Not long ago, a community benefit society, Hastings Pier Charity, went into administration. It was the first example of administration for a community benefit society – often known as a bencom – and it produced a slightly startling result.
The charity’s main asset, the pier, which had received £12.7m of Heritage Lottery Fund money, not to mention well over £1m of other funds, was sold to a private businessman, Eastbourne hotelier Sheikh Abid Gulzar, for £50,000.
The administrators turned down a bid from a local group, the Friends of Hastings Pier, which would have kept the pier in community ownership, and had raised more than £500,000 to do so.
It raises a lot of questions about whether there is sufficient protection for charities in administration, and particularly whether there is strong enough regulation around Hasting Pier Charity’s particular legal model – the charitable community benefit society. There appears to be a strong argument, in both cases, that there is not.
History of the charity
Hastings Pier Charity existed to first restore and then run the town’s pier, which burned down in a fire in 2010. It is the successor to a registered charity, Hastings Pier and White Rock Trust, which deregistered and converted to a charitable bencom in 2013. This took it off the register of charities run by the Charity Commission, and out the Commission’s regulation. Instead its registrar is the Financial Conduct Authority, and it appears to have no primary regulator.
It did so in order to allow local people to buy shares in the pier. Bencoms, unique among charities, are permitted to issue interest-bearing shares, on a one-shareholder, one-vote basis – a model which has been used successfully to raise the cash to buy community assets up and down the UK, most notably shops and pubs in rural locations, where they were at risk of closure.
The charity sold shares worth £600,000 - a successful campaign. Sadly the shareholders have now lost their money, although I suspect most of them never expected to get any cash back anyway.
The charity planned to first restore the pier and then run it as a community resource. But it proved a difficult process. Even though the pier itself won awards and was widely praised, restoration cost more than expected, and the charity struggled to become a going concern. There were various financial challenges which made this tricky.
The pier appears to have suffered from giving fatigue. It had already required a huge amount of charitable money to keep going. In addition to the HLF money, and the community share issue, other charitable funders had made various grants and loans. Getting the capital investment needed to build a sustainable business was proving hard, and it may have required quite a different skill-set from that needed to get the pier rebuilt.
The pier charity estimated it would need to raise another £800,000 to run it sustainably, which it struggled to find, and it went into administration.
What happened in administration?
Administrators Smith & Williamson worked with the charity to help it keep the doors open, but in the end it didn’t prove viable. The charity has since said it was reluctant to go back to local people to seek yet more funding, but given the amount of money the Friends of Hastings Pier were able to put together, it does seem possible this was a mistake.
The pier’s main creditor was the HLF, which stepped in and agreed to fund the pier through an interim administration period to find a stable revenue model. The HLF, it appears, was getting fed up with pouring money into a black hole, and just wanted the pier off its books.
It’s easy to see why a sale to a commercial operator was the obvious move. While the local operation might have been able to access more money, it was hastily cobbled together and was still trying to establish leadership. It would have taken time, and probably some hand-holding, to get them into a position where they could take the pier on.
We know that this is a common problem when it comes to community ownership of an asset. The community is normally more than able to run an asset better than a private operator, but skilling up and building consensus is far from easy. To someone looking to solve the problem swiftly, community ownership must look a tricky option.
Gulzar, on the other hand, had run a pier before, and he had the cash to hand. He must have seemed the simple answer.
A charitable asset in private hands
The problem is that a charitable asset, paid for with public money, is now available for a businessman to make money out of. It doesn’t feel right. It feels as if the community put in the hard yards, and a speculator is now able to profit.
On the other hand, the administrators acted properly. The process is rightly designed to protect the creditors, first and foremost, and the main creditor here was the Heritage Lottery Fund, which basically got its wish. It seems hard to square the circle.
There are attractions. Most notably, Gulzar runs the business at his own risk, so if it goes wrong there's no public loss. On the other hand, decisions about a community resource now rest in his hands, rather than those of the people. That's the problem.
Luke Fletcher, a partner at Bates Wells Braithwaite, says that it is very likely that everything has been conducted properly, especially if it is with the blessing of the HLF. However he also says this raises the question of whether there should be a separate administration process for charitable organisations, with more emphasis on ensuring that asset-locked resources, where possible, end up in the hands of other charitable organisations.
“This raises all sorts of questions for me,” he says. “It raises questions about whether there should be separate rules for assets of community value.”
Such rules already exist for the sale of assets which aren’t in administration. A series of protections for assets of community value exist in the Localism Act 2011, allowing communities time to put together a bid, but it seems that they may not apply in this context. Arguably, they should.
Lack of transparency
The case of Hastings Pier Charity also raises the broader question of whether there are problems around its legal model.
By becoming a bencom, rather than a registered charity, the pier seems to have been stripped of many of the protections you would expect a pier to have. Rather than the close scrutiny you might expect the Charity Commission to have applied in these circumstances, there appears to have been polite disinterest.
The Financial Conduct Authority is, unsurprisingly, less interested in charities than is the Charity Commission. No one appears to even know how many bencoms have charitable status, because the FCA is not keeping track. It does not even know how many bencoms there are in the first place, charitable or otherwise.
Co-operatives UK – the relevant infrastructure body – thinks that about 500-700 charitable bencoms exist, which would suggest maybe £1bn of charitable assets are not subject to any proper scrutiny.
Their documents are not readily available on any register – neither Companies House nor the Charity Commission – although you can get them from the FCA for £12 each.
Bencoms do, to be fair, have an excellent alternative system of scrutiny, because of their membership system, but it shouldn’t a substitute for regulatory scrutiny.
If we compare the regulation of bencoms with the excellent system of scrutiny which exists for ordinary registered charities, it seems woefully inadequate.
It’s just the latest in a series of instances where charitable assets seem to attract very different levels of scrutiny depending on how and where they’re raised, what peculiarities of legal structure exist, and how and where they’re spent. It feels as if the rules have failed the people of Hastings, and everyone who worked hard to restore its pier. It’s another instance of how the charity regulatory framework seems in need of significant changes.