24 Jun 2020

The pandemic has strained the fabric of society with its impacts felt across the full spectrum of charities across the sector.

Charities are ready to embrace that challenge. Many can see an opportunity to make more difference, to more people, than ever before. But we must not lose sight of the fact that charities are stepping up to the plate against a backdrop of their own difficulties. Fundraising activities have been restricted and volunteers forced to shield. Charities being forced to close their doors means that income from admissions has been temporarily extinguished and commercial operations have been decimated. On top of that, many investments have performed poorly so charities looking at their returns cannot take a short term view and draw upon their investments.

As you will have heard many times before, in the days when one could fly by aeroplane, you need to put your own oxygen mask on before you can help others. And that is what charities must do now.

The first step is to properly understand the charity's current position. Trustees need to make sure that they have regular, up-to-date financial information available to them. They should make sure they have appropriate skills on the board to properly interrogate it. This information is the foundation stone of a robust decision making process going forwards.

Policies also need to be reviewed. It makes sense that reserves may need to be utilised during these rainiest of rainy days to help cope with unexpected and uncertain events, but the reserves policy needs to be carefully considered. Reserves need to be retained at levels that take account of short, medium and longer term future risks. Does your reserves policy and your risk register take account of the risk of a second, and possibly even a third, wave? Does your risk register consider the risks of financial difficulties as lock-down restrictions ease but there is a time lag before public spending and the economy truly pick up again? Do you know how long your funding will last and have a plan for protecting service users if you run out of funds? These are not always easy questions but they need to be asked.

So you have reviewed the finances and it looks like there is a problem. What do you do then? The worst thing to do is to bury your head in the sand. Trustees of charitable companies also owe a duty to act in the best interests of their creditors when a charity is in financial difficulties. Failure to do so can result in personal liability for the trustees. Perhaps more importantly, the earlier financial difficulties are identified, the more options are available for resolving those difficulties and protecting current and future service users.

The Charity Commission recognises that when a charity is in financial difficulties, the decision on what do will often be difficult and there may not be an obvious 'right' decision, and that charities will be exposed to higher levels of risk today than in normal times. The Commission therefore encourages trustees of charities in financial difficulties to take appropriate professional advice at an early stage. Specialist legal advisors and insolvency practitioners can help to identify solutions and can assist the trustees with the process of answering seemingly impossible questions.

Sometimes, an orderly closure of the charity's operations might be the only way to protect service users but there are often better alternatives if advice is taken early enough. Those alternatives are about to get a shot in the arm in the form of the Corporate Insolvency and Governance Bill which is currently passing through Parliament. Once it obtains royal assent, it will make available a moratorium to protect against creditor action and create a breathing space to allow time to address the underlying financial issues. The Bill will also make available a flexible restructuring plan which will allow a deal to be done with creditors to save the charity and secure a stable financial footing for the future. These options will be available to both charitable companies and CIOs.

It is too early to say exactly how these new tools will be used in practice but what is clear is that they are an incredibly useful new tool and are one of the biggest changes to restructuring law in decades. Their use in relation to charities may differ to their use in relation to commercial enterprises and trustees should therefore seek the support of advisors who understand both restructuring law but also sector regulation and context.

If you have any questions about the issues raised in this article then please contact Emma Moody or Sam Dixon, or for more insights about current issues in the charity sector please see here.