In this article we remind readers of the risks faced by charity trustees and the need for them to know and understand the law relevant to their sector – but more specifically this article focuses on the law in relation to insolvency.
We have previously considered the effect that the recession had had on charities, with regards the withdrawal of grants and reduced donations as a result of households and corporations tightening their own budgets and cutting back on charitable giving.
The more recent upturn in the economy can, one would hope, only be good news for those reliant on donations and grants but a note of caution should be sounded, as businesses are more likely than ever to run out of cash and become insolvent in a growing economy than in a falling one. The same applies to charities.
The Charity Commission has previously warned trustees of their dual duties to both protect the assets of the charity, while also ensuring the assets are used to further the purpose of the charity for the benefit of the public.
Trustees of an unincorporated charity, as opposed to directors and employees, including managers of a charity, carry potential personal liability for the liabilities of the charity in excess of its assets. In contrast, charity trustees of incorporated charities do not face personal liability for the charity’s debts.
All trustees must balance the careful financial management and legal compliance of the charity while exercising independent scrutiny of the executive. They, as must as the executive itself, must maintain minutes of their meetings and in any insolvency event, e.g. the charity entering into administration, liquidation… these will be reviewed.
All trustees should have a basic knowledge of insolvency law, and not permit their charity to trade in circumstances where it cannot reasonably avoid insolvent liquidation, i.e. would a reasonable person looking at the charity believe that it would so avoid liquidation or is the financial situation and creditor pressure such that short of a significant increase in funding the charity will be forced to enter a formal insolvency event. They should appreciate the fiduciary duties which they owe to the charity and the consequences of breach. They should further, be prepared, where needed, to take and act upon professional advice at an early stage, in particular in relation to the solvency of the charity and whether it should continue, bearing in mind also the requirement to maintain charitable status of fulfilling the public benefit which it was established to deliver.
Where a decision is taken to carry on the business of the charity, it is essential that the trustees understand and agree a plan which will allow the charity to return to solvency, which may include merger or take-over by another charity with similar objects.
Our next article will go into more detail as to what is an insolvency event and what the trustees should look out for in order to know if this is likely to occur.
If you have any questions or would like more information, please contact one of our specialists below.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.