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COVID-19: Secured finance under the Charities Act

27th March 2020

COVID-19: Secured finance under the Charities Act

As independent schools face the prospect of being closed for a prolonged period, all are busy revisiting their financial forecasts and considering the potential implications on their finances. Many will be seeking additional finance in the form of overdrafts and loans to ensure they have sufficient funds available in these uncertain times. From discussions with our clients, the banks are being supportive. However, in most cases, any finance will be secured on the assets of the school.

Governors and management are having to move quickly to ensure the necessary funds are in place, but it remains important that due process is followed. Under Section 124 of the Charities Act 2011 the governors need to obtain and consider proper advice, in writing, before they enter into an agreement where the school’s assets are provided as security.

It should be considered whether:

  • the loan or overdraft is necessary;
  • the terms are reasonable regarding the status of the school; and
  • the school has the ability to repay the loan.

Section 124 of the Charities Act 2011 states that proper advice is considered to be from an individual:

  • who is reasonably believed by the governors to be qualified by ability in and practical experience of financial matters; and
  • who has no financial interest in relation to the loan in connection with which the advice is given.

This advice could be given by an employee of the school or a governor. However, it is important that the advice is supported by a detailed independent scrutiny of the budgets and cash flow forecasts prepared, whether that be by an employee, an individual governor or a professional advisor.

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