Charities play a crucial role in society, providing essential services and support to those in need. However, like any other organization, they can face financial difficulties that may lead to insolvency.
If a charity finds itself on the brink of insolvency, it’s vital to seek professional advice immediately.
Engaging with financial experts or insolvency practitioners can provide clarity on the charity’s financial position and offer potential solutions.
Trustees should also be proactive in their approach, reviewing the charity’s financial health regularly and considering diversification of income sources.
It’s essential to communicate transparently with stakeholders, including donors, beneficiaries, and staff, about the charity’s financial situation. Exploring partnerships or mergers with other organizations might also be a viable option.
Ultimately, the primary goal should always be to ensure that the charity’s mission and the welfare of its beneficiaries remain at the forefront of any decisions made
How are charities treated differently to limited companies in a formal insolvency procedure?
While numerous charities have a structure akin to limited companies, there are diverse charity formation models. In certain instances, the charity’s configuration may limit the insolvency procedures they can access during financial hardships.
The recent downfall of the Kids Company charity was attributed to financial mismanagement. This charity faced scrutiny after its closure in August 2015. The fact that it heavily depended on public funds also sparked political debates, especially after receiving a £3 million government grant just a week before its shutdown.
In this discussion, we’ll delve into the various charity formation models, understand the responsibilities of trustees and directors, and explore the impact of insolvency on each type.
Trustees
Trustees are obligated to adhere to the charity’s goals, but they also owe a responsibility to the charity’s creditors.
It’s essential for trustees to convene and deliberate on:
- The most recent financial data, encompassing the accounts from the previous year and up-to-date profit and loss statements and balance sheets.
- Practical financial projections. Is the financial situation on an upward trajectory or deteriorating?
- Potential outcomes might include shutting down, settling all dues, and then transferring any leftover funds to another charity, or ceasing operations and entering liquidation.
Regardless of the decision, trustees must maintain a documented account of the discussions and the rationale behind continuing operations, if that’s the chosen path. If trustees have acted improperly and exacerbated the financial situation, they could be held accountable for the charity’s debts. Retaining these records or meeting minutes might be crucial in the future, especially if faced with legal action for permitting wrongful trading as a trustee.
Numerous charities operate similarly to limited companies, where directors and members possess restricted liability. All earnings generated by the charity are dedicated exclusively to charitable endeavors and are never shared among members.
Each member’s guarantee dictates their liability level in the event of insolvency, and this sum is typically minimal, ranging from £1 to £10. Directors of the guarantee company simultaneously serve as its trustees and are obligated to adhere to both corporate and charitable regulations.
Should the charity face insolvency, the remedies applicable to limited companies come into play. It’s essential to highlight that directors of a company limited by guarantee bear the same obligations and roles as those of limited company directors
Charitable Trusts
The operations of a charitable trust are carried out under the trustees’ names, who assume responsibility if the charity faces insolvency. Trust deeds have historically been instrumental in establishing charities, and numerous contemporary trust deeds incorporate the protocols to be followed for dissolution if they encounter insolvency
Charitable Incorporated Organisations (CIOs)
Trustees and members of CIOs have restricted liability, yet the charity isn’t registered with Companies House. Such charities fall solely under the oversight of the Charity Commission and can be disbanded or voluntarily terminated based on their governing document.
Unincorporated associations
Frequently referred to as clubs or societies, unincorporated associations don’t stand as distinct legal bodies. As a result, members might bear personal responsibility for the association’s debts during insolvency.
Given that most clubs or societies aren’t established with profit-making intentions, standard insolvency processes typically don’t pertain to such situations.
Royal Charter bodies
Such entities are incorporated via charter instead of the Companies Act, granting them limited avenues to UK insolvency methods. While pre-pack administration might be an option, they cannot leverage the company administration pathway, a Company Voluntary Arrangement, or voluntary liquidation.
Industrial and Provident Societies (IPSs)
Most Industrial and Provident Societies operate as mutuals, serving their members’ interests. Some, however, are centered on the community and are recognized as Community Benefit Societies. With the 2014 legislation, a significant portion of IPSs can now initiate administration and choose a CVA or a scheme of arrangement.
In cases of charity insolvency, the Charity Commission wields significant authority. They can demand a probe into the charity’s administration. Their primary role is to safeguard the beneficiaries’ interests, and if trustees are deemed negligent, the Commission can mandate them to reimburse the charity.
Common issues and questions for charities facing financial difficulties
- Staff: Should the charity enter liquidation, its employees have the right to claim backdated wages, notice pay, redundancy, and payment in lieu of notice from the Government. The responsibility to provide this compensation doesn’t fall on the charity.
- Dedicated Resources: Charities frequently allocate specific funds for distinct projects. During insolvency, unless these funds have been separately maintained in a trust, they often merge with other assets. Typically, creditors can stake a claim on these earmarked funds.
- Preference: In situations of insolvency, charities cannot prioritize certain creditors over others, regardless of their association (like local vendors, for instance). Every creditor should receive equal treatment. Any payments made favoring certain creditors can be overturned under the Insolvency Act.
- Assets: If a charity possesses a freehold but lacks the necessary liquidity to settle all debts or meet creditor demands promptly, it’s deemed insolvent. If trustees don’t address this promptly, a creditor has the authority to push the charity into Compulsory Liquidation.
Conclusion
In conclusion, charities, like any other entities, can face financial challenges that lead to insolvency. The complexities surrounding charity structures and the varied insolvency processes available make it imperative for such organizations to seek expert advice at the earliest signs of financial distress.
By doing so, they can navigate the intricacies of their situation and ensure the continued fulfillment of their mission. If your charity is facing such challenges, don’t wait. Complete an online enquiry today to get the help and guidance you need to secure your organization’s future.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.