You would think a charity could not have financial problems, but it is surprisingly common.
Quite often no one is directly in charge of the charity and it is run by volunteers who come and go so it can be difficult to take a long-term view on the finances and predict the problems that are coming. It is not like a typical ‘business’ which has an owner who is ultimately responsible and can make quick decision. Quite often financial problems go unnoticed for a long time.
Charities can often end up growing and taking on staff so that the payroll cost builds up and then an income stream disappears for whatever reason (perhaps a change in the law) and suddenly a profitable charity has become a loss-making charity with lots of overheads. Then as the charity is losing money you have a board of trustees who do not want to make a wrong decision so collectively, they do nothing as the financial situation deteriorates.
We often see the situation where the charity owns a freehold property with little or no mortgage and has lots of unsecured creditors such as PAYE arrears. On paper the charity looks solvent (if the building could be sold) but the legal definition of insolvency also includes ‘being unable to pay your debts as they fall due’ s at this point by legal definition the charity is insolvent.
The charity trustees must be very careful – if they allow the finances to continue to decline without taking any action, they can become personally liable for the debts. In these situations, a liquidation maybe a sensible approach as it stops all ongoing costs and allows the government redundancy fund to pay out the employees. Any profitable part of the charity can be transferred to a new entity either set up for the purpose or another registered charity.
The Charity Commission monitor all UK charities but do not need to give permission for a charity to close or go into liquidation.
The key for a charity in financial trouble is to take early advice.
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