Many charities will be at the sharp end of the pandemic. Their operations will be affected in different and serious ways by the risks it poses to their beneficiaries, their staff, their volunteers and all other members of the public who come into contact with them.
While these risks should not in any sense be underestimated and must be responded to, the economic implications of the pandemic and its direct impact on the financial position of many charities will inevitably raise a wide range of governance challenges for trustees. This is particularly true of charities which face an immediate and material drop in income (e.g. charities which generate income via a retail operation, or by operating facilities which must now close in accordance with Government guidance). However, many other charities will be affected in diverse ways (e.g. grant-making charities are likely to be faced with a significant drop in investment value).
There are many decisions that trustees will be called upon to make, both now and in the longer term. Many of those decisions will be very hard. Should trustees prioritise the here and now and their charity's ability to continue to meet the needs of their beneficiaries in the coming weeks and months? Or, should they take a longer term view of the sustainability of the charity? Should they (and can they) aim to do both?
The decisions that trustees will need to take are likely to be multi-faceted. For example, financial considerations must be balanced against the needs of beneficiaries, often with relatively complex legal and regulatory implications that need to be taken into account.
The bottom line in relation to many trustees' decisions will be the financial position of their charity and the cash it requires in order to continue to operate effectively and, in some cases, to avoid insolvency.
What follows is our view on some key issues for trustees as regards financial issues. Not all will be relevant to all charities, but at least some are likely to be relevant to many.
Trustees will want to understand the implications of any insolvency risk for their charities, not least because it can raise the risk of personal liability for trustees. Specific rules apply to charities set up as companies, with statutory obligations that apply where a charitable company is insolvent on a cash flow or balance sheet basis. Trustees will want to understand the way in which these tests apply and the way in which their duties change if a company is insolvent (or there is no reasonable prospect of avoiding insolvency).
Unincorporated charities (e.g. charities established as trusts or by Charity Commission scheme) are not caught by these statutory provisions. However, the degree of personal risk run by their trustees where (in essence) a charity's liabilities exceed its assets is often higher than the risk run by the trustees of a charitable company.
Trustees of charities facing any insolvency issues should ensure that they are aware of the relevant rules and the steps they may need to take to mitigate the associated risks.They will need to consider the implications of the changes to the insolvency regime announced by the Business Secretary, including the suspension of the wrongful trading rules.
HM Government has said that they will: "make changes to enable UK companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency" and that "this will also include enabling companies to continue buying much-needed supplies, such as energy, raw materials or broadband, while attempting a rescue, and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability".
More detail on the measures is awaited.
While obvious in many ways, it is worth recognising that, for some charities, their ability to operate in the short term and avoid insolvency will depend upon their ability to meet their liabilities as they fall due. Cash is king in this scenario, particularly when regular fixed expenditure on e.g. rent and staff costs is generally matched by regular income which may drop materially and rapidly as a result of the pandemic.
An accurate forecast of a charity's cashflow will be fundamentally important for many trustees - not least because a shortfall in income may mean that the rules on insolvency become relevant.
In assessing cashflow, the funds available to the charity, particularly funds held in reserves, will be critically important in terms of the cashflow forecast. Many charities' reserves will not have been designed to meet the extreme circumstances that currently apply, but may provide trustees with some breathing room for decision-making.
In establishing the scope and extent of the funds a charity can use to meet its liabilities as they fall due, it is important to bear in mind that restricted funds are often not available to meet a charity's general operating expenses.
This is because a restricted fund is (by definition) held for a particular purpose and cannot therefore be used to meet general expenses. To do so would generally give rise to a breach of trust.
Trustees should ensure that any cashflow forecast does not assume that restricted funds will be available to meet their charity's liabilities. To plan on the basis that they will be available would be to plan on the basis of a likely breach of trust by the charity's trustees.
There may be options open to trustees in relation to restricted funds. Some funders have already indicated their willingness to allow grant recipients to use restricted funds for their general purposes in response to the pandemic. Others may follow, but it is likely to be worth asking grant funders whether they are agreeable to loosening any grant restrictions that may have been previously imposed.
Accurate, up-to-date and clear management information is essential in any scenario, but particularly now and as regards to cashflow. Trustees will need to decide what additional information they will need in order to support their decision-making. Decisions that are taken will, as ever, need to be carefully recorded at the correct level of detail.
The Government has announced a range of measures for UK business which will be relevant to charities. The most important are:
There is clearly more detail to come in relation to many of these measures. Trustees will need to take some time to understand how they will impact on their charity's financial position. Meanwhile, further change is likely.
Sector bodies including NCVO, CFG, the Charities Tax Group, and ACEVO are actively lobbying for additional measures, including:
Staying up-to-date on these developments and the associated detail will be essential. As outlined above, some charities' reserves may give their trustees a limited breathing space within which to take stock and make decisions on the basis of that detail.
As ever for trustees, the way in which they take decisions will be critically important to their charities. Perhaps most importantly, decisions will take time in circumstances when trustees (as volunteers) will inevitably be faced with other decisions in their lives, relating to the welfare of their families, jobs, their businesses and any practical challenges of working from home etc.
The key point will be to adhere to the Charity Commission's guidance on decision making. This is to obtain the all of necessary information and advice they need, and identify and consider all of the relevant factors they need to take into account.
Making good decisions will be hard. For example, reducing a charity's fixed costs may involve restructuring staff who have devoted years of loyal service to a charity and its values, in order to maintain the charity's ability to operate beyond the pandemic. The challenge facing trustees to make good decisions in these circumstances should not be underestimated.