The COVID-19 pandemic has sent financial shockwaves through much of the UK economy, including its further education (FE) sector.
The UK's system of FE colleges provides technical and professional education and training for young people, adults and employers in the UK, offering complementary and alternative options to university courses.
According to the Association of Colleges (AOC), FE institutions provide education and skills training to over three million students in the UK every year.
Unlike universities, which are primarily funded by tuition fees and accommodation charges, the Education and Skills Funding Agency (ESFA) provides the majority of funding for colleges, which colleges themselves can supplement with income from hiring out their facilities.
The ESFA pays colleges based on the numbers of students they expect to enrol, with adjustments made for factors including student retention.
But with continued social distancing measures set to restrict college's ability to provide teaching to large, physically assembled groups, colleges are likely to face a significant drop in student enrolment for the next academic year.
There is also expected to be a fall in the number of international students attending FE institutions due to the effects of COVID-19 and, possibly, Brexit, restricting travel to the UK. Brexit may also affect the rights of EU students to access publicly funded courses in the UK.
Under the EFSA funding model, these curbs on student numbers threaten to open a yawning and potentially ruinous gap in colleges' income.
The AOC has estimated that an average college might lose between £500,000 and £1 million per month of temporary closure or reduced capacity and that very few, if any, will be able to cope without government support.
It has made clear that education technology and online learning is less developed in colleges than in schools and universities. The investment needed to develop FE colleges' online learning tools would be significant and would only add to the financial issues currently faced by colleges, unless additional funding is made available for digital upgrades.
Many subjects offered by FE colleges also involve practical learning using specialist equipment, which is hard, if not impossible, to replicate virtually.
On top of this, career incentives for enrolling in FE courses have declined sharply as a consequence of COVID-19, with the Institute of Student Employers estimating that employers will be taking on 23% fewer apprentices and school leavers and 31% fewer interns and placement students this year.
On the 23 March 2020, the government issued guidance for FE providers on maintaining education and skills training provision following the COVID-19 lockdown.
The ESFA will continue to pay grant-funded providers their scheduled monthly payments for the remainder of the 2019/2020 funding year and allocations for 2020/21 confirmed at the end of March will be made in line with the government's Funding Rules.
The government further noted that the inability of some students to complete FE courses due to COVID-19 may have an impact on retention rates, which could affect funding calculations, and promised to review this situation once the extent of the impact of COVID-19 on the FE sector becomes clear.
However, these pledges to maintain student funding do not take into consideration additional income generated by colleges from hiring out their facilities for conferences, sports clubs and as community spaces, which will be significantly depressed by COVID-19 infection control measures.
Meanwhile, overheads for colleges with considerable property portfolios will continue to be incurred, with little or no income to support their maintenance.
It therefore seems likely that, despite continued funding being provided by the government, there will still be a considerable deficit in FE finances over the course of at least the next academic year, and likely into the future.
Further intervention will follow only where the government finds there is a case to do so, where it believes intervention is possible, appropriate, in the students' best interests, and as a last resort. Any action will also come with attached conditions.
Possible FE insolvencies
Before the arrival of the COVID-19 pandemic, the UK's FE sector was already in a tight spot.
A rise in the number of colleges and institutions getting into financial difficulties prompted the government to take action and, in January 2019, it brought in a new insolvency regime for FE bodies under the Technical and Further Education Act 2017.
This new regime effectively meant that, for the first time, it would be possible for colleges to "fail" and be placed in to an insolvency process.
Most of the insolvency laws that apply to companies and charities have applied to colleges since 31 January 2019 and the new rules allow the Secretary of State to appoint an education administrator to take over an insolvent college.
Under the new framework, the education administrators would first seek to rescue the college as a going concern and, if this is not possible, seek to transfer the college's "business" to another institution.
If neither of these options are achievable, the administrator will try to keep the college operating until students have completed their study, been transferred to an alternative provider, or a restructuring can be effected.
The stated aim of this regime was to cater for what was considered to be the unlikely event of colleges becoming insolvent, and improve the financial resilience and sustainability of the FE sector and eliminate the need for the government to 'bail out' struggling institutions.
FE college's financial obligations
One of the duties owed by governors as charity trustees is to ensure good financial management of colleges as corporations.
If a college finds itself in financial difficulty that could result in insolvency, governors have an obligation to act to ensure that they do not allow the college corporation or company to continue to trade when insolvent, if this worsens the creditor position.
Where a college is unable to pay its debts, or has more liabilities than assets (including contingent liabilities), it should ensure that regular meetings are held to monitor the cash flow position and undertake robust and comprehensive reviews to minimise exposure.
Disqualification proceedings can be taken against appointed governors, and those acting as a governor although not formally appointed as one, in instances of wrongful and/or fraudulent trading.
The mention of attached conditions for bailouts may lead to the conclusion that any financial intervention by government will accompany a broader sector restructuring, regardless of how colleges tackle their financial difficulties.
It remains to be seen whether and how the government will amend its insolvency regime for FE colleges in light of the unprecedented circumstances caused by the COVID-19 pandemic. In the meantime, colleges or their creditors should seek advice from insolvency professionals about their positions and the applicable legislation as soon as possible, if they have any concerns.
Carly Schiff, Director and Jean-Luc Esposito, Junior Lawyer at Fieldfisher