The new Corporate Insolvency and Governance Act: greater flexibility for charities

Posted: 10/08/2020

The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020 and introduces key changes for charitable companies and charitable incorporated organisations (CIOs).

Governance arrangements

The Act includes provisions which override any requirements under a charitable company or CIO’s constitution for a physical general meeting to be held (or for it to be held in any particular place). The new flexibilities under the Act, designed to allow governance requirements to be met during the Covid-19 pandemic, also include:

• electronic voting may be used, regardless of any provision to the contrary in the charitable company or CIO’s constitution (or any objection by members); and
• any members joining a meeting remotely (including from different locations) can be counted as part of the quorum, even where the constitution requires one or more members to be present in person.

These provisions apply until 30 September 2020; although they may be extended until 5 April 2021, there is not currently any notice of an intention to extend them until this date.

The Act applies retrospectively and so will validate any meetings already held since 26 March 2020, even if they were not held in accordance with the charitable company or CIO’s governing documents (eg virtually, despite there being no constitutional provision for virtual meetings) and could also validate any resolutions passed at those meetings.

For other charities which are not charitable companies or CIOs, the Charity Commission’s guidance in relation to the Covid-19 pandemic suggests that meetings may be held virtually, even where this is not permitted by the charity’s constitution, provided that the trustees determine it is in the charity’s best interests to do so, rather than to defer the meetings, and the reasoning for this is recorded. We recommend that you seek further advice in relation to this, in order to minimise the risk of a decision being held to be invalid.

Filing requirements

Secondary legislation enacted pursuant to the Act allows for filing requirements to be temporarily eased until 5 April 2021 in relation to the filing of company accounts, confirmation statements, event-driven filings (eg change of board members) and mortgage charges. Filing periods have been extended by Companies House in respect of such filing requirements.

Where there may be a requirement to file documents late with the Charity Commission, charities should contact the Commission at its dedicated email address (filingextension@charitycommission.gov.uk), setting out the reasons for this and anticipated timescales for meeting filing requirements.

Insolvency

The Act introduced a new moratorium procedure under Part A1 of the Insolvency Act 1986, which applies to CIOs and charitable companies (as well as other entities). Under the Part A1 moratorium, an entity (here a charitable company or CIO) is given a ‘standstill’ period, during which some creditors cannot take specific types of enforcement and execution action without leave of the court. The initial moratorium period is 20 business days, but this can be extended with creditors’ consent or a court order. This is designed to give financially distressed entities time to organise their affairs and to increase the prospects of a rescue being possible. However, it should be noted that financial creditors (eg lenders) are not prevented from taking enforcement action during the moratorium.

Other key features of the moratorium are that the charitable company or CIO will:

• have the ability, with the court’s permission, to dispose of property free from any charges or security interests which would otherwise apply. The creditor should be compensated for the loss of its security interest; however, this is likely to lead to creditors’ rights being prejudiced;
• be restricted from certain actions such as obtaining credit and paying pre-moratorium debts without consent of the court/monitor (see below); and
• be entitled to payment holidays in relation to certain debts, which also affect the priority of those debts during the moratorium and any subsequent insolvency proceedings. We discuss payment holidays further below.

In order to obtain the Part A1 moratorium, a court filing can be made without the charitable company or CIOs creditors’ consent; however, unless such consent or a court order is obtained, the moratorium can only last for a maximum of 40 business days.

A key distinction of this insolvency process is that during the period of the moratorium, the trustees will remain in control of the charitable company or CIO, rather than an administrator or other insolvency practitioner. However, an insolvency practitioner (a ‘monitor’) will be appointed to oversee and supervise the process. The monitor is able to end the moratorium if they consider the charitable company or CIO is not paying critical debts when due or the entity is no longer financially viable.

The new Part A1 moratorium provisions are designed to allow trustees some ‘breathing space’ to arrange the entity’s rescue before creditors (other than financial creditors) can take action. This could include, for example, sourcing new grant funding or borrowing (although consent of the monitor will be required to enter into new credit arrangements). During the moratorium, the trustees remain in control of the charitable company or CIO (albeit under the oversight of an insolvency practitioner).

The charitable company or CIO will benefit from payment holidays during the moratorium period; however, this will not apply to specified debts including the monitor’s remuneration or expenses, goods or services supplied during the moratorium, rent in respect of the moratorium period, wages/salaries, and redundancy payments. In addition, in order for the moratorium to remain in force, debts owed to financial creditors (eg loan repayments) must still be paid or else the moratorium protection may be terminated.

Trustees should note that they will not be able to apply for the charitable company or CIO’s dissolution while a Part A1 moratorium is in force. They are required to notify the monitor if, during a moratorium, they recommend a resolution for voluntary winding up to be passed.

It should be noted that Part A1 moratoriums do not apply to charitable companies or CIOs which are registered housing associations (ie private registered providers of social housing in England or registered social landlords in Wales). This is because they are subject to separate administration/moratorium provisions.

Trustee liability

In some circumstances, trustees of a distressed charitable company or CIO could face potential personal liability for wrongful trading (where they allowed the charity to trade while insolvent) or fraudulent trading (carrying on trade with the intent to defraud creditors or with any other fraudulent purpose). Fraudulent trading is also a criminal offence which can attract a fine or potential imprisonment for up to ten years. However, courts are generally reluctant to find (unpaid) charity trustees personally liable, provided they have acted honestly and reasonably.

The Act also introduces a suspension on personal liability for directors in relation to wrongful trading until 30 September 2020, where they have continued to trade through the pandemic. The court is to assume that the director/trustee is not responsible for any worsening of the entity’s financial position or impact on its creditors.

If trustees find that their charitable company or CIO is in financial distress, they should:

• ensure they receive regular, up-to-date financial management information and scrutinise and challenge this appropriately;
• analyse and review sources of income and planned and proposed expenditure and consider what options may be available to maintain the entity as a ‘going concern’;
• keep a full written record of all decisions and actions taken through any distress or closing down period and the rationale for these;
• ensure they understand the test for whether their charity remains a ‘going concern’; and
• seek professional advice from an insolvency practitioner as soon as possible.

If the charitable company or CIO does need to be liquidated or wound up, the trustees’ primary duty is to pay the entity’s debts.

It may also be appropriate for the trustees to consider whether merger with another charity, with similar charitable objects, might be a rescue mechanism available to the charitable company or CIO.

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