2016 saw the rise of high profile charity insolvencies, a sector that had until then appeared immune from financial crisis. Examples included Keeping Kids Company (commonly known as ‘Kids Company’) the well-known and well-loved charity set up to support exceptionally vulnerable children and 4Children, another large children’s charity which had to effect an orderly wind down of its services in light of its financial difficulties. Associate Gemma Flanders explores the details.
2016 showed that charities, like any business, are not bulletproof to the current market instability. Despite there being a reluctance for financial institutions to act aggressively in respect of their existing lending to their charity customers, one could argue that charities currently risk greater exposure than most in the current financial climate due to their reliance on government grants which are becoming less available.
There is a further pressure on charities in that they need to ensure that from a governance perspective they are well-structured and that the management in place has strong financial backgrounds. As the driving force for the existence of most charities tends to be vocational, this is an area that may easily be overlooked, as trustees see funds best diverted to helping those in need rather than paying weighty FD salaries or engaging with financial consultants.
It is however a vital part of a trustee’s duty that they are compliant with their legal obligations to understand and manage the financial health of their charity. They are expected to:
- act in the interest of their charity and its beneficiaries;
- protect and safeguard the assets of their charity; and
- act with reasonable skill and care.
The charity regulator, the Charities Commission, expects trustees to discharge their duties by regularly “assessing and monitoring the overall financial position of their charity and by taking steps to ensure that its funds continue to be used for the purposes for which they were given”. The trustees also have a duty to recognise that when their charity has to close due to financial pressures that they have planned for an orderly shutdown.
As an unincorporated charity cannot technically be insolvent (as there is no legal identity separate to its members and its trustees), it is of further concern that the liability of such charity rests with its trustees.
It is key for trustees to recognise when their charity may be facing insolvency and it would be wise to look at the ‘cash flow’ or short term liquidity test to see if the charity can make its debts as they fall due on a regular basis. A trustee of a charity may also want to consider the last time they carried out a general risk assessment, the last time they measured their total assets against the liabilities and expenditure and assess what is the charity’s reliance on party funding to finance day to day needs? They should regularly be considering if the charity is able to secure the finance it requires and if the charity has breached any existing banking covenants?
It is key to remember that although insolvency is seen in the market place as a frightening word, it does not necessarily mean the end for the charity. Administration can be used as a rescue procedure to enable the charity to continue or to survive as an on-going business to try to keep alive the spirit of the charitable aim. When an administrator is appointed over such charity, he will be appointed to act in the interest of all creditors of the company and the primary aim will be to attempt to rescue as a going concern.
It will be interesting to see what the year ahead brings for the charity sector and we expect to see more high profile charity insolvencies hit the news over the next twelve months as funding continues to be squeezed and uncertainty still remains in relation to the current financial climate.
For more information, please contact:
Gemma Flanders, associate, Corporate Recovery
T: 0121 234 0154