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My Charity Is Insolvent – What Should I Do?

The quick answer

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 get out of control.

The legal definition of insolvency is:

a. The balance sheet test – of there being more liabilities than assets or,

b. The cash flow test. This is a test of whether the charity can pay its liabilities as they fall due? If not, then under the law, the charity is insolvent.

A charity becoming insolvent is not as rare as you would think and the Trustees should take insolvency advice as soon as possible.

In more detail

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 to the creditors 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 from a Licensed Insolvency Practitioner like us.

We have helped a number of charities facing insolvency. If you would like some advice please get in touch and will initially ask to see:

  • Your last annual accounts.
  • Up to date management figures.
  • An aged creditors list.

tip

If you need insolvency advice the earlier you talk to someone like us the better as you will have more options. We can help, contact us today.

More questions in this section

Author: David Kirk - ACA FABRP
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Just a quick email to say a heartfelt thank you for your very calm, considered, expert advice regarding my circumstances on Tuesday. Things looked bleak before you explained my options much more clearly, in simple layman’s terms.
Rob Elliott (14th December 2021)

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David Kirk

Licensed Insolvency Practitioner