The Easter term has started for universities in England and Wales, with several financially troubled establishments looking closer to the edge than when they returned after last summer. The direction of travel is clear: the modest recent increase in fees charged (3.1%) to £9,535 for a domestic university student is still well shy of the estimated £14,000 cost of their place; vital overseas students are staying away after visa rule changes; and higher national insurance costs are making all staff more expensive.
The economics are complex; many say the numbers will never add up – scope for much higher fees is limited and, for government funding, almost non-existent. A key problem, however, is the lack of a ‘special administration’ available for universities; an insolvency process for businesses that provide a statutory or critical public service or supply.
Six months ago, sector regulator the Office for Students predicted that 40% of UK universities could end the year in the red. That figure now looks a little light, as they remain saddled with debt and continue to compete unrealistically for bright students, with a solution for sustainable ‘trading’ no closer to being developed.
The huge growth in degree-level apprenticeships, including directly into the top professions, supports the view that universities may not necessarily be providing a critical public service. Among the roughly 150 universities, very broadly, the ‘original’ pre-1992 universities dominate the top 50 in rankings, followed by former polytechnics and others in HE. Nonetheless, virtually all charge domestic students the full capped fee. Lower status universities face a significant drop in applications, resulting in job cuts and strikes; by contrast, some of the more prestigious names are overrecruiting, increasing class sizes and stretching accommodation.
It is highly likely that a number of universities are close to breaking their banking covenants. Several are already in dire need of restructuring their borrowings to put them on a more sustainable footing. The government has already indicated ‘no bail out’; any support will be limited to temporary cash flow issues, not tackling a more fundamental lack of demand.
Of course, universities aren’t necessarily limited companies. They may be charities, trusts or other entities. The legal clarity of a ‘special administration’ route might provide welcome guidance and protection for lenders, trustees, students and trade creditors, but these are very different – and possibly conflicting – stakeholders from those in other service businesses which may be somewhat more transactional. A university’s obligation to a student, complicated by his or her expectations and subjective view of possibilities further down the line, has little in common with its duty to a major lending bank.
University managers and finance leaders face a list of serious financial issues to address immediately:
- Price / yield optimisation for overseas students
- Identifying a realistic timetable to an ultimate covenant breach
- Urgent talks with lenders, agreeing new financial targets
- Legal liabilities (including broader contract exposure) triggered by breaches
- Pension liabilities
- HMRC issues
These are just the tip of the financial iceberg. It may be that a reset of the model for British university funding is long overdue, but stricken individual establishments failing to act will harm tens of thousands of students already being educated there.
Higher Education leaders should waste no time in seeking professional advice to help address the list above, as well as other challenges unique to their own situation. Buchler Phillips is available for a no-obligation consultation to assess priorities and suitable courses of action.
Misfeasance trading
Last year’s High Court judgment in a claim brought by the joint liquidators of British Homes Stores Group (BHS) against its former directors established “misfeasance trading” as a new breach of duty that is widely expected to reappear in 2025.
Directors are bound to act in good faith to promote the success of the company for the benefit of its shareholders, as outlined in section 172 of the Companies Act 2006. An additional “creditor duty” arises when a company is close to insolvency. It was claimed that BHS directors had breached this duty by entering into two expensive short-term finance arrangements.
In continuing to trade, directors had not considered their duty to creditors or that such duty prevailed over their duty to BHS’s sole shareholder). The company should have been put BHS into administration immediately, but by not doing so and continuing to trade, the directors had demonstrated “misfeasance trading”. As such, there was no liquidator burden to prove that the directors knew of no reasonable prospect of the company avoiding insolvency – as there might have been in a wrongful trading claim. The latter may still be pursued separately in the same action, establishing a ‘knowledge date’.
In the case of BHS, the Court indicated that if the board had considered the interests of creditors and decided in good faith that it was in their interests to continue trading, the claims would have been dismissed. The directors were not able to evidence this. Going through the motions of taking legal and accounting advice is not sufficient; to defend a claim, it must be clear that this advice was considered and discussed properly before continuing to trade.
The bar is therefore arguably lower in bringing a claim for misfeasance trading. Directors sailing close to the wind on both this and wrongful trading should:
- Be mindful of the knowledge condition as difficult trading develops
- Document any board discussion of professional advice
- Consider the position of creditors
- Record properly the reasons for believing that the company may trade successfully in the future
Fallout from rogue insolvency advisers continues
In the world of insolvency we know only too well that desperation in tough times can unfortunately lead to bad choices and, before too long, action from company regulators. The latest twist in a sorry tale from last autumn almost beggars belief and involves hundreds of incorporated entities.
Company director Neville Taylor has been disqualified by the Insolvency Service for nine years. He had been paid by Atherton Corporate UK Ltd (Atherton) to replace the directors of 12 companies which had ceased trading but had not entered liquidation. In each of these, Taylor had made little or no attempt to verify information relating to company affairs, including securing records and assets, breaching his duties as a company director and subverting the insolvency system in the process. More than £7.6 million in assets across the 12 companies could not be accounted for at the date of insolvency.
Taylor was paid more than £250,000 by Atherton to become the sole director of more than 400 companies. Provisional liquidators were appointed to Atherton and its sister company, Atherton Corporate Rescue Limited, in September 2024. The companies offered a service to facilitate the sale of distressed companies as an alternative to using insolvency practitioners.
Using a qualified, licensed and regulated insolvency practitioner is the only sensible route for stricken businesses needing to explore options for handling their affairs – including restructuring and turnaround. Frustratingly, there is no shortage of unregulated, paid-for false hope offered to businesses as a way out of insolvency.
