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Solvency Issues CANN conference 31 January 2012. Who I am Ian Oakley Smith – Director, Business Recovery Services Chartered accountant and Licensed Insolvency.

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Presentation on theme: "Solvency Issues CANN conference 31 January 2012. Who I am Ian Oakley Smith – Director, Business Recovery Services Chartered accountant and Licensed Insolvency."— Presentation transcript:

1 Solvency Issues CANN conference 31 January 2012

2 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

3 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

4 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?

5 Charities are not immune to becoming insolvent Predictable income flows Unreliable income Need to track trends in income Most vulnerable position Most comfortable model Need to understand reserves policy Flexible cost base Fixed cost commitments

6 Charities are not immune to becoming insolvent Predictable income flows Unreliable income Need to track trends in income Most vulnerable position Most comfortable model Need to understand reserves policy Flexible cost base Fixed cost commitments Actually, it is almost invariably....weak financial and risk management

7 Charities are not immune to becoming insolvent Comfort LOST THE BUSINESS IN TROUBLE, NOT AWARE LOST CONTROL IN TROUBLE, BUT IN CONTROL The Control Watershed © Concern Crisis Advisory Executory The corporate demise curve ©

8 How does a charity know when it is insolvent? The law Insolvency Act 1986: The cash flow test The balance sheet test What do we mean by contingent liabilities? Some practical challenges Restricted funds Grant clawback provisions Outcome targets Pension schemes Future contractual commitments Who should make that call?

9 What should a charity do if it is insolvent? Insolvency Legislation Company limited by guarantee Company Incorporated By Royal Charter Foundation Trust Charitable Incorporated Organisation (CIO) Various for Specific purposes Cathedral (!) Industrial and Provident Society Community Interest Company (CIC) Unincorporated Association/trust Different legal entity types…..

10 What should a charity do if it is insolvent? Understand its position/prospects Need to review 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? Put creditors at the heart of its decision making Creditors’ interests are paramount What would Trustees do if it were their money? Communication with creditors

11 What should a charity do if it is insolvent? Slide 11 Time is critical – how long does your charity have? Streamline Diversify income Focus on core Collaborate Merge Availability of options Time Close Milestones

12 What should a charity do if it is insolvent? 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 Trustees’ liabilities

13 What should a charity do if it is insolvent? 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" Trustees liabilities – wrongful trading

14 What should a charity do if it is insolvent? 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 How can Trustees mitigate the risk of liability for wrongful trading? Prompt action is key: The law recognises the need to avoid “knee- jerk” reactions, but care should be taken to avoid unnecessary delay

15 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

16 The use of formal insolvency processes UK Insolvency processes Liquidations Formal Arrangements ReceivershipsAdministrations CVA (600 last year) S.425 Scheme of Arrangement Fixed Charge Administrative Receivership (fixed & floating charges) CVA

17 The use of formal insolvency processes UK Insolvency processes Liquidations Formal Arrangements ReceivershipsAdministrations CVA (600 last year) S.425 Scheme of Arrangement Fixed Charge Administrative Receivership (fixed & floating charges) CVA

18 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; the meaning of insolvency; options when facing potential insolvency; the personal liabilities trustees might potentially incur; and the role of the Charity Commission where charities are facing insolvency or are insolvent. Some of the details may be different if a charity: is unincorporated (ie not established as a company under the Companies Act); was established by an Act of Parliament; has been incorporated by Royal Charter or Letters Patent; or is an Industrial and Provident Society.

19 The importance of accountants and financial advisors Your organisation’s role - getting your strategy right Asking the tough questions Are we still effective? Can we afford to do everything? Do we know what our funders want? Are we the best people to deliver? Do we understand our competition? Do we know what works and what doesn’t? Are we over-staffed? Who can we collaborate with? Should we merge? Should we exist at all? Getting the governance right? Have we got the right people in charge? Who plays the “devil’s advocate”? Does anyone dominate discussions? Do we meet regularly enough? Slide 19 Trustees and others will turn to you for the right advice

20 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?

21 Contacts Ian Oakley-Smith, Director, PwC T E -

22 Thank You This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2010 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.


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