Governance, solvency, contracts and employment update – Bates Wells

Article date
25 March 2020
Primary interest
Voluntary sector

This morning Bates Wells Solicitors, in partnership with NCVO, hosted a very helpful webinar for charities on the impact of coronavirus. They have generously shared their slides, which can be found at the bottom of this article. What follows are the main points for trustees to consider.

Governance and solvency
  • The legal form of your charity will be particularly important at this time, so please check whether your charity is an incorporated charity (e.g. Charitable Company or CIO) or an unincorporated charity (all other forms, including charitable trusts and unincorporated community associations). If you are unsure, contact and we can advise you. If you are an unincorporated charity, then your trustees may be responsible for debts the charity cannot meet.
  • Solvency test:
    1. Your finance officer or treasurer will need to keep a watch over cashflow and the balance sheet.
    2. It is recommended that trustee meetings take place weekly during this pandemic so these conversations can take place.
    3. You may choose to have a ‘crisis team’ who meet regularly consisting of your CEO or manager, your finance officer, your treasurer and any HR trustee or staff member.
    4. Information is key at this time and for trustees to make the best decision possible with the information available. See Charity Commission Guidance CC27 on making decisions.
    5. Look at all income streams and all expenditure streams. What is the position now, what will be the position later (as far as you can see on the information available). Talk to funders, banks etc.
    6. Look at your assets, which of these can you use? Look at your reserves, this is what reserves were created for. Take a closer look at restricted funds and permanent endowments, is it possible to release these for general cash flow purpose? (Bates Wells will be providing a link to a fact sheet soon, which we will share).
    7. Keep your cash flow forecast under constant review. It will give you a best guess on your solvency/insolvency position.
    8. Create a crisis plan: what circumstances do you need to keep under review, when should you do this, at what points might you take particular action? Keep this as accurate as possible and keep it under review as a living document at your trustee meetings.
    9. Be careful you are not ‘wrongful trading’ (see the slides below for details).
Contracts, Force Majeure and the Doctrine of Frustration
  • Dust off the contracts and check the detail:
    1. What are the key obligations under the contract for each party? How will Covid-19 and associated restrictions impact upon each party’s obligations?
    2. Is there anything in the contract specifically that allows you to terminate it, i.e. an early termination clause?
    3. If the contract comes to an end, what will the effects be? i.e. do payments made need to be reimbursed? Do any materials/equipment need to be returned?
  • Check if your contract has a ‘Force Majeure’ clause and check the precise definition in your contract. It will need to specifically say ‘disease’ or ‘pandemic’ or ‘restrictions on social gatherings’. Is it possible to perform your obligations in another way? Think creatively and negotiate.
  • It is unlikely that the Doctrine of Frustration will apply, as you would most likely be expected to negotiate an alternative way of fulfilling your obligations, including delay.
  • If you are unsure, you should seek advice on the precise contract terms.
  • Dust off your insurance policies to see the precise circumstances when you can claim, i.e. does it cover ‘business interruption’. However please note that most policies will be unlikely to specify ‘Covid 19’ as a cause of business interruption.
  • Some larger insurance companies have said ‘business interruption’ only applies to flooding type situations and not a long-term pandemics.
  • In any case, if you think it could apply, be sure to notify your insurance provider as soon as possible that you are contemplating making a claim, as otherwise a claim in the future may be defeated due to inadequate notice being given of intention to claim.
Job Retention Scheme and Furlough
  • When homeworking is not an option, employers have the following options:
    1. Pay employees whilst they do not work (not sustainable in the longer term).
    2. By agreement, pay the employees a reduced pay whilst they do not work and permit them to take annual holiday on full pay despite it not having fully accrued.
    3. Lay off employees without pay – subject to the Furlough Scheme announced on 20 March 2020.
    4. Make employees redundant.
  • Full details on definitions and process can be found on the attached slides below. Please continue to check official updates, as this will continue to develop in line with government guidance.

BatesWells Coronavirus Governance, Solvency, Contracts and Employment including Furlough

Further resources