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One fifth of charity and not-for-profit organisations surveyed face insolvency
27 July 2011
In a recent survey of almost 100 organisations, 92% of finance executives at charity and not-for-profit (NFP) organisations say the government has underestimated the full impact of public sector spending cuts on the sector, with many facing the real threat of requiring restructuring or entering an insolvency procedure.
In March and April this year, we carried out some research into the charity and NFP sector, in partnership with Third Sector – the leading media title for this sector. We asked almost 100 senior finance executives about the current and forecast financial health of their organisation, in what are probably the most challenging economic times charities and NFPs have faced in many years.
The results were very sobering, if not unexpected: just under a half said they had scaled back their charitable activities in order to stay afloat, more than a fifth of senior finance executives reported their organisations’ solvency is at risk, and two fifths said they regarded restructuring as a possibility in the future.
That two fifths of those surveyed regard restructuring as a viable option is encouraging, as it indicates that many organisations may be able to be rescued. However, that still leaves the majority of organisations in this sector uninformed about the restructuring options available to them if they experience solvency issues. This is concerning - if an organisation fails to seek advice soon enough, the risk of failure is increased. If advice is sought early, it is very possible to save the organisation, either through a restructure, sale or merger.
The challenge is that though Trustees or the Executive are skilled and deliver vital services successfully, very few have experience of restructuring or insolvency. There is a degree of uncertainty about their legal duties and responsibilities, as laid down in The Insolvency Act 1986, and a lack of awareness about where to seek advice if the charity faces financial difficulties.
In our experience, having been appointed the Provisional Liquidators and Administrators of The Work Foundation (TWF) and CILT, the National Centre for Languages, respectively, increasingly common causes of financial difficulty are a pension deficit and a decline in income. A large number of charities still have defined benefit pension schemes in place and, as fundraising gets more and more challenging in this economic climate, these pension schemes become a big drain on a charity’s finances.
However, it can be the case that Trustees do not regard pension deficits, which often amount to many millions, in the same way as they would if, say, the charity owed a trade supplier a significant sum of money. In reality, and in law, their duties are exactly the same. The Trustees have a legal responsibility to act in the best interests of the creditors of the charity, and this includes the Pension Trustees. In spite of this, pension liabilities are often allowed to reach levels that greatly exceed other liabilities. This is, in part, because the Pension Trustees recognise that should they pursue legal channels to force the charity to pay out against the pension, it could result in the charity’s failure and this may mean a deficit is crystallised.
It is possible, however, if problems are recognised in good time, that Trustees can work with specialist advisers to safeguard the organisation in the interests of all stakeholders. Crucially, Trustees need to seek advice the moment they believe the organisation to be insolvent because, from this moment, their duties as Trustees are owed to creditors.
If, as in the case of TWF and CILT, advisers are able to negotiate the sale of the charity as a part of a restructuring process, the Trustees can demonstrate to all creditors that their position has been improved or, at the very least, not worsened.
Though a restructuring process can feel daunting to a Trustee, it is far better to recognise solvency issues early and avoid being forced to close the organisation down in its entirety, benefitting no one – employees are made redundant, the charity’s beneficiaries suffer and, in all likelihood, the creditors would be worse off.
Where specialist restructuring advice is taken early on, it removes the potential liability of wrongful trading from the Trustees and greatly increases the potential for the charity to be saved in whole or in part – preserving jobs and its charitable activities.
If you are concerned about, or have any queries relating to your charity and NFP clients, please contact Jason Baker on 020 3005 4000 or via email using the online form below.
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