Education sector businesses are taught a lesson by Covid-19
Of course they operate in their own sector but they have to pay bills, employ staff and provide a valuable service and make a profit to reinvest in growth and development – just like any other company.
But they face a range of unique challenges and constraints too.
Their safeguarding measures will be more stringent than most companies and they will be under closer scrutiny too due to the nature of their existence – keeping children safe, educated and happy.
Not that the challenges of the last 18 month have been anything but normal for institutions, students and staff alike.
Classroom bubbles, home or halls of residence quarantines and entire terms spent moving in-class learning to online platforms for remote learning.
Taking remote learning as an example – schools and colleges have had to make sure that enough students (and staff) have the actual technology to be able to deliver and receive tuition.
This can mean purchasing laptops and tablets, along with necessary software licenses if applicable.
Any establishment that offers accommodation will have seen this income stream vanish along with those that hire their facilities out to other businesses and local communities for sport, productions and corporate events.
With the ongoing disruption to international travel and Brexit restrictions means any business relying on foreign students would have seen severe disruption to this model – as does the idea of remote learning for establishments whose whole business model is based on in-person tuition or residence.
In 2019, Hadlow College and West Kent and Ashford College became the first in the UK to go into educational administration costing the Department of Education some £26.6 million to keep them operating while a permanent solution to their educational provision was found.
When the total support for all colleges in England receiving financial aid was factored in then the total rose to over £40 million.
This includes the provision of £14.4 million in emergency funding to five unnamed colleges in “serious financial difficulty” that received payments in order to prevent them from also entering educational administration.
Significantly the Education and Skills Funding Agency (ESFA) which provided the payment, recognised that the cost and effort of handling colleges in education administration means “it may need to limit the number of colleges in the insolvency regime at any one time,” depending on each case.
The Department for Education said protecting students is “the overriding priority for colleges that have entered education administration” and the most significant costs from the two insolvency cases were related to “supporting the operation of the colleges while they were in administration and in facilitating a long-term solution by enabling the transfer of the provision to other local providers.”
Some money will be recouped from the sale of campus assets which are no longer required for educational provision such as buildings and land but not every college has assets that can be sold to support them.
The National Audit Office also revealed that the government was intervening in nearly half of all open colleges and had spent over £700 million on bailing out and restructuring colleges in the previous 12 months up to September 2020.
The figures for the following year might end up being even worse.
When it comes to borrowing under the bounce back loan scheme, our own investigations have revealed that businesses operating in the education sector obtained over 31,000 loans totalling some £726 million overall – an average total of £23,238 per loan made.
We also calculated that according to official estimates between £109m to £436m could be expected to be written off from repayment.
In an effort to keep the number of education administrations from rising, the government has proposed giving the Education Secretary the ability to force college mergers instead.
The Skill and Post-16 Education Bill currently before the House of Lords, proposes to “extend the existing intervention powers, enabling the Secretary of State to: exercise their statutory intervention powers in circumstances where there has been a failure by a college to adequately meet local needs and direct structural changes (such as mergers) where use of the powers has been triggered under any of the thresholds in the legislation.”
The Bill says it will give “power for the Secretary of State to amend legislation to expressly provide for Company Voluntary Arrangements to be available in education administration”.
Under the current rules, An educational administrator can be appointed by the Secretary of State to take over an insolvent college.
They will have a wider remit than in a standard administration as their job will be to protect courses for learners alongside their statutory duty to secure the best outcome for creditors.
Other industries such as energy, railways and housing associations also have special administration regimes in place to protect vital public services if the provider supplying them runs out of money.
If students have already begun their courses when a college goes into administration or other insolvency proceedings then they will look for another institution to take over the course provision alongside their insolvency duties.
Administration might be the best solution for an indebted education business if new buyers are happy to take on the existing debt and provide new investment, energy and ideas into the institution.
They will have their own plan on how to return to profitability and will be encouraged to do so if at all viable.
Similarly, if the business can otherwise make a profit but is burdened with seemingly insurmountable debt or has been temporarily affected by Covid-19 but is otherwise fundamentally sound, then a company voluntary arrangement or CVA might be suitable.
In return for a proportion of the debt being written off, they will repay the remainder in regular monthly instalments, usually for five years, until it’s cleared. All the while continuing to trade, provide a service and gain customers.
Even though the Department of Education would prefer private schools and universities to be saved in one form or another, sometimes the financial reality means that closing down the business and liquidating the company is really the only option on the table.
This will allow the institution to be closed in an orderly and efficient way with all assets being sold to benefit creditors.
Another advantage for an education based business to consider liquidation is that it will be conducted and managed by a licensed insolvency practitioner.
In a creditors voluntary liquidation (CVL), their role is to oversee the valuation and sale of assets at a fair price to repay creditors as far as possible. Crucially, they will also handle all creditors claims which could be useful if they include staff, students or parents.
Any liquidation process needs to be handled carefully as the business has to cease trading immediately and close in an orderly fashion but one involving children or older students worried about their future paths needs special care and attention given to both the procedure and the ongoing communication with creditors.
Liquidations can also include bounce back loan debt or CBILS lending too but an insolvency professional will be able to advise more specifically.
Every industry has had challenges to overcome during the year of lockdowns.
Some have been common to every business, some have been unique to the industry in question and education is no exception.
The experience of being a student has changed, possibly irrevocably, and this will have short and long term consequences – some temporary, some permanent and others that can’t be predicted yet.
The landscape has changed – probably for good and it provides every business in the education sector with new problems – but also solutions too.
No matter what your situation – one of the best moves you could make right now is to get in touch with us.
We offer governors, directors and business owners a free initial consultation where we can discuss your business in detail and help you plan your next steps – efficiently and effectively.
Now colleges and schools are being treated like any other business when it comes to insolvency, they can also use the advantages of the protections that some insolvency processes bring too – but only if they act while they have the time to do so.
Being taught a lesson is one thing, learning from one is always better.