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CICs have become a vital part of the UK's social enterprise landscape. It is no wonder this has happened because they are specifically designed to operate for the benefit of the community rather than private profit, so they can be a real asset to their local area. They provide employment and often have a core cause that can be a real force for good.
Despite having the best of intentions, though, insolvencies do happen, and, although overall CICs do tend to dissolve a little bit less than other businesses (possibly mostly due to the non-profit status), there was a sharp jump in 2022, and the number is climbing as far as we can tell. Add to this the increase in registration of CICs in recent years, and it seems like we are going to see more of them going through insolvency.
Well, the short answer is they become insolvent for all the main reasons any business does when it struggles financially. However, they can also have added specific CIC pressures on their finances.
One major contributor to financial strain within CICs is the rise in staff costs. Recent increases in the National Living Wage and employer National Insurance contributions have significantly impacted many of them. CICs can sometimes be dependent on more staff than other businesses. This is understandable because delivering community services effectively can be more workload-heavy than many purely commercial services. Clearly, there will be a lot of variances in the number of employees in a CIC depending on their core services, but employment costs are certainly a factor if they have employees.
There is further pressure caused by the actual practicalities of their operation for a lot of CICs. Many operate physical premises, with community cafés or centres, and social club style businesses being a good example. The rising cost of running these premises can quickly dig into the already slim profit margins. In fact, the not for profit, principle and the desire to provide services at a low cost can work against the CIC when times are hard.
Many CICs are also partially funded by income streams such as public sector grants and corporate sponsorships. The competition for these is high, and if they are no longer available, it can leave a big hole in the accounts. This, coupled with the reduction in community generosity when times are hard, can severely impact CICs. Even the community goodwill, which many CICs heavily depend upon, can diminish significantly if the economy or public opinion changes.
Yes, in some ways, no, in others. The basic definition of insolvency is that the company is unable to pay its debts as they fall due or that its liabilities exceed its assets. This is known as the cash flow and balance sheet test. In that respect, insolvency is the same for a CIC as it is for anyone. For most CICs, this will come down to the sad fact that they can no longer pay the bills and staff.
Where things can be very different is when it comes to the details of how the insolvency is implemented. CICs, for example, will frequently operate with a specific mandate called an ‘asset lock’ in place. That means the assets need to be assed to see if they can only be used for some specific purposes. This can be a very complex process, so you are going to need an expert in the area of insolvency to deal with it to make sure you stay compliant.
CICs also need to be handled differently from a charity. While CICs and charities may share similar altruistic goals, charities operate under a totally different set of legal requirements from a CIC. They are regulated and overseen by the Charity Commission, and while the definition of insolvency is still the same, they have very different rules when it comes to how the insolvency is handled. You must be very careful not to confuse the two.
As you can see, if you think you are looking at insolvency for a CIC, you need to contact us as soon as possible so we can see where you are with your finances.
Employees of CICs facing insolvency are usually eligible for statutory redundancy payments if they meet the criteria. Part of our role when we are managing a CIC's insolvency will be to guide everyone through the process, as well as clarify what can be claimed and where to claim it.
Generally, eligibility includes:
Employees who are eligible under these conditions should be able to claim statutory redundancy payments, unpaid wages, accrued holiday pay, and notice pay. Claims are usually processed through the government's Redundancy Payments Service.
The Directors of the CIC may also be able to claim redundancy, but the claim can be an awkward and complex process, so speak to us about this.
We have more information on redundancy for directors on our website.
Given the complexity of CIC insolvencies, directors and management really should seek professional guidance early. If you leave it to the last moment, you may limit your options.
Being aware of the potential pitfalls and seeking timely intervention may significantly enhance the resilience of CICs. It could even allow them to continue serving the communities they are so committed to helping. Specialists like Smart Business Recovery can offer strategic insights into options such as restructuring, voluntary liquidation, or rescue plans. If insolvency is on the cards, though, we are there to ensure compliance and minimise disruption.