Insolvency

Charitable companies can sometimes face financial difficulty. It can be tempting for trustees to try and keep a charity going for the good of its beneficiaries and hope that its financial health improves. 

However, trustees of charitable companies should always monitor the risk of the charity becoming insolvent (the equivalent for a company of becoming bankrupt). 

If trustees of charitable companies do not act when the charity is at risk of insolvency, there is a possibility that they may be held liable for wrongful or even fraudulent trading. ‘Shadow directors’ can also potentially be held liable.

Wrongful trading takes place if a company continues to operate when the company directors (the trustees of a charitable company) knew, or ought to have known, that there was no reasonable prospect of the company avoiding going into insolvent liquidation. 

Its defence to the claim of wrongful trading is that the company directors (trustees) took every reasonable step to minimise potential losses to the charity’s creditors.

Fraudulent trading can happen when a company is insolvent and the business of the company has been carried on with the intent to defraud the charity’s creditors or for any fraudulent purpose. 

Fraudulent trading could cover, for example, the situation where trustees are winding up a company and incur a debt knowing it will not be repaid.

If the trustees of a charitable company are found to be wrongfully trading, they could be disqualified from being a company director and could be held personally liable to repay money to those the charity owes money (creditors). Fraudulent trading can also carry penalties from the court.

Insolvency is a complex matter. Trustees of charitable companies should take professional advice from a solicitor, accountant or insolvency practitioner, if the charity looks to be in financial difficulty.

Unincorporated charities are not governed by insolvency law, but can still face financial difficulty. 

Unincorporated charities have no legal identity of their own. This means that trustees and members of unincorporated charities can, potentially, be personally liable for the debts of the charity, if the charity has insufficient funds and owes money to someone who seeks to recover it. In this case, trustees and members could be held joint and severally liable for the charity’s debts.

Trustees can minimise their liability for the charity’s debts by avoiding putting the charity in a position where it could run out of funds - for example, by paying attention to reserves levels and financial commitments, and carrying out regular risk management). 

Trustees might also reduce the risk of claims from creditors by limiting liability in contracts to the assets of the charity. 

Trustees need to consider incorporating the charity as a charitable company or IPS, if the risks of the charity getting into debt are felt to be too high.

It is rare for Trustees who have acted honestly and carefully to face personal liability.