Taking control of the school (cash) register

Posted: 18/07/2025

Independent schools are typically registered as charities and therefore adopt a higher standard of practice in their operation. Their insolvency attracts a suite of particular considerations that can be problematic if not planned for.

In this article, PMC's Restructuring team offers four key factors for insolvency and turnaround practitioners at the outset of an appointment over a business within this unique sector. 

1. Identify trust monies 

One of the top priorities after taking appointment - and preferably before if funds are tight - over a school is to identify which monies are held on trust.It is common for 'cash' not to be 'free cash' as much of it will be advance fee payments or deposits and the status of that money depends on a number of factors. Do not assume that it is available for use until you are sure. 

Funds held on trust do not form part of the business' assets and should be held separately. Following consultation with solicitors, those funds should then be returned to those who provided said funds on trust. Just because the money is not held in a ringfenced account, that does not always equate to a lack of a trust being present. The devil is in the detail and often the school's trustees, as laypeople, will not leave the situation obviously accounted for.

There are three types of trusts: express trusts, resulting trusts and constructive trusts. A brief summary of each is set out below:

• Express trusts - the school must have intentionally made it clear to the parents that it wishes to create a trust, detail the specific terms on which the school must hold the funds and set it out in some form of ‘trust’ document. The Terms and Conditions between the parents and the school typically satisfy the test for an express trust. 
• Resulting / Quistclose trusts - where the parents (as the beneficial owners of the funds) transferred those funds to the school for a specific purpose (teaching/education) and for no other purpose. If the school becomes insolvent before applying the funds for that purpose, those funds cannot be used to satisfy its creditors. 
• Constructive trusts - arise through operation of law, regardless of the school’s/parent’s intention. Constructive trusts are often found to prevent unjust retention of funds by the receiving party. Unless there has been some form of misrepresentation, dishonesty or mistake made by the company, a constructive trust will not usually arise.

It is typical in independent schools that overseas students pay fees an academic year in advance and domestic students pay fees a term in advance. As the students are taught, the funds are then drawn down from the trust into the school's ownership. It would be unusual for student fees not to be considered held on trust. 

Insolvency practitioners should also consider that there are likely to be donated funds in the school's possession as well. These are typically made from donors to the school and are often for a specific purpose. Where the funds are donated for a particular purpose, they too are likely to be considered trust funds and will need returning to the donors outside the usual operation of the waterfall payment structure to creditors. 

Where funds are donated without a particular purpose they are unlikely to be considered trust funds and can form part of the general assets of the school. Each circumstance is different and legal advice should be considered on whether funds are held on trust or not. 

2. Regulatory reporting

Where an appointment has taken place, it is imperative to check that the Charity Commission (presuming the school is registered as a charity) has been notified. Anything that falls within the definition of a 'serious incident' must be reported to the Charity Commission. A 'serious incident' includes an insolvency event/process. 

A serious incident should be reported promptly: “as soon as is reasonably possible after it happens, or immediately after your charity becomes aware of it.” The trustees should have completed this report prior to the appointment but it is crucial to check that this has been actioned. It is possible that in the fast-moving insolvency situation, the trustees may overlook or not be aware of this requirement. 

If a report has not been made to the Charity Commission an insolvency practitioner must do so immediately. 

3. Ensure any merger complies with the charitable purpose of the school 

Due to the nature of independent schools and their charitable purposes, there are additional challenges that they face with any sale/merger out of the insolvency. Insolvency practitioners must make sure that any such transfer of the business still upholds the charitable objectives of the school. 

It is not, therefore, as simple as receiving an offer from, say, a private equity firm. This offer will instead need to be supported with a plan to maintain the spirit of the charitable purpose. The Charity Commission will need to approve any merger/sale and such authority may take time to obtain. The ease in which it can be obtained may well be dictated by whether the Charity Commission has been engaged prior to appointment.

It may be necessary to change the charitable purpose in order to carry out the transfer of the business and maximise the return to creditors. While it is possible to do this, the process is not straightforward by any means and requires an application to the Charity Commission and  may need legal assistance. It will be prudent for an insolvency practitioner to keep this additional possibility in mind when appointed and seeking a possible sale of the business, especially if there is an accelerated sale process being sought as a rescue and timing is paramount. 

4. Reporting to the Charity Commission – trustee conduct and evidence for claims 

As a high percentage of independent schools are also registered as charities, a useful tactic is available to insolvency practitioners to consider making a recommendation/report to the Secretary of State on the trustees conduct where appropriate. 

The Secretary of State has the power to address the failure of leadership and management of the trustees of the school. If such power is exercised successfully, then it may aid the ability of insolvency practitioners to bring a claim against the trustees of the school. The Secretary of State action can be referenced as evidence against the trustee to quicken litigation and leverage a greater settlement for any improper action of the trustee. 

Conclusion

These are just our four top tips for working with independent schools and the sector is laced with school specific nuances and requirements. Whether an IP is retained early on with a view to turnaround options or later in order to take a formal appointment, school insolvency leaves much food for thought and there is much to navigate. PMC has particular expertise in educational turnaround and insolvency and can offer specialist support on all education and charity issues.

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