Students could be left stranded if a major UK university went bust this year, according to an influential parliamentary committee as it warned about the “real possibility” of institutional failure.

Noting the UK higher education sector is facing “unprecedented” financial pressure, the House of Commons’ Education Select Committee said it is concerned over the “deeply conflicting” evidence that its inquiry had received over what would happen if a university became insolvent.

While ministers have insisted these institutions could enter liquidation and continue operating – which would allow them to “teach out” existing students and avoid a “disorderly exit” – legal specialists told MPs that liquidation would require the immediate cessation of trading, potentially meaning the sudden closure mid-term of an institution.

This “uncertainty” applied, in particular, to “universities that either hold a Royal Charter or are Higher Education Corporations that sit outside of the usual insolvency process that applies to private higher education providers that are companies and can be wound up by the Insolvency Act 1986”, explains a report outlining the findings of the inquiry published on 12 May, referring to both older universities and most post-92 universities.

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According to higher education minister Jacqui Smith, however, insolvent universities would not need to be liquidated, which would allow students to be transferred to other institutions and their records and achievements would be protected, the report says.

“Currently, there is no clearly understood protocol for how the government might respond to a situation of a provider at risk of imminent insolvency, which is a very serious problem,” the committee warns.

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In its 142-page report, which also considered the impact of forthcoming visa changes and an international student levy on universities, the committee calls for the government to urgently establish an early warning protocol, which would be triggered by the Office for Students categorising an institution as being at risk of insolvency.

It should also legislate to clarify the situation so that universities that become insolvent can continue to operate, while the sector should have costed plans for protecting students, staff and the wider community if the institution becomes insolvent and should provide a range of options to take action, including restructuring, merging with another institution, direct financial support or orderly exit.

During the committee’s evidence phase, the Office for Students’ then-chief executive Susan Lapworth said the regulator was concerned about 24 institutions exiting the market within the next 12 months, of which seven had more than 3,000 students. Another 26 institutions were at risk of exiting the market over the next two to three years, of which half had more than 3,000 students, she added.

While the OfS requires higher education institutions to create student protection plans in the case of institutional failure, the committee also found it “would be unlikely that the OfS could secure reasonable outcomes for students if a large multi-faculty university closed”.

“They would not provide sufficient protection were a large provider to become insolvent, something acknowledged by the Office for Students. Moreover, the plans do not cover the interests of staff, the impact on research or harm insolvency would do to the local economy and community,” it explains.

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“Protection for students should ensure a teach-out process and options for transfer to other suitable higher education providers, and ensuring international students can continue their studies until completion,” it says.

The committee also voices support for a special regime to support insolvent universities, which could provide more clarity for students and lenders affected by any closure.

While Smith told MPs that her department would not provide a “government bung” to bail out at-risk universities, Universities UK backed the idea of a “transformation fund” to help stricken universities, while other sector bodies supported the idea of a “stabilisation fund”. Supporting the idea, the committee said the negative impact of a disorderly exit is “too great to be left unchecked”.

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Helen Hayes, chair of the education committee, said the “possibility of a major UK university becoming insolvent is a real possibility, not a theoretical warning”.

Such a development would be devastating to students, staff and the wider local community. It would deliver a severe and lasting blow to the UK’s research footprint and international reputation,” she continued.

Given the “risk of insolvency is real”, developing an early warning system is “essential”, Hayes continued. “The government and the Office for Students should be ready to step in when the lights are turning amber, not when they are already flashing red.”

“Action must also be taken to protect students, who have invested time, money and energy into their studies. The government should clarify whether universities will be able to continue teaching if they reach insolvency, and Student Protection Plans must offer students peace of mind that they will not suffer through no fault of their own.”

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“While the committee respects the sector’s diverse views on the possibility of a special regime, in our view the risk of a disorderly exit is simply too great,” she added.

jack.grove@timeshighereducation.com