Navigating Financial Turbulence: Should Labour Introduce a Special Administration Regime for Universities?

Eugenio Vaccari and Yseult Marique

After 14 years of Conservative governments, Labour won the general election in July. One of the most pressing issues that the new government will have to address is the crisis in the education sector. 

The Labour manifesto did dedicate some space to education. Its focus was mainly on issues surrounding childcare, primary and further education. However, the financial health of higher education institutions (HEIs) in England and Wales is a growing concern, as acknowledged by the new PM’s staff shortly before the elections. 

English universities receive funding from various sources, including government grants, tuition fees, borrowing, revenue from assets such as accommodation, licensing and franchising. The financial landscape is increasingly precarious. Tuition fees have been frozen despite inflation since 2016, and recent policies have made it harder for international students, who pay higher fees, to obtain visas, either because of costs or because of restrictions in bringing dependants with them. This financial pressure is compounded by the varied legal statuses of universities (as discussed below), complicating the process of addressing financial distress.

The only part of the Labour manifesto dedicated to higher education states as follows: 

The current higher education funding settlement does not work for the taxpayer, universities, staff, or students. Labour will act to create a secure future for higher education and the opportunities it creates across the UK. We will work with universities to deliver for students and our economy.

This is quite a broad statement, that does not provide much clarity as to the actual measures that the new Labour government will implement to address the higher education (HE) crisis. 

One of such options is to allow HEIs to restructure their debt like many other companies, through a special administration regime (SAR). Such a system is already available to further education institutions. This brief article explores whether the introduction of a SAR for universities could provide a viable solution to the financial and related issues they are facing.

The Status Quo

HEIs in England and Wales are generally incorporated as Royal Charter Corporations (RCCs), Higher Education Corporations (HECs, post-1992 universities), or Companies Limited by Guarantee. Currently, there is no specific regulatory framework for HEIs in financial distress, except for companies limited by guarantee, which can utilise general corporate insolvency remedies. The case of GSM London (2019), one of the largest private education providers, illustrates the challenges faced when such an institution – incorporated as a company limited by guarantees – goes into administration. Its collapse left thousands of students and staff in limbo, highlighting the need for a more structured approach.

RCCs and HECs, unlike companies, can only be wound up as unregistered companies, as illustrated by the case of Tamlin v Hannaford [1950] 1 KB 18. This process does not normally allow the institution to continue trading. While this may work for ‘general’ companies, such an outcome would not be in the best interest of universities’ creditors or students. If a university stopped trading in the middle of the academic year, the university would have to refund a significant portion of the tuition fees received until that date, and the students will be unable to complete their studies. The confidence in the HE system would be badly affected, and the reputational damage to the sector could cause a domino effect on other institutions. 

A potential solution could be the appointment of special managers alongside liquidators, similar to the approach adopted in recent years for Carillion, Thomas Cook, and British Steel. This would involve government intervention, which may be politically sensitive due to perceptions of ‘bailing out’ a sector commonly misunderstood by the public to be wealthy. In other words, it would be difficult to prevent the impression that taxpayers’ money is spent on supporting institutions that misspent large amounts of the government’s funding to subsidise unsuccessful courses delivered by well-paid lecturers, but which failed to attract sufficient students’ interest or were found inadequate to prepare the students to their professional lives. However, appointing official receivers with government-backed indemnities to operate the institution until the end of the academic year could provide a smoother transition for students affected by a financial collapse of their university, similar to the approach taken in the liquidation of Baglan Operations.

Enforcement of securities in this context presents its own challenges. Secured charge holders generally have a stronger position than floating charge holders, but uncertainty, both political and legal, often makes lenders hesitant to take action. Governors of HEIs also face potential liabilities under the Insolvency Act 1986, including misfeasance (s.212), fraudulent trading (s.213), and wrongful trading (s.214). However, the threshold for holding a governor accountable is high, and many financially distressed institutions have not yet reached this point.

The Office for Students (OfS) plays a crucial regulatory role under the Higher Education and Research Act (HERA) 2017. The OfS focuses primarily on students’ interests, but s.2 of the HERA 2017 provides for a general duty that encompasses a broader range of potentially conflicting interests (such as competition ‘in the interests of students and employers’, including the promotion of quality and of ‘greater choice and opportunities for students’). The OfS also has a specific duty of ensuring the financial sustainability of HEIs (s.68 of the HERA 2017). 

