The loss of income of income to charities for the six months to December 2020 is estimated to be £6.4 billion due to covid-19 related causes. At the start of 2020 just over one fifth had insufficient reserves to meet more than one month’s expenditure. Most of these charities as well as others are now struggling.
Whereas many charities have proved innovative and enterprising during lockdown and some qualified for Government emergency funding not all have found ways of raising money
Most charities have had to stop fund raising activities; concerts, dinners, sporting fixtures, auctions and galas; not only did they have insufficient funds to keep going for much more than a month without raising funds most of the ways they used to raise funds had to be curtailed.
According to Pro Bono Economics one in ten of our 170,000 charities in this country are now insolvent.
If your charity is in that position – what could, or should you do?
The definition of a charity is enshrined in law, which was consolidated in Charities Act 2011 to include 12 distinct charitable purposes which must be exclusively for the benefit of the public.
It follows from this definition that any drop in income to our charities will affect the health and well-being of all or us, in one way or another, so it is in our interests to keep them going for as long as it takes until they can raise monies again for their charitable purposes.
Most charities are either formed as trusts or as companies limited by guarantee with charitable purposes. Of the two a company limited by guarantee is the more popular because if a charity should fail – with less income than outgoings – its losses are limited to the extent of the guarantee, with one notable exception which I will touch on later.
However, if a trust should fail its trustees could face unlimited liability, if found to be in breach of trust – such as not acting as a prudent man of business – and if the trust deed did not have a robust indemnity clause for its trustees.
A company limited by guarantee, like other companies is subject to the Insolvency Act 1986, which does not have a definition of when a company is insolvent other to say ‘unable to pay its debts’.
The Insolvency Act 1986 – tries to draw a balance between keeping a company going with mechanisms and processes to get it over tough times – such as applying for administration - to enable the directors to refinance – or in these covid – 19 times to hang on for better times.
Many charities have indeed been most innovative and resilient – but these testing times will see some charities close down. One option, which is disliked by many charity founders is to merge with another charity with similar objects. The reason why this country has so many charities, 170,000, is because most wealthy founders like to set up their own charity which they can run themselves for their own purposes; in memory of a loved one, or a lifechanging event, but for some there will be no other option.
But not every charity is able to find a suitable home; some are not managed well enough, or own wasting assets that other charities do not wish to take on.
These charities are in a tricky situation, although the Insolvency Act 1986 encourages companies to take to time to sort out their finances – not all can - even after time – these charities need to be mindful of ‘wrongful trading’. This is when a creditor can apply to a court to determine that the directors of a company are continuing to trade knowing that the company is insolvent. If on such an application the court determines that a company is indeed wrongfully trading – the directors of the company can find themselves ‘personally liable’
To avoid this, the directors can pass a resolution to put the company into insolvent liquidation and if not pursued by creditors can appoint an insolvency practitioner who needs to be licensed and authorized to act in relation to an insolvent company. Most insolvent practitioners are accountants working in a firm of accountants.
As a law firm Garnham Family Office Services, we set up charities as well as deal with tax and succession, and I find it is much more enjoyable to set up charities for clients than to close them down. However, during these difficult times some charities have no option but to seek advice if their income is falling behind their expenditure.
Like many other tasks closing down a charity needs a team of advisers – I would need for example to appoint an Insolvency Practitioner since I am not authorized or licensed to act for an insolvent company – which is where Caroline’s Club comes in – if I do not have the skills or experience necessary to complete a task, I can find someone who has through the Club
If you have concerns about a charity please contact me on caroline@garnhamfos.com or if you would like to join our club, sign up to our meetings and meet our network simply register here, or contact me on caroline@carolines.club