Timely fee payments at independent schools can be achieved through a clear fee policy and a watertight contract, but if this fails you may need to go to court. Maggie Moodie explains
On 31 July 2008, the Times reported that the independent girls’ school Wentworth College had been put into administration. The school, which is over 100 years old, apparently had its funding withdrawn by its bank and was forced to close.
Independent schools, like many commercial ventures, face difficult times ahead as a combination of rising food and fuel costs and a shortage of lending put financial pressure on parents and schools alike. When parents struggle with cash flow, unfortunately the problem often filters through to the providers of private education.
Cash flow, the key to any successful business, is essential for survival as the credit crunch hits all walks of life. Whilst you may have a healthy balance sheet on paper, unless you have a healthy cash flow you run the danger of creditors being able to establish that you are unable to pay your debts as they fall due. If that is established, any creditor, not just your lenders, can seek to have a school made bankrupt.
In this article, we will consider ways to reduce the risk of bankruptcy from two angles:
- what you can do to ensure your school’s cash flow remains healthy
- steps you can take to minimise the risk of school closure in the event of facing pressure for payment from creditors
Parents should understand that if fees are not collected when they are due, this may affect the quality of education and extra-curricular activities in the school as a whole. If your terms and conditions and policies are clear from the outset, you reduce the chances of parents reneging on payment.
A healthy cash flow
Ensure contract terms are clear
From the outset, it is important that the contractual terms with parents be clear. Put at its simplest, a contract is an offer and acceptance: the school offers to provide education and ancillary services to parents of pupils, in return for payment of fees.
It is important that parents understand at the outset what your fee terms are:
- make sure that you give parents a clear statement about your payment terms
- if possible, and appropriate, explain the reasoning behind your policy of insisting that fees are paid on time
Should you credit check?
If you have any doubt about an individual’s ability to meet school fees, it may be prudent to carry out a credit check before agreeing to take his or her child as a pupil at the school.
School fees often represent a significant percentage of income for families — and it is important that you be confident from the outset that parents can meet fees.
Companies such as Experian and Call Credit will be happy to set up an account for you and they can prepare credit reports for as little as 90 pence a time.
Credit control letters
It is important to have a credit control system in place for when parents fail to pay fees within the agreed time.
It is good practice to create a diary system setting out timescales for sending out standard credit control letters — and to stick to that routine. Many businesses have a policy of issuing three credit control letters before they decide to instruct solicitors to attempt to recover the debt (or bring a small claims action themselves).
In most cases, the first letter acts as a gentle reminder that a fee note or invoice is outstanding if payment is not received within a week of the due date. The second letter is generally in slightly stronger terms, and the third and says that if payment is not made by a fixed date court proceedings may have to be brought.
The following tips may assist your credit control:
- This may seem basic, but ensure that you use the correct address. It may be prudent to issue credit control letters by recorded delivery so that you can be sure they have been received.
- Be clear with the facts — make sure that your letter states clearly the amount that is due. Quote your invoice numbers and be clear that you are seeking payment of the full amount rather than just an ‘overdue amount’ or ‘outstanding account’.
- Remind the parent of your payment terms. Do not ask for payment ‘by return of post’. Quote a date by which you want payment so that there can be no misunderstanding.
- Make allowance for the possibility that payment has already been sent to you. For example, consider including the following sentence: ‘If your payment has been sent in the last few days please disregard this letter.’
- If you have sent one or two previous requests for payment that have been ignored, then your last and final letter may include a threat to bring legal proceedings.
It is unwise to make that threat unless you intend to carry it out. If you are unsure whether or not you ultimately intend to bring legal proceedings, you may wish to indicate that you will ‘consider taking enforcement action’ if payment is not made within the required time-scale.
- If you decide to accept arrears of fees by instalments, put that acceptance in writing and make sure that you set out how you intend to deal with fees in the future.
For example: are future terms’ fees to be settled in one payment or does your instalment plan cover these too?
