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Advice for Owners of Private Schools
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Rescue, Recovery, and Closure Options for Private Schools
Schools operating in the private education sector face a number of challenges that have led to insolvency for some. Stronger competition due to improving state schools, rising operational costs, and lack of financial reserves, commonly contribute to a poor commercial position.
If you are involved in running a private school that has become insolvent, there are likely to be a number of options open to you. It is essential to act quickly in these circumstances, however, and make it a priority to obtain professional insolvency assistance.
Essentially, you need to ensure your actions do not worsen the position of your creditors, and that you are not open to allegations of trading whilst insolvent. But before we look at the potential options for an insolvent private school, what sector-specific issues might have led to this unfortunate situation?
- Improving state schools
With some state schools improving their levels of discipline, offering a more diverse timetable, and enjoying better exam results, parents may have decided to enroll their children into high-performing local state schools or sixth-form colleges, rather than paying for private schooling.
- Rising private school fees
Rising fees, in conjunction with lack of parental wage increases, might also have influenced parents’ decisions against private schooling. When your school is already experiencing financial difficulty avoiding fee increases is a significant challenge, particularly when you are also trying to meet the high expectations of parents.
- Controlling expenditures
Older private school buildings commonly require high capital expenditure for upgrade and maintenance, with ongoing revenue expenses such as heat and light, also typically high due to the nature of the building. Controlling these costs can be difficult, and although private schools tend to be asset-rich, they are also generally cash-poor with little available working capital.
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Decisive action is needed if you are to prevent your school from being liquidated, and it is advisable to seek professional insolvency assistance at the earliest sign of financial trouble. If the school has already become insolvent, restructuring and financing plans can still be put in place if the circumstances are appropriate.
If your school is asset-rich, you may be able to secure financing based on one or more hard assets such as property, land, or equipment – a vital lifeline when your bank will not lend. Introducing a cash lump sum via asset-based finance allows you to meet your immediate liabilities, put in place a plan for restructuring, and move forward with more confidence.
Placing the school into administration offers an eight-week moratorium period in which to formulate a plan for recovery. During this time creditors are prevented from taking legal action against you, which offers a valuable ‘breathing space’ to plan restructure or secure vital additional funding.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement, or CVA, involves negotiations with your creditors for a proportion of the school’s debt to be paid over a longer term. A licensed insolvency practitioner (IP) negotiates with unsecured creditors, 75% (by value) of whom must vote in favour of the proposal for it to go ahead.
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- Taking care when communicating with stakeholders
The timing of communications, to parents in particular, is crucial to the school’s survival and potential for a successful outcome. If news emerges that it has entered insolvency, there is likely to be a mass departure of pupils, and any plan for restructure or recovery will be futile.
- Potential for personal liability for directors and trustees
It is imperative that, as a director or trustee of an insolvent private school, you take professional insolvency advice as soon as you become aware the school is knowingly insolvent. This advice will not only help you understand your options for turning around the company's position, but it will also allow you to assess the potential personal financial exposure and whether you could be held personally liable for any of the school’s debts.
If the school's financial problems have take it beyond the point of rescue, you may need to look at ways of winding down the school's operations and dealing with its outstanding financial liabilities in an orderly and legally compliant manner.
Closure of an insolvent school can be achieved through a formal process known as a Creditors' Voluntary Liquidation (CVL). This is a director-initiated liquidation option which allows an insolvent company to be wound down while taking care of its outstanding debts. A company can only enter into a CVL under the guidance of a licensed insolvency practitioner who will assume the role of the company's liquidator.
As part of the process, all assets belonging to the company will be identified before being sold with the proceeds going towards settling the company's debts as far as possible. Once this has been done, the company will then be struck off from the register of companies held at Companies House and will cease to exist as a legal entity.
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Insolvency is a complex and challenging position for any private school, given the inherent concerns about the education of its pupils, as well as the potential redundancy situation for members of staff. Seeking professional insolvency advice at the earliest signs of financial distress and cash flow constraints is vital in giving your school the very best chance possible of overcoming its problems.
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