Charities and Insolvency

In our latest blog, our Head of Charities, Jenny Simpson, provides some helpful suggestions for Trustees;

Trustees give their time and skills freely to the charities they work with, so it is important that they have an awareness of the complexities they face if a charity experiences financial difficulties and potential insolvency.  In extreme circumstances, they may become personally liable for the charity’s debts and obviously they will wish to avoid that situation!

It is imperative that Trustees receive regular financial information so that they have a good understanding of the charity’s financial position.  This will include management accounts showing the actual performance as well as budgets and forecasts showing what is expected to happen in the future.  This will put Trustees in the best position to spot future problems at an early stage and take remedial action be that attracting additional income, reducing costs or even seeking to merge with another similar charity.

Insolvency occurs when a charity is unable to pay its liabilities as they fall due or when its liabilities exceed its assets (a negative balance sheet).  This does not automatically mean the charity must cease operation but the Trustees must have a clear and achievable plan of how the charity can move forward and return to a solvent position. 

In the case of an unincorporated charity, such as a Trust or Association, the charity has no separate legal identity and the Trustees may be personally liable for any shortfall.  In the case of an incorporated charity, such as a company limited by guarantee or a SCIO, the Trustees have additional protection but may still be personally liable for any debts incurred after they knew, or reasonably should have known that the charity was insolvent.  At the point the charity becomes insolvent the Trustees responsibilities and duties to the charity and its beneficiaries effectively switch and become responsibilities to the creditors.

Regular accurate financial information is the best way of ensuring a charity remains solvent but we would always recommend that Trustees seek advice from a qualified Insolvency professional at an early stage if they have any concerns.

This blog is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as a substitute for taking professional advice in any specific situation. Wylie & Bisset LLP (and its subsidiary Wylie & Bisset (Audit) Limited) will accept no responsibility for any actions taken or not taken on the basis of this blog. If you would like further advice or would like to discuss any of the issues raised in the blog then please get in touch with your regular Wylie & Bisset contact or use the contact form on our website.