Lessons from Further Education

The introduction of a SAR for further education institutions, as delineated in the Technical and Further Education Act 2017 (TFEA 2017) and The Further Education Bodies (Insolvency) Regulations 2018, provides a valuable model when considering a similar framework for HEIs. 

The TFEA 2017 was designed to address the unique challenges faced by further education institutions, ensuring minimal disruption to students while providing mechanisms for financial recovery or orderly closure. According to s.16 TFEA 2017, the primary objective of an education special administration is to avoid or minimise disruption to the studies of existing students and ensure that the institution does not need to remain in this process longer than necessary. This can be achieved by rescuing the institution as a going concern, transferring its operations to another body, keeping it running until students complete their studies, or making arrangements for students to complete their education elsewhere.

Additionally, s.24 of the TFEA 2017 mandates that education administrators must prioritise the needs of existing students, especially those with special educational needs, while also considering the best outcome for creditors. This balanced approach aims to protect students’ interests without neglecting the financial responsibilities of the institution. Moreover, sections 27 and 30 of the TFEA 2017 allow for loans and guarantees from national authorities to facilitate the administration’s objectives, providing crucial financial support to stabilise the institution.

The introduction of a SAR for further education was driven by the need to protect students without resorting to financial bailouts for non-viable colleges. The Explanatory Notes to the TFEA 2017 emphasise that the government’s overriding objectives are learners’ protection and providing orderly processes and rescue mechanisms for financially failing colleges. This approach ensures that while students are protected, non-viable institutions are not artificially sustained.

This regime was first implemented in January 2019 when Hadlow College in Kent became the first further education college to be placed under special administration. This was followed by another case involving West Kent and Ashford College, which was also placed under special administration later in 2019. However, the use of SARs for further education has proven controversial. A 2020 report from the National Audit Office concluded that the government was carrying out long-term interventions in nearly half of the colleges for financial health reasons, and that the two SARs mentioned above cost nearly £27 million. This prompted the government to launch an inquiry into the financial sustainability of further education colleges. 

The UK government’s inquiry led to a comprehensive review of the sector, highlighting significant challenges. Conducted by the Public Accounts Committee, the inquiry underscored the fragility of the sector’s financial health, with many colleges facing ongoing financial pressures despite various support measures from the Department for Education (DfE).

As a result of the inquiry, the DfE acknowledged the need for a more strategic approach to address these systemic issues. The previous government had committed to implementing reforms aimed at improving the financial oversight of colleges. This included enhancing the role of the Education and Skills Funding Agency (ESFA) in monitoring colleges’ financial conditions more rigorously and providing targeted support where necessary. The government had also signalled its intention to introduce measures to prevent colleges from reaching critical levels of financial distress, thereby reducing the need for emergency interventions like the special administration regime. However, no meaningful actions were taken before the end of the previous legislature.

The Case for SARs for HEIs

Translating this (controversial) framework to HEIs presents both opportunities and challenges. The primary advantage of extending a SAR to higher education would be the provision of clear guidelines and structured processes to manage financial distress. This could help prevent chaotic closures and ensure that students’ education is prioritised. Furthermore, such a regime could offer a moratorium on creditors’ actions and additional funding to support the institution during its recovery, similar to the provisions in the TFEA 2017.

However, there are potential drawbacks. One concern is that the introduction of non-terminal restructuring options could lead to a wave of rescue-oriented procedures, resulting in significant staff reductions, loss of institutional memory and cuts to academic programs. This could undermine the quality of education and research, potentially harming the sector in the long term. Additionally, while the SAR for further education focuses on minimising disruption to students, it also emphasises achieving the best result for creditors. In the higher education context, balancing these interests could be more complex, given the broader range of stakeholders involved, including staff, students, alumni, and the local community and economy.

Moreover, the accountability of those responsible for the financial distress of the institution must be addressed. While wrongful trading provisions apply to administration procedures, ensuring that governors and senior management are held accountable for their decisions is crucial. This accountability is essential not only for justice but also for maintaining public trust in the higher education sector, as there have already been egregious cases of financial mismanagement of university finances.

Finally, it is to be remembered that universities are distinct from many other businesses, even if the previous government wanted them to behave as such. Universities’ primary role is to provide education, to equip the next generation of workers with the tools needed for personal and professional self-development, as well as to be good citizens who contribute to the society they are a member of. These considerations should be the focal point of any discussion on the future of the HE sector in the country. 

