Chief Legal Officer:

Mirza F.N. Ahmad MBA LLM Barrister

Ingleby House,

11-14 Cannon Street,

Birmingham B2 5EN


BRIEFING NOTE : SCHOOL COMPANIES UNDER THE EDUCATION ACT 2002


Legislative background

 

One of the main purposes of the Education Act 2002 is to promote innovation in schools. In order to achieve this target the government has enacted provisions enabling schools to join together to form or participate in a company. This is intended to allow groups of schools to procure goods and services collectively and therefore benefit from economies of scale. Companies may also be established to provide services to other schools.

The School Companies Regulations 2002 (‘the Regulations’) have now been published and they provide detail on the restrictions for school companies and also the detail relating to the local education authority’s (LEA) role as a "supervising authority".

School Companies (PFI Companies) Regulations 2002

Separate regulations apply where the main purpose of the school company is to enter into or facilitate agreements under the private finance initiative. This briefing note does not seek to cover these provisions.

The provisions in the Education Act 2002, the Regulations came into force on 20 January 2003.

 

SECTION 11 POWER

Under Section 11 the governing body of a maintained school will be able to exercise the power relating to school companies.

Whilst it was already accepted that under Schedule 10 of the School Standards and Framework Act 1998 (‘the SSFA 1998’) a school governing body had the power to form a company to assist in the running of the school, the Section 11 power is far more specific in that a governing body will be able to set up a company to undertake three types of activity: -

Previously schools have been unable to contract jointly with a service provider to make savings through economies of scale and have to some extent relied upon the LEA for this. The DfES guidance states that the policy of school companies is designed to give companies the greatest degree of flexibility while providing a secure framework in which to operate.

This in turn will allow schools a certain degree of flexibility to develop the constitution and membership of the company to reflect their individual circumstances.

 

SECTION 12 RESTRICTIONS

A governing body interested in setting up a company under the Regulations must have the consent of the LEA and must also have a delegated budget within the meaning of Part 2 of the SSFA 1998. The powers may only be exercised within the requirements of the regulations and if at any time, the company fails to satisfy requirements relating to school companies, the governing body may not remain as a member of that company.

The Regulations apply in relation to any company whose members include the governing body of a maintained school which has exercised its powers under Section 11 of the 2002 Act to become a member of the company. (That is except where the main purpose of the members in forming the company is to enter into or facilitate agreements under the private finance initiative (PFI).

Other potential members of the company could be Higher and Further Education institutions, LEA’s, independent schools and other companies providing education services.

Limitation on membership

At Schedule 1 to the Regulations there is a list of 14 categories of persons who cannot be members of a school company and importantly, at number 14 is a person who is employed by the governing body of a maintained school or who is employed by a LEA.

This will obviously exclude head teachers and other school staff from engaging in the process directly.

Other disqualifications relate to bankruptcy, disqualification under company law, disqualification under charity law, disqualifications from teaching or working with young persons, previous convictions, age and mental health status.

DfES guidance states that companies are expected to ensure that the appropriate checks have been made on members bearing in mind the potential for access to school premises.

Personal Interests

The constitution of a school company may permit it to enter into contracts into which a director of the company has an interest.

However in these circumstances the constitution must also provide that the company may only enter into such a contract if the goods or services supplied are required by the company and the cost to the company is no more than is reasonable in relation to the value of the goods or services.

The constitution of a school company must provide that whenever a director has an interest in a matter to be discussed at a meeting of the directors or a committee, the director concerned must declare an interest at that time or before the discussion begins on the matter. The director must also withdraw from the meeting for that item, not to be counted in the quorum for that part of the meeting and withdraw during the vote and have no vote on the matter.

Non-executive directors

At least 40% of the directors of a school company at any one time shall be non-executive directors. For those directors who may receive remuneration, the level of remuneration is to be decided by a committee made up of non-executive directors who must recommend to the directors of the company the terms of service and remuneration of the executive directors.

Application of profits

Regulation 10 provides for the application of any surplus or profits generated by the company. Any such surplus or profits may be distributed according to the company’s constitution so that they shall either be applied to further the objects of the company, or they shall be distributed among the members according to the proportions and procedures set out in the constitution.

This is a matter which must be decided at the formation of the company.

Supervising Authority

Each school company must have a LEA designated as its supervising authority. However if it is likely that the company will be competing with the LEA who would be a supervising authority, the company may request that the Secretary of State designate a different LEA as the supervising authority.

Further detail is found in the regulations where companies are comprised of more than one governing body and that those governing bodies are part of different LEAs.

However it is possible for Birmingham LEA to be designated as the supervising authority for a school company where an out of area governing body is a member of the company. (If this is the case, there is provision for the LEA to resign as supervising authority after 2 years.)

