At the outset of the recession in 2008 doom and gloom headlines predicted “crunch time for charities” (Sunday Times 2008), and charities facing “£2.3bn black hole” (Guardian 2008). Yet seven years on the gloom merchants were thankfully wrong, and in general there have been few high profile collapses.
The basis of the concern was simple. Recession means less disposable income, and charitable donations are one of the easiest modes of expenditure to cut. There are other issues however facing charities and the four that we have acted for recently illustrate some of these issues.
Case Study 1 – Outside Trust
The Outside Trust was an unincorporated charity funded by donations and income from a working farm. The Trust owned the farm and visitor centre, and was financed by a Bank loan of £1 million. The Trust ran outward bound days for underprivileged and disadvantaged children from urban locations.
The issue was that the charity could not attract sufficient general donations to service the farm costs and overdraft interest. The Trust received many restricted use funds for specific projects; however these were ring-fenced.
A sale of the farm would be sufficient to repay the Bank but would not be sufficient to repay all creditors in full. As the Trust was unincorporated the Trustees faced personal liability for the shortfall. Administration and Liquidation procedures were also not available to the unincorporated Trust.
Our solution was to write to all of the donors explaining the position and requesting their agreement to waive any claims against the Trust.
The majority of donors were agreeable to this. We then wrote to all remaining creditors explaining that formal insolvency procedures could not be applied and that after the sale of the farm, there would only be sufficient funds available to pay 80p in the £ to unsecured creditors. We further stated they should take their own advice regarding the remaining 20p. The farm was then sold, creditors were paid 80p and no creditors chose to pursue the trustees.
Case Study 2 – Educational Trust
We were engaged by the Trustees of a charity which provided statistical tools and analysis to educational establishments. The Trustees requested advice from us on their responsibilities and obligations under the provisions of the Companies Act 2006 and the Insolvency Act 1986. The charity was a company limited by guarantee.
The charity, which had been in existence for twenty years, traditionally made a small annual trading loss, funded by donor contributions, but it faced a significant deficit on its employees’ final salary pension scheme which rendered the company insolvent on a balance sheet basis (liabilities exceeded assets) and the Trustees knew that the charity would be unable to meet any request for additional contributions from the pension scheme.
Efforts had been made to sell the company (as the core business was attractive to competitors) but the size of the pension scheme deficit put interested parties off.
The first thing we did was to meet with the pension scheme to discuss the possibility of ring-fencing the scheme to enable the business to continue but after we had reviewed the charity’s forecasts it was clear that the business was unlikely to generate sufficient surplus funds in the short to medium term to address the deficit, so this was not a realistic option.
This meant that the formal insolvency of the charity was inevitable. We felt that the core business would be of interest to third parties, so we advised the Trustees to proceed into Administration rather than Liquidation, which would have resulted in the closure of the business.
We then set about identifying potential purchasers for the business. This was an unusual case in that the key employees were not prepared to work for a commercial organisation, only another charity. This limited the number of potential buyers but we were able to agree terms with another charity for the acquisition of the business and assets and we eventually completed the sale, safeguarding the jobs of all employees and providing continuity of business to its former clients.
Case Study 3 – Mental Health Charity
We were engaged to advise a mental health Trust which was struggling to meet its recently increased leasehold property costs. There was a solution to vacate part of the premises if the landlord would agree, however the Trust was tied into the lease for a further 10 years.
Our solution was to write to the landlord explaining that the Trust was unable to continue to trade under the present lease, and setting out the minimal return that the landlord would receive if the Trust was liquidated. We compared this to the income that the landlord would continue to receive from the part occupation. The landlord agreed to the partial surrender of the lease and the charity continues to this day.
Case Study 4 – Berkshire Age Concern
We were engaged to advise when this charity, having lost 50% of its government funding, had exhausted its resources and faced real issues of being able to pay monthly salaries. Whilst the charity was building up its private residents to replace government funded residents, there was a funding gap over the next 12-18 months.
We immediately arranged meetings with the local authority to outline the problems and issues, and in effect explain that unless they were able to assist, the centre would close and our problems would become their problems.
We negotiated funding and the running of the centre was taken over with the full agreement of all of the Trustees. The centre continues to provide services for the elderly community in the locality.
Four cases and in only one was a formal insolvency procedure implemented. Lateral thinking and persuasive negotiation on the others has meant that three of the four continue to provide their services in a restructured form. Our website states “An insolvency process is not necessarily the end” and our recent work in the charity sector demonstrates this.