But is it the same procedure as other businesses?
Incorporated in 1984, the Lifeline project was a registered charity employing 1,300 employees over 90 locations throughout England and Scotland. It provided drug and rehabilitation services to over 80,000 users including prisoners.
The subsequent report from the administrator to the Insolvency Service and further investigations revealed that the primary cause of the charity’s failure was signing three Payments by Results (PbR) contracts with some of the local authorities they worked with.
A PbR contract is commonly used in the healthcare industry and means that payment is only made for services if certain pre-agreed targets are met. The Insolvency Service found that the CEO and de facto director of Lifeline, Mr Ian Wardle, signed the contracts without performing necessary due diligence so he failed to realise that the targets in the contracts were unachievable.
This led to a non-payment of £1.4m worth of services which ultimately caused the charity to close. The Insolvency Service also disqualified Mr Wardle as a director for seven years.
More charities are working ever closer with local authorities looking to save money from shrinking budgets. Insolvency events such as those experienced by Kids Company and 4Children for example, are even more damaging as they directly impact front line services.
Charities finances are under increasing scrutiny and an independent review of the Charity SORP (Statement of Recommended Practice) committee, who are responsible for writing the accounting rules for the charity sector, led by Professor Gareth Morgan recommends that both reporting and accounting needs to be overhauled to provide more transparency and accountability and to simplify the reporting process.
The increasing number of restructures and insolvencies in the charity sector only highlights the necessity of good governance and running a charity as business-like as possible.
We’ve written previously about what happens when a charity is considered insolvent and the various financial tests trustees, board members and directors can apply to give them a clear indication of their charity’s strength.
The most positive action a charity can take if they think they’re running into financial difficulties is to contact us. We can advise on all available options for an organisation including potential alternative sources of funding, restructuring and administration if it’s the only viable course of action left.
Chris Horner, Insolvency Director of BusinessRescueExpert, said: “Running charities in a business-like manner is a misunderstood phrase. People usually take it to mean spending cuts, charging more and paying lip service to their core mission while looking everywhere for profit but it’s actually about becoming more systematic and resilient.
“Charities should look at their operations and see where they could make them more robust and able to withstand external events like not receiving payments or staffing issues such as redundancies.
“Business structure is a good example. A charity set up similarly to a limited company will enjoy all of those advantages and protections such as limited liability.
“A board of trustees model sounds more equitable and ‘like’ a charity – but each member of that board would be personally liable for any debts if the charity failed! That wouldn’t happen as a limited company.”