Charity Insolvency

The economic downturn has been indiscriminate in its affects on UK companies.  Banks, building societies, and high street retailers have all succumbed to some of the worse economic conditions the UK has seen since immediately after World War Two, when GDP fell in double digits. You could be forgiven for thinking that financial worries are the sole concern of the private sector. Yet as the role of the third sector continues to grow so too does the possibility that these organisations could find themselves in financial difficulty with the fear of becoming insolvent.

As government cuts deepen, social enterprises and charities are becoming seen by local governments as a way of filling the gaps left by reductions in services. However, as the third sector grows and rising numbers of charitable organisations jostle for position in an age of austerity, we are unfortunately bound to see a rise in third sector organisations needing advice on restructuring and insolvency.

When faced with this dilemma, trustees must realise that their duty is also to the charity’s creditors. If trustees do not act promptly to address financial issues, then the risk of insolvency increases and they themselves may be held personally liable for the charity’s debts.

Personal liability can differ depending on how the charity is structured. A registered charity can, in broad terms, be treated as any other corporate body; and, as with company directors, trustees are generally not liable for any debts incurred. This may not apply, however, when trustees have been found to have allowed the charity to continue to operate and incur debts when it was clear that the charity could not avoid insolvency. In this case the trustees can be found liable for wrongful or even fraudulent trading.

Trustees of unincorporated charities fair worse. An unincorporated charity (such as a trust or society) has no legal standing. It is the trustees that take on the legal personality and by assuming this mantle will have contracted in their own name and can incur liability in their personal capacity. Although they will often be entitled to be indemnified out of the assets of the charity, the indemnity will be worthless if the charity has insufficient assets.

If you are a trustee and need advice on any of the issues in this article, then feel free to contact Gore and Company for further information.

Please note that the above is provided for illustration purposes only and comprises a short view of extremely complex insolvency and other legislation. This is a complicated area and specific advice must be sought before undertaking any course of action or before refraining from any course of action. Gore and Company takes no responsibility for any loss incurred to or by any person who either acts or refrains from acting on the basis of the above or of any other item published on this website. The above note may not be reproduced without the prior written consent of Gore and Company.

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