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.
How can we help?
It is crucial that charity trustees undertake their duties diligently. MacRoberts advises a number of third sector clients in relation to their trustees' duties.
Please do not hesitate to get in touch with our Charities and Third Sector team if you have any queries regarding your charity.
