Are your clients incurring unnecessary costs?

With the ever changing environment there is continued pressure on organisations to reduce costs, improve efficiency and ensure that funds are being utilised in accordance with the organisation’s objectives. Therefore, it is increasingly important to ensure that organisational structures are efficient and do not expose the entity to unnecessary costs.

It is not unusual for organisations to have dormant companies within their structures. Perhaps a trading subsidiary is dormant or a charitable project has been completed. Alternatively, boards of trustees may realise the charity itself is unsustainable in its current form and are looking for a merger or orderly wind-down, with the funds being reallocated elsewhere.

If trustees are planning a wind-down or merger of a charity or a non-charitable subsidiary, the practicalities and cost of closure is a critical consideration. It is likely to involve redundancies, contractual issues, potential termination claims, taxation issues and possible service transfers. There are also likely to be assets which have a value to be realised, such as stock, property, debtors or intellectual property.

Even an organisation which is dormant still poses very real risks and liabilities, such as warranties or indemnities in connection with asset disposals, contractual obligations, restricted funds, rent or pension liabilities. These all need to be considered prior to any dissolution process. Groups can be a mix of charitable and non-charitable subsidiaries and closing old trading companies ensures that trustees are managing their commercial and personal risk.

According to Charity Commission guidance, the minimum reserve that a charity or a trading subsidiary should hold is enough to meet the costs of an orderly wind-down. Streamlining the structure ensures that the charity’s resources can be applied to charitable purposes rather than locked up in meeting contingencies and holding costs.

The majority of Not for Profit organisations are subject to the same legal requirements as any other company and are not exempt from filing annual accounts at Companies House or with the appropriate Charity Commission. The costs and ongoing risks of keeping alive these dormant companies are estimated to be between £1,500 and £5,000 per entity per annum. In addition there are indirect costs, such as the management and administrative time spent dealing with the organisation, not to mention corporate memory loss as senior management teams and trustee boards change. 

Two routes to dissolution

If an organisation is dormant or surplus to requirements, whether as a result of closure, transfer, or merger of its activities, in addition to the appropriate Charity Commission considerations there are generally two methods of dissolution. One route is to apply to Companies House to strike it off the Register. The second involves placing the organisation is into Members’ Voluntary Liquidation (MVL).

Whilst a striking off application is relatively straightforward, trustees/directors are not released from their potential liabilities to the company and could be held personally responsible for discharging the company’s debts. In addition, any remaining assets or rights at the date of dissolution, including donations or legacies, automatically pass to the Crown, which is not what the donor intended.

An MVL, on the other hand, although more formal, avoids many of these drawbacks, providing more protection for both the assets and funds of the charity, and mitigates risks for the trustees. An MVL may therefore be a more appropriate method of dissolution in many circumstances. 

As the environment for charities remains challenging, there are both cost and risk reasons for simplifying corporate structures, resulting in management having more time and resources to focus on driving the main organisation forward.

If you require any further information, please do not hesitate to contact Karen Spears or your local RSM contact.