Solvent Winding-Up: 4 Key Considerations for Charities
With the ongoing challenges associated with the COVID-19 pandemic and continual cuts to local authority grant funding, many charities are finding themselves facing an uncertain future.
Charity trustees have a responsibility for safeguarding charitable funds and ensuring that such funds are used for the purpose for which they are given. Where the future of a charity is uncertain, the solvent winding-up of the charity is an option which should be kept under review. Early consideration of this option may mean that surplus funds can be granted to another charity, to continue to fulfil the purposes for which the money was given. The alternative insolvent wind-up prevents this final charitable use of funds, and furthermore, may expose the trustees to personal liability issues.
Review of the charity’s financial performance, position, and cash flow (both current and projected into the future) should be undertaken regularly by the trustees – including discussion around whether it may be appropriate to wind up.
Below are 4 key considerations to be made when assessing whether a solvent winding-up would be the right choice for your charity.
1. The asset and liability position
The charity may hold a decent cash balance and show a sizeable net asset position in the financial records. However this may not be sufficient to see the charity through a solvent winding-up for the following reasons:
- The balance sheet does not account for employee termination costs. If there are a high number of staff with long service records, the potential cash requirements of large-scale redundancies could be very high.
- If the charity operates a defined benefit pension scheme, there may be a significant additional liability triggered by the decision to wind up. Expert pensions advice should be sought by the trustees to fully understand the implications of the decision.
- Long-term contracts and lease agreements may contain specific causes in relation to early terminations, notice periods and penalties. The trustees should also consider whether it will be possible to take advantage of a break clause included within a lease.
- Asset values as stated in the financial statements do not necessarily represent the realisable value of said assets. There may also be selling fees to be taken into consideration.
- There are likely to be a number of other costs associated with winding up, such as legal fees and the cost of other professional advice sought.
If it is not possible for the charity to meet all liabilities, this means that it is insolvent, and there may be personal liability for the trustees. If there are sufficient funds to meet all the liabilities and costs of winding up, then it is likely to be a solvent winding-up.
Where there is uncertainty, we recommend that the estimated costs of redundancy and long-term contracts be calculated and included in the board papers for consideration by the trustees.
2. The legal form of the charity
There are a number of different types of legal entities that a charitable organisation can be. The charity’s constitution should be referred to for any conditions or requirements regarding winding up, for example, any specified voting provisions or stipulations on how remaining funds are to be distributed.
We recommend that the trustees should take advice from an insolvency practitioner (even if solvent) or legal advisor.
3. The remaining funds
Any funds remaining, after the costs of winding up have been met, should be transferred to a charity with the same or similar charitable purposes. Any provisions in the charity’s constitution in respect of remaining funds should also be complied with.
It is particularly important that, in the case of restricted funds, the recipient charity must be fully appraised, and confirm their understanding in writing, of the restrictions in place for the use of the funds.
The trustees must also consider the impact on the charity’s stakeholders, and any actions that must or should be taken. For example:
- Regulatory bodies – must be notified in accordance with their individual requirements.
- Employees – contractual or statutory notice periods must be observed where applicable, and redundancy procedures must be carried out in line with government guidance to avoid potential employment tribunal claims.
- Leases and contracts – contractual notice periods must be checked, and formal notice issued in adequate time.
- Books and records – HMRC requires that financial and charitable records must be kept for 6 years, therefore storage and/or electronic back-up arrangements must be put in place.
- Other stakeholders (service users, beneficiaries, grant providers) – the trustees must make decisions about who needs to be informed and how, and what (if any) support or advice should be offered to service users.
This is intended as a general guide, and you should seek advice if you wish to consider winding up a charity. For more information, please get in touch with a member of our Not for Profit team on 01903 234094.