The question of whose interests a special administration procedure would serve is also critical. While the primary focus should be on protecting students and ensuring continuity of education, the broader public interest must also be considered. HEIs play a vital role in their communities, the national economy, and the knowledge ecosystem, and their stability is of public concern. Thus, a SAR for higher education should not operate solely for the benefit of creditors but should take a holistic view of the institution’s role and impact.

Alternatives and Priorities for the New Government

Mergers and strategic alliances can provide a way for financially distressed HEIs to stabilise, as evidenced by examples such as the mergers between TVU and Reading College, as well as between Bedford College and Royal Holloway.

There are two main merger models. Model A involves setting up a new organisation, which is time-consuming and expensive, while Model B involves one institution transferring all undertakings to another, a simpler and more cost-effective approach. 

Successful mergers, such as those between St George’s and City, University of London, and Anglia Ruskin’s merger with Writtle, demonstrate the potential economic benefits of strategic alliances. However, distressed purchases are risky and should, where possible, be avoided. Long-term sustainability requires careful planning and assessment of future risks.

As stated above, governors and vice-chancellors of universities need to be more aware of their responsibilities and the potential liabilities they face. The National Audit Office raised concerns about the governance of HEIs, particularly in relation to financial oversight and the reliance on too optimistic assumptions on student numbers in a highly competitive market. The Public Accounts Committee also criticised university leadership for not always demonstrating adequate awareness of their duties. There is evidence that governors and vice-chancellors are becoming increasingly aware of the multi-faceted and inter-linked nature of the challenges faced by HEIs in the UK. However, the thresholds for holding a governor accountable are high, and there are defences available. Proper training in financial management and governance is crucial for those in leadership positions to navigate these challenges effectively.

The role of the OfS is central to this regulatory landscape. Under HERA 2017, the OfS is tasked with ensuring that universities operate in the best interests of students. This involves a range of regulatory measures, including the requirement for Student Protection Plans. These plans are designed to protect students in the event of course cancellations or university closures. However, the OfS has been criticised for being too focused on students and not considering the broader interests of the institution and its stakeholders.

When a higher education provider is at risk of insolvency, the OfS can issue a Student Protection Direction. This requires the institution to implement specific measures to protect students, such as ensuring that they can complete their courses at other institutions. While this provides some level of protection for students, critics argue that it can divert resources from addressing the root causes of financial distress and may inadvertently exacerbate the situation. However, strong regulatory oversight is essential to prevent failure and ensure early detection of financial distress.

The previous government had no sympathy for the financial difficulties faced by HEIs, with one minister on record for saying: ‘for too long, these universities have been selling immigration to international students rather than education’. Their war on international students led the (then) Home Secretary to establish a commission to assess whether the graduate route to allow them to study in the UK was being abused. To the relief of most HE institutions, the final report, published just before the elections, concluded that the graduate route had broadly achieved the purposes for which it was established, and that there was no evidence of significant abuse.

The new government and OfS under the direction of the newly appointed interim chair, Sir David Behan, have an opportunity to work collaboratively to ensure that universities can continue to provide high-quality education and support for students and staff in an increasingly challenging financial environment. Arrangements need to be made to address existing inefficiencies, but also to equip universities for new challenges, including the likely reduction of domestic students applying for graduate studies due to a demographic crisis and, as a result, a (potential) decline in university population. 

Concluding Remarks

In conclusion, while the SAR for further education institutions offers a valuable yet controversial model, adapting it to higher education requires careful consideration of the unique characteristics and challenges of the sector. The primary objective should be to protect students and to ensure the continuity of education, while also providing mechanisms for financial recovery and accountability. By learning from the experience of further education, policymakers can develop a tailored SAR that addresses the specific needs of HEIs, supporting their stability and sustainability in a complex and evolving financial landscape.

The financial challenges facing English universities necessitate a robust and flexible approach to managing financial distress. While a SAR could provide much-needed clarity and protection for students, the potential drawbacks and existing alternatives must be carefully considered. Strategic alliances and mergers, supported by strong regulatory oversight, offer viable pathways to sustainability. The government and regulators must work collaboratively to ensure that universities can navigate financial turbulence without compromising the quality of education and support for students and staff. 

To achieve this goal, it might be worth having a national, honest and frank discussion about the current status of higher education in the UK, its challenges and opportunities. This would be a much needed ‘difficult’ conversation, but one that could guarantee a lasting legacy for the new government and consolidate the UK higher education sector as an attractive place of learning and sharing. 

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