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Insights // 20 September 2016

Charity Law - One More Thing for Trustees to be Aware of…

Partner Nick Burrows, in our Charities & Education team, looks at the Charity Commission’s financial guidance it publishes to assist charity trustees, in the wake of the collapse of Kids Company.

  1. Managing a charity’s finances: planning, managing difficulties and insolvency;
  2. Charity reserves: building resilience; and
  3. Charity governance, finance and resilience: 15 questions trustees should ask.

The report on the collapse of Kids Company, published by the House of Commons Public Administration and Constitutional Affairs Committee, blamed the trustees for its demise stating that:

“Trustees repeatedly ignored auditors’ clear warnings about Kids Company’s precarious finances. This negligent financial management rendered the charity incapable of surviving any variance in its funding stream.” 

One of the major issues identified by the report was that Kids Company only had a fraction of the reserves recommended for a charity of its size to manage any variance in funding.

The Charity Commission hopes the publications will assist charity trustees in understanding their responsibilities when it comes to charity finances and reserves.

Managing a charity’s finances: planning, managing difficulties and insolvency

This guidance sets out how trustees can manage their charities in challenging financial circumstances. Sarah Atkinson (Director of Policy and Communications at the Charity Commission) says trustees should “actively take steps to manage their charity’s finances through regular monitoring, asking the right questions and getting professional help where needed”.

Trustees are encouraged to review their charity’s financial position and its performance against budgets and future projections at least once a month. The extent of this review will vary according to the size and stability of the charity. 

So far as the insolvency of the charity is concerned, the guidance states that trustees are expected to have planned an orderly wind down. The advice from the Commission includes getting good professional advice as soon as the trustees foresee the risk of insolvency. This is crucial to ensure that trustees are protected from personal liability in the event of insolvency as trustees may be personally liable if they allow their charity to continue operating in circumstances where an insolvent liquidation is unavoidable.

Charity reserves: building resilience

This guidance emphasises the importance of having a good reserves policy and the need for trustees to keep it under review throughout the year. The level and range of reserves should reflect the particular circumstances of the individual charity. Where a charity hasn’t got the reserves it thinks it needs, it is exposed to greater risk and the Commission expects the trustees to address this actively. The Commission expects trustees to understand the legal requirements in relation to charity reserves and to know what they should do in terms of good practice.

Charity governance, finance and resilience: 15 questions trustees should ask

The Commission has designed 15 questions to help charity trustees deliver against their trustee duties. Trustees need to be able to identify the critical issues: the charity’s purposes and plans, its solvency, its resilience and quality of governance and to be able to review these at regular intervals. These 15 questions should help trustees focus on what needs to be done to comply with the Commission’s expectations.

The sector’s response to the newly issued guidance has not been wholly positive. Many consider the expectations of trustees to be too onerous and could deter individuals from taking on a trustee role for fear of falling foul of the many duties and responsibilities that they are expected to meet.

For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800. 

This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.

Nick Burrows

Nick Burrows

Chairman & Partner, Charity & Commercial Law

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