Avoiding detention as a trustee of an independent school

Posted: 17/07/2025

With financial pressures ever increasing in the independent school sector, trustees must be alive to solvency issues now more than ever. Despite typically being laypersons, trustees are expected to have the same knowledge as a professional director and ensure that an independent school does not enter into an academic year without knowing if it will complete it. If an independent school ceases trading partway through the academic year there can be serious repercussions for trustees as this so critically affects the education of students under their care. Those repercussions span both the insolvency and charity regime.

When should a trustee be concerned about solvency?

A prudent trustee is one who, along with their fellow trustees, regularly reviews the financial performance of the school to ensure its ability to continue trading. In that review, if a trustee answers ‘yes’ to one or more of the 15 questions below - as set out by the Charity Commission - then the charity is at risk of insolvency and the trustees will need to examine the charity’s financial situation in more detail and/or obtain professional advice: 

1. Is the cash balance insufficient to pay the debts?
2. Does the cashflow forecast indicate that the school will not be able to pay its debts when they are due?
3. Does the school have more liabilities than assets?
4. Are the school's current assets plus investments less than its current liabilities?
5. Are the school's total assets and foreseeable income less than the total liabilities and expected expenditure?
6. Has the auditor or independent examiner raised any going concern issues?
7. Do the last or upcoming accounts state that the charity is not a going concern?
8. Do the trustees need to regularly use reserves because the incoming resources are not enough to meet all of the school’s commitments?
9. Does the school have negative reserves?
10. Are the trustees relying on cash from funds which have been allocated for a particular project (designated funds) for general day to day needs because there are no other funds?
11. Do the trustees need to provide additional security for long-term borrowings?
12. Is the school relying on bank loans with unclear renewal or extension options in order to continue operating?
13. Have the trustees breached the banking covenants or exceeded the borrowing facilities with no immediate means of restoring the situation?
14. Is the school under pressure from creditors who are chasing overdue payments?
15. Does the school have potentially significant contingent liabilities? (In simple terms a contingent liability is money which might be owed if a particular event happens).

Seek professional advice as soon as possible for a rescue plan

The Independent Schools Inspectorate (ISI) is appointed by the Department of Education (DoE) to inspect independent schools in England and reports to the DoE on the extent to which The Education (Independent School Standards) Regulations 2014 are met.

Part 8, 'Quality of leadership in and management of schools', sets out the responsibility to actively promote the well-being of pupils, which will be relevant to decisions about how and when to communicate plans to merge or close a school. 

It is clearly not in the interests of pupils for an academic year to be started and not completed. Therefore, if trustees are aware or should be aware that the school will not comfortably complete the academic year then it will be prudent for them to take the appropriate steps to avoid pupils starting it at the school. 

Instead, trustees should seek immediate professional advice from insolvency solicitors and insolvency practitioners who will work in tandem to advise the school on the best way forward. If a rescue plan cannot be established, trustees will be advised to notify the parents of all pupils so that alternative arrangements can be made for their education in the forthcoming academic year. 

Risks to trustees

If any of the above trigger points are met then trustees need to act promptly or else risk committing a series of offences that are as alarming as they sound including but not limited to:

• Regulatory action taken by the Secretary of State to address failures relating to the quality of leadership in or management of a school. This extends to governors as well as employees in management positions.
• Trustee disqualification proceedings.
• Wrongful trading, where a trustee who allows a school to continue trading when there is no reasonable prospect that it can avoid going into insolvent liquidation or administration may be personally required to contribute to the school's assets to the extent of the amount lost as a result of that conduct.
• Misfeasance, if, in the course of winding up a school, it appears that a trustee or former trustee has misapplied, retained or become accountable for any money or other property of the school, or been guilty of any misfeasance or breach of any other fiduciary or other duty, the court may order the trustee to personally repay the money or property with interest or contribute such sum to the school's assets by way of compensation as the court thinks just.

Avoiding personal liability as a trustee

There are several steps that a trustee can take to minimise the risk of incurring personal liability including:

• Ensure the charity can meet its financial obligations, particularly before agreeing to any contract or substantial borrowing.
• Ensure the charity can meet any obligations to staff pension schemes.
• Hold regular trustee meetings and keep proper records of decisions made and the reasons for those decisions.
• Ensure you prevent conflicts of interest from affecting decisions.
• Ensure any transactions with and benefits to trustees or connected persons are properly authorised.
• Take appropriate advice from a suitably qualified person when you need to.
• If you delegate any powers, give clear written instructions and make sure the instructions are being followed.
• Ensure the charity has effective management and financial controls.
• Keep receipts and records of income and expenditure.
• Receive regular financial reports.
• File accounts on time.
• The Charity Commission and the courts can relieve trustees from liability if they have acted honestly and reasonably and have not benefited from their actions. 

Summary 

Current law and regulation make it crystal clear that trustees must be prudent in their approach to conducting the business of the school and furthering its charitable purposes. Regular review of the school's finances will go a long way in ensuring that the trustees are taking the right action at the right time. 

It is imperative that trustees take professional advice as early as possible and act accordingly if any of the insolvency triggers are met. Failure to take such action is likely to lead to a trustee personally pursued for any insolvency-related offence that is established. 

Trustees acting reasonably and in the interests of the school will not usually be found personally liable for an insolvency-related offence. It should be noted that burying their head in the sand and avoiding looking at finances and financial issues is not a legal defence to a claim and, therefore, all trustees must be proactive in their management of an independent charitable school. 

If there one piece of advice to take away from this article, it is that early intervention is the best form of prevention and protection and the easiest way to reduce the stress and pressure of financial challenges.

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