A charity becoming insolvent is not as rare as you would think.
Quite often the trustees of a charity are not full time employees and unless they have proper day to day control of the finances then matters can quickly become out of control.
In addition, insolvency is not just the balance sheet test of there being more assets than liabilities, but also the cash flow test. The key question is, can the charity pay its liabilities as they fall due? If not, then under the law the charity is insolvent and it has failed the cash flow test.
Trustees will have some protection if the charity is incorporated as a limited company, and in most cases they will not be personally liable for the debts. However, it is important to note that for un-incorporated charities once the charity assets have been exhausted the trustees will be liable for the debts.
Trustees however must be careful if they believe they are insolvent or that insolvency is inevitable and they must act sooner rather than later. Failure to do so may bring in personal liability to the creditors of the charity.
Directors and Trustees have a financial duty and a Court will consider the actual experience and qualifications of the Trustees in deciding on their responsibility in the failure of the charity.
If in doubt it is always worth taking professional advice early on.
We have helped a number of charities facing insolvency. Contact our expert team for free initial advice.