The Government has turned down pleas for new laws to protect university and college governors from personal liability where their institutions run into serious financial problems.

Department for Education and Employment officials told the Nolan Committee on Standards in Public Life this week that it would be a waste of public money to introduce extra protection because it would only be under "wholly exceptional circumstances" that governors would find themselves liable.

The DFEE has sought legal advice on the issue after representations to the Nolan Committee and the DFEE by pressure groups like the Association for Colleges, which wants better safeguards for governors. The AfC is particularly worried because up to 40 further education colleges have been reported as facing financial crises.

But Tony Clark, the DFEE's director of higher education, said governors could only be held personally liable if it were proved they were in breach of their duties and a valid claim was made by someone with a "sufficient interest" to bring a claim.

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He told the committee that the DFEE's legal advisors had said that in practice, the courts "are very unlikely to hold that there is any personal liability in cases where individual governors or members act within the scope of their functions and procedures, act honestly and reasonably, with care and common sense, and without ulterior motive, and seek to persuade their colleagues against acting other than in this way."

The AfC described the DFEE's decision as "quite unsatisfactory" and predicted it could lead to many governors deciding to give up their position.

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Standards of governance and management in higher education had improved immeasurably, Baroness Perry, principal of Lucy Cavendish College, Cambridge, told the committee on Tuesday. But a clearer distinction between the two was still needed. The 1992 Education Act had gone some way, she said, to correct the excessive powers given to governors but more needed to be done.

Asked about gagging clauses in severance contracts, Baroness Perry said that industrialists on boards of governors were accustomed to deal in this way with poor performance. "If a senior academic is under performing, if they are a block, it is difficult to go through open procedures. It is much easier to persuade them to go." Tribunals, she said, inevitably involved bad publicity.

Asked about the same matter, Gareth Roberts, chairman of the Committee of Vice-Chancellors and Principals, said that the CVCP might consider issuing guidance on gagging clauses in conjunction with the Chairmen of University Councils. David Melville, vice chancellor of Middlesex University and vice chairman of CVCP, said gagging clauses were "inherently the wrong approach. It is generally possible to reach settlements which stand up to public scrutiny."