Functions and duties of a supervising authority

When an LEA becomes a supervising authority for a school company it must provide the Secretary of State with the names of the members of the company, the name and registered number of the company and the fact that it is the supervising authority for the company within 28 days of becoming the supervising authority.

Monitoring role

A supervising authority has a duty to monitor the management and finances of a school company and notify the members of the company and relevant LEA’s if it considers that the company is poorly managed or there is a risk of the company becoming insolvent.

In addition a supervising authority must notify the Secretary of State of changes to the company’s membership, name and registered number, and if it ceases to be a relevant LEA.

Requirement to provide accounts

In turn a school company must within 10 months of a governing body of a maintained school becoming a member of the company, prepare audited accounts covering the first six months of the operation of the company and provide a copy of the accounts to its supervising authority.

The school company must also provide a copy of its constitution to the supervising authority within 28 days of the LEA becoming the company’s supervising authority.

The company also has a duty to notify its supervising authority in writing within 7 days if it ceases to become a school company.

Power to borrow subject to permission

Regulation 11 provides that a school company shall not borrow any funds, whether secured or unsecured, without the permission of the company’s supervising authority.

Powers of a supervising authority

The supervising authority may: -

A direction to reduce involvement or resign as a member of the company may only be made in the following circumstances: -

A supervising authority may revoke such a direction by notice in writing to the governing body to which the direction was given.

Consequences of failure to comply

Where a supervising authority directs a school company to take specified steps in order to comply with regulations and there is a failure to comply with such a direction, the supervising authority has a duty to direct all the governing bodies who are members of such a company to resign.

Prior to making a direction to reduce involvement or resign, a supervising authority must give the governing body and the company a warning notice at least 28 days before the direction is issued.

The governing body or the company may make representations to the supervising authority following receipt of a warning notice but they must be served in writing within 14 days of receipt of the warning notice.

 

DfES guidance

The DfES guidance is understandably upbeat regarding the proposals relating to school companies. It states that forming a company is a well-established and relatively straightforward procedure.

It also states that it provides financial protection for the school in that the companies must be limited liability companies.

The guidance gives straightforward advice regarding forming a company including draft Memorandum and Articles of Association.

However it is envisaged that in order to comply with any provisions relating to a supervising authority, the LEA would be well advised to provide advice at an early stage to any governing body thinking of investing in or establishing a school company.

Is a school company a local authority company?

It is possible for a school company to be a local authority company and therefore to be regulated by regulations which apply to local authorities.

However, both the Regulations and the guidance are silent in this area but it is a further reason why the LEA should be involved in providing good quality advice to governing bodies at an early stage.

Whether a school company is a local authority regulated company will depend on the membership of the company, the voting rights in the company and control of the board of directors of the company.

For example, although employees of a governing body or LEA are not allowed to be members of a school company, elected members and employees of other local authority departments may be members.

This means that if governors of the school are members of the company and are also elected members or employees of the local authority, this may affect whether or not the company is local authority regulated.

It is also possible for a LEA to be a member of a school company or for a company already established by the LEA to be a member of a school company.

Consequently membership of a school company will be a consideration for more reasons than just complying with the Regulations.

If a company is "controlled" or "effectively controlled" by the local authority it will be regulated.

A company will be "controlled" if the local authority;

  1. holds more than 50% of the voting rights;
  2. has the power to appoint or remove a majority of the directors or
  3. the company is controlled by another company controlled by the local authority.

A company will be "effectively controlled" by the local authority if it is an "influenced" company in that

  1. between 20% and 50% of the voting rights are held by councillors or local authority officers;
  2. between 20% and 50% of the directors are councillors or local authority officers; or
  3. 20% to 50% of the voting rights at board meetings are held by councillors or local authority officers.

The local authority must also have a business relationship with the company, for example, through payments from the local authority accounting for 50% or more of the company's turnover or local authority grants and stocks and shares in the company exceeding 50% of the company's assets.

Even if the company is "influenced" it will not be "effectively controlled" by the local authority unless certain criteria are met.

For example, the local authority having power to appoint or remove the majority of the directors of the company or holding options in the company or controlling the business activities of the company. If the local authority does have effective control the company will be regulated as if it was a controlled company.

 

Effects of being a local authority company

If the company is regulated it will be subject to the capital finance regulations governing local authorities so that any capital finance transactions carried out by the company will be regarded as if they were carried out by the local authority and will count against the local authority's borrowing limit.

In addition, proprietary controls applicable to local authorities such as restrictions on the publication of party political materials, requirements to provide information to the local authority and to disclose the local authority's interest in the company. There would also be controls on directors' remuneration and expenses.

This means that if a school company is a regulated company it may lose the flexibility, which the Secretary of State sought to give to school companies under the Regulations.

 

February 2003