Academy Trusts and the Risks of Insolvency
Academy trusts’ financial circumstances are becoming more challenging and increasing numbers are now seen to be at risk of insolvency. With the fall in free reserves, and an increase of the reported number of academies running at a deficit, it is important that trustees are aware of the tipping points and the implications of insolvency, and when to seek appropriate professional advice.
The Kreston Academies Benchmark reported that 55% of academies were in deficit in 2016/17, a significant increase from the previous year. In light of this report, and with growing concerns about the general tightening of the public purse and a contemporaneous increase in staffing and other costs, academy trusts should be mindful of insolvency law, and the risks associated with relying on academy reserves.
This highlights the importance of seeking expert advice early on and asking for timely well-presented financial information from the senior leadership team and providing the appropriate level of challenge.
Earlier this year the Department for Education published a guide on deficit recovery – it is clear that they are growing increasingly concerned:
"….in academy trusts, where there is no LA acting as "banker of last resort”, no ability to borrow and where budgets acutely reflect financial and operational viability, successive deficits will consume cash, and ultimately could lead to insolvency.”
As insolvency law applies to academy trusts, and given the collective responsibility of the board, it is important that all trustees are aware of the insolvency regime and what it means for them personally.
The Insolvency Act 1986 defines the circumstances in which an academy trust will be deemed insolvent. Broadly, an academy trust shall be deemed insolvent if the academy trust is unable to pay its debts as they fall due (Cash Flow Test) or where the value of the academy trust’s assets is less than its liabilities (Balance Sheet Test). Both tests, along with other similar indicators, should be kept under review by trustees. The board should also have sufficient financial training to enable them to provide appropriate challenge to the SLT and to be aware of the warning signs.
Trustees should be constantly mindful of their duties under company, insolvency and charity law. Although rare due to their unpaid role and commitment, a trustee could be at risk of a claim for wrongful trading and potential director disqualification if, prior to the academy trust’s insolvency, a trustee knew or ought to have realised that there was no reasonable prospect of avoiding the insolvency and continued to trade. This highlights the importance of seeking expert advice early on and asking for timely well-presented financial information from the senior leadership team and providing the appropriate level of challenge.
Some practical tips:-
- Finances: Monthly cash flow is as important as the year end position.
- Call in the experts: Contact a professional advisor to gain professional advice and support at the earliest possible stage if there are concerns about financial viability.
- Engage with the ESFA: the message from the ESFA is to communicate with them as soon as there are financial concerns as options may be reduced if they are approached too late in the day.
- SRMA: consider accessing the school resource management self-assessment tool, which will show how the trust’s own data compares against a range of performance measures.
- Employment: consider staffing ratio and options to reduce expenditure.
- Procurement: are you getting value for money and are your contracts proportionate to the risk?
- Income: are there any additional ways in which the academy trust can bring an income stream?
- Training: provide governance and financial training to the board.
- Ensure clear and accurate financial records are kept: it is important that decisions and challenges are recorded appropriately as they may be called upon later.
- Board assurance: make sure the risk register is up to date and that risk is being measured and monitored and appropriate controls are in place.
- Estate: develop an estates strategy over 5-10 years – plan and budget for future needs and the "what ifs”.