Written evidence submitted by Mills & Reeve LLP (HEF0069)

Education Committee

Higher Education and Funding: Threat of Insolvency and International Students

Introduction

Mills & Reeve LLP are the leading law firm in the education sector, acting for over 120 universities, colleges, national agencies, academies, educational businesses and charities across the UK. We frequently advise HEIs on their most complex and strategically significant projects, including the two recent mergers in the higher education sector (the merger of St George’s, University of London and City, University of London and the merger of Anglia Ruskin University and Writtle University College). We are using our broad experience and exposure to key insights across the sector to help drive positive change and innovation in higher education including through our thought leadership campaign on university financial resilience. We have recently co-authored (with KPMG) the report Radical Collaboration which provides a playbook for collaboration within the sector, using case-studies and examples to illustrate potential models for collaboration and their outcomes. We also recently co-authored (with WonkHE) the report Connect more: creating the conditions for a more resilient and sustainable HE sector in England and we are working with sector leaders and key stakeholder groups to facilitate conversations and to help institutions position themselves in financially challenging times.

Higher Education Insolvency Protections

What is the current state of insolvency processes for higher education institutions?

The vast majority of entities operating as HEIs are not able to go into an insolvency process, save possibly for liquidation.  This is because they are mostly incorporated by Royal Charter or are HECs, and are not therefore companies under the insolvency legislation.

We believe that such entities could be wound up by the Court as unregistered companies and, to the extent they have granted fixed charges to lenders, those lenders could enforce that security by the appointment of fixed charge receivers (FCRs).

However, both liquidation and the appointment of FCRs are terminal procedures that are entirely inappropriate to enable a HEI to trade, teach out and/or transfer students or merge with another provider.

We say this because we do not believe that a HEI could trade through an insolvency process and continue to exist, due to the damage it would cause to its reputation and market position.

The appropriate insolvency process to effect such a teach out and transition is administration, which is not available to non-companies.

What measures exist to protect students, staff, and other stakeholders in case of institutional insolvency?

The only priorities for creditors in respect of a HEI insolvency process, are those set out in the insolvency legislation.

Certain employee claims are “preferential” under the insolvency legislation and the employees can recover those claims from the Redundancy Payments Services, to speed up recovery, who then subrogate to those employee claims in the insolvency process.

There is no specific protection in the insolvency legislation for students, whose claims will be unsecured, recovering equally with all other unsecured creditors, which is often little or nothing.

In addition, there is no specific duty on the body responsible for an HEI to act in the best interest of students in an insolvency process of a HEI. The duty is to act in the best interest of all creditors, which would include students in respect of any claims they may have arising out of the HEI’s insolvency process.  While the law is not settled on the point, the OfS (or other HE regulator’s) conditions are likely to be subservient to the duties arising in insolvency.

Are additional safeguards needed to strengthen protections?

Yes, as per the FE special administration regime, there should be a legal obligation that protects the student’s interest, specifically their academic interests.  That may be expressed as a specific duty to act in the academic interest of students.  This will protect the students, but will also give greater clarity to the trustees as to how they should exercise their duties in an insolvent situation.

We are suggesting that the focus should be on the students’ academic interest because, while students may choose their HEI having taken into account the extra-curricular provision, the purpose of HEIs, many are charities whose charitable object is education in the public interest.

The majority of higher education students attend HEIs that are charities.  As things currently stand, charity trustees (usually the governing body of the HEI) owe no greater duty to students, than any other creditor under the insolvency and companies legislation.  This may be inconsistent with charity law and the institution’s charitable objectives, and creating a conflict between the duty to students and the duty to creditors in an insolvency situation, both for trustees and insolvency practitioners.

There is also a current lack of clarity as to whether the misfeasance and wrongful trading provisions of the insolvency legislation apply to trustees of many HEIs, making advice on duties and responsibilities difficult and unclear.

With a lack of a clear insolvency process for many HEIs, in our experience, extra time and resource has to be devoted to contingency planning in answer to the OfS’s “market exit plan” and policies. We also believe that an administration process for non-corporate HEIs would provide greater clarity to lenders into the sector.

There is currently a lack of a viable enforcement route for lenders, which, in conjunction with the inability of various providers to grant floating charge security, may lead to lenders seeking to avoid the sector. 

In addition, this can lead to more difficult and protracted refinancing/restructuring conversations with lenders who may look to fortify their security position on hearing of a HEI in financial difficulty.

We do not believe that a clearer legal position will result in lender enforcement against HEIs (we have seen none in the FE sector since a special administration regime came into force in 2019), but may increase borrowing options for HEIs.

Given that:

(a)                royal charter corporations and higher education corporations cannot grant floating charges; and

(b)                there is uncertainty as to whether unsecured creditors would be able to claim on a pari passu basis in an insolvency process,

the prospect of a HEI going into an insolvency process has, in our experience, led to a “land grab”. Key creditors, including pension providers, have sought to improve their position by demanding legal mortgages over land as these confer the contractual remedy of fixed charge receivership. This leads to highly expensive and time-consuming legal due diligence at just the point where the HEI can ill-afford those costs.

Ramifications of Institutional Insolvency & Regional Impact

What would be the consequences of a higher education provider becoming insolvent?

Many HEIs are in financially difficulty, but if one was to go into an insolvency process, even if administration were available, we do not believe that the HEI could survive that process as a going concern, rather would use the process to teach out, transfer students and/or merge with another HEI.

There are significant practical questions over “what happens to the students?”   Students are not a homogeneous group.  For example:

• Students that require visas to enter the country to study would find that their immigration sponsor no longer existed.  There are no simple arrangements under which all of the students, together with the monitoring required by UKVI, can be transferred to another HEI. 
• Postgraduate students, particularly research students, require specialist supervision and often specialist equipment which may not be available from other HEIs.
• Students choose their HEI for a myriad of reasons, and not simply the qualification they hope to achieve at the end of their studies.  Transferring to another HEI is likely to frustrate greatly the student’s experience
• Importantly, the point of higher education is that it is not the same course at every institution.  Thus, there may be knowledge deficits to be overcome when transferring from one HEI to another; and some modules or courses may not be able to be delivered by the receiving HEI.

Students have different needs and often choose their HEI according to that need.  Specifically, some students flourish when engaging in self-directed learning, while others benefit from more directive teaching.  If a single HEI were to take over operations, it is possible that the insolvent HEI’s operations might survive such that students would continue to be taught from the location and jobs saved.  However, more likely is that students, in due course, would transfer to other HEI’s locations and ultimately student income in the area, properties, and jobs, would be lost.

That would inevitably have a devastating effect on the local economy of the insolvent HEI, if a local HEI does not take on the operations.

However, most similar tariff HEIs do not operate in close proximity to each other, so it is less likely, outside London, that a local HEI would take on those operations.

September 2025