Higher education institutions and financial distress - what are the options now?

Despite reports of rising costs in the United Kingdom settling down over the last few months, the financial pressures faced by English universities continues to increase. This article seeks to remind universities and other higher educational institutions (HEIs) in England about the considerations and options available when facing situations of doubtful solvency.

A look at the background - what was the HERR and was it used successfully?

Under the regime, it was intended that an HEI in financial distress would undergo a restructuring exercise and implement restructuring plans under independent supervision, so that it was able to overcome the challenges of the COVID-19 pandemic and emerge stronger. Mindful that taxpayers' money was supporting the regime, the Department for Education (DfE) stressed that should an HEI require funding, that funding would be subject to strict conditions which would be assessed on a case-by-case basis and that any financial support would take the form of a repayable loan. It was theoretically possible to undertake a restructuring through HERR without being provided with funding from the DfE.

Having made enquiries of the DfE, we understand that three HEIs applied to HERR following its launch in July 2020 and, of those three institutions, only one received financial support under HERR, with the other applicants refused support under the regime because they failed to meet the necessary criteria. We understand that the support that was provided to the successful applicant was in the form of a repayable loan in the sum of £7.3 million and that to date the repayment terms of that loan have been complied with.

Despite the continuing need for financial support in the sector, the DfE has indicated to us that there are no immediate plans to replace the now withdrawn temporary regime with something more permanent in response to the increasing struggles that universities are facing. The DfE has assured us that it fully intends to provide such support as may necessary to protect the best interests of students going forward but with a change in government on the horizon and very little from the Labour party about its plans for higher education and the funding of it, the future is very uncertain.

What now for Governing Boards of HEIs?

It goes without saying that Governing Boards need to be on top of their institution's financial circumstances, so that situations of financial distress can be recognised and addressed at the earliest opportunity. Experience shows that the earlier action is taken, the more likely it is that an institution will be successfully rescued from a position of doubtful solvency and the higher the prospects are of avoiding a closure.

Any early signs that an institution is struggling to balance its books should be acted on by seeking professional financial and legal advice at the earliest opportunity.

What are the responsibilities of Trustees and Governors?

Individual members of governing boards have fiduciary duties. These fiduciary duties, whist directed towards beneficiaries ordinarily, will shift so that creditors' interests are taken into consideration in situations of financial distress, with those creditors' interests taking prime importance once insolvency is inevitable.

It is therefore important that these individuals continually assess the institution's financial circumstances, and any rescue measures available, to ensure that prompt action is taken at the relevant time.

In particular, this requires that:-

• Management and trustees/governors have access to up to date and accurate financial information and cashflow forecasting data (both long and short term)
• Situations of potential conflicts of interest at management/trustee/governor level are considered and risks in respect of them minimised
• Communications from creditors are monitored and signs of increased pressure from creditors, including the threat of legal action, spotted
• The Governing Boards and their relevant committees meet on a regular basis to consider the financial circumstances and options available to them. It is crucial that discussions and decisions made, or issues considered, at these meetings are properly recorded and documented, including the reasons for any decisions taken
• Professional advice is sought on the institution's financial position and the legal options available to it. This is particularly key where governors/trustees are unsure about what actions they should be taking in response to early warnings signs of financial distress or have any concerns about the decisions being made
• Any necessary regulatory communications or notifications are made, such as to the Office for Students or the Charity Commission, as applicable

What options are available to institutions in financial distress?

As HERR has been permanently withdrawn by the DfE and there are no plans to introduce a similar, permanent regime, the onus is very much on institutions to understand the options available to them, explore them properly to assess viability and promptly take the appropriate steps to respond to financial distress - such as further diversification of activities to secure additional income streams, reducing costs through redundancy exercises or disposal of costly parts of the University's estate, closing unviable courses and extending external finance facilities.

The elephant in the room is what prospect there is for consolidation in the HE sector as a means of addressing increasing financial pressures. Following the post-16 area reviews which identified a number of financially unsustainable further education colleges, the sector saw an influx of FE mergers, many forced through by a regulator which had no appetite to see institutions fail. HEIs have more autonomy and without a statutory regime through which an HE merger could be effected, there may be little appetite for these types of discussions to take place voluntarily. We can only watch this space.

Insolvency options if a rescue is not possible

Unfortunately, a rescue is not always possible or successful and so institutions need to understand what insolvency options may be available (or enforced) if the need arises. There is not a single insolvency regime for HEIs. The relevant insolvency processes capable of applying depend on the institution's corporate form - whether a royal charter body, a higher education corporation, a limited company or something else.

Different insolvency procedures come with varying characteristics and are each suitable for different scenarios, depending on the objectives to be achieved. It is therefore important for universities in financial distress to obtain specialist insolvency advice at an early stage to understand not only what insolvency procedures are legally available to them, but also the advantages and key features of that specific insolvency processes.

Universities which are established as limited companies are usually able to avail themselves of most of the insolvency processes a standard English corporate entity can avail itself of, including administration and liquidation.

Royal Charter universities are treated as 'unregistered companies' for the purposes of the Insolvency Act 1986 (the Act). Institutions falling into this category can be wound up under Part V of the Act but not under Part IV of the Act which means that a winding up process via a Court route would be possible. It would also appear that royal charter universities cannot benefit from administration or Company Voluntary Arrangements (CVAs) but may be able to avail themselves of a Part 26A restructuring plan or a scheme of arrangement in certain circumstances.

For other higher education corporations, the position is not so clear. Whilst on the one hand, it is arguable that such an entity should also be treated as an unregistered company for the purposes of the Act, an alternative view is that such entities can only be wound up and dissolved by the DfE at the request of the HEI in question.

Either way, the varied and differing ways in which insolvency processes apply to HEIs across the board lends itself to a strong argument that a specialist insolvency regime for the HE sector, perhaps one incorporating elements of HERR or of the special administration regime available to FE colleges would lead to a welcome degree of certainty.

The key takeaway from this article is that insolvency in the higher education sector is an evolving and complex area with very little policy or guidance from the DfE or government about their appetite for supporting institutions in financial distress. What is clear is that the OfS will want to see that the interests of students are protected as far as possible. The sooner financial distress is spotted, the sooner action can be taken, and specialist professional advice sought, to attempt to overcome and address issues in a controlled and responsible manner.

If you have any questions about the topics considered in this article, please contact Ambuja Bose on 07469 850 886 and Morag Roddick on 07393 765 860 in our Corporate team. Alternatively, please complete the form below.