We have been more giving thought as to how students might be better protected in the scenario of a sudden exit, following on from our Wonkhe article earlier this year. One area we remain concerned about, is the issue of complex and uncertain legal processes in a disorderly exit.
Within the sector there are a variety of legal structures that providers can take which impact what would happen upon insolvency. The main structures are Royal Charter Corporations, Higher Education Corporations and companies limited by guarantee. We have set out the implications of these when facing financial distress below.
Depending on what type of structure a student is studying at will impact the options to manage their experience and likelihood of continuation of study where there is a sudden market exit. We believe this leads to unfairness to students who would not be treated equally in the same situation.
We believe all students should have equal access to remedies in an exit scenario and should not be disadvantaged because of the legal structure provider they have chosen to study at. There are a number of ways this could be addressed, perhaps by a formal insurance scheme that could help protect and compensate students and pay out in the worst-case scenario. Alternatively a general pot of money which could be made accessible in in various ways, including supporting students in transferring to other providers to complete their courses.
However, we believe ultimately a change in the current options around insolvency which could apply to all HE providers whatever their legal structure, could put students as a priority in these situations.
Registered Companies
The providers which are companies are in some ways more straightforward since covered by the Companies Act 2006 in the event of financial failure. In some circumstances a provider could enter into administration. The purposes of administration are to either rescue the company as a going concern; achieve a better result for the company as a whole than would be likely if the company were wound up (without first being in administration); or realising property to make a distribution to one or more secured or preferential creditors. However, this process does not necessarily offer much in the way of student protection. Administrators do not have a duty to act in the best interests of students, only creditors. However, this period has been used prior to a liquidation to enable teach out to happen because this would maximise the benefit for creditors by, in part, reducing student claims.
The two providers we have been involved in the exit of, GSM and ALRA were both private companies, however, were required to take different approaches to students because of their circumstances. It is important to note that many parties were involved in a taskforce which sought to achieve the best outcome for students within restrictive legal boundaries. In both cases it was other providers offering places to students to complete studies which enabled students the opportunity to complete. We are conscious of the impact this has on providers and their existing staff and students, and it may not always be there as a safety net.
GSM London
GSM London (GSM) was a private company with over 3,500 students enrolled in 2019 when, following a restructure and failed attempt at a sale, the Directors concluded in July 2019 it could no longer trade without first being placed into administration.
Administrators concluded that the most likely improvement for creditors would be achieved by allowing GSM to continue trading to teach out until the end of the semester to allow students to complete and achieve their outstanding credits. This would mitigate as far as possible potential claims from students.
The Administrators engaged with the OIA in dealing with student complaints and directing them to us as the statutory independent complaints handling body. They agreed that where we made a Recommendation for financial compensation, they would consider the amount as the total owing to the student as an unsecured creditor (though unsecured creditors are not likely to receive the full amount owed to them). Where students had made a financial claim directly, we explained to those students that they could complain to us and this would feed into the Joint Administrators’ assessment of their claim.
What we saw this in the example, which worked well for a large majority of students, was that it enabled time and a process for students to complete credits to enable transfer, giving the provider, validator and the OIA time review complaints and put in place remedies where possible. However, students have not received the full amount owed to them as they were treated as unsecured creditors and for some a transfer was not feasible. In our view, students would have benefited from having a different administration regime in place enabling their interests to have a clear priority for the Administrators.
Academy of Live and Recorded Arts (ALRA)
ALRA was a private company which faced significant financial problems which it reported in 2021. After looking into various options, it appointed a restructuring adviser. Due to a number of legal and operational issues administration was not a viable option for ALRA it entered compulsory liquidation on 12 April 2022. The court appointed the Official Receiver as Liquidator and their duty was to wind down ALRA, for the benefit of the company’s creditors. This happened with immediate effect preventing staff and students from accessing personal possessions until the Official Receiver enabled access. It had 284 students studying at the time of closure. In our view, students would have benefited from a more appropriate administration regime enabling the provider to perhaps complete teach out and prioritise students’ positions.
Royal Charter Institutions or Higher Education Corporations
It is very unclear what would happen if a Royal Charter Institution or Higher Education Corporation were to get into extreme financial distress. They would likely be treated as an unregistered company and therefore the only available insolvency regime may be liquidation, losing the opportunity for having a period of teach out (like ALRA above).
It becomes unclear in this instance whether any processes put in place via a market exit plan, student protection direction from the OfS or any other instruction from a regulator will be followed since a liquidator isn’t bound by them. The only duty is to wind-down the organisation, for the benefit of its creditors which is likely to be in direct conflict with the interests of students.
Many of these providers are also charities and the Directors are also the trustees of the charity. The duties of trustees become complex in these scenarios. Usually when facing a closure a provider would be encouraged to explore alternative provision for students to transfer to with other providers, perhaps under a non-disclosure agreement, in advance of insolvency. However this may be complex and possibly conflict with competition law.
However, it would clearly be in the best interest of students to be able to explore details of alternative provision as early as possible. In our experience course mapping is more detailed and lengthier than is often thought and feedback from transfers we have been involved in has been that this needed more time. In some complaints we’ve seen it has not been identified until after closure that extra modules need to be completed before courses could continue.
A different administration regime?
Special Administration Regimes (SARs) are available for organisations which carry out a wider public interest function and give an Administrator special objectives depending on the sector. There are SARs in sectors such as energy, postal and water.
In January 2019 the provisions of the Technical and Further Education Act 2017 which introduced a SAR for FE colleges as well as applying a corporate insolvency process to statutory FE colleges, came into effect. This means that the Secretary of State may apply to appoint an education Administrator to manage the provider with the objective of minimising or avoiding disruption to existing students. It gives the student interest a clear priority over that of creditors and places a duty to avoid and minimise disruption to the studies of existing students as well as to secure the best outcome for learners. It also prevents creditors from enforcing their rights immediately allowing a provider to consider teaching out current students and would enable some regulatory oversight whilst the teach out was taking place, ensuring the students are protected as much as possible.
Although it is too early to understand the real impact of this regime, it has been used in 2019 in the cases of Hadlow College and West Kent & Ashford College which carried on with “business as usual” for students whilst in administration before merging with other providers.
Whilst this is appealing from a student protection point of view, it is unlikely that extending this into the HE sector would be straightforward and further consideration would need to be given to the detail and implications.
It remains the case, however, that a change is needed particularly where administration not an option, for example providers that are created by Royal Charter or are a Higher Education Corporation, or in the example of ALRA, it is not viable. There needs to be a process which prioritises students and allows time without immediate creditor action to enable an orderly transfer or teach out of students and put in place meaningful remedies prior to an orderly wind down.
Whilst this would not be perfect, it would at least give clarity as to what would happen if a Royal Charter Corporation and Higher Education Corporation were to become insolvent and give all students an opportunity to complete or transfer in an orderly fashion in these circumstances. From the situations we have seen, students are likely to be left with very limited options, if any in the case of a university or other higher education provider failing. It would be unlikely that another provider would be able to take on the number of students that would need to be transferred in these situations and the time it has taken to enable these transfers to happen in the past would likely not be available on the scale needed. A clear regime applicable to all higher education providers would likely give more time and resources to ensure options are explored and put in place for students rather than an immediate closure.
Importantly, it could also ensure that students’ needs are prioritised and taken into account above creditors. It would enable the majority of students to complete their studies where they signed up and on the courses they wanted to study, having less impact on their mental health and financial status.
Charlotte Corrish
Head of Public Policy
If you have any questions, please contact Charlotte Corrish at charlotte.corrish@oiahe.org.uk.