Duties on trustees when an independent school is in financial distress

Due to recent changes to VAT payable on school fees and the removal of charitable tax relief on business rates, many independent schools are experiencing financial strain and some have been forced to consider their options in the event of closure. These financial challenges in addition to other increased costs such as Employer National Insurance contributions and rising costs to maintenance of buildings are contributing to many independent schools becoming financially unsustainable. For many independent schools, the suggestion of raising tuition fees for parents to cover these additional costs is not a viable option as this could result in losing pupils and rather than offering a solution, may actually contribute to the problem.

If the school is facing financial difficulties, it is recommended that insolvency advice be sought at the earliest opportunity so that possible rescue plans and the different types of rescue methods applicable to corporate insolvency can be considered. Rescue methods include insolvency procedures such as Administration or Company Voluntary Arrangements which aim to rescue the business from financial difficulties. Another insolvency method which might be considered is Liquidation, but the business cannot be resurrected from this and will result in the closure of the school. Professional advice is best sought through an insolvency practitioner to discuss these options and which is the most appropriate in the circumstances.

Another reason to seek insolvency advice at the earliest opportunity is to minimise the risk of personal liability to the trustees. The trustee of an independent school has a duty to deal with the day-to-day running of the school and this includes the financial aspects. If the school is unable to pay its bills or the liabilities of the school outweigh the assets of the school, then the school is considered to be insolvent and there is a legal duty imposed on the trustees of the school to protect the interest of creditors.  If the school enters into an insolvency process such as Administration or Liquidation, then the appointed insolvency practitioner is under a duty to review transactions to see if they can recover any funds to the creditors of the school. There are various claims which a subsequently appointed insolvency practitioner can bring against the trustees following a review of the affairs and dealings of the school which include:

-  A ‘transfer at an undervalue’ would be recoverable by the liquidator and need to be repaid. For example, gifting an asset, such as land, for no consideration or less than market value immediately prior to the closure of the school would need to be transferred back to the liquidator so they can realise the value for the benefit of the creditors.

-  Another reviewable transaction is a ‘preference’ which involves certain payments to creditors prior to the school closure to put them in a better position than other creditors.

-  If the school continues to trade when insolvent and liabilities are incurred with no prospect of being repaid, an insolvency practitioner may bring a claim against the trustees for wrongful trading which may require the trustees to compensate the school for the ongoing losses from the date it was insolvent with no prospect of recovery.

- Trustees should take particular caution when paying funds to any connect person or connected company when the school is in financial difficulty. Generally, trustees owe duties to the school and a breach of those duties such as failing to act in the best interests of the school or its creditors could result in a claim that the trustees have breached their duties and should compensate the school personally for any loss that the school has suffered.

It is advised to seek professional advice at the earliest opportunity as there may be practical ways to reduce the liabilities of the school and rescue the business without the need to go through a particular insolvency process. If advise is taken promptly enough, such may also afford the trustees a potential defence to a wrongful trading or breach of duty claim. It is also important to keep regulatory bodies such as the Charity Commission or Ofsted updated and involved with any insolvency process. The effects of the closure of a school are more than just financial, the disruption to the pupil’s education and the risk of job losses to staff is paramount and therefore it is crucial that trustees are aware of the financial position of the school and take early professional advise at the first signs of financial distress.

If you are a trustee of an independent school and you are concerned about the financial prospects of your school, please contact a member of our Insolvency team who can discuss matters further with you.