Introduction

This case study examines a situation where a charity that prevents and supports victims of child trafficking and exploitation believed they had a reasonable financial buffer, yet they faced financial uncertainty and declining reserves. This was the result of a reduction in donations, grants and local authority income, together with increased costs as a result of the economic downturn.

The charity held a fundraising event, which did not raise sufficient funds to attract the expected match funding and resulted in the trustees seeking initial advice from McTear Williams & Wood. At the time of seeking initial advice, it appeared that there would be sufficient funds to trade on if the charity made reductions in staff and other costs as a matter of urgency.

Despite implementing the reduction in costs, the trustees came to realise that prior cash flow figures were inaccurate and that significant grant monies were no longer expected to be received in time. As a result, the charity instructed McTear Williams & Wood to navigate a wind-down and liquidation process, which included guidance and support in making informed decisions about the charity’s future while also prioritising the well-being of the vulnerable individuals they served.

The challenges they faced

The primary challenge the charity faced was a significant cash flow issue. While they initially believed they had a financial cushion for a wind down of approximately 12 months, they discovered that anticipated funding would no longer materialise. While they possessed reserves, these were being steadily eroded. The charity had uncertainty of future donations or grants, which were essential to their operation. This revelation meant they would struggle to meet their obligations, particularly staff salaries, within a couple of months.

This uncertainty led to concerns about potential insolvency. The board of trustees needed to make a critical decision about whether to continue operations or initiate an orderly wind-down to avoid a more dire financial situation. Additionally, they needed to ensure that any wind-down was handled responsibly and with consideration for the services they provided to vulnerable refugees and trafficked individuals.

The prospect of insolvent liquidation loomed, compounded by the unique challenge of ensuring continuity of care for these individuals. The situation demanded a delicate balance between legal obligations to creditors and ethical responsibilities to service users.

Despite the company’s efforts to navigate the financial difficulties caused by the Covid-19 pandemic and subsequent economic downturn, the strain on its cash flow became unsustainable. While steps were taken to reduce costs and secure additional funding, delays in securing grants and a reduction in commissioned services from local authorities ultimately left the company in a vulnerable position. The impact of leadership challenges, including the CEO’s extended leave and restructuring complications, further hindered the organisation’s ability to adapt to the evolving financial landscape. As a result the trustees concluded that the charity could no longer viably continue its operations, leading to an orderly wind-down and eventual liquidation.

The process and solution we provided

Our team of experts worked closely with the trustees, helping them and guiding them through the whole process, ensuring any concerns were discussed and options clearly explained. This included:

Cash flow analysis: Our team reviewed the charity’s cash flow forecasts to understand the extent of the financial challenges and project future financial stability.

Wind-down planning: Based on the financial analysis and the charity’s concerns about future funding, we assisted in developing a plan for an orderly wind-down of operations, with the charity’s service users in mind.

Cost and timing management: The plan included strategies for managing the costs associated with winding down, including redundancy payments and operational cessation.

Service continuity: Our team advised the charity to consider identifying another organisation in a similar sector that could potentially take over some of the services they provided, which was incredibly important to them. The primary goal was to ensure that individuals requiring support would continue to receive it, even after the charity entered liquidation. We also advised the charity to immediately contact local councils to explore options for relocating or transferring the support services to other providers.

Asset and fund transfer: We suggested exploring the possibility of transferring surplus funds or assets to another charity in the same sector, ensuring that the charity’s work would still have a positive impact.

Risk mitigation: We provided guidance on minimising the risk of falling into insolvency and possible personal liability for the Trustees during the wind-down process.

Temporary trading: Our specialists advised the charity to continue trading for an additional month to six weeks. This time would be used to put support mechanisms in place for the vulnerable individuals.

Staff redundancy (phased): Individuals involved in accounting and management were made redundant first, while service-providing staff continued to operate.

The result

The charity successfully executed an orderly wind-down and ensuring a responsible liquidation in the second. Key outcomes included:

• Planned cessation: The charity ceased operations on a planned date, minimising disruption and confusion.
• Responsible management: Costs, such as redundancy payments, were managed effectively, reducing financial strain.
• Sector benefit: The charity was able to produce reports and projects based on their experiences, which could be used by other organisations in the sector.
• Peace of mind: The trustees were reassured that they were taking the right steps and making informed decisions, reducing stress and uncertainty.
• Service continuity: Mechanisms were successfully put in place to ensure that refugees and trafficked individuals continued to receive support and accommodation.
• Vulnerable individuals protected: The strategy prioritised the well-being of vulnerable individuals, minimising risk and disruption.
• Responsible liquidation: Although insolvent liquidation was necessary, it was conducted in a manner that considered the unique circumstances and ethical obligations of the charity.
• Council collaboration: Effective collaboration with local councils facilitated the transfer of support services.

Our involvement provided the charity with the necessary expertise and support to navigate a challenging situation, resulting in a responsible and beneficial wind-down that protected the charity’s legacy and positively impacted the wider sector while ensuring the continued care of vulnerable individuals.