Forward thinking

Recent headlines announcing closures of independent schools have made sobering reading. Adrian Pashley advises on a plan of action

The next few years are likely to be difficult for charitable independent schools, particularly those that are single-sex schools facing local competition from a wide selection of schools in the same catchment area and are located in glorious (if impractical) historic buildings.

In particular, charitable independent schools need to plan for the following challenges:
1. The economic climate: the credit crunch is likely to have an effect on the ability of parents to afford school fees. Increases in home repossessions, the tightening up of credit availability and job instability will inevitably lead to falls in pupil numbers and an increase in unpaid fees. Schools with, or in need of, bank borrowings may find that banks are offering more onerous terms and adopting a less relaxed approach.
2. Increasing costs: increases in the costs of fuel and food will already be affecting the bottom line of many schools. In particular, we have heard reports of schools being faced with huge increases in utility bills at the end of contractual discount periods. The cost of capital projects to which the school may be committed could also increase, putting even greater pressure on fundraising initiatives.
3. Increasing regulation: including a plethora of health and safety rules, the new protection of vulnerable persons regime, wide anti-discrimination rights, and the ever-shifting sands of employment law.
4. The public benefit test: while the obligation on charitable schools to operate for the benefit of the public is not new, the Charity Commission's focus on how schools are meeting this test is. Its draft guidance on fee-charging charities emphasises the need to ensure that people in poverty ie those who could not normally afford the fees, are not prevented from accessing the benefits offered by charitable schools. In practice, the easiest way for schools to satisfy the requirement will be to operate means-tested bursary and scholarship schemes. For schools already facing financial hardship, seeking to boost free or subsidised places may well prove to be a step too far.

It is, however ,clear that it is not legally possible to side step the public benefit challenge by deciding to opt-out of being a charity and asking the Charity Commission to deregister the school.

Faced with these challenges, it is inevitable that more charitable independent schools will be forced to discontinue their operations. Governors who are also company directors should be aware that they could be personally liable for wrongful trading where they have allowed their school to trade at a time when they knew or should have known that it was insolvent.

Those that succeed in meeting the financial challenges will do so thanks to prudent, timely forward planning.

Consider these practical steps:
• Review banking facilities: can the school continue to meet its obligations to its lenders? A school facing difficulties should not delay talking to them. To what extent is the school exposed to interest rate rises? Are interest rate rises on deposits being passed on by the bank to the school's benefit?
• Review contracts with suppliers and contractors: to what extent can and will cost increases be passed on to you; when are any discount periods due to end? To what extent can expensive contracts be renegotiated or terminated? Are cheaper alternatives available? To what extent can risk be shared with suppliers and contractors?
• Take care when tendering capital projects: capital projects may become cheaper as contractors become desperate for work. However, there is a risk that they will pitch too low and become insolvent during the build. Schools should carry out credit checks and obtain guarantees if possible from parent companies or banks.
• Review budgets and forecasts and (if necessary) recast them: model a range of scenarios and agree with your governors what degree of risk they are comfortable with.
• Parent contracts and fees: litigation usually increases in difficult financial times as people have more to lose. Does your school have robust terms and conditions for contracting with parents? Do you operate a sound deposit policy and exclude pupils at half term for non-payment of fees? Consider credit checking and obtaining financial references for parents and suppliers. Engage proactive school fee recovery experts. Consider alternative methods of paying fees, for example instalment options and/or advance payment of fees schemes.
• Staffing: review levels of teaching and support staff. Review staffing structure and performance indicators.

Adrian Pashley is a senior solicitor in the Charities, Education and Social Housing sector group at Blake Lapthorn.

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