How can we help with Insolvency in charities and not for profit organisations?
Charity insolvency is, sadly, a common occurrence, that requires specific knowledge and expertise from an IP. According to the Charity Commission, at the end of 2023 there were c.170,000 registered charities in the UK involving 946,000 trustees, 828,000 employees and 2.9 million volunteers. These organisations generate income in excess of £39 billion per annum although 78,000 charities have an annual income of less than £10,000.
As with any business, when the accountants helping to manage the affairs of the ‘company’ (in this instance a charity) see its liabilities exceed the assets of the company, they have to raise the fact that it may be, or may become, insolvent. This may be first noticed when the charity finds itself not able to pay its creditors. Some form of debt management or debt solution then needs to be put into place very quickly before the financial distress becomes critical.
Charities registered with the Charity Commission have to abide by their regulations and meet certain financial criteria. Although not all ‘not for profit’ organisations are registered charities they will be included here in the generic term of charity. The most common structures are detailed below.
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What are the common structures of Charities?
Unincorporated Associations
Small clubs and organisations such as Village Halls are often unincorporated, they operate on a similar basis to a “sole trader,” so technically those running the organisation have unlimited liability for any debts. The organisation will typically be governed by a Rule Book or Trust Deed and managed by a committee of volunteers.
Such organisations may be registered charities if they fulfil the requirements of the Charities Commission.
Charitable Trusts
Charitable Trusts are formed as irrevocable trusts, which have a charitable purpose. They benefit from exemption from most forms of tax and are regulated by the Charities Commission.
Companies Limited by Guarantee
When a charity reaches a certain size, has employees and enters into contractual agreement, it becomes more suitable to incorporate in order to provide a legal entity.
As charities generally do not have shareholders, the most common structure is a Company Limited by Guarantee, where a charity requires a legal personality. The members act as the guarantors of the Company’s liability in the event of a winding up. However, this guarantee is typically limited to a nominal amount.
Charitable Incorporated Organisations
This is a new form of legal entity, which has been specifically designed for charities and was introduced in March 2013. A Charitable Incorporated Organisation (“CIO”) provides a legal identity and allows limited liability for members and trustees. CIOs do not need to register with Companies House but they do need to register with the Charities Commission.
Charitable Companies
It is uncommon for a charity to incorporate as a Company limited by shares because the shareholders would be entitled to dividends from any profits. With a charity the assets are held for charitable purposes rather than on behalf of the shareholders.
Community Interest Companies
A Community Interest Company (“CIC”) allows an enterprise to have a corporate structure, but any profits and surpluses are reinvested into purposes aimed at the public good, rather than as dividends to shareholders. A CIC cannot be a charity, although a charity might run a CIC.
Industrial & Provident Societies (“IP Societies”)
Registered under the Industrial & Provident Societies Acts 1965 to 1968, IP Societies are registered with the FCA rather than Companies House. The Industrial Provident Societies and Credit Unions (Arrangements Reconstructions and Administration) Order 2014 introduced Administrations and CVAs for IP Societies from 6 April 2014,
What is the role of the Regulator?
The Regulator of Charities is The Charity Commission of England, which:
- Is forbidden by law to become involved in the day-to-day administration of a charity
- Provides on-line guidance to charities
- Where there is suspicion of mismanagement, maladministration or risk to charitable property, it may open an S46 inquiry
- Has a duty to remove charities from the register (e.g. following dissolution)
What Issues face the Charity sector?
These are some of the key issues that charities are facing:
- Falling Income – Principally caused by Government austerity measures since 2010 and ‘donor fatigue’
- 25% of charities rely on statutory funding
- Rising costs – inflation
- Escalating demand for services
What is the definition of a Charity insolvency?
The tests for a charity insolvency are the same as those used for a normal Company or Individual. For example, the cash flow test: is the charity unable to settle its liabilities as and when they fall due; or the balance test: is the value of the assets less than the liabilities?
What is the definition of a Charity insolvency?
All forms of corporate insolvency can be used to conduct the formal insolvency of a charity, resulting in a closure of a charity, or an attempt to save the organisation and turn it around.
Charity FAQs - Ownership of Assets
Endowment Funds are held subject to specific trusts which are declared by the donors. An endowment may be expendable or permanent.
