In conjunction with The Chartered Governance Institute, today we have published guidance around the Corporate Insolvency and Governance Act 2020 that provides advice to charities, social enterprises and mutuals about insolvency.
A separate piece of guidance about holding meetings during the current pandemic has also been published.
Louise Thomson, Head of Policy (Not for Profit) at The Chartered Governance Institute comments:
“COVID-19 has had a significant financial impact on organisations, but a group particularly hard-hit is the not-for-profit and social enterprise sector. The lockdown period has seen a surge in demand for services, such as support for mental health, social care, homelessness and domestic violence, but this has coincided with lost fundraising income and increased operating costs. Welcome assistance has been announced in the Corporate Insolvency and Governance Act 2020, which has recently come into force and is intended to provide organisations with breathing space to continue to trade. The guidance that we have produced jointly with Bates Wells is intended to show charities, social enterprises and mutuals which are in financial difficulty how the Act could benefit their organisation.
“We have also produced guidance about meetings as the Act has given temporary freedoms to the sector in this respect. That guidance has been designed to help charities, social enterprises and mutuals which may be planning their AGM, need to pass members’ resolutions in the coming months or have already held their AGM (as the measures have retrospective effect). The new measures also provide a helpful opportunity for organisations to amend their governing documents so that members’ meetings can be held more flexibly in the future, particularly as the flexibility offered by the Act will only last until 30 September 2020 (unless extended by secondary legislation).”
The insolvency guidance provides advice about what charities, social enterprises and mutuals need to consider in relation to their current financial situation, including their legal form, solvency and trustees’ duties. It also covers what to avoid if there is a risk of insolvency, such as wrongful trading, preferring some creditors over others, transactions at an undervalue and fraudulent trading, and highlights practical steps, such as alertness to warning signs. The guidance also lays out how the changes to insolvency law in the Act might help during the pandemic and beyond.
Simon Steeden, Charity and Social Enterprise Partner at Bates Wells adds:
“There are a number of measures brought in by the Act that could provide some help to charities, social enterprises and mutuals in these very difficult times. Temporary measures include the suspension of directors’ liabilities for wrongful trading and the prohibition on presentation of winding-up petitions. Other measures introduced by the Act are permanent, including the introduction of a new ‘company moratorium’, a new ‘restructuring scheme’ and the nullifying of clauses in supply contracts. It is important for organisations to be clear which measures will end in September 2020. If an organisation is in financial difficulty, trustees may need to consider both the best interests of the charity and the interest of creditors. It will generally be advisable to check the extent of any trustee indemnity insurance, minute meetings carefully, thoroughly review income and expenditure, talk to creditors about having more time to pay, choose when and how to use assets and possibly also consider any options to collaborate or merge.
“On the subject of meetings, it is essential that charities check their governing documents to see what flexibility is already allowed and consider how to keep members engaged if it is determined that general meetings in physical format are not possible in the current circumstances. Now would also be a good time for organisations to consider amending their governing document to permit flexibility in the future. We are still in the first phase of the pandemic, with future lockdowns a real possibility, so ensuring that governing documents allow the freedom to hold virtual or hybrid meetings in the future would be a sensible approach.”