What to do when your organisation is failing or threatening to fail?
When the going gets tough, the tough seek assistance from their professional advisors. Or at least they should. Stephen Goderski takes a look at options available to Trustees when their organisations are failing or threatening to fail including what steps Trustees should take to demonstrate that they have acted in accordance with their fiduciary duties.
It happens. Every business cannot succeed, there will always be a number of business failures resulting from misfortune, mismanagement, or a combination of the two. If it is going to happen to you let’s try to ensure that you are on the misfortune side of the fence – as that means that no one is going to successfully attack your personal assets.
Trustees need to be on top of every aspect of their organisation’s financial performance, including budgeting and attuned to both their particular sector as well as those of their main donors.
Even assuming that these good habits have been followed diligently, organisations can still find themselves in financial difficulties. So what should you, dear Trustee, do if you find yourself in such a place?
Firstly ascertain the scale of the problem, especially whether the organisation is insolvent. Insolvency is defined on two bases – the balance sheet test and the section123 Insolvency Act 1986 test.
The balance sheet test is very simple – do liabilities exceed assets? If they do, the organisation is insolvent. You will need to be realistic with asset values here, making justifiable provisions and obtaining property valuations where appropriate.
The section 123 Insolvency Act 1986 test is pretty straightforward too – can an organisation discharge its liabilities as and when they fall due? That is when they contractually or statutorily fall due, not when you usually pay them. If the answer is no, the organisation is insolvent.
Insolvency has implications for Trustees. For one, they need to act to either take the organisation out of its insolvent state (by cost-cutting or introducing additional capital for example) or, if this is not possible, by ensuring that they minimise the loss to creditors.