Trustees – Is personal liability now a real prospect?
With the financial demands on government, businesses and households how will our charities, voluntary organisations and not for profit organisations survive?
Press articles in recent months have shown that this sector is not immune from recession or market pressures with the well publicised insolvencies of the Immigration Advisory Service and most recently the Choice Care Group. Other headlines refer to more than 2,000 charities having their funding levels either cut or withdrawn altogether and net funding reductions of some £110 million in this year alone.
With over 180,000 registered charities and countless thousands of other voluntary and not for profit organisations in the country there is a real fight for such organisations to survive as funding cuts begin to bite hard with little prospect of relief on the horizon.
Euta Clinch of Optimum Care Services, a care home provider based in the West Midlands has been advised by Patrick Murtagh of Cranfield Business Recovery in recent years. “These are very difficult and challenging times for the charitable and care sectors and particularly for small providers that keep the market varied, value driven and cost effective. There is so much adverse press regarding residential and social care, yet there are many excellent providers who feel that they are expected to deliver a champagne service on beer money!”
Euta also stated; “The Birmingham Care Consortium recently lost its High Court application for an inquiry into the way the local Council set its fee policy, which has seen a freeze in care fees since 2008. With significant increases in utility and employment costs, the costs of adherence to new Care Standards and the ever changing demands of health and safety, the mounting demands on cash flow are now a very real concern”.
With increased financial pressures comes greater risk to Trustees who provide their services to charities, for the most part unpaid. However Trustees bear the burden of responsibility of running the charity, dealing with its property portfolio, finances and engaging employees and volunteers.
The Charity Commission guidance on Trustee’s responsibilities refers to a duty of prudence on Trustees to ensure that the charity is and will remain solvent, and a duty of care to consider obtaining external professional advice on all matters where there may be material risk to a charity. This is highlighted further in the charity’s financial statements where the Trustees collectively are required to prepare these on a going concern basis unless it is inappropriate to presume that the charitable company will continue in business.
It is rare for a charity Trustee who acts reasonably and in good faith to be held personally liable for their actions. Trustees who act prudently, lawfully and in accordance with the charity’s governing document can generally seek reimbursement of any personal liabilities out of the charity’s resources. But what if the charity’s resources are depleted or exhausted?
Trustees can potentially be held liable for breaches in their duties should they act outside the governing document or fail to follow a statutory or legal requirement. A Trustee’s liability for the charity’s debt depends mainly on the legal structure of the charity; whether it is incorporated or unincorporated. A possible remedy is to transfer the charity from an unincorporated status to incorporated; however whilst the transfer of status can be straight forward a Trustee cannot merely transfer status to avoid personal risk should the charity already be insolvent. It is therefore vitally important that Trustees liaise with professional advisors at the earliest opportunity should such matters be of concern.
The risk of personal liability is small but Trustee’s should now, more than ever, pay particular attention to the financial status of their charity.
Cranfield Business Recovery is experiencing an increase in the number of enquiries from charitable, voluntary and not for profit organisations. They have already seen reduced levels of funding which cannot be replaced and are seeking to wind up their financial affairs on a solvent basis before liabilities exceed assets. Others however have left it too late and are being advised on an insolvent basis due to depleted or exhausted reserves.
In both such scenarios Trustees, directors and others should be particularly wary of their own risk and the potential of facing a personal claim for restitution.
Telephone us on 024 7655 3700 for further assistance.
