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Insolvency procedures against charities

Third Sector, 21 April 2009

Sacha Pickering, associate in the insolvency team to Michelmores solicitors, offers a guide to the process

The number of charities struggling to fulfil grant conditions is likely to increase in the recession, and some will face insolvency. Many grant-making charities will be reviewing how they enforce grant conditions. This involves a balance between maximising the chance of recovering funds and helping charities to deliver services. Where a grant recipient appears to have no resources, funders may be tempted to write off the outstanding grant.

However, funding bodies are accountable to a wide range of stakeholders - from a neighbourhood trust's donors to the National Audit Office in the case of public sector grant makers. These stakeholders are likely to ask difficult questions if it emerges that the grant maker did not take all reasonable steps to recover funds in appropriate cases.

The use of insolvency procedures, such as applying for the liquidation of the grant recipient, can help. The prospects of recovering the outstanding grant monies may be limited, but that is not always the case, and the procedure has a role to play in holding the grant recipient to account.

If a charitable company enters insolvency, the person appointed to oversee the process - the insolvency practitioner, or IP - must submit a report to the Department for Business and Regulatory Reform, setting out the reasons for the failure of the organisation and any misconduct on the part of the directors. This may result in the disqualification of directors and can result in personal liability.

In any insolvency procedure it is important to keep the IP informed. The IP may otherwise rely on information from the trustees of the insolvent charity. If creditors believe there are issues that ought to be investigated, they should inform the IP as soon as possible.

- Sacha Pickering is an associate on the insolvency team at Michelmores solicitors

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