How insolvency can happen more quickly than you might imagine

For the vast majority of leaders and board members in the sector, insolvency of a higher education institution is not something that they will have experienced and even prepared for. Potentially for some institutions in the current climate that lack of preparedness can be a high scoring risk factor, given the experience of the University of Dundee in November 2024.

In the late 1980’s I had the opportunity to work in the insolvency practice section of an accountancy firm, and the learning from that time when reviewing the cases of multiple failed businesses has stuck with me.

Key points that all institutions experiencing financial challenges should be re-visiting:

• Moving from a place of relative financial stability to insolvency is not linear. It can happen very quickly indeed. By definition, insolvency is a cash based measure – when there are net cash outflows, then the risk that the cash will run out increases exponentially.
• Living on ‘jam tomorrow’ is not a safe strategy. The temptation will always be to create a point of reliance on an income stream increasing that will turn the equation. For universities that will generally be the next student recruitment target. That point of reliance is likely to cause a crisis if the outcome is not positive.
• Bank covenants are more likely to be re-negotiable when an institution is not already in breach. Once in breach, the bank will call the shots.
• Trading whilst insolvent means that an entity continues to operate even when it is unable to pay its debts, including bank loan repayments, as they fall due (ie, the entity doesn’t have enough money to cover its outstanding bills or financial obligations). In the UK, trading while insolvent could have serious legal implications for senior leadership and board members.
• Because insolvency means an entity must prioritise creditors’ interests first, continuing to trade when aware the entity has no future represents a breach of directorial responsibility. For the sector, there is the added complication of the obligations to enrolled students, who may also be locked into whole year accommodation contracts.
• Insolvency will nearly always create blame, which can be very public; who should have been aware, and when, and why preventative measures were not taken.

What strategies can institutions put in place to mitigate these risks?

Whilst the OfS already has a regime of ‘enhanced monitoring’ where there are risks around Registration Condition D (Financial Sustainability), well before that point senior leadership and the board should have put in place their own internal enhanced monitoring. That would typically involve monthly more detailed cash flow forecasting with sensitivity analyses. CFO’s will need to be looking at longer term creditors and whether payment profiles can be renegotiated. Bank overdraft facilities need to be in place and realistic, with only a short term in-year reliance on them.

Additionally, there needs to be a close and open dialogue with the institution’s bankers and lenders. Typically banks do not want to deal with covenant breaches as this is a time-consuming and costly business for themselves. So they are often persuadable to change covenants, even temporarily, to ensure that there are new conditions that can be monitored, and with greater certainty of meeting them.

Perhaps the biggest issue is around communications. Understandably, putting out any public admission of financial difficulties could create a cycle of doom whereby good staff start to leave and student applications drop off rapidly, closing off any prospects of recovery. Finding the balance is therefore vital. Senior leadership and board members should take on full cognisance of any issues at the earliest stage, enabling them to take all possible measures to find a recovery plan or structural options that will garner support from stakeholders and avert any terminal crisis.

Unlike in the further education sector, currently there is almost no framing in regulation terms that could be called an insolvency regime and hence this is now an open priority at the DfE. Student Protection Plans are at best a statement of good intent that is seldom underpinned by any legal or even collaborative agreements. Reform in this area is now very timely and we await any proposals with interest.