnacle of the Autonomy Scorecard published by the European Universities Association (EUA).

Legally, higher education corporations are bodies corporate, established to conduct certain former local authority maintained higher education institutions. This was the alternative to granting Royal Charters back in 1992, which would have given them a virtual guarantee of permanent existence.

The governing bodies of these institutions were established as HECs by five orders issued under the Education Reform Act 1988 (ERA), and then became corporations conducting post-1992 universities following changes made by the Further and Higher Education Act 1992 (FHEA). As such, HECs conduct a large number of universities in England, and Schedule 8 of the Higher Education and Research Act 2017 (HERA) deregulates controls over their governance which were there under earlier legislation.

Before 1988, these institutions had no specific legal status separate from the local authority which could open and close them at will after taking advice from the National Advisory Body for Local Authority Higher Education. Given there was concern in 1988 about how many of the former local authority institutions would survive, the power to dissolve HECs was conferred on Ministers by s.128 ERA – allowing government to determine where assets should go or the details of a merger.

There are examples post-1992 of voluntary closures by Order in England, e.g. Wimbledon School of Art (2006), Leeds College of Music (2011). There are no examples of an involuntary dissolution under s.128, although it was considered in Wales in 2012. Instruments of government do not include reference to dissolution, so that HECs cannot dissolve themselves.

Prior to HERA, autonomy was restricted by a ministerial power to close an HEC by Order – at least in theory. But HERA added a new section to the Education Reform Act 1988 (ERA) providing that such Orders in England can now only be made at the request of the HEC itself. This is quite separate from the powers of the Office for Students (OfS) under s.18 HERA to deregister institutions in defined circumstances.

This means that under the recent changes, HECs are in this sense not as distinct as they were from the older universities, including for example Oxford and Cambridge preserved ‘forever’ by an Act of 1571; the University of Newcastle Upon Tyne created by primary legislation in 1966; the chartered institutions which can in practice only be closed by an Act of Parliament (e.g. Chelsea and Bedford Colleges in 1985); and the small number of institutions run by limited companies or trusts.

The powers under the new s.127A include power to transfer property, rights and liabilities of the corporation to:

(i) a person appearing to the Secretary of State to be wholly or mainly engaged in the provision of educational facilities or services of any description;

(ii) a body corporate established for purposes which include the provision of such facilities or services;

(iii) the Office for Students.

In all cases the transferee’s consent is required – this is cited in the 2006 and 2011 Orders governing the Wimbledon and Leeds closures, and repeated in s.127A ERA.

Are there guarantees?

The question is what legal guarantees there are of the continued existence of HECs, as opposed to those constituted in other ways? A new government could decide to revert to the 1988 closure provisions to save money, recognising that revoking Royal Charters is more difficult. But what happens for the time being?

In 2012 the rating agency Moody’s took the view that De Montfort University (DMU) HEC had some form of protected existence for at least 30 years, and recently the temporary “bridging loan” granted by OfS to an unnamed university has reignited the question of universities’ “security of tenure” to use another phrase derived from property law and practice.

The question is on what legal basis did Moody’s assert in 2012 that the government was in effect a last resort guarantor of an HEC and on what basis might it be doing so now? Neither Moody’s nor De Montfort would provide an answer. The published Moody’s rating incorporates their assessment on which they must have taken legal advice and had to rely on information provided by the governors of the HEC of a strong regulatory framework and of “a very high likelihood of extraordinary support from the UK government in the unlikely event of the HEC experiencing acute liquidity stress”.

In 2014 Moody’s reported that a reduction of support for HE in government policy, as well as a reduction in the oversight exercised by HEFCE, would hurt the sector’s credit profile. But in the same report, when Moody’s reduced the credit rating for a chartered university, it noted that: “The rating also takes into account Moody’s assessment of a high likelihood that the UK government would act in the unlikely event that the university faces acute liquidity stress”.

Today, the legislation relating to the government’s involvement is negative, not positive. It is the OfS, not ministers, which has a direct link with institutions.  Under s.68 HERA OfS has a duty to monitor and report on financial sustainability, it has no statutory authority to guarantee that sustainability in any institution. Where HEFCE has consented to bonds in the past, ministers were not involved in the process – it is ultra vires in terms of s. 81 FHEA (repeated in s.77 HERA) for it to give institution-specific financial support directions to what is now OfS, except where there is mismanagement of the affairs of a particular institution.

In other words, there is no power in today’s legislation for the government to give “extraordinary support” to a particular HEC. On the contrary – if an HEC is experiencing “acute liquidity stress”, i.e. going bankrupt, ministers have no powers to intervene at all in the absence of mismanagement. And although OfS still has the power to issue grants and loans, it no longer has the duty to do so to keep an HEC afloat – regarding it as irresponsible to do so. It is the HEC itself, i.e. the governing body, which would experience the stress, and could only then request closure under s. 127A ERA – which would be handled by ministers, not them.

Another fiscal illusion

All of this means that the government guarantee assumed by Moody’s is illusory, and HECs truly do conduct “disposable universities”. So what can be done to reduce the risks of dissolution and how do the members of the governing bodies of HECs protect their institutions?

The obvious way forward, as has been discussed over a number of years (but ultimately rejected), is to convert HECs into private companies so that the procedures for dissolution would be the same as for any other company.

One such company is London Metropolitan. At the time of its financial problems coming to their attention in 2009, ministers were apparently alarmed at the fact that (unlike back then in the case of HECs) it was beyond their powers to intervene directly.

However, in the consultation exercise following the 2011 White Paper (specifically on Chapter 4), it seems there was no particular enthusiasm for a change of legal status – although some support for making changes to simplify existing governance structures, which has been done in Schedule 8 HERA.

To bring the HECs into line with the rest of the sector, and to justify the UK retaining its position as having the most autonomous university system in the EU, either they should all be granted Charters – which is the best protection from the exercise of executive authority – or they should all be converted into companies. Members of governing bodies then in either case would arguably enjoy a greater measure of protection.

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