Is this the future?

That may be so but I still think that the Directors / Trustees should be mindful of the level of risk they are running. If for example the railway is issued with an improvement notice by the ORR would that materially alter the "reasonable expectation" of the future?

 

It might - depending upon the impact of the changes resulting from the measures that need to be taken. Risk is not static, and information may emerge that changes the perspective on decisions. I can think of decisions I've been involved in where, had I known what subsequently became apparent, I would have given different advice - but where the original decision remained reasonable and valid.

 

That goes to the budgetting point, and is really a separate question. Whether or not the railway spends enough on maintenance is not directly connected to how much cash it has. Indeed, if the railway felt such a notice was in the offing, the board would be more remiss not to spend the money from future bookings to deal with this. Prevention is always better than cure.

 

On that basis most of the worlds leading airlines are insolvent. Having said that they are under a number of other measures, but the normal rules never seem to apply in that industry until, as with Fly Be the rug gets pulled without warning & those that have already paid are likely left with nothing.
Hence the reason that things like ATOL protection for package tours.

 

Exactly, the airline industry doesnt follow normal rules probably because they have been in existence doing their own thing for so long and because at one time most scheduled airlines were state owned.

 

Road haulage and passenger vehicle operations (bus and coach) are required to prove (and maintain) a level of financial resource which ostensibly is so that they have sufficient funds to maintain their vehicles to the required standard.

 

Does that have to be in cash though? If you have an annual revenue of a given sum, if you know you are going to have cash coming through every month, you can have that level of resource allocated, even if the actual cash coming in and out isn't the same cash.

It's always "debts as they fall due". The fun starts if you have a loan due to mature in say 6 months and you breach the terms of that loan, at which point the money is suddenly due (and depending on the nature of the breach, not forseeable the day before), and all the careful cashflow plans go out of the window.

The other thing is that the person who can pull the trigger will want to. It's reckoned that small builder insolvencies peak well after the bottom of a recession as there is no point for the bank to exercise it's security over the builder's yard and assets when there's no market for them. Railways near areas of housing growth will be particularly at risk.

 

Hang on. @80104 seems to be suggesting that the only thing that the money taken for Santa can be spent upon is Santa. This is not how business works. We don’t hold money in escrow for each individual transaction. That said, if you don’t reasonably expect to deliver a product or service you cannot take money for it as that would be fraudulent. As always there exceptions. So for example booking a ticket through an agent means that they have an obligation to either not take your money until the service is delivered or to refund if it isn’t. This normally does not apply in a transaction with a heritage railway since they are not acting as an agent, but their terms and conditions of sale should state the situation in full (though I suspect that some will not have this level of sophistication).

 

No that wasnt what I was saying. My point really appertains to Santa Specials and possibly dining trains only (not general operations) as these are the products where customers book and pay up front sometimes many months in advance. What would happen if a Heritage Railway say took £200k up front for Santa Specials, spent the money, and then for whatever reason was unable to operate the santa specials and thus fulfill the contract? Could a HR find the money to refund in December given the lack of other income at that time of year?

 

With respect it isn’t possible to answer your question. If you’re asking would they have to repay the money then that depends on their Ts&Cs that formed the contract of sale.

If you are asking should they repay it then It goes without saying that there is a reputational damage risk if you don’t pay people back too. This dilemma was faced a couple of times during covid. At the start of which one railway I know well had well into 6 figures of forward bookings. Kindly some people donated this money, but some didn’t. The repayment had to be staged in blocks. Over almost 12months.

If your question is could, then how can we know? It would depend on so much else, but if your hypothesis is that there are no reserves and no other income then I would suggest the answer is no. But if that is the case then presumably the reason they cannot run the service is because they have no money to pay the costs, and that means they are bust. More likely would be that they have the money to operate the service they contracted to deliver, but are unable to because of an external issue. Then it depends on what the external issue is and whether they have insurance against such an event. If they do then happy days. The insurance will pick up the cost. If not then they may still trade out of the situation by the simple expedient of not refunding the fares immediately, but waiting until they trade again. Or refunding part now and part later. But here again the Ts&Cs will be important.

In your scenario what would be more important than the customers who individually are very small creditors, is what the bank and big trade creditors thought about it all. They might not believe the railway could trade out even if the directors thought they could.

 

I doubt that your T&C’s can provide an escape i& you’ve taken payment in advance for a service/ product you cannot provide. The Unfair Contract Terms Act renders void any condition in a consumer contract ( which most will be ) that purports to exclude liability if the seller fails to substantially provide what has been contracted for. So advance payments would be debts due which, if the cash isn’t there to cover them, could be an insolvency event no matter what the T&C’s might say.

 

Fair point, what I had in mind was specifying what the remedy for a service not provided was. Not all Ts and Cs are sufficiently clear on this point and it could be quite reasonable for example to state that the first remedy is transferring your booking to another service or issuing a credit note. Might not be an immediate cash repayment. Neither of which can fully step around your comment of course.

 

These are two seperate points though. The insolvency question is not governed by UCTA, and it would considered generally reasonable not to ring-fence monies.

The duty under UCTA (which isn't UCTA any more, it's the unfair terms (consumer contracts) regulations) is to do with excluding liability. As any litigator will tell you, just becuase you have a claim doesn't mean you have a claim against someone with sunstance

 

And, to reiterate a point I've made previously, were railways to adopt the practice of ring-fencing moneys, there would be significant consequential impacts at least during the transition period. For an illustration of that debate, and without expressing a view either way on the arguments, observe the debates over utility companies, positive balances in customer accounts, and whether those funds are ring-fenced or just part of the supplier's cash position.

Ultimately, if cash is tight, controls need to be similarly tight to ensure that an organisation can continue to operate without becoming unable to meet its bills as they fall due.

 

Advanced payments for goods/service is unlikely to meet the revenue recognition definitions required under either of the main applicable accounting standards. Accepting advance payments won't improve the balance sheet as the cash that comes in from the transaction should be offset by deferred income entry, net impact on current assets being nil.

Increased cash at bank might however stay off practical insolvency though if the organisation has a strong net total asset position.

What might be interesting to understand would be how many railways in the first instance have a sufficiently resourced finance department to allow the SMT / Board to receive appropriate management accounts throughout the year.

 

Most that I have seen, though the quality and depth of analysis is variable and cashflow projections sometimes a bit flaky.

 

If a heritage railway, or indeed any other business, is not producing regular management accounts and cash flow forecasts they will not survive for long.

 

The Traffic Commissioners can and will reduce the numbers of vehicles that an operator can have licenced to try and rebalance the equation.
After that is a recommendation to surrender the operators licence before it is withdrawn.
Various levels of this process has happened to three stage carriage operators and one coach operator in Southern Hampshire in the last 30 years.
Others have sold out to larger groups before things got too fraught.

Cheers, Neil

 

Yes the three options for action by the TC is revocation, curtailment or suspension.

Of course one of the peculiarities of the licencing system is that some operators licences are authorised for more vehicles than they actually use / have thus curtailing the licence may not actually have any practical effect.

TCs have been known to suspend school bus operators licences during the school holidays (ie thus having no effect on operating) to allow school bus operators a period of time to rectify the matters in issue.

Another peculiarity is that whilst vehicles are specified on an HGV operators licence, they are not specified on PCV operator licences.