Charity insolvency

In November 2012, People Can, a charity employing around 300 people, went into administration after being overwhelmed by a pensions deficit of over £17 million. With charitable donations and public funding reducing, they will not be alone, as many charities face an uncertain future.

The risk for Trustees of personal liability will often influence the decision to incorporate (or consider becoming a Charitable Incorporated Organisation in line with the new legislation). Registered companies and CIOs are separate legal entities and creditors cannot normally pursue Trustees personally for the charity’s debts (provided of course the Trustees have acted prudently and lawfully). Trustees of charities that operate as unincorporated associations or charitable trusts may be seen to face a greater risk, however, as if the charity had insufficient resources to settle its debts and liabilities, the Trustees could find themselves personally responsible for the shortfall. The Spirit of Enniskillen Trust was an unincorporated association set up following the Enniskillen Bombing in 1987. When it resolved to wind itself up in March 2013, it had a pensions deficit of £250,000 but assets of only £150,000. The Trustees will be personally liable to meet that shortfall if it is pursued.

If insolvency looms, the focus of the Trustee’s duties shifts towards the creditors. Directors of an incorporated charity, as with any company, can be ordered to contribute to the assets in a liquidation if they trade “wrongfully”, by allowing it to trade on in circumstances where insolvent liquidation cannot be avoided. However, whether the charity is incorporated or not, Trustees have a duty to act prudently to ensure the charity is and will remain solvent, and to avoid placing the charity's assets or reputation at undue risk. Ensuring there are effective financial controls in place will go a long way towards complying with those duties. Accurate and reliable financial information, cash flow forecasts and budgets and regular audits are essential to identifying and addressing financial concerns at an early stage. For larger charities, particularly those concerned about the potential for longer term liabilities (such as pension deficits), obtaining professional advice and maintaining a dialogue with major creditors, including any pension trustees, is key to protecting the assets of the charity and balancing the interest of it with its creditors.

The Charities Commission has issued some helpful guidance on Managing Financial Difficulties and Insolvency in Charities.

How can we help you?

If you would like to discuss any issues raised by this article, please do contact Lino Di Lorenzo on 01223 222311 or [email protected]