18 November, 2016 in Industry News

Charities – the risk of the Trustee

Trustees of Charities, particularly unincorporated charities, should be aware of the extent of their potential liabilities should a charitable organisation face insolvency. In light of significant and immediate cuts to grant funding and reduced income from donations, more and more Charities are coming under financial pressure.

In the wake of more and more enquiries from charitable bodies, Shauna McStravick, Legal advisor sets out the common risks and pressures facing those managing and leading our local Charity and community sector.  Whilst it is important to be aware of these risks, there are important steps that can be taken to protect the Trustees and leaders of these vital organisations.

Most individuals, donors and sponsors, would view a Charity spending all its raised funds as favourable.  This would tend to suggest that the money is being used for the good that was intended and not being held in a “rainy day” account or covering the cost of “needless” administration or expensive overheads.  However, it is this dichotomy which poses a problem for the charity sector as a whole.

An unincorporated charity has no legal identity separate to its members and trustees. As such, any liability incurred by the Charity, is a liability incurred by its Trustees or members.

Where such a liability has been incurred and the charity does not have sufficient assets to meet the liability, the Trustees could legally be asked to meet the shortfall personally.  We are aware, for example, of many community groups with Bank debt secured on property which is now in negative equity with the Trustees now at risk should the organisation fail to meet the loan repayments.

How this liability will be shared amongst the trustees may be dictated by the terms of the agreement which gave rise to it, but the creditor could be in a position to pursue any of the Trustees for payment of the liability.

A vital part of a Trustee’s compliance with their legal duties and indeed avoiding any personal claim against themselves, is to ensure that they understand and manage the financial health of their Charity.  Trustees are legally obligated to act in the interests of their Charity and its Beneficiaries and to protect and safeguard the assets of their Charity.

In order to ensure that a Trustee is fulfilling their obligation, Trustees should regularly assess and monitor the overall financial position of their Charity. In essence - they should run the Charity as if it were like any other Business. 

Trustees should ensure that they:

  • Have access to up to date financial information;
  • Maintain fit and proper controls for managing cash flow around the organisation;
  • Have adequate controls for approving expenditure and retain sufficient reserves to deal with  unforeseen circumstances;
  • Ensure all financial contributions are used solely for the purpose they were intended;
  • Regularly assess the risk of financial failure and understand the impact.  This could include the risk of specific income sources being withdrawn;
  • Have an optimal organisational structure - a Corporate structure may offer more  protection to Trustees and leaders but has additional financial and regulatory requirements which may not be practical for small community organisations;
  • Seek independent professional advice which is often provided at a discount for Charity and community groups.

Our Charity and community team is actively involved in local community groups.  We offer review services and consultations with Trustees to ensure proper controls and structures are in place.  It is important that those giving their time and effort to carry on this vital work are not discouraged by the regulatory environment surrounding the sector.  We will often advise on the risks associated with leading these organisations but provide simple and straightforward advice to protect individuals and the organisations. 

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Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.