Charity Insolvency and the Community Good

John Picton

This is a ‘throwing it out there’ piece. Thoughts remain in need of refinement.

Charity insolvency has never been the focus of sustained policy attention. Governed alternatively by company and trusts law, no tailored regime exists. Although there has been a lack of interest in charity insolvency, the picture is brighter elsewhere. In the context of commercial insolvency, a considerable body of critical literature has developed, emphasising the public interests at stake in winding up, and the importance of corporate ‘rescue’ where it is possible. This approach is self-consciously communitarian: rather than looking at insolvency as a legal event upon which property is distributed to entitled creditor, it looks at the impact of closure on wider societal interests.

In assessing the law of charitable insolvency, this communitarian approach is uniquely appropriate. Charities are, by their nature, community organisations. At one level, they might be staffed by local community volunteers, and at another, they might work with the community to either improve it, or enhance its spirit. This analysis take the communitarian vision as has developed in the context of commercial failure and adapts it to critique the law as it applies to charities.

1. Community and Contract

In sharp distinction to most instances of commercial insolvency, charity trustees risk personal insolvency where their organisation becomes insolvent. The most common cause of financial crisis occurs where trustees enter into loss-making contracts. Insolvent trustees are treated as having contracted in their own names, and so they are liable for the loss. From a communitarian perspective, this is problematic. While the ordinary law of contract might be appropriate to govern self-interested individuals taking risks in pursuit of private profit, it is misplaced in the context of volunteers. At the level of principle, it might be said that trustees, acting selflessly, ought not to suffer the consequences of bad bargains, when they do not gain from good ones. And at the level of policy, it might be said that that fixing trustees with contractual liability might deter them from taking office; other than a sense of charity, they have no positive incentives to become trustees.

2.  Community and Property

Where a charitable corporation becomes insolvent, its community impact will be upon employees and the local the economy. In parallel, the closure of charities will also have a negative community impact. The loss of their mission will negatively alter the community around them. It is possible that there will be a sustained attempt to manage the charity ‘business’ so that it will stay open. In this regard, the application of commercial principles is appropriate; the law should strive to keep open charities, just as it strives to keep open commercial entities. It is beneficial for the community if both circumstances.

Yet there is a further and problematic issue in the context of insolvent charities. In the case of both trusts and incorporated charities, insolvency might lead to charity assets being dispersed to the creditors. This is again an application of commercial principles: if it is not possible to save an organisation, then its assets should be distributed according to the legal entitlements of creditors. But this might be problematic from a community perspective. Very often, charity assets will themselves be of a community value, such as an artistic collection, a village hall, or sporting facilities. In this context, there is a further community stakeholder unacknowledged by the law: the public at large. The straightforward application of commercial principles in favour of creditor payment leaves no space for consideration of the community value of the charity property.

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