The solvency question: Should we continue to exist?

The not-for-profit sector is facing the same existential questions as the corporate sector at present due to COVID-19.

Association members are wondering whether they will have jobs or businesses that they can keep viable, and so renewal of membership subscriptions is not necessarily a priority right now, while attendance at conferences and educational events is also being replaced with online learning (where possible).  Charities are seeing their donor base shrink as many have uncertain economic futures, and donors who still have jobs are preoccupied with keeping their families safe, coping with online schooling from home, and other lifestyle changes.

Many non-profit directors are faced with these concerns personally, and yet they also have legal obligations to meet, one of which concerns determining the future viability of their organisation. Some are also faced with shorter term liquidity problems, where normal cash flows have dried up and they are having to look at liquidating assets to meet overheads.

Your finance and management staff, and finance committee, will be able to advise your board regarding liquidity and solvency ratios based on revised budget projections, and where there is some doubt about the analysis of those ratios, advice should be obtained from suitably qualified external experts.

In the event your organisation’s solvency is in doubt, you will also need to comply with your constitutional obligations regarding wind-up, and legal advice will be helpful, if not essential, to that process.  Merging with another body or other survival strategies may need to be canvassed, and if so, there can be many tricky legal issues involved.

Non-profit entities in Australia employ various legal structures, and depending on their governing legislation they have slightly different legal obligations.  Despite this, the directors’ duty to avoid insolvent trading is common across all of these structures. The following extracts from ASIC, ACNC, and NFP Law advice regarding solvency is offered as a starting point for non-profit boards and directors who recognise that they may need to ask the hard question about whether or not to ‘stay open’.

The headings below are hyperlinked to their sources.

ASIC advice for Companies Limited by Guarantee

As well as general directors’ duties, you also have a positive duty to prevent your company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts as and when they fall due. This means that before you incur a new debt you must consider whether you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

An understanding of the financial position of your company only when you sign off on the yearly financial statements is insufficient. You need to be constantly aware of your company’s financial position.”

ACNC advice for registered charities

A charity is insolvent when it is unable to pay all of its debts when they are due.

A charity may be insolvent if it:

  • has overdue taxes
  • is behind on loan repayments
  • is operating at a loss, or
  • is unable to pay for goods it has received.

Generally speaking, charities that are insolvent must appoint a liquidator or administrator to manage the charity. In some cases, if a charity is insolvent it must be wound up. If a charity is insolvent, and has not acted to appoint an administrator or liquidator, a court may order that the charity be wound up.”

NFP Law advice for incorporated associations

The legislation that regulates incorporated associations in each state and territory … generally sets out the duties of ‘office holders’ (including committee members) in these associations. Office holders have the following four basic duties:

  • a duty to act in good faith in the best interests of the association and for a proper purpose
  • a duty to exercise reasonable care, skill and diligence in carrying out the role of a committee member. This means office holders must prevent insolvent trading by the association, which includes the duty not to incur a debt that will cause the association to become insolvent
  • a duty not to take advantage of their position as an office bearer or information they have gained in the role for personal advantage, and
  • a duty to manage conflicts of interest between personal interests and the interests of the association

Committee members of incorporated associations that are registered charities with the Australian Charities and Not-for-profits Commission (ACNC) must also meet their duties under The Australian Charities Not-for-profits Commission Regulation 2013 (Cth) (ACNC Regulation).

See also:

CAV advice for incorporated associations in Victoria


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