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UK independent school finances set for gruelling Covid test

Carly Schiff
21/10/2020

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United Kingdom

As fee-paying schools grapple with shortfalls in income as a consequence of the pandemic, Fieldfisher insolvency specialists Carly Schiff and Jean-Luc Esposito outline how existing and emergency insolvency legislation applies to struggling institutions.

 
As the UK's independent schools welcomed students back for the 2020/2021 academic year, many head teachers and boards of governors were deeply concerned about the precarious financial position in which these institutions find themselves.  

According to the British Educational Suppliers Association, there are 2,408 independent schools in the UK, representing a little over 7% of the total 32,770 schools across England, Wales, Scotland and Northern Ireland.

A report by Tes in May 2020 warned that many as 30% of UK private schools could end up insolvent before the end of the current academic year.

Most independent schools were forced to cut fees when students were sent home in March, but were unable to furlough teachers who continued to provide online lessons and have been needed to help make schools Covid-secure.

Meanwhile, schools have had to keep up with maintenance costs on what are often large and/or old buildings in costly locations.

All of this means that many schools face near-terms closure, unless they can find new owners or investment. 

Cash strapped

Independent schools are commonly operated as not-for-profit entities (most are registered charities), and the majority have limited cash reserves.

Prior to the Covid-19 pandemic, many independent schools were already facing financial challenges. Competition between independent schools and from top-performing state schools has made it more difficult for some private schools to attract viable numbers of students, while rising operational costs have put pressure on cash flow.

A more direct challenge to independent school finances came in the form of the employer contribution that colleges, schools and post-1992 universities pay to the Teacher Pension Scheme (TPS), which rose from 16.48% to 23.68% in September 2019 – a 43% increase.

These pressures on private school incomes had already led to mergers and closures at some smaller schools and these difficulties are only set to worsen with the impact of Covid-19.

Having initially been forced to reduce fees to reflect constraints on students' learning and access to facilities (including accommodation in boarding schools) during the initial Covid-19 lockdown, many schools are now having to extend fee reductions in response to parents' financial difficulties due to the economic effects of the pandemic.

Schools reliant on international students saw a drop in numbers returning in September and with the Brexit transition period due to end on 31 December, there are concerns about the ability of UK independent schools to continue to attract EU students.

Income streams from other private sources have also fallen, whether through the cancellation of lucrative revision courses, summer programmes or venue-hire arrangements.

Certain schools have cited concerns about teacher recruitment, due to Brexit restrictions on freedom of movement and because teachers are worried about the financial stability of employers in the independent sector.

The ‘representative occupier’ concession, allowing living accommodation to be provided free of tax to employees who qualify as representative occupiers, will be withdrawn from 6 April 2021, resulting in additional tax liabilities for schools that allow staff to live on school premises.

Governors' obligations

While most independent schools are established as charities, they may also be trusts, unincorporated associations or companies.

The application of the Insolvency Act 1986 to independent schools will vary accordingly, but is largely synonymous for both company directors and charity trustees (governors) who must be mindful of their obligations in perilous financial situations.

Governors must act independently and with reasonable care, skill and diligence for the benefit of the school and its pupils. What is considered "reasonable" will be subject to both subjective and objective standards in any given situation.

 What can schools do to manage their situation?

Where an independent school is insolvent or facing liquidity issues because it is unable to pay its debts as they fall due, or the value of its assets is less than the amount of its liabilities, it should ensure regular meetings are held to monitor cash flow and undertake robust and comprehensive reviews to minimise exposure.

The key is early engagement with all key stakeholders and heads of independent schools and the board of governors should engage with their financial and business advisors to access cash and financial support from banks, funders and investors.

They should also consider available help under the UK government's various Covid support schemes for businesses, including loans and job retention programmes.

Planning is essential, so heads and governors should use their experience to analyse likely risks and implement steps to avoid them, as well as consider seeking professional help to mitigate the situation.

In these unprecedented times, there is more room for flexibility and innovation than there might have been under normal circumstances, so schools should work with creditors, partners and parents to come up with potential solutions.

For many, adopting a commercial approach to credit control and supplier contracts and reviews will be a daunting step outside their comfort zone, but decisive financial planning needs to be undertaken urgently to ensure financial threats are addressed.

Adopting appropriate procedures

Where a school holds charitable status, it should make a Serious Incident Report to the Charity Commission if it is insolvent or likely to be insolvent, or closed permanently within 12 months.

In these circumstances, governors will have a duty to consider the interests of creditors above the school's charitable purpose. Professional advisers are often indispensable here, as they can provide guidance as to when such steps are necessary following an independent review.

Governors and charity trustees may be liable to contribute to the assets of their school where they allow it to continue trading with no reasonable prospect of avoiding insolvency, and fail to take every step possible to minimise losses to creditors, worsening the school's financial position.

While there was a temporary suspension of liability for wrongful trading under the Corporate Insolvency and Governance Act 2020, this came to an end on 30 September.

Disqualification proceedings can be taken against appointed governors, and those acting as a governor although not formally appointed as one, in certain instances of wrongful and/or fraudulent trading.

What next for the UK's independent schools?

Dozens of UK independent schools failed to reopen for the new 2020/2021 school year, including a number of well-known and prestigious institutions.

There are likely to be further restructurings and mergers to enable those that remain to survive and weather tough economic conditions.

It remains to be seen whether and how the government will respond to developments in the independent schools sector, and what conditions may be attached to any rescue packages.

In the meantime, governors and trustees should seek advice from insolvency professionals about their positions and the applicable legislation as soon as possible, if they have any concerns.

This article was authored by Fieldfisher insolvency specialists Carly Schiff and Jean-Luc Esposito. For more information on Fieldfisher's restructuring and insolvency expertise and our experience in the education sector, please contact one of the authors or visit the relevant pages on the Fieldfisher website.

 

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