Insolvent charities and pre-pack sales

Benn Richards, senior associate with Russell-Cooke, discusses the pre-pack administration sale of a registered charity and questions whether there will be an increase in the numbers of charities failing.

What are the details of the pre-pack sale of 4Children?

4Children, a large children’s charity and the charity my firm was acting for, transferred a substantial amount of its services and its employees to other service providers immediately after entering administration. This was required to affect an ‘orderly wind down’ of its services in light of the charity’s financial difficulties and to ensure there would be a continuity of those services. The steps that were taken were also in the best interests of the creditors and reduced potential liabilities.

What additional legal considerations were there given it was a pre-pack for a registered charity?

In theory, a pre-pack of a registered charity is no different to any ‘normal’ pre-pack, in that you negotiate a deal with the purchaser prior to the company being placed into administration and effect that deal shortly after the company enters administration.

However, given 4Children’s charitable status and the nature of a charity’s business, the matter was not as straightforward. Some of the additional considerations included:

• dealing with and notifying the Charity Commission
• the very nature of a ‘not-for-profit’ business means transferring certain ‘assets’ that have little or no market value—you are effectively transferring services under certain contracts and as a matter of law there are certain ways to achieve that
• there are a finite number of willing purchasers to take on the services the charity will provide
• many of the charity’s main contractual counter parties were local authorities, which created additional considerations and challenges such as procurement issues

Given the nature of the work, did you consider disc