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No trustee wants to find their charity at risk of
insolvency. Unfortunately, it can and does happen, and trustees
must be live to the possibilities of insolvency and take
appropriate advice at the first sign of financial
difficulty.
We are surrounded with stories about the cost-of-living crisis,
rising inflation and interest rates. It is a difficult economic
climate for many businesses, charities included.
A charity’s trustees are responsible for the management and
control of the charity. They must make all key decisions involving
the charity and are accountable for the governance of the charity
and its overall strategy. That includes ensuring that the
charity’s finances are managed effectively.
No trustee wants to find their charity at risk of insolvency.
Unfortunately, it can and does happen. Even minor cash flow issues,
if not managed properly, can quickly lead to difficulty in making
payment of debts as and when they fall due. Trustees must be live
to the possibilities of insolvency and take appropriate advice at
the first sign of financial difficulty. If they don’t act
quickly and decisively, the repercussions for the charity and the
trustees can be severe.
Identifying a financial problem early will give a better chance
of a good outcome. However, in some cases, insolvency cannot be
avoided.
Process
If they are owed money, a charity’s
creditor could decide to serve a statutory demand
for payment. On expiry of that demand with no payment and no
dispute to the debt, the creditor can lodge a petition at court
asking that the charity be put into liquidation.
If the charity’s trustees want to put the
charity into liquidation, they must first discuss matters with an
insolvency practitioner and pass a resolution to confirm their
proposed course of action. The charity also needs to seek consent
from OSCR and apply to the court to appoint a liquidator.
Impact
An insolvency situation will vary depending on the legal
structure of a charity and whether it is a company or
unincorporated.
An Unincorporated Charity has no limited
liability. This means that trustees can potentially find themselves
liable for the debts of an insolvent charity. A creditor could
potentially raise an action for payment against an individual
trustee if the charity has no funds available. If the trustee
cannot pay the debt, the creditor could take steps to sequestrate
(bankrupt) the trustee.
With charitable companies such as a Charitable Company
(Limited by Guarantee) and a Scottish Charitable
Incorporated Organisation (SCIO), trustees will not
normally have personal liability for the charity’s debts
– but there may be exceptions if the trustee has given a
personal guarantee, traded whilst insolvent or undertaken
fraudulent activity.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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