Analysis: Charity Business - When outsourcing goes wrong

When the financial outsourcing company Charity Business collapsed earlier this year, scores of charities were left without the data needed to run their organisations. David Ainsworth reports

Charity Business' headquarters
Charity Business' headquarters

On 12 January, Charity Business, an outsourcing company offering financial services to charities, sent an email to its estimated 200 clients saying that it was closing with immediate effect. The move came as a bolt from the blue for many of its charity clients, which relied on it for payroll, bookkeeping and accounting services.

Paul PalmerUntil then, all appeared to be going well for the Swindon-based company set up as CBusiness Limited in 1999 by Mark Freeman, a former chair of the Charity Finance Directors' Group. The charity's website boasted clients including local Age UKs and the Bank Workers Charity, and it had attracted as directors the well-respected names of Steve Round, chair of the Big Issue, and Paul Palmer (right), professor of voluntary sector management at Cass Business School.

But behind the scenes, the company had problems. The most recent sets of accounts filed at Companies House for the year to September 2010 show that CBusiness and its holding company, CBusiness Holdings, set up in 2003, had racked up losses of £310,000 and £258,000 respectively over the course of their existence.

Palmer, who sat on the board between January 2009 and May 2010, says Charity Business appeared to be well-run. "At the time it was a good organisation with a long-standing track record," he says. "It's not obvious what went wrong."

Peter GothamPeter Gotham (right), principal at the chartered accountancy firm Macintyre Hudson, believes the business might have attempted to expand too fast and undercharged for its services, which ultimately led to its failure. "It might simply not have charged enough to make a profit," he says. "Another possibility is that too much money went out of the business to shareholders."

There was dissatisfaction among some of its clients. Third Sector has spoken to a number of Charity Business customers and their complaints include money being held in company accounts for long periods, mismanagement of payroll and failure to claim Gift Aid on their behalf.

Fiona BlackeFiona Blacke (right), chief executive of the National Youth Agency, says the service her charity received was so bad that it had decided to stop using Charity Business after only a few months. "Charity Business had provided a terrible service," she says. "We were already going to leave it when we received information telling us it was going to shut down."

Sources close to Charity Business say the problems came to a head in October following complaints from senior staff and investors about managing director Freeman, who, with his wife Val Austin, owned 46 per cent of the business. The complaints led to the company's auditors, Haines Watts, producing a report that was submitted to the board. Round says the report referred to several examples of mismanagement and led to Freeman leaving his post as managing director later in October. Freeman stepped down as a director, but remained as a shareholder. Freeman is now taking Charity Business to an employment tribunal and a hearing into his case is due to be heard in Bristol on 9 March.

At that point, negotiations took place to sell the business to Nelson Wootton, an entrepreneur. However, the deal fell through, and Austin went into the office on Tuesday 10 January to tell staff the business would close.

Michael Wass, a senior accountant at Charity Business, says former staff feel let down by Freeman and Austin, and that charities will suffer because of the disorganised way the organisation was wound up.

"A lot of data has gone missing and it will be difficult and expensive for charities to reconstruct it," he says. "Some charities are racking up tax bills as we speak because they can't file their tax returns."

Blacke says she agrees that many charities will find themselves in difficult positions, although her own organisation has not suffered too much because it had already decided to leave.

But she says the move won't put off her charity from outsourcing.

"We have successfully outsourced our HR and IT," she says. "We have already outsourced our financial services to another company, which is doing a good job.

"This was a failure of procurement on our part, not of outsourcing."

Third Sector has made repeated attempts to contact Freeman and Austin for comment but has not received a response.

WHAT HAPPENED TO THE DATA? On the hunt for the charities' accounts

One of the most mysterious aspects of the closure is what happened to the data managed by Charity Business.

It became obvious to affected clients immediately after the closure that they would require their documentation back. In the days around the closure, staff from Charity Business began the task of filing data stored at their offices in Swindon to ensure clients could access it easily. But the offices were shut suddenly.

Fearing that it would not be able to access its data, Cambridge House, a south London-based community organisation, sent an employee to Swindon to collect its data. Cambridge House says that a Charity Business employee handed over two hard drives and a CD containing data belonging to 48 clients along with keys to a lock-up in Swindon where hard-copy data was stored.

A spokesman for the Information Commissioner's Office indicated it was questionable under data protection rules whether this information should have been handed over or whether the charity should have accepted it, but Clare Gilhooly, chief executive of Cambridge House, defends taking the data. "We took a split-second decision to take it because we thought it was potentially the last chance to protect our data," she says. "We also hoped it might be best for the others."

The charity has since arranged for most organisations to collect their payroll data and for hard copies of this year's information to be collected from Charity Business's storage facility.

It has since emerged that copies of previous years' data are being stored by the Gloucester-based storage company Ardent. The company says the files will be held until an official administrator is appointed.


WHAT HAPPENS NEXT? Charities face problems waiting for liquidation

Charity Business comprises a holding company, CBusiness Holdings, and two subsidiaries, CBusiness and CBusiness Consultancy.

Mark Freeman The two subsidiaries have no remaining directors after Mark Freeman stepped down on 31 October and Val Austin on 9 December.

Under the Insolvency Act 1986, directors are required to remain in place if they know a company is to cease trading and be placed in liquidation. But a spokesman for Companies House said that directors were rarely pursued by the authorities in instances where they stepped down before a company was officially wound up.

According to Companies House, CBusiness Holdings has two remaining directors: Steve Round and Bruce Keith, the chairman. Round told Third Sector that CBusiness Holdings had been placed in voluntary liquidation by the directors, in a process believed to have cost them personally between £2,000 and £3,000. Keith was not available for comment despite repeated attempts to contact him.

A statement of affairs submitted to Companies House shows that RSM Tenon has been appointed as the liquidators. The statement also shows that it does not expect to realise any value for creditors from the holding company's assets.

CBusiness and CBusiness Consultancy are not yet in liquidation. But sources close to the holding company say that, immediately before going into liquidation, it filed a petition with the courts requesting that the two subsidiaries also be placed into compulsory liquidation.

Although this petition has not yet been officially recognised by the courts, it is unlikely to be challenged.

This means that the business, assets and liabilities of the two subsidiary companies are likely to end up in the hands of the Official Receiver, a court-appointed official, in the next two months.

The Official Receiver will then go about the business of winding the company up, including recovering any remaining data belonging to charities. It is impossible to say how long the administration process will last: however, the complexity of the two companies' affairs means the process could run into years.

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