Insolvency is something to be addressed as a matter of urgency because:
- If you continue to trade when insolvent, there may be significant Committee member liability, even in an incorporated organisation; and
- Closing down an insolvent organisation is much more arduous and costly than closing down a solvent one
There are two basic tests for insolvency:
- The cash-flow test: you will fail this if you are unable to pay your debts when they fall due – now or in the foreseeable future (usually taken to mean the next 12 months)
- The balance sheet test: you will fail this if your total assets are less than your total liabilities; if you think you may have to close down in the foreseeable future, you need to include the cost of this (e.g. redundancy payments) in calculating your liabilities
You need to be able to pass both tests.
If you think insolvency is a danger, this should be a major concern for the whole Committee. You need to:
- be clear about Committee member liability
- be clear about all your contractual obligations
- be clear what your general reserves will cover (x months’ operating costs)
- ensure you are maintaining a cash flow forecast, updated monthly
- carry out a formal risk assessment
- consider taking specialist advice
It is worth noting that the Insolvency Service Redundancy Payments Office will pay out moneys owed to employees of insolvent companies and individuals but not unincorporated associations. In the case of an unincorporated association, a redundant employee would need to pursue individual Committee members for any moneys owed.
For most organisations, if imminent insolvency is a concern, the first step may be a conversation with your accountant.
Approaching insolvency factsheet
For more formal guidance see: