Case Study: National Charity

A national charity that had been in existence for many years found itself and similar charities in a state of dwindling incoming resources but every growing outgoing resources.

The trustees took the decision to merge a number of these charities to allow the combined entity had the best chance of long term survival. The trustees also knew this combined entity would have much greater weight in its area.

Despite the depth and breadth of financial and business expertise on the board of trustees, the charity began to be unable to see it had a long term future when its defined benefit scheme was revalued to a level that saw its shortfall rise to an insurmountable position.

The charity took every step possible to deal with its deficit, very conscious that it did not want to let its pensioners down. Every possible option was examined with its pension scheme trustees and actuaries. However, when the deficit got to almost double its incoming resources, it was clear that there was no feasible plan that could be agreed with its pensions scheme trustees to either repay the deficit or secure the best outcome for pensioners.

Faced with the prospect of potential closure the trustees searched around for advice on charities and pension scheme deficits. After speaking to a number of Insolvency Practitioners they realised there was almost no expertise in the area of charities or with pension schemes.

The trustees eventually approached Kevin Lucas of Lucas Johnson and a 6 month project ensued to implement the UK’s first charity pension scheme rescue involving the Pension Protection Fund.

The position presented to Kevin Lucas was that the charity was faced with the prospect of being unable to continue as a going concern and closure was the only option. The trustees believed closure would happen in approximately 12-18 months, but a review by Kevin Lucas discovered that trading for 12-18 months could not happen without the trustees breaching their statutory duties or the provisions of the Insolvency Act. This news came as a shock to the board, but it is unlikely any trustee of any charity will be familiar with the Insolvency Act and its consequences or how it applies to charities.

Clearly closure was something no stakeholder wanted to happen given the closure would have a significant impact on the charity’s 1 million users. A Company Voluntary Arrangement (CVA) was however a feasible way out of the situation, allowing the charity to continue under the control of the trustees without the burden of the pension scheme deficit.

Due to the nature of a charity decision making can be slower than in a normal commercial business, however the board organised itself by making a committee to deal with the matter of the CVA. This made things much smoother and quicker than it may otherwise have been.

During the ensuing 6 months many meetings were held with key stakeholders. Negotiations were complex and lengthy, however after a lot of hard work from all concerned a CVA was successfully implemented and the charity will continue to serve its users for many years to come and the jobs of all its members of staff were preserved.

The CVA was only possible because the charity would have faced certain closure without it being put in place. Unlike many CVA’s it dealt with many different classes of creditor in different ways, thereby preserving the goodwill and good reputation of the organisation with all concerned.

For Lucas Johnson it proved a new challenge because the organisation it helped used Plain English in its communications and wanted Lucas Johnson to do the same. It also wanted its members to be considered and therefore the reports and other documents produced by Lucas Johnson in ways that were new and never before considered in the Insolvency industry.

It was fantastic outcome for all concerned certainly cemented Lucas Johnson’s position as experts in the area of charities and not for profit organisations.