Insolvency warning to quangos

Regeneration and other non-profit bodies which are affected by public spending cuts are being warned to monitor their finances to ensure they are not breaking the law by trading while insolvent.

R3, the trade body for insolvency practitioners, says that many of these organisations will see their funding slashed or even cut altogether – but where they get into financial difficulties and collapse as a result, trustees and directors could be held personally liable.

Matt Dunham, North West regional chairman of R3 and a partner at Grant Thornton, said: "The cuts will squeeze the voluntary sector and some organisations will have to make tough choices – such as cutting services, cutting costs or in some cases closing down altogether. No matter how difficult the decisions, if the financial situation is unsustainable, directors need to take urgent action.

"Trading while insolvent is illegal. Directors or trustees who allow the organisation to continue operating when insolvency is inevitable or who don't make every effort to minimise losses can be convicted of wrongful trading and be held personally liable.

"If you are unsure whether the organisation is insolvent, perhaps because it has complex income streams, if it is already facing debt problems, or if you want expert help to reduce costs and turn around the finances, take professional advice from an insolvency practitioner."
R3 offers the following advice for non-profit bodies facing a loss of funding:

  • Review the situation – ensure you have access to robust management information including both financial and non-financial indicators, and prepare realistic forecasts.
  • Decide what services you need to provide – which are critical to your mission and which are optional? Are there any unnecessary projects or sacred cows?
  • Consider the most efficient way to provide these services – that might be using the current delivery channels but making cost savings, or through collaborative working or even a merger with another organisation and sharing a back office function.
  • Monitor the finances closely – remember cash is king so keep a tight control on cashflow.
  • Sweat your assets – ensure they are working hard for you and sell off any that are surplus to requirements.
  • If it is apparent that the organisation is no longer viable in its current form, try to provide a continuation of service through another provider.
  • Get professional advice if necessary and at an early stage – don't let problems escalate. Insolvency practitioners can often prevent a financial meltdown, but the sooner they are called in the more scope they have to secure a successful outcome.

While the current situation holds many challenges, Dunham believes there are also opportunities. "The cuts are encouraging many third sector organisations to review their operation and seek even greater efficiencies. They will emerge from this in better shape than before. The most efficient providers will not only survive the downturn but will also have the opportunity to expand by taking over services from other providers."

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