A major British university is in a financial and governance crisis, having reported itself to regulators over a £121m loan.

The University of Reading has confirmed to the Guardian that it is investigating whether it improperly benefited from the sale of land belonging to the National Institute for Research in Dairying trust, with the £121m from the sales having been spent by the university and replaced with the equivalent of IOUs in the trust’s accounts.

The university said it had launched an inquiry into a potential conflict of interest and admitted that its actions did not meet the standards of governance expected as the sole trustee of the charity intended to fund agricultural research.

Prof Robert Van de Noort, the university’s acting vice-chancellor, said: “Our financial statements set out the handling of the sale of land held by the National Institute for Research in Dairying trust. We are confident that appropriate governance arrangements are now in place relating to the university’s management of the trust, and the designation of the money as a loan has no wider implications for the university’s ongoing financial position.”

Reading is not in a position to easily repay the £121m converted into a loan, which would take its debts to £300m. Its recent financial struggles include large losses from an overseas venture, falling undergraduate student numbers and operating deficits totalling more than £40m over the past two years.

Reading achieved university status in 1926, and has grown to have 15,000 students and 4,000 staff, with annual spending of nearly £350m. Last year it was ranked 195th in the QS world university rankings, making it the the 26th highest UK university.

The revelations are the latest symptom of the financial pressures facing those universities among the losers from the UK’s boom in higher education, fuelled by higher borrowing and lax administration based on over-optimistic forecasts of student numbers.

The higher education sector in England already faces looming threats from Brexit cutting off the EU as a source of students, staff and research funding, while a review of funding ordered by Theresa May last year is expected to recommend undergraduate tuition fees be cut from £9,250 a year to less than £7,000.

Reading’s precarious balance sheet will be an early test of the Office for Students as the higher education regulator in England. Its chairman, Michael Barber, has publicly declared that the OfS will not bail out struggling universities.

Reading said it had informed the Charity Commission and the OfS, and had set up two teams with separate legal representation to attempt to unravel the complex issues involving the university’s potential conflict of interest as a trustee and beneficiary of the loans.

Charity Commission guidance explains: “A conflict of interest exists where there is the possibility that a trustee’s personal or wider interests could influence the trustee’s decision-making.”

A spokesperson for the OfS said that the matter had been reported by Reading, and that it could not comment on the substance.

The OfS is the principal regulator of English higher education charities, which are exempt from registration with the Charity Commission but must still comply with charity law. The OfS is able to notify the commission if it has concerns and ask it to open a statutory inquiry.

The trust’s assets come from the National Institute for Research in Dairying, founded at Reading by the Board of Agriculture in 1912 and moved to Shinfield near Reading in 1921. In 1985 the institute was closed and its assets passed to the trust, with the university as the sole beneficiary and trustee.

According to Reading’s accounts: “The trust aims to promote and develop high-quality research into agriculture or food (whether its production or otherwise) at the University of Reading.” Offering a loan to its sole trustee on terms that Reading has not disclosed potentially go beyond the trust’s remit.

The university applied for planning permission to build 1,300 homes on the trust’s land known as Shinfield West, although it eventually sold the property to developers for £100m.

The land sales and loans occurred under the leadership of Reading’s previous vice-chancellor, Sir David Bell, one of the country’s most prominent educationalists, who was formerly permanent secretary at the Department for Education and the chief inspector of schools as head of Ofsted.

In August last year it was announced that Bell was leaving Reading, to become vice-chancellor at the University of Sunderland.

Reading was already in a precarious financial position before the discovery. The university has posted operating deficits of £22m and £19m in its accounts for the last two years. As well as the £121m owed to the trust, the university owes a further £180m to external creditors, including a privately placed bond and loans from Barclays and HSBC.

The external debts alone come to about 60% of Reading’s annual income, double the average level among English universities. Adding the £121m pushes the total to 100% of the university’s income.

The university has struggled to hit its undergraduate recruitment targets, with last September’s intake down by 650. A campus partnership in Malaysia that was meant to allow Reading to expand into a lucrative overseas market has instead been a loss-maker, forcing the university to write off £27.6m in its last accounts.

Staff were informed in January that a voluntary redundancy scheme was opening as the university sought to cut costs and staff.

Angela Rayner, the shadow education secretary, said there was a real risk that staff and students would be victims of a free-market experiment in higher education.

“Given the consequences not just to the education system but local economies and communities if a major university goes bankrupt and closes its doors, ministers must now make clear what action they intend to take to avoid this happening,” Rayner said.

Reading is not alone in its financial woes. Several universities are reported to have needed bridging finance last year, while at least one was given a short-term loan by the regulator to cover cashflow problems.



