Charities and the Credit Crunch
Volatility
in the world financial markets and the instability within the
banking sector are causing widespread consternation in every level
of society and the impact of the credit crunch is now being felt
outside the banking and financial sectors of the economy. As we have
all heard in the news, a number of charities have had their deposits
frozen in Icelandic bank accounts, but this is only the tip of the
iceberg. Professor Paul Palmer, quoted in The Guardian suggests that
charities might lose up to £1bn in the worst case scenario.
You
need to carefully consider where and how charity assets are being
held. Charity trustees have a duty to preserve the assets of their
charity and in making investment decisions need to ensure they have
an appropriately diverse portfolio. If these duties were carefully
followed losses stemming from the Icelandic situation, while
difficult, should not have been disastrous as only a portion of
investment assets would have been affected. That said all charity
trustees need to undertake a rapid review of their charity’s
circumstances. But what should trustees look out for?
Charities
should reconsider the credit rating of the organisations with which
they hold deposits and ensure that they are subject to the
Government’s deposit protection scheme. The Charity Commission has
guidance on its website
(http://www.charity-commission.gov.uk/news/fincomp.asp). Trustees
with substantial investment portfolios will no doubt have already
asked advice from their investment managers as to how to protect the
value of their portfolio but they have wider issues to consider.
If
the charity uses its investment portfolio to finance its grant
funding, can it still continue to meet agreed funding programmes? If
the charity’s portfolio consists of “permanent endowment”, which
generally prevents the expenditure of capital, will that mean there
will be a shortfall of income with which to continue grant making?
Similarly charities that receive grants from large grant making
trusts will need to consider the likelihood of future cuts in grant
income. As well as individuals and charities a number of local
authorities have had deposits frozen in Icelandic banks – will they
be able to continue to fund your programmes?
Over
the medium term it must be expected that Government spending will be
tightened and there will be pressure to increase levels of taxation
to ensure that the public sector borrowing requirement does not
spiral further out of control. Again, charities will need to
anticipate the consequences of a cut in funding or considerably more
aggressive contract procurement. It seems obvious that in a
recession individual and corporate giving is likely to fall.
We
expect, and have already seen the beginnings of, an increase in
merger activity where small charities join with each other or larger
charities with a view to surviving in a difficult market. It is
important for organisations which look to rescue failing charities
to undertake a thorough financial and legal due diligence exercise
to ensure that the extent of the liabilities being assumed are
understood. Mergers can be structured to minimise the risk to the
charity which assumes responsibility for the failing charity. The
costs in terms of management time and reputation mean that a merger
should never be approached lightly. Where an organisation is seeking
to restructure, whether or not in the context of a merger with
another organisation, careful consideration needs to be given to
redundancy programmes to ensure that they are conducted fairly and
do not give rise to employee claims. Other risks need to be
identified for example dilapidation claims in relation to property
leases and potential implications from contracts or grants which
contain repayment or claw back provisions.
We
have for some years run a register where clients seeking merger, or
collaborative working partners, express their interest on an open or
confidential basis. We can then "match" interested parties. If your
organisation would be interested in these arrangements or you need
further information please email us.
Charities
that are financed by loans or overdrafts, like many small and medium
sized enterprises, may expect to pay higher interest rates and may
even find facilities being withdrawn despite the cut in Bank of
England base rates and massive injections of liquidity by the
Government.
Things
are only likely to get more difficult for charities as demand for
their services increases and sources of funding decrease. Sadly
there is potential for some charities to face insolvency. Charity
trustees will need to continually review their financial position
and cash flow forecasts. Where a charity that is a company faces
insolvency the law is clear that where a director of a company knew
or ought to have concluded that there was no reasonable prospect
that the company would avoid going into insolvent liquidation, that
person must take every step with a view to minimising the potential
loss to the creditors. In some limited circumstances directors may
become liable to make a contribution to the company’s assets. Where
a charity is unincorporated, the Trustees are, on the face of it,
personally liable for its debts.
Even
if governments globally succeed in rescuing the financial sector,
the reverberations in the real economy are likely to continue for
some time yet.
For
further information please contact:
ANDREW
STUDD
020
8394 6414
Andrew.Studd@russell-cooke.co.uk
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