Charities in the Credit Crunch - Russell Cooke Solicitors

Charites in the Credit Crunch by Russell Cooke Solicitors - The Charity Team 

Volatility in the world financial markets and the instability within the banking sector are causing widespread consternation in every level of society and the impact of the credit crunch is now being felt outside the banking and financial sectors of the economy. As we have all heard in the news, a number of charities have had their deposits frozen in Icelandic bank accounts, but this is only the tip of the iceberg. Professor Paul Palmer, quoted in The Guardian suggests that charities might lose up to £1bn in the worst case scenario.

You need to carefully consider where and how charity assets are being held. Charity trustees have a duty to preserve the assets of their charity and in making investment decisions need to ensure they have an appropriately diverse portfolio. If these duties were carefully followed losses stemming from the Icelandic situation, while difficult, should not have been disastrous as only a portion of investment assets would have been affected. That said all charity trustees need to undertake a rapid review of their charity’s circumstances. But what should trustees look out for?

Charities should reconsider the credit rating of the organisations with which they hold deposits and ensure that they are subject to the Government’s deposit protection scheme. The Charity Commission has guidance on its website (http://www.charity-commission.gov.uk/news/fincomp.asp). Trustees with substantial investment portfolios will no doubt have already asked advice from their investment managers as to how to protect the value of their portfolio but they have wider issues to consider.

If the charity uses its investment portfolio to finance its grant funding, can it still continue to meet agreed funding programmes? If the charity’s portfolio consists of "permanent endowment", which generally prevents the expenditure of capital, will that mean there will be a shortfall of income with which to continue grant making? Similarly charities that receive grants from large grant making trusts will need to consider the likelihood of future cuts in grant income. As well as individuals and charities a number of local authorities have had deposits frozen in Icelandic banks – will they be able to continue to fund your programmes?

We expect, and have already seen the beginnings of, an increase in merger activity where small charities join with each other or larger charities with a view to surviving in a difficult market. It is important for organisations which look to rescue failing charities to undertake a thorough financial and legal due diligence exercise to ensure that the extent of the liabilities being assumed are understood. Mergers can be structured to minimise the risk to the charity which assumes responsibility for the failing charity. The costs in terms of management time and reputation mean that a merger should never be approached lightly. Where an organisation is seeking to restructure, whether or not in the context of a merger with another organisation, careful consideration needs to be given to redundancy programmes to ensure that they are conducted fairly and do not give rise to employee claims. Other risks need to be identified for example dilapidation claims in relation to property leases and potential implications from contracts or grants which contain repayment or claw back provisions.

We have for some years run a register where clients seeking merger, or collaborative working partners, express their interest on an open or confidential basis. We can then "match" interested parties. If your organisation would be interested in these arrangements or you need further information please email us at Andrew.Studd@russell-cooke.co.uk

For further information please contact:

ANDREW STUDD

020 8394 6414

For more information please visit, http://www.russell-cooke.co.uk/