Insolvency

Report
Solvency Issues
CANN conference
31 January 2012
Who I am
Ian Oakley Smith – Director, Business Recovery Services
• Chartered accountant and Licensed Insolvency Practitioner
• Specialist in turnaround and restructuring for charities and other not-for-profit
entities
• Worked with wide range of charities and social enterprises, typically small to
mid-sized charities experiencing some sort of financial difficulty
• Experienced in solvent and insolvent winding up of charities
• Part of the PwC Charities Team
• A member of the Committee of the ICAEW Charities and Voluntary Sector
Special Interest Group
Agenda
Key messages
How does a charity know when it is insolvent?
What should a charity do if it is insolvent?
The use of formal insolvency processes
What does the Charity Commission say?
The importance of accountants and financial advisors
Key messages
Questions
Key Messages
• The current climate is placing increased pressure on many charities
• Some charities are more vulnerable to failure than others
• Trustees need to know when their charity is insolvent
• Becoming insolvent need not mean closure of the charity, but…
• Trustees (and senior management?) need to understand their
obligations and their personal position if things go wrong
• Accountants and financial advisors have a crucial role to play
How well do you understand the financial position of your charity(ies)
and is your charity(ies) taking the right advice?
Charities are not immune to becoming insolvent
Predictable
income flows
Need to track trends in
income
Most comfortable model
Fixed cost
commitments
Flexible cost base
Need to understand
reserves policy
Most vulnerable position
Unreliable
income
Charities are not immune to becoming insolvent
Predictable
income flows
Need to track trends in
income
Most comfortable model
Actually, it is almost invariably..
Flexible cost base
..weak financial and risk
management
Need to understand
reserves policy
Fixed cost
commitments
Most vulnerable position
Unreliable
income
Charities are not immune to becoming insolvent
Comfort
IN TROUBLE,
NOT AWARE
Concern
IN TROUBLE,
BUT IN CONTROL
Advisory
Crisis
The Control
Watershed©
LOST
CONTROL
LOST THE
BUSINESS
The corporate demise curve©
Executory
How does a charity know when it is insolvent?
The law
Some practical challenges
• Insolvency Act 1986:
• Restricted funds
• The cash flow test
• Grant clawback provisions
• The balance sheet test
• Outcome targets
• What do we mean by contingent
liabilities?
• Pension schemes
• Future contractual commitments
Who should make that call?
What should a charity do if it is insolvent?
Different legal entity types…..
Company limited
by guarantee
Unincorporated
Association/trust
Community Interest
Company (CIC)
Industrial and Provident
Society
Company Incorporated
By Royal Charter
Insolvency Legislation
Foundation
Trust
Cathedral (!)
Various for
Specific purposes
Charitable Incorporated
Organisation (CIO)
What should a charity do if it is insolvent?
Understand its
position/prospects
Put creditors at the heart of its
decision making
• Need to review
• Creditors’ interests are paramount
• Current balance sheet
• Contingent liabilities
• Future income and expenditure
forecasts/scenarios
• Cash flow forecasts and scenarios
• Is the position going to worsen?
• Is the charity going to run out of
cash?
• What would Trustees do if it were
their money?
• Communication with creditors
What should a charity do if it is insolvent?
Availability of options
Time is critical – how long does your charity have?
Diversify income
Streamline
Focus on core
Collaborate
Merge
Close
Time
Milestones
Slide 11
What should a charity do if it is insolvent?
Trustees’ liabilities
• Directors should be aware when company is insolvent
• There are pitfalls for the unaware, including:
– Wrongful trading, could lead to personal liability
– Other possible offences, including preference payments,
transactions at undervalue etc
• Trading whilst insolvent can be a minefield of practical problems
• Advice should always be sought if in doubt
What should a charity do if it is insolvent?
Trustees liabilities – wrongful trading
• What is wrongful trading?
– S214 Insolvency Act 1986
– "at some time before the commencement of the winding up of
the company that person knew or ought to have concluded
that there was no reasonable prospect that the company
would avoid going into insolvent liquidation“
• Unless…
– The court "is satisfied that person took every step with a view
to minimising the potential loss to the company's creditors he
ought to have taken"
What should a charity do if it is insolvent?
How can Trustees mitigate the risk of liability for wrongful trading?
• Understand the position: Trustees need to know the charity’s
financial position
• Plan for return to solvency: Trustees need to be clear how the
charity is to return to solvency
• Document their decisions: Trustees need to keep a clear record of
decisions taken and their rationale
• Take advice: Serious consideration should always be given to taking
professional advice to mitigate the risk of liability
Prompt action is key: The law recognises the need to avoid “kneejerk” reactions, but care should be taken to avoid unnecessary delay
The use of formal insolvency processes
• Formal insolvency processes can be very constructive
• Most recent legislation (Enterprise Act 2002) most positive yet
• Emphasis on preserving companies/businesses
• A formal process may provide the best outcome
• Understanding the outcome of a formal process can inform a
successful informal arrangement
The right advice on available options could be crucial
The use of formal insolvency processes
UK Insolvency
processes
Liquidations
Formal
Arrangements
CVA
CVA
(600 last year)
S.425
Scheme of
Arrangement
Receiverships
Fixed Charge
Administrations
Administrative
Receivership
(fixed & floating
charges)
The use of formal insolvency processes
UK Insolvency
processes
Liquidations
Formal
Arrangements
CVA
CVA
(600 last year)
S.425
Scheme of
Arrangement
Receiverships
Fixed Charge
Administrations
Administrative
Receivership
(fixed & floating
charges)
What does the Charity Commission say?
CC12 – Charities and Insolvency
The guidance aims to explain:
• the key elements of effective
financial management and the role of
trustees;
Some of the details may be
different if a charity:
• the meaning of insolvency;
• is unincorporated (ie not
established as a company under the
Companies Act);
• options when facing potential
insolvency;
• was established by an Act of
Parliament;
• the personal liabilities trustees
might potentially incur; and
• has been incorporated by Royal
Charter or Letters Patent; or
• the role of the Charity Commission
where charities are facing insolvency
or are insolvent.
• is an Industrial and Provident
Society.
The importance of accountants and financial
advisors
Your organisation’s role - getting your strategy right
Asking the tough questions
Getting the governance right?
• Are we still effective?
• Have we got the right people in
charge?
• Can we afford to do everything?
• Do we know what our funders want? • Who plays the “devil’s advocate”?
• Does anyone dominate discussions?
• Are we the best people to deliver?
• Do we understand our competition? • Do we meet regularly enough?
• Do we know what works and what
doesn’t?
• Are we over-staffed?
• Who can we collaborate with?
Trustees and others will turn to
you for the right advice
• Should we merge?
• Should we exist at all?
Slide 19
Key Messages
• The current climate is placing increased pressure on many charities
• Some charities are more vulnerable to failure than others
• Trustees need to know when their charity is insolvent
• Becoming insolvent need not mean closure of the charity, but…
• Trustees (and senior management?) need to understand their
obligations and their personal position if things go wrong
• Accountants and financial advisors have a crucial role to play
How well do you understand the financial position of your charity(ies)
and is your charity(ies) taking the right advice?
Contacts
Ian Oakley-Smith, Director, PwC
T - 0207 212 6023
E - ian.oakley-smith@uk.pwc.com
Thank You
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