All content on this page is correct as of April 23, 2020
As charities continue to feel the pressures of the Covid-19 crisis, many will be seeking to raise additional finance. For some, this may involve borrowing – but does your charity have the necessary power?
Many charities may be looking to borrow in order to provide liquidity to sustain their operations during the current crisis. Potential sources of emergency finance include third party funders and government schemes, such as the Coronavirus Business Interruption Loan Scheme (made available through funds such as the Resilience and Recovery Loan Fund and others).
Trustees should consider not only whether the terms of a proposed loan are suitable for the charity, but check that the charity has the power to enter into the loan in the first place. We take a brief look at different types of charitable entity and how they can check whether they have the power to borrow.
Some loans may require the charity to provide security. In addition, there may be situations where a charity is asked to provide a guarantee; for example, in relation to its trading subsidiary’s borrowing. The rules on giving security and providing guarantees can be complex and go beyond the scope of this article. There are also specific rules relating to mortgages and borrowing in relation to land, which are not covered here.
If you would like to discuss the issues that your charity is facing in relation to these areas, or any of the points raised below, please get in touch as we’d be happy to speak with you. You may also like to note that some sector organisations are working to compile resources and lists of funding opportunities, to help civil society organisations during the crisis; for example, the Good Finance COVID-19 Resource Hub for Charities & Social Enterprises. We ourselves have a suite of resources available on our Coronavirus Hub and we’re offering a helpline service to charities to provide support during this difficult time.
Charitable company limited by guarantee
The trustees will need to check the charity’s articles of association, to see whether they specify a power to borrow. Where no borrowing power is specified it may be implied if there is a general power in the articles, allowing the charity to do whatever is desirable to achieve the charitable purposes. There may also be other limited situations in which a power to borrow can be implied. However, determining the availability of implied powers can be complex and trustees should seek professional advice if they are in doubt.
In order to have certainty, the trustees should amend the articles of association to provide a power to borrow. Charity Commission consent is not required for this kind of amendment, but the members would need to pass a special resolution (with 75% member consent, subject to any stricter requirements in the articles). If this is not possible for some reason, the trustees may need to apply to the Charity Commission to authorise the borrowing or confer the power.
Charitable Incorporated Organisation (“CIO”)
A CIO has the power to do anything that is calculated to achieve its charitable purposes including borrowing money, except if this is expressly prohibited in its constitution. If there is a prohibition on borrowing specified in the constitution, the members of the CIO must approve any amendments to the constitution to remove the restriction; this also would not require Charity Commission consent.
The trust deed may contain a specific power to borrow. Where the power is not specified, it may be implied if the constitution contains a “catch-all” power (for the charity to do any lawful things required to achieve its charitable purposes). There may also be other limited situations in which a power to borrow can be implied. However, determining the availability of implied powers can be complex and trustees should seek professional advice if they are in any doubt.
The trustees may be able to amend the trust deed to add a power to borrow, by following any procedure for amendment set out in the trust deed itself. If the trust deed does not provide a procedure for its amendment, it may be possible for the trustees and members to resolve to add the power, or remove any restriction on such a power, under charity law. If this option cannot be taken for some reason, the trustees may need to apply to the Charity Commission to authorise the borrowing or confer the power. The situation will be more complex if the charity holds a permanent endowment.
The rules of an unincorporated association can contain whatever provisions the members have agreed, and they may specify a borrowing power. Where no borrowing power is specified, it may be implied in certain limited situations. However, for clarity, the trustees should be able to add a power to borrow, or remove any prohibition or restriction on such a power power, by following the procedure for amendment set out in the rules.
If the rules do not set out how they can be amended, under charity law it may still be possible for the trustees and members to resolve to make the necessary modification. However, if this option cannot be taken for any reason, the trustees may need to apply to the Charity Commission to authorise the borrowing or confer the power. Also, the situation will be more complex if the charity holds a permanent endowment.
Community Benefit Society
A registered society’s rules must contain provisions setting out its borrowing powers and any conditions or restrictions on those powers. If the trustees want to amend the rules to remove restrictions on the power to borrow, the rules themselves are required to set out the procedure for amendment.
Royal Charter Body
A Royal Charter Body will have full power to act in order to achieve its purposes, including by borrowing money, unless there are restrictions written into the Royal Charter document. If the trustees would like to amend the Charter to remove a restriction on borrowing, an application can be made to the Privy Council Office.
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of April 23, 2020.