How to protect your charity in times of financial difficulty

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Trustees of charities facing financial problems should make robust plans to help prevent the organisation becoming insolvent – and to protect themselves from being liable for any debts.

Government spending cuts, a reduction in individual and corporate giving, low interest rates and more stringent procurement practices are taking effect with increased numbers of charities finding themselves becoming insolvent. If this happens and finances are not managed properly, trustees could find themselves liable. Trustees’ liability is determined by the way the charitable organisation has been set up. For example charitable trusts and associations cannot be technically insolvent themselves and so where there are insufficient assets to meet liabilities, the trustees must make up the shortfall.

A much broader range of options are available to incorporated charitable companies and their creditors. These types of charity can go into liquidation, administration, have receivers appointed or propose a voluntary arrangement. Because charitable companies are liable for their own debts, creditors would not usually have recourse to trustees for any shortfall. However, trustees should not assume blanket immunity.

Andrew Cawkwell, Banking and Restructuring Partner at Muckle LLP, said: “During the ‘twilight period’ – the time leading up to the point of insolvency – trustees need to seriously consider whether the charity is financially strong enough to sustain operations.

“When it becomes apparent that insolvency is unavoidable, the fundamental duty of trustees shifts from protecting the charity’s assets to acting in the best interests of its creditors. If they fail to take all reasonable steps to minimise their losses, then trustees may be held personally liable for the charitable company’s debts.”

Steps trustees can take to demonstrate they are acting in the interests of creditors include:

1) keeping up-to-date financial information;

2) seeking professional advice where required;

3) holding regular board meetings;

4) keeping written records of decisions made by trustees; ensure liabilities are not increased by incurring additional creditors;

5) considering negotiating new repayment terms for loans; and

6) formulating and following a clear plan.

Andrew added: “Once trustees have recognised the issues, timing is crucial and it is often necessary to take several courses of action at the same time, such as improving income whilst exploring sales of assets, merger or other restructure. Any turnaround plan will take time and trustees should be looking several months ahead.

“Good governance, proper financial management and taking appropriate professional advice can minimise the risk of personal liability for trustees.”

For more information, help or advice please contact Kelly Jordan on 0191 211 7899.