Charity Insolvency Reform in the United Kingdom
By Dr. John Tribe (University of Liverpool)
Charity insolvency is on the rise in England and Wales. High profile cases have brought not-for-profit insolvency into focus. Kids’ Company, 4Children, the Wedgewood Museum Trust, and the Work Foundation have all passed into insolvency procedures. These cases highlight how insolvent charities have been regulated over time and how different stakeholder interests are treated in charity insolvencies. The current position is unsatisfactory when the public benefit requirement of charities is considered. This public benefit requirement is unique to not-for-profit entities. If charities fail the public benefit objectives of charities cannot be achieved.
There is also strong evidence that charity insolvencies are on the rise due to the corona pandemic. Prior to the pandemic the UK Law Commission suggested a review of charity insolvency. In a 2018 consultation paper, they stated, in the context of insolvent charities, “There might be scope for a wider review of insolvency law...This might be suitable for a future Law Commission project...” Three years on this review is now urgent, particularly against the backdrop of corona and its devastating effects on the not-for-profit sector. There are two areas on which to focus in any review by the Insolvency Service or the Charity Commission, the two regulatory bodies in the United Kingdom with oversight of insolvency and charities, or indeed, the Law Commission.
Honing Administration or a New Procedure for Insolvent Charities?
Charitable purposes have no direct equivalent in for profit corporate insolvency were rescuing viable companies is the aim. Keeping this charitable purpose alive can potentially be achieved through (1) using the current administration procedure to “rescue” the charitable purpose, or (2) the use of the doctrine of cy-près to safeguard the charity’s assets for the benefit of the charitable purposes (to the exclusion of other (creditor) interests). This continued application of the charitable funds is consistent with the idea that English and Welsh law treats any donation to charity as a general charitable gift to be applied for charitable purposes generally, not just for the specific purpose that they were given. Both administration and cy-près are however uncertain.
English and Welsh insolvency law should instead provide a new charity insolvency mechanism through which the charitable purpose, or at least the asset value, can continue to exist and be applied for charitable purposes. This approach might also help rationalise the multiple legal devices that charities can use to constitute themselves and the resulting plethora of insolvency provisions that are needed to achieve consistent insolvency policy objectives when those charities suffer from liquidity issues.
There are no published and available statistics on charity insolvency. Neither the Insolvency Service nor the Charity Commission have published specific statistical data on charity insolvency. This is deeply unsatisfactory and perhaps evidences how charity insolvency falls through a regulatory gap in the United Kingdom.
Rescuing Charities
Mrs Justice Falk’s recent judgment in the Kids Company case also highlights why charity rescue, and the continuation of charitable purposes, is much preferred to liquidation. As Falk, J observes in her judgment (para.602 onwards) the charity may have survived if the unfounded sexual assault allegations had not undermined the 2015 survival period restructuring plan. This would have meant the valuable public benefit purposes Kids Company was performing would have continued. Indeed, Falk, J states that the company may well have still been in existence today. This raises the question of charities and the rescue culture in English and Welsh insolvency law. Kids Company may have been rescued two years earlier than the sexual assault allegations and the eventual liquidation. Falk, J notes that in 2012 the directors of Kids Company shied away from using an insolvency process (para.272). This fear of insolvency processes has long been an issue for insolvency law procedures (Corporate rescue: CVAs and the challenge of small companies (Milman and Chittenden,. 1995)) and it seems a change in director mindset is still needed if the rescue procedures are to be properly utilised. If the rescue culture and the procedures that facilitate it, such as administration and company voluntary arrangements (CVAs), are grasped at an early stage then more rescues will flow. We will diminish the number of wrecks which Chamberlain drew attention to as early as 1883. In the context of charities this means that more public benefit will flow from the salvaged charities. If the directors of Kids Company had engaged in a rescue procedure earlier they may have avoided the liquidity problems that eventually led to the insolvent liquidation in 2015.
Charity insolvency, and the underlying policy, needs reform. Wider public benefit would flow from rescuing charities and this reform should take place sooner rather than later.
(*) Further discussions on these issues can be found in Tribe, J. P. (2020) Deploying Communitarianism Bankruptcy Theory to Rescue Insolvent Charities and Maintain Charitable Purposes. In J. Picton, & J. Sigafoos (Eds.), Debates in Charity Law (pp. 81-101). Oxford: Hart Publishing.