An Expendable Endowment is a fund that may be invested to produce income. Depending on the conditions attached to and the nature of the endowment, the trustees will have a legal power to convert all or part of it into an income fund which can then be spent. An expendable endowment fund differs from an ordinary income fund in that there is no actual requirement to spend the capital for the purposes of the charity unless and until the trustees decide to.
A Permanent Endowment is capital to be used to produce an income for the charity that cannot be spent as income. The document that directs how the property should be held will probably specify that the capital should be invested and the income used from the investment used for specific charitable purposes. It can also consist of capital assets which should be used for a specific purpose or purposes of the charity. Common examples of this type of endowment include village halls, recreation grounds, housing museums and historic buildings.
Restricted Funds are to be used for specific purposes set out by, for example, the donor, grant maker or the terms of a public appeal. Often restricted funds can be spent at the discretion of the trustees in furtherance of some particular aspect(s) of the purposes of the charity as determined by the donor, grant maker or the terms of the appeal. Restricted funds may not be spent on any other part of the charity’s work.
The Charity Commission
There is no doubt that charities play a crucial role in addressing the needs of society, supporting vulnerable communities, and driving positive change. However, for the public to have confidence in the charitable sector, there must be a robust regulatory framework in place. This is where the Charity Commission steps in, serving as the independent regulator of charities in England and Wales.
The Charity Commission is a non-ministerial government department, accountable to Parliament, that operates across four sites in Liverpool, London, Newport, and Taunton. As the registrar of charities, the Commission is responsible for maintaining an accurate and up-to-date register of charitable organisations, ensuring they meet the legal definition of a charity and operate within the bounds of the law.
The Charity Commission’s primary responsibilities can be summarised as follows:
Registering Eligible Charities
The Commission is tasked with registering organisations that meet the legal criteria for charitable status in England and Wales. This includes assessing whether an organisation’s purpose is truly charitable and aligns with the definitions outlined in the Charities Act.
Ensuring Legal Compliance
The Commission oversees charities’ compliance with legal requirements, including the provision of annual reports and financial information. This helps maintain transparency and accountability within the sector.
Enforcement and Intervention
When the Commission identifies malpractice, misconduct, or situations where charities are not operating in the public interest, it has the authority to take enforcement action. This can include issuing warnings, removing trustees, or even deregistration.
Providing Guidance and Support
To help charities run as effectively as possible, the Commission offers a range of guidance and resources. This includes advice on governance, financial management, fundraising, and other operational aspects.
Promoting Public Trust
By maintaining an accurate charity register, taking appropriate enforcement action, and providing transparency around the sector, the Commission aims to foster public confidence in the charitable landscape.
The Charity Commission has outlined five key priorities that guide its work and help it fulfil its ambition to be a fair, balanced, and independent regulator:
- Fair and Proportionate Approach: The Commission is committed to being fair and proportionate in its work, clearly communicating its role and expectations to charities.
- Robust Action Against Wrongdoing: While the Commission aims to support charities in getting things right, it will take decisive action against any instances of wrongdoing or harm.
- Speaking with Authority and Credibility: The Commission strives to be a trusted and authoritative voice on charity-related matters, free from external influence.
- Embracing Technological Innovation: The Commission recognises the importance of leveraging technology and data to enhance its regulatory capabilities and services.
- Empowered and Enabled Employees: The Commission is dedicated to developing its workforce and ensuring its people have the necessary skills and resources to deliver excellence in charity regulation.
In addition to its administrative responsibilities, the Charity Commission also wields quasi-judicial powers similar to those of the High Court. This includes the ability to:
- Make decisions on the charitable status of organisations
- Remove trustees or appoint new ones
- Authorise the use of charity assets or property
- Investigate and intervene in cases of misconduct or mismanagement
These quasi-judicial functions allow the Commission to play a critical role in safeguarding the integrity and proper governance of the charitable sector.
To effectively fulfil its mandate, the Charity Commission collaborates with a range of stakeholders, including:
- Charities and their trustees
- Other regulatory bodies, such as the Fundraising Regulator and the Advertising Standards Authority
- Law enforcement agencies, when necessary
- Policymakers and government departments
These partnerships and collaborative efforts help the Commission stay informed, share best practices, and address complex issues within the charitable sector.
