What Happens When A Charity Goes Into Administration?
Charities facing financial difficulties could find themselves thrown into administration in an effort to survive and continue pursuing their charitable endeavours in the future.
Entering into administration is no easy decision for trustees to make, as it involves handing over complete control of the charity to an administrator. However for an insolvent charity, it can be the best way to save themselves from total liquidation.
In this article, the financial experts at Irwin Insolvency explain the administration process for charities in more detail, to help you fully understand what it could mean for your charity.
When Can a Charity Go into Administration?
Administration is a process that can be applied to both companies and incorporated charities under financial stress. It’s an insolvency procedure overseen by a licensed insolvency practitioner, and it’s primarily used as a way to save a company or charity from liquidation.
A charity can enter into administration when it’s deemed to be in a state of insolvency. Insolvency occurs when the charity can no longer pay its debts, as there are more expenses and money owed than there is money coming into the charity’s accounts.
Once a charity has become insolvent, an administrator can be appointed to take over the duties and responsibilities of the charity’s trustees in order to restructure, refinance and, ultimately, find a way out of insolvency. Charities can enter into administration as soon as they declare themselves to be insolvent, but they must do so before any liquidation process begins.
What Is the Process of Entering into Administration?
Administration is a legal procedure that must be initiated in the courts and must be overseen by a licensed insolvency practitioner who acts as the administrator throughout the entire process. For this reason, when a charity goes into administration there’s a clear process.
Let’s take a look at this process, step by step.
1. Trustees recognise the charity has become insolvent
To enter into administration, a registered charity must recognise that it’s become insolvent. They can perform the basic insolvency tests (primarily the cash flow test, which determines if there’s enough cash in the accounts to pay the next bills) or carry out a full analysis of the charity’s accounts. In most cases, a state of insolvency should be readily apparent to a responsible trustee.
2. Trustees appoint an insolvency practitioner to act as administrator
Once insolvency has been recognised, the trustees have a responsibility to save the charity from liquidation. There are other routes that can be tried before going into administration, such as fundraising, restructuring or entering into a company voluntary arrangement (CVA) with creditors.
If the trustees decide that administration is the best way forward, they need to first appoint an insolvency practitioner to act as administrator. In extreme cases, creditors may appoint an administrator in order to reclaim debts owed to them. In either case, the administrator immediately petitions the court in order to legally take control of the charity.
3. The trustees produce a ‘statement of affairs’
The trustees need to put together a comprehensive statement of affairs, a document outlining the charity’s current assets, liabilities and accounts.
It’s a detailed financial statement that the administrator uses to establish the likelihood of saving the charity. The administrator uses the statement of affairs to assess the best way out of insolvency and the best way to pay back creditors.
4. Creditors are sent proposals from the administrator
Once appointed, the administrator has a period of eight weeks to establish their action plan based on the statement of affairs. Once established, creditors are notified of how the charity intends to repay them, based on the administration plan.
The creditors have to accept or reject these plans. If they are rejected, then the process has to go through the courts, which then arbitrate and make a decision that all parties need to adhere to.
5. The administrator puts the plan into action
When the plan to turn the charity around has been agreed, the administrator puts that plan into action over the course of a 12-month administration period. During this time, creditors are no longer allowed to aggressively chase payments or take any further legal action against the charity, providing valuable breathing space.
During this 12-month period, the administrator may proceed with a number of turnaround options designed to reduce costs or improve fundraising. These can include:
- Restructuring the charity
- Streamlining the charity (cutting down costs or making staff members redundant)
- Selling assets
- Reassessing suppliers and renegotiating deals
- Entering into CVAs with creditors
- Reorganising fundraising efforts
- Carrying out further fundraising campaigns
After 12 months, the administration period ends and the efforts of the administration team in saving the charity need to be assessed.
What Happens If the Administration Process Doesn’t Work?
The primary goal of any administration process is to save the charity from liquidation, to turn the charity’s finances around, and to ensure it can continue carrying out its charitable work.
However, despite the noble aims of a charity, the realities of market forces, politics or world disruptions such as Covid-19 can cause the administration process to fail. After the 12-month administration period has ended, then the charity needs to face up to its next remaining options if a turnaround hasn’t been achieved.
Unfortunately, things are limited at this stage. If creditors are still owed money and fundraising has failed to raise the necessary cash to pay off those debts, then the charity may very well need to be liquidated. Liquidation sees the charity’s assets being sold off in order to pay off its debts. Once the liquidation process is complete, the charity is struck from the register.
Contact Irwin Insolvency Today for Your Free Consultation
With decades of experience providing charities across the UK with impartial advice, our team of licensed insolvency practitioners can offer expert financial assistance to help you through insolvency proceedings.