Explain what will happen if the parent fails to miss an instalment as it falls due. For example, in those circumstances, you may wish to reserve your right to seek to recover all of the arrears.
Having a conversation with someone who owes you money can be a very effective method of collecting overdue accounts. If you adopt this strategy, you should always keep a record of your telephone call and use a diary system for noting when you ought to follow it up.
If you have to make further calls chasing payments, make sure you have copies of your attendance notes and reminder letters in front of you so you are armed with all the facts.
Try to get a promise to pay. In an ideal world, you should obtain confirmation that payment will be made in full that day. If that is not possible, try to obtain a commitment from the parent that payment will be made by an agreed date. Delaying tactics are common so try to keep control of the conversation. Be positive, confident and polite — but state your position clearly.
In some cases, if all else fails, you will have little option but to bring legal proceedings.
In many cases, the issuing of a ‘letter before action’ by a solicitor is enough to prompt payment, even in cases where your own credit control department has issued numerous demand letters.
In other cases, you may need to raise an action against the debtor. If you instruct a solicitor many will agree to bring and serve undefended actions for a fixed fee, to reflect the expenses that the court will award in undefended actions.
Small claims court
Alternatively, you might wish to bring the action yourself. If your claim falls within the small claims limit (which differs according to where you live in the United Kingdom), your local court should be able to provide you with guidance on how to bring and run the proceedings.
Even when you obtain judgment or a decree in your favour, that is often not the end of the matter. You may need to enforce that judgment or decree to get your money. Successfully enforcing a judgment is not always straightforward. It is unusually best to consult a solicitor for guidance.
Steps to minimise the risk of school closure
If the school is experiencing problems with cash flow, it may be unable to meet debts to third parties. If you find yourself in this situation, it is imperative that you don’t bury your head in the sand. If you communicate with your creditors rather than ignore their requests for payment, you are much more likely to avoid drastic steps being taken against you — such as the appointment of an administrator.
In many instances, there may be a very good reason for your not paying sums that creditors allege are due.
Example: dealing with creditorsIf, for example, services have been provided to the school under a construction contract and those services are not up to standard, ensure that you advise the contractor at the earliest opportunity. Make a record of telephone calls, and follow these calls up in writing. Explain in your letter what the problem is and why you are not willing to pay the invoices rendered.
If creditors either raise an action for payment or seek to raise insolvency proceedings against the school, these letters can be produced to the court and can be crucial in successfully defending the action.
Pressure from lenders
If you are under pressure from your lenders, again it is crucial that you keep in touch with them. Pre-empt their having to call you by calling them first and letting them know what steps you are taking to recover any monies owed to the school. Generally speaking, the last thing that lenders want to do is withdraw lending or, worse still, instigate insolvency proceedings.
Take advice. Your accountants or solicitors may be able to help steer you out of what might be a temporary cash-flow difficulty. If that is not possible, they will advise you of what your legal obligations are in terms of whether or not you can continue to operate on a long-term basis.
In some jurisdictions, it is possible to obtain early warning of insolvency proceedings being raised. For example, in Scotland, by lodging a caveat in court, your solicitors will be given advanced warning that a creditor is seeking to have a provisional liquidator appointed.
Normally these appointments are made without your knowledge. If a caveat is lodged, your solicitors will be given a short time to prepare for the court hearing and can attend the hearing to object to the proposal. The cost of lodging caveats is well worth the protection they afford.
Don't let it happen to you
Ultimately, private schools have to be run as businesses, and running a tight credit control department will go some way to ensuring that your cash flow is as healthy as it can be.
While chasing parents for overdue fees is often a sensitive and difficult task, it is a necessary evil if you want to avoid a Wentworth scenario. In the blink of an eye, 50 teachers were made redundant and 180 pupils were left looking for alternative education. Don’t let it happen to you.
Find out more
- ‘Wentworth College to close as schools fall victim to credit crunch’
Maggie Moodie is a partner at Morton Fraser LLP
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