Private schools in financial difficulties - Governors’ responsibilities

According to the Independent Schools Council, more than 550,000 children attend just over 1,400 private schools. It is worth noting that half of these schools have less than 285 pupils.

Current financial challenges for independent schools

• Increase in estate and general running costs.
• Increases in staff costs, particularly due to the rise in employers' National Insurance and contributions to the teachers’ pension scheme.
• Removal of business rates relief
• Imposition of 20% VAT charge on fees introduced in January 2025

These factors have resulted in schools having to make difficult decisions to try and maintain profitability. Should the whole of the 20% VAT charge be passed on to parents, with the probability that pupil numbers will reduce, or should schools sacrifice some of their ‘bottom line’ to try and maintain pupil numbers?

There is no doubt that economic factors have tipped a number of schools into insolvency. In fact, since the beginning of 2025 more than 20 schools have closed.

Role of private school governors

Independent schools are usually overseen by a board of governors, sometimes called trustees, who provide strategic leadership. They make decisions on school policies, finances, staffing, and compliance with legal and regulatory requirements.

In their legal form, most independent schools are charities or a charitable company limited by guarantee, meaning governors must also act as charity trustees, ensuring the school meets its charitable objectives to advance the education of its pupils.

The fact that directors in a charitable company limited by guarantee double as school governors means that they must adhere to both company law (including obligations under the Companies Act) and charity law (as enforced by the Charity Commission).

Steps to address financial difficulties in independent schools

• Recognise signs of financial distress

Regular meetings of the governing board to review performance are vital. Warning signs such as falling pupil numbers or a lack of working capital should lead to an in-depth review of the school’s financial position.

• Obtain expert advice

Early expert guidance will always mean that more options are available. For example, many schools are asset-rich but cash poor. It may be possible to refinance at more attractive rates, or perhaps a plot of land could be sold to bring in additional funds to help create a long-term improvement in pupil numbers. Assessing what future forecasts may look like will help determine whether rescue, restructuring, or closure is the most viable option. Whatever the outcome, expert advice will ensure that decisions made by the governing board are legally and financially sound.

• Formal decision making

A formal meeting needs to be convened to discuss all the available options and to decide on the best way forward. This meeting must be thoroughly minuted so that the factors considered and the decisions made can be explained at a later date, if necessary, particularly when a decision is made to close the school.

• Prepare a statement of affairs

A statement of affairs will list all assets, together with related charges, and all liabilities. Complications can arise if prepaid fees have been merged with the school’s bank account or reserved funds e.g. certain endowments, have not been kept in separate trust accounts. Also, it will be necessary to calculate the amounts due to staff members for any unpaid wages and holiday pay, redundancy, and pay-in-lieu of notice. In the event of a formal insolvency, an element of these amounts will be paid by the Redundancy Payments Service, which will stand in the shoes of the employee, as a creditor.

• Communication

Where the decision has been made to close a school, this can be a very worrying time for pupils, parents, staff and creditors. Clear communication will help ease this process and where possible there should be a clear runway to closure, including key milestones, which will allow time for pupils to find new schools and also for them to complete vital examinations prior to the closure. The introduction of an experienced adviser at an early stage, who will work together with management, staff, funders and regulators, often over a teach-out period, is essential to ensure the best possible outcome for pupils.

Options for private schools facing financial distress

Instead of closure, and where time is available, many private schools have gone down the merger or sale route, often to overseas buyers, and this is certainly something the governing body should explore. The financial position of the school will dictate whether or not any sale needs to be done via an insolvency process or whether a solvent sale can be achieved.

• Notifying regulatory bodies

Where there is financial distress, advice from an experienced restructuring professional will be invaluable in navigating a way through all the pressing problems associated with the closure of an independent school and help to ensure the governing body does not breach its statutory directors’ duties. It is especially important that the various regulatory bodies such as the Charity Commission, Ofsted, the Independent Schools Inspectorate, and the Department for Education are involved in the process.

• Safeguarding pupils and managing data

Maintaining the continuity of the pupils’ education is a priority in the closure of a school. Effective communication with the Department of Education is vital in drawing up a plan for transferring pupils to other schools. In line with this aim, it is essential that academic records are securely maintained and transferred in accordance with data protection regulations.

What is the best course of action?

While the financial challenges facing independent schools are significant, it's important to remember that every situation is unique. The best course of action will vary depending on the specific circumstances of each school. It is crucial for school governors to seek expert advice before making any decisions to ensure all options are carefully considered and that any actions taken are legally and financially sound. By doing so, schools can work towards solutions that prioritise the education and well-being of pupils.