Close Or Rescue Our Private School – What Are The Options?

Running a private school is very similar to running any business in that it suffers commercial pressures. however, its charitable status does mean it has obligations and benefits not experienced by other businesses.

If a school encounters financial difficulties and becomes insolvent, then the directors/trustees have a duty to act in the best interests of creditors, just like any other company director.  Of course, any parent who has already paid school fees, before a school closes and the pupil has not finished the term, are in fact creditors.

So why might a private school become insolvent?

Falling Pupil Numbers

Fewer pupils mean less revenue, which can significantly impact the school’s budget.  Numbers of pupils can fall for all sorts of reasons ranging from changes in population demographics, family budgets being strained and even the prevailing political mood.

In the current election campaign to July 4^th 2024, the Labour Party have said they will impose VAT on school fees, from day one, if elected.  This could lead to a 20% increase in fees, if schools chose to pass the VAT on to customers. In addition, there is prospect of having to pay business rates on their premises.

High Operating Costs:

Salaries, facility maintenance, and utilities can become unsustainable if not managed well.  Many private schools have quite old buildings, and their maintenance costs can be disproportionately high.  Recent expansion of the facilities can also mean greater costs.

Increased Competition:

Competing with other private and public schools can reduce the number of new pupils joining the school.

Taking on too much debt:

Capital and interest payments on loans and other debts become more of a cost burden after the last two years of increases in interest rates.

Insufficient Fundraising:

Lack of successful fundraising efforts can limit additional revenue sources.

Poor financial Management:

This is the most common reason for business failure as management do not realise the extent of the problems until it is too late.

What options are available to private schools?

Creditors Voluntary Liquidation

If your school is facing legal threats and you don’t believe it is viable, even if you could extend payment terms, then creditors voluntary liquidation could be the correct course of action.  A liquidation will require a licensed insolvency practitioner to oversee the process.  Once you appoint a liquidator then they will put together a statement of affairs on the school that sets out the financial position.  They will ask the creditors to agree to their appointment and then will set about selling assets to try and repay creditors.  As part of the process an investigation is carried out into the directors conduct and on the reasons for the failure.

A creditors voluntary liquidation is preferable to being wound up via the Court through compulsory liquidation. The Court process can be led by a disgruntled creditor like HMRC as the bank may freeze the accounts the moment a winding up petition is presented which would cause unprecedented difficulties for the school and its pupils.

If the school could be rescued as there is a viable business, but historic debt is dragging it down then either an administration or a company voluntary arrangement could help save it.

A company voluntary arrangement (CVA)

A CVA may be appropriate if the school has significant unsecured debts i.e. to HMRC/suppliers. This is a powerful way to restructure HMRC debt, write off significant unsecured debt  whilst servicing secured bank debt. See our guide here to CVAs

Administration

An administration is a powerful process in that it places a moratorium around the company that prevents both secured, and unsecured creditors, from taking legal action to wind the school up via a court led compulsory liquidation.   This breathing space can allow the school to raise additional finance or maybe be sold to a third party.

Issues to be aware of!

It is obvious that if a private school is faced with closure there are going to be a lot of worried parents and children.  So, communication is key.  In any rescue scenario if rumours surface of closure, then it is likely that any turnaround will be difficult if parents start pulling children out of the school.  We can help directors and/or trustees draft appropriate wording in communications and offer support throughout the process.