Charities across the UK are operating in an exceptionally challenging environment. Rising demand, escalating costs, and static public funding have combined to erode reserves and sustainability.

The Scottish Council for Voluntary Organisations’ Third Sector Tracker (Spring 2025) reports that more than 80 per cent of Scottish charities face financial challenges and nearly 40 per cent are running deficits. Similar trends are seen in England and Wales, with falling real-terms income and growing dependence on dwindling reserves.

Charities are being asked to do more with less, often stepping in to fill gaps left by stretched public services. For trustees — many of whom are volunteers — this creates difficult questions: how long can operations continue, and what duties arise when insolvency becomes a risk?

Recognising financial distress

Trustees should act early, not when cash runs out. Key indicators include:

  • Persistent cashflow pressure – deferring payments, using restricted funds for general costs, or exhausting overdrafts.
  • Budget deficits and shrinking reserves – especially where deficit budgets lack credible recovery plans.
  • Creditor pressure – late payment demands, covenant breaches, or suppliers withdrawing credit.
  • Loss of key funding streams – grants not renewed or delayed, uncertain contract income.
  • Governance fatigue – reduced board engagement, missed meetings, or over-reliance on senior staff.

Trustees should review up-to-date management accounts, maintain 12–24-month rolling cashflow forecasts, and test best- and worst-case scenarios.

Seeking early professional advice can relieve pressure and demonstrates compliance with trustees’ duties of care and diligence.

Trustees’ Duties When Insolvency Threatens

Charity trustees’ overarching duty is to act in the best interests of the charity and its beneficiaries.

When financial distress emerges, trustees’ duties become more complex and can depend on the charity’s structure — charitable trust, unincorporated association, or charitable company — and on the severity of its financial position.

Guidance from the Office of the Scottish Charity Regulator (OSCR) and the Charity Commission provides that trustees should:

  • Monitor finances to identify insolvency risk.
  • Seek professional advice promptly.
  • When insolvency is unavoidable, take every step to minimise creditor losses.
  • Follow governing documents and statutory requirements if winding up.

Failure to act properly may result in regulatory investigation, disqualification, or personal liability. Trustees should check the charity’s constitution for indemnity provisions and confirm trustee indemnity insurance.

If a charity is an unincorporated association, it lacks separate legal personality, meaning trustees may be personally liable for debts.

Additional Duties for Charitable Companies

Where a charity is also a company, trustees act as company directors and are bound by both the Companies Act 2006 and the Insolvency Act 1986.

The Creditor Duty

Under the Companies Act, directors must promote the success of the company for the benefit of its members.

However, once insolvency becomes probable, this duty shifts toward protecting the interests of creditors.

This can mean avoiding actions such as incurring new liabilities or making discretionary payments that could worsen creditors’ prospects of recovery.

Insolvency Act obligations 

The Insolvency Act prohibits wrongful trading, meaning the continuation of trade when directors know (or ought to know) that there is no reasonable prospect of avoiding insolvency. Fraudulent trading (intent to defraud creditors) and misfeasance (misuse of charity assets) are even more serious breaches.

Trustees may continue operations in the “zone of insolvency” only if they can demonstrate they took every step to minimise creditor losses.

Once a formal insolvency process begins, insolvency practitioners will review trustee conduct closely and breaches can result in personal liability.

Conclusion

Charities often operate under immense pressure, but proactive governance and early intervention can protect both the organisation and its trustees. Acting decisively is not just good practice, it’s a legal and ethical imperative.

At MBM Commercial, we support charities and their trustees through periods of financial uncertainty. If your organisation is facing financial pressure, we can provide practical, tailored guidance to help protect both your charity and its leadership.

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