Some of these advertise brazenly on LinkedIn; others will physically turn up at hearings for winding up petitions, many of which are brought by HMRC, and engage in conversation with directors who have obtained an adjournment while they source funds to settle. They will offer to ‘buy’ a company, complete with debts, at a cost to the ‘vendor’ of at least £5,000. All forward discussions with creditors, including HMRC, will apparently be handled by the new owner and the former directors are led to believe they can legitimately walk away.
This is not the case, by any means. The Insolvency Service has publicly taken action against such unscrupulous operators and the individuals behind them. Former directors of ‘sold’ businesses will remain under scrutiny and at risk of disqualification.
Many troubled small businesses being preyed upon by unlicensed advisers are caught in a cycle of late settlement with suppliers and non-payment of tax. Managers can’t afford to bury their heads in the sand: they MUST take action sooner rather than later to keep their enterprises afloat and, in particular, stay on the right side of HMRC:
- Get on the front foot with tax. Engage and explore a ‘Time to Pay’ arrangement. Being unresponsive only aggravates HMRC and hastens a winding up petition.
- Look at extending credit terms. Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
- Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.
SMEs unable to pay tax should seek professional advice on communicating with HMRC, the potential for debt restructuring, credit management, invoice discounting, overdraft planning, and contractual terms to explore a last-ditch attempt to stay afloat. Avoid unlicensed ‘insolvency advisers’ offering an easy, blame-free exit.
London falling
Scroll back 10 years and the London Stock Exchange was ranked third globally for Initial Public Offerings (IPOs). It enters 2025 barely in the top 20, having raised less than £800m of new equity for companies last year, well below the bourses of Malaysia, Luxembourg, Poland, Australia, Saudi Arabia and tiny Oman.
Even considering January’s slightly better than expected UK inflation figures, international investors are nervous about our economic prospects and ongoing political headwinds. Their reduced participation in the London market affects liquidity and trading volumes begin to fall in a spiral. Things will undoubtedly change for the better: pension funds’ appetite for domestic equities is expected to improve in line with the export prospects and overseas earnings of larger UK-listed companies. Financial services have grown to become one of the largest segments of UK national income in recent years and, with looser ties to its closest trading partners, a return to growth the sector is vital to the nation’s recovery and prosperity.
Nonetheless, in the meantime, a broad ecosystem of businesses dependent on busy IPO and M&A markets in London stand to suffer from delayed projects and a blocked revenue pipeline: investment banking, institutional stockbroking, wealth managers, financial public relations firms, printers, law firms, fund administration companies – the list goes on. Many of these supporting specialist businesses are far from easy to manage and grow, not least because they have to flex amid constant regulatory and economic changes. They are endlessly overhauling their ownership structures, refocusing their business models and having to generate sustainable income against a background of higher inflation, rising costs and low visibility in markets. All under close scrutiny from a range of authorities.
Technology has brought problems as well as solutions. While it has acted as a great enabler – electronic trading, online banking, screen-based interaction and even compliance – two clear, unintended consequences are (i) a further demolishing of barriers to entry in markets that already have too much capacity, and (ii) the rapid rise of cybersecurity breaches and institutional grade fraud.
For smaller market participants, in particular, the time and cost incurred to undertake ESG-driven risk management and disclosure requirements can become an existential problem when added to growing competition, narrowing margins and tech challenges.
Sale to a consolidator or exit via a voluntary liquidation will be the main options for many. Specialist lenders, leasing businesses, wealth managers, and insurance brokers are already being absorbed by financial buyers, mainly private equity firms, while others are throwing in the towel and at the same time are still in one piece before they face calls for additional regulatory capital or have to meet other higher costs.
Whether selling or closing, it is vital to adopt a planned, managed approach with professional advice that might cover:
- Unwinding of contracts
- CVLs / MVLs
- Schemes of Arrangement
- Forensic accounting
- Investigations of financial crime
- Tax treatment of trading positions
- Support for market participants in regulatory investigations
- Issues involving the Financial Services Compensation Scheme
- Liaison with the Prudential Regulatory Authority and Financial Conduct Authority
Partners or Directors of financial services businesses facing trading or regulatory difficulties should act quickly to assess options for closure or restructuring.
As ever, the Buchler Phillips approach to business challenges is ‘workout, not bail out’. Don’t hesitate to get in touch for an exploratory chat if your business needs help. Addressing the cracks now will, in many cases, avoid the need to start again.
Our helplines below are open for free initial consultations.
Jo Milner 07990 816904
David Buchler 07836 777748
Let’s get to work!
About Buchler Phillips
Buchler Phillips is an independent, UK based corporate recovery and restructuring firm, with an impeccable Mayfair heritage dating back to the 1930s.
Led by David Buchler, former Europe and Africa chairman of global consultancy Kroll Inc, our senior team is equally comfortable advising large corporations, Small & Medium Enterprises (SMEs) or individuals. In addition to decades of experience, each of our Partners brings to any given assignment unique independent insight, free from conflicts of interest, that is often sought but rarely found by clients or co-advisors.
The firm is sector-agnostic, but has particularly strong credentials in property; financial services; professional services; leisure and hospitality; retail and consumer; UK sports; media and entertainment; transport and logistics; manufacturing and engineering; technology and telecoms.
Our activities fall broadly, though by no means exclusively, into financial restructuring, including fraud and forensic investigations; operational restructuring and turnaround; expert witness services and recovery solutions for corporates and individuals.
This newsletter is published for the purposes of general information only and does not constitute advice. Any action taken by readers upon the information above is entirely at their own risk.