How charities and not for profit organisations handle insolvency

Whilst a charity is insolvent it does not have to cease operations or immediately look to enter into an insolvency procedure. If the charity continues to operate however it should only continue with great care so as not to worsen the position for creditors. The Charity Commission states that in the event of a potential charity insolvency Trustees should seek immediate advice.

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Can a charity still operate when insolvent?

The Charity Commission expects Trustees to address any potential insolvency concerns promptly to ensure a plan for an orderly shutdown is in place where necessary. Trustees should seek advice at an early stage whether that is initially from their accountant or directly from a Licensed Insolvency Practitioner. If you take and follow professional advice then the Trustees effectively pass the risk on to their advisers.

Non charitable businesses have boards of mostly executive directors and management structures are in place with the senior personnel who manage the day-to-day activities, as well as monitoring long term strategies. This is not the same for charities where a board of Trustees, often volunteers who are non-executive, will look after governance, strategy and finance for the charity and the day-to-day operations will likely be overseen by managers. Careful monitoring of budgets, accounts, projects and other financial reports for the enterprise will provide important indicators on the overall financial health of the charity.

Early warning signs for charities

Just like regular businesses early warning signs of potential insolvency could include:

  • The Charity is unable to pay its debts as and when they become due; and/or
  • The Charity’s assets are worth less than its current liabilities.

Often one situation or incident can lead to Trustees becoming concerned with the financial position of the charity, for example, failure to obtain a grant or donation which had historically always been received and relied upon, a change or loss of a key member of staff or something completely unforeseen that causes cash to run low and cashflow forecasts to predict deficits.

Anthony Davidson

Director

Anthony is a Chartered Certified Accountant and Licensed Insolvency Practitioner advising companies and individuals experiencing financial difficulties. 

Works with a variety of stakeholders to establish and implement the best strategy for individuals and companies experiencing financial difficulties and acts as an Insolvency Practitioner in all forms of corporate and personal insolvency.

Anthony leads on complex investigation and forensic recovery engagements and has extensive knowlege and experience of advising charities, community interest companies and not for profit organisations.

Qualified as a Licensed Insolvency Practitioner in 2007, is a member of R3 and the ACCA. 

Don't delay, seek early advice

These could indicate potential insolvency for the charity, at which point the Trustees should not delay and seek immediate professional advice from a Licensed Insolvency Practitioner to ensure the situation does not get any worse. An insolvency practitioner can offer expert support and advice on what action should be taken.   However, if Trustees are concerned with the financial position of the charity, we would recommend that they should:

  • Hold regular Trustee meetings to capitalise on the board’s skill set.
  • Minute all decisions made, particularly those which may have a financial impact.
  • Maintain up to date financial records which are accurate and realistic.
  • Ensure sufficient unrestricted reserves are available to fund a potential insolvency procedure if required.

Other available options

It is important to be aware that just because a charity may be technically insolvent, it does not necessarily have to cease operations or immediately look to enter into an insolvency procedure. There are often steps that can be taken to return the charity to solvency and continue operations.

As referred to above, the Charities Commission will expect Trustees to address any insolvency issues together with having a plan for an orderly shutdown. In a situation where cashflow permits and there is sufficient time available it may be possible to negotiate a merger or transfer of resources to a successful charity with similar objectives. This would hopefully allow for the service supplied by the charity to continue and protect any vulnerable individuals.

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