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As an insolvency practitioner, our duty is to look at all options when a charity is struggling financially. Sometimes people assume our only role is to close the charity, but in fact, we look at all options to see if there is a way for the organisation to survive. Sometimes that is possible, and sometimes we need to face the unfortunate truth that the charity is not financially viable and needs to go the insolvency route. When that happens, it’s vital that we look at several key issues as soon as possible so that everything is legal and follows the correct process.
One of the most complex of these is restricted funds. We are happy to advise on other areas, but for no,w let’s look at how restricted funds can and can’t be used.
The first thing to look at is what are, and are not, restricted funds. For convenience, let’s just focus on what restricted funds are firs,t and then we can go on to look at what you can and can’t do with them.
Restricted funds are donations or grants given to a charity with specific conditions attached. These restrictions mean the funds can only be used for a particular purpose or project, as outlined by the donor or funding body.
So, what that means in plain English is that these particular funds are ringfenced and can only be used for the purpose they were meant for.
Some common examples of the kind of donations that create restricted funds could include:
These are just a few examples, but they give a good idea of the kind of charitable aims surrounding restricted funds.
Once they are designated as being for a purpose, restricted funds cannot be used for any other purpose. That means they must:
The charity doesn’t usually need to go such lengths as keeping separate bank accounts or similar, but they must be able to account for the funds. So, records must be totally transparent about how they are used, where they are held, and they must also be clearly and accurately identified in the charity’s accounts.
The temptation here is to give an emphatic ‘no’ to using restricted funds for any general purposes. In the letter of the law, this is absolutely the case. Restricted funds are ringfenced for a specific use. However, as always, things are not quite as clear-cut as we would all like.
The first thing to say is that anyone involved with a charity that is using restricted funds for any purpose that raises a question about ‘legitimate use’ needs to be very careful before they proceed. Check fully and take expert advice about whether the use you intend to put them to will be allowable. If you don’t confirm, and it turns out later that you misused restricted funds, you could find yourself in some very hot water.
That said, (and after repeating our usual guidance that every situation is different and you should always seek professional advice when you need it), here are a few thoughts that may help.
Restricted funds will generally fall into two broad categories.
There is sometimes a slightly grey area around what is covered by the restriction on the use of the funds, though. Unclear or non-specific descriptions can be difficult to deal with and may allow for wider use. Again, it is vital to check how you are interpreting the donor's wishes.
The short answer is, technically, no!
Restricted funds are, by their very nature, restricted to the purpose for which they were donated. Therefore, in practice, they are often not available to help pay general debts, no matter what the circumstances.
What that means in practical terms is that if a UK charity becomes insolvent (unable to pay its general debts), the trustees cannot automatically use restricted funds to cover the charity’s liabilities. Restricted funds remain protected and ring-fenced, and using them improperly could constitute a breach of trust and charity law.
However, in some circumstances, as we mentioned earlier, it could be possible to change their use. You could, for example, ask the original donors to allow redirection of the funds, or it may be that the description of how they are to be used has some leeway in it.
Alternatively, legal permission could, in theory at least, be sought to lift or alter the restrictions due to exceptional circumstances. However, typically this will only be granted if the original charitable purpose is no longer possible or practicable and no other options are available that meet the wishes of the donor. A good example of when this is more likely to be acceptable legally is if the funds were intended for something that is difficult to define or no longer exists in the same form. Times change, and the use of the funds may well need to change with them. If that can be proven, then the charity could look to a change of purpose. However, it will need to be a solid, legitimate reason.
Restricted funds in UK charities are protected and not freely accessible for any other purpose, and that could include paying debts during insolvency. Trustees must respect the original purpose and seek appropriate approval before attempting to redirect restricted funds for insolvency purposes.
Misusing restricted funds in a charity during insolvency, or for any other reason, is considered a serious breach of trust and charity law. It can result in significant consequences for the trustees or the charity officers involved, including legal action against them, resulting in criminal charges or becoming personally liable to repay the funds.