Corporate pitfalls for new academies

It may seem, to the outside eye, that very little changes when a school converts to an academy. Chris Wilks reports

The premises, the teachers and support staff and the curriculum will usually remain broadly the same as before a conversion. But behind the scenes there will have been fundamental financial and legal changes to the structure and operation of the school. Not least among these will be the fact that the new academy will be a company limited by guarantee and the governors will constitute the board of directors of that company. This new role brings with it duties and responsibilities for the individuals concerned and it is often this aspect of the conversion, more than any other, that generates the most concern.

A brief summary of the responsibilities and duties owed by a director to the company is set out below. Governors (acting as directors) will also have many other duties under the Companies Act, such as the duty to deliver accounts and the annual return, and also under a wide variety of other laws and regulations such as charity, insolvency, and health and safety legislation.

Duty to promote the success of a company
A director/governor must act in the way s/he considers, in good faith, would be most likely to promote the success of the academy for the benefit of its membership as a whole. In doing so, the director should have regard to the likely consequences of any decision in the long-term, the interests of the academy’s employees and the need to foster the academy’s relationships with third parties and the wider community.

Duty to act within powers
A governor must act in accordance with the academy’s constitution (ie its articles of association) and must only exercise her/his powers for their proper purpose.

Duty to exercise independent judgement
A director must exercise her/his judgement independently of any outside influence. This will not prevent governors relying on advice, as long as they exercise their own judgement in deciding whether or not to follow that advice.

Duty to exercise reasonable care, skill and diligence
A governor must exercise the care, skill and diligence which will be exercised by a reasonably diligent person with both:
• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the academy; and
• the general knowledge, skill and experience that the governor actually has.

In other words, where a governor has specialist knowledge the higher standard must be met.

Duty to avoid conflicts of interest
A governor must avoid situations in which s/he has or can have a direct or indirect interest that conflicts with, or may conflict with, the academy’s interest. That applies, in particular, to the exploitation of property, information or opportunity, and whether or not the academy could take advantage of the property, information or opportunity.

Duty not to accept benefits from third parties
A governor must not accept any benefit (which obviously includes a bribe) from a third party which is conferred because of her/his being a director/governor or her/his doing or not doing anything as a governor.

Duty to declare interest in proposed transactions or arrangements with the academy
Governors must declare to the other governors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The governor need not be a party to the transaction for the duty to apply.

Practical steps
In summary, it is vital that before any conversion, the academy’s governors take the following steps:
• ensure that they, and other members of management and key employees, are aware of these new duties;
• review the academy’s policy on, for instance, the keeping of minutes, terms of reference for sub-committees and the academy’s policies generally;
• familiarise themselves with the constitution of the academy, in particular any limitations on the powers of the academy or the governors; and
• identify any potential conflicts of interest.

Finally, and perhaps of most significance for those directors who are concerned about their potential personal liability, the academy is entitled to purchase insurance for its directors against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to the academy. That would be money well spent.

Chris Wilks is a partner in the corporate department at SA Law, based in St Albans. Chris can be contacted on chris.wilks@salaw.com or 01727 798000.

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