Trading Issues For Trading Companies

• Published date: 29 June 2020
• Subject Matter: Corporate/Commercial Law, Tax, Charities & Non-Profits , Corporate and Company Law, Directors and Officers, Corporate Tax, Sales Taxes: VAT, GST
• Law Firm: Veale Wasbrough Vizards
• Author: Emma-Jane Dalley

The impact of coronavirus (COVID-19) has put a tremendous additional work load on schools, particularly their governors and senior leaders. The pace of change has been high and the need for dynamic decision making has never been more important.

But there is one aspect of the independent school structure that should not be overlooked - the solvency or otherwise of any trading subsidiary.

Trading subsidiaries are strictly separate companies with their own board of directors, who will need to consider the position of that company and its financial projections, taking into account their duties as directors of that company. Many boards of directors will have been doing so (likely in consultation with the school) and may have taken advantage of the furlough scheme and the business interruption loan scheme where operations have been affected.

However, the coming months are likely to result in more disruption for school trading subsidiaries as the summer let season approaches, which in most years would be financially lucrative. Directors of the subsidiary must consider its financial position carefully and ensure they are fully up to speed with their contractual commitments, and have adequate financial information in order for them to do so. It would also be right for the school to be kept informed of these matters as (very often) the sole member.

Where the projections for a trading subsidiary do not look favourable, its directors should be mindful of its solvency. There are two key tests for solvency - the income test and the balance sheet test. The majority of school trading subsidiaries will have very few assets and the ability of the subsidiary to pay its debts as they fall due (including to the school itself) will be critical. The directors must ensure they have access to up-to-date and relevant information and keep it under constant review. If there is any question that the subsidiary may face insolvency, the directors should take immediate advice as their duties as directors will change.

Where a subsidiary does face financial issues (whether or not they threaten its solvency) it can be tempting for the school to provide financial support. This is something that should be very carefully...