Director’s duties under financial pressure: guidance for leaders of independent schools

The independent school sector in England is facing unprecedented challenges. The quick introduction of VAT on school fees in January 2025 left schools with little time to plan.

This coupled with rising operational costs, including TPS and other non-sector specific costs, have caused a significant drop in enrolments in some areas, leading to increased financial stress and, in some cases, school closures.

HCR Law’s Education and Restructuring and Insolvency teams are currently working together on multiple assignments advising boards of governors and senior leadership teams on safeguarding schools and key stakeholders, while helping to mitigate personal liability for governors acting as charity trustees and (in most cases) company directors.

In this climate, directors and trustees must act decisively and responsibly. This article outlines key considerations on how current pressures intersect with some directors’ duties under the Companies Act 2006 (or equivalent duties under charity law for schools registered as charitable trusts). It’s not an exhaustive list of actions to take, and we urge directors and trustees to seek advice if their school is facing financial pressure.

1. Duty to promote the success of the school (s.172 Companies Act 2006)

Directors must act in a way they consider most likely to promote the long-term success of the school, balancing:

• Financial sustainability
• Educational excellence
• Staff and parent interests
• Reputation and regulatory compliance.

Key actions:

• Regular stress-testing of financial forecasts in light of fee increases and potential pupil loss
• Diversifying income – for example through commercial lettings, international expansion or increased bursary fundraising
• Assessing the long-term impact of cost-saving measures – factors to consider include teaching quality, student welfare, diversity of education provision and quality of facilities.

We’re aware of some schools taking daily enrolment checks due to concern about inadequate uptake for the current academic year, but not seeking legal or accountancy advice. This approach could leave directors and governors exposed to risk of personal liability.

2. Duty to exercise reasonable care, skill and diligence (s.174)

Boards must ensure they have:

• Accurate, up-to-date financial information and enrolment data
• Access to external legal, tax and insolvency advice where necessary
• Robust systems for risk management and internal controls.

Risk signals requiring urgent board scrutiny:

• Significant or recurring reduction of pupil numbers (tolerances will differ school by school)
• Delay or difficulty in collecting fees
• Cash flow forecasts indicating liquidity issues within three to six months
• Dependency on short-term loans or overdrafts.

3. Charity law duties (for schools registered as charities)

Trustees of charitable schools must ensure:

• The school continues to operate according to its governing document and for its charitable purposes – primarily advancing education
• Decisions regarding fee increases, bursary cuts or school closures are:
  • Fully documented
  • Complaint with charity law and Charity Commission guidance
  • Supported by a clear assessment of charitable impact vs financial necessity.

Consider whether rising fees significantly reduce public benefit. If so, governors should evidence how they’re mitigating this – for instance, through targeted bursaries or widening access initiatives.

4. Insolvency and your duties

If a school becomes insolvent or is close to insolvency, directors must shift their primary duty to prioritise the interests of creditors. Indicators include:

• Inability to pay debts as they fall due
• Net liabilities exceeding assets
• A combination of the two.

At this stage:

• Seek professional insolvency advice immediately
• Avoid trading “wrongfully”, including taking on new liabilities that can’t be met
• Carefully document all decisions to show they were made in good faith and with appropriate advice. This forensic trail is key
• Consider the constitution of the board of governors and any conflicts of interest that could invalidate important decisions if quorum isn’t present
• Consider revaluing assets for borrowing or to assess balance sheet solvency.

5. Forward strategy: questions for the boardroom

Directors should proactively engage with:

• Strategic reviews: is the current operating model viable over three to six months, or should a longer-term approach (three to five years) be considered?
• Collaboration or consolidation: are mergers or federations an option?
• Cost containment: how can value be preserved while reducing spend?
• Stakeholder communication: are parents, staff and alumni being well managed and, where possible, being kept transparently informed?
• Viable plan: what steps are being taken to manage the situation? For example, can assets be sold to help with cash flow? Have all potential benefactors been approved?

Conclusion

The pressures facing independent schools demand high standards of governance, foresight and integrity. Governors and leadership teams must stay alert to financial warning signs, act in line with their legal duties (in the care of governors) and consider not only the preservation of the school but its purpose and public benefit.

Inaction or misjudgement in this context may expose governors to regulatory scrutiny, personal liability or reputational damage. But with early intervention, transparent leadership and a commitment to the school’s core mission, many institutions can adapt, survive and even thrive.

Getting the right advice early is important. Not taking appropriate steps – or not ensuring that the right steps are being taken – can lead to failure and expose governors to claims of wrongful trading, breaches of directors’ duties and disqualification as a director and charity trustee.