How do we know if we're in real trouble?

England and Wales: This page sets out the position in full, including the two statutory tests and the Charity Commission’s guidance. Scotland: partly covered — the two tests and wrongful trading are the same law, because insolvency is reserved to Westminster; what charity failure has looked like in Scottish cases is not covered. Northern Ireland: partly covered — the same two tests, near word for word, under Northern Ireland’s own Order; whether the Charity Commission for Northern Ireland publishes guidance or case examples like England’s is not covered.

Is there a number that tells you?

No. No single figure tells the trustees of a charity in financial difficulty that they are in trouble. It does not matter how long they wait for one.

This page applies whenever the problem is cash, whatever else the board is considering. If you have not yet named the problem, diagnose what actually needs to change sets out the questions to ask.

The Charity Commission for England and Wales has published inquiry reports into charities that failed or were badly run. None of the four reports below describes a bold strategic bet. What they record is unpaid tax, missing financial controls and poor governance, over years. Each of those is visible in a charity’s own records.

The warning sign is not a number. It is the gap between what the trustees were told and what the bank statement said.

So the question for the board is not “have we crossed a line?”. It is “do we know, from our own records, where we stand today and where we will stand in the coming months?”

Financial position as a standing agenda item

In England and Wales, the Commission’s guidance CC12 turns a vague worry into a routine. CC12 says, verbatim:

The earlier you can identify that your charity is in financial difficulties, the quicker you can act to protect your beneficiaries… your charity’s financial position and performance should be a standing agenda item at trustee meetings and sent to each trustee before the meeting.

That is the regulator’s expectation, in its own guidance. CC12 also says what the board needs in front of it:

• how much cash the charity has
• cash coming in and going out over the coming weeks and months — a cashflow forecast
• the charity’s assets and liabilities — a balance sheet

A treasurer’s verbal “we’re fine” is not any of these. The documents are the point, because the next section tests them.

The two insolvency tests, in the statute’s words

CC12 puts it plainly: a charity “may be insolvent if either” test is failed. The tests themselves come from the Insolvency Act 1986. It applies in England and Wales and in Scotland. Read the tests in the statute’s words. CC12’s summary leaves out the part that catches most charities.

Test	Insolvency Act 1986 (England, Wales and Scotland)	What CC12’s summary says
Cashflow	s.123(1)(e): the company is “unable to pay its debts as they fall due”	“it cannot pay its debts when they are due”
Balance sheet	s.123(2): “the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”	“it does not have enough assets to cover its liabilities”

The words CC12 drops are “taking into account its contingent and prospective liabilities”. For many charities, that clause is the whole point. The clause means the balance sheet test counts debts that have not fallen due yet. It also counts some that may never arise:

• a lease — the rent still to pay, and the cost of handing the building back in repair
• a pension scheme — a deficit or a debt that crystallises when the charity stops employing members
• a grant you may have to repay if the project stops

A charity can have money in the bank, pay every bill this month, and still fail the balance sheet test on the statute’s wording. Ask your treasurer or accountant to show the future liabilities, not only the current ones.

What the Commission’s inquiry reports show

The inquiry reports are a better warning list than any invented set of red flags. These four were each opened and read at source.

Charity	What the Commission found
Keeping Kids Company	Tax not paid on time, over a long period, and treated by the inquiry as evidence of mismanagement. Its report records, verbatim: "The Charity regularly failed to make some PAYE payments to HMRC on time... By June 2015 the Charity owed an estimated £1,162,920 to HMRC and at the time of its liquidation the Charity owed around £850,000 to HMRC." And: "These failures to make payments to HMRC, workers, and other creditors on time is, in the Inquiry's view, evidence of mismanagement in the administration of the Charity."
Salvation Proclaimers Ministries (“SPAC Nation”)	Funds put at risk and good governance not followed. The High Court wound it up in the public interest. It had filed accounts described as “suspicious and incorrect”. It was also “balance sheet insolvent on a substantial scale”. Outcome: Three trustees disqualified 12 years, one for 10 years.
Newham Community Leisure Trust	“Serious misconduct and/or mismanagement … over a sustained period of time”. The charity was “poorly governed, poorly managed, and had poor financial management”. Its winding up followed “the long-term debts that the charity appears to have accrued”. The Commission has since archived the report under its archiving policy for older reports.
Bangladeshi Parents and Carers Association	“Gross financial mismanagement” and a lack of financial controls, which let a finance manager make “material unauthorised payments”. This charity survived — it is a controls case, not an insolvency.

The common thread is not risk-taking. It is unpaid PAYE, absent controls, and governance that did not look. Tax arrears were central to the Kids Company finding. They can build quietly while everything else seems to be paid.

The Kids Company story has a second half: what happened to its trustees afterwards. The next step covers it: If the charity can’t pay, can they come after me?.

Why the date you notice matters

For a charitable company or a CIO, spotting trouble late is what creates personal exposure for trustees. The rule is wrongful trading, in the Insolvency Act 1986 (England, Wales and Scotland). Wrongful trading is measured from a moment. In the words of s.214(2)(b), it is when a trustee “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration”.

Three things about those words matter.

• “Ought to have concluded”, not “ought to have known”. CC12 words it as “knew or ought to have known”. The statute asks what conclusion a trustee should have reached from what they knew or should have found out.
• The standard is set by s.214(4). A trustee is judged against a reasonably diligent person with the knowledge and skill expected of someone in their role. If the trustee’s own knowledge and skill are greater, they are judged against those too. No dishonesty is needed.
• Administration counts, not only liquidation. Since 1 October 2015 the test has included “entering insolvent administration”, defined in s.214(6A). A charity that goes into administration, not liquidation, falls under a second, separate provision: s.246ZB of the same Act.

The practical point is simple. The board’s minutes are the record of what it knew and when. A board that looks at the forecast and the balance sheet at every meeting can show what it concluded, and when. What a trustee must then do is the subject of the next two steps.

If the charity is unincorporated, wrongful trading does not apply. The reason is different, and harder: the trustees are personally liable for the charity’s debts from the start. The next step explains.

Scotland and Northern Ireland

Scotland. The two tests and wrongful trading apply in Scotland in the same way as in England and Wales. Charity regulation is devolved.

But insolvency of companies and other business associations is reserved to Westminster, under the Scotland Act 1998, Schedule 5, Part II, Head C2. So the Insolvency Act 1986 tests reach a Scottish charitable company in the same way.

A SCIO is different. Head C2 leaves out any body whose estate may be sequestrated, and an insolvent SCIO is sequestrated under its own regulations (SSI 2011/237), through OSCR and the Accountant in Bankruptcy. Whether wrongful trading reaches a SCIO’s trustees was not established for this page.

This page does not cover what failure has looked like in Scotland. The Office of the Scottish Charity Regulator’s own inquiry reports were not searched for examples like the four Commission reports in the table.

Northern Ireland. Northern Ireland has its own instrument, the Insolvency (Northern Ireland) Order 1989. Its Article 103 sets the same two tests, almost word for word. That includes the words “taking into account its contingent and prospective liabilities” in the balance sheet test.

Article 103 also has a formal route through a written statutory demand: a debt above a set amount, left unpaid for a set period. That figure and period are not reproduced here.

Whether the Charity Commission for Northern Ireland publishes guidance like CC12, or case examples like the English reports, was not found. A Commission blog post on financial difficulty, found by search, returned an error page when opened. It may be a broken link, not removed guidance.

What to put in front of the board

Put these in front of the board at every meeting:

1. A cashflow forecast covering the coming months, updated for every meeting — see build a cashflow forecast.
2. A current balance sheet that shows future liabilities, not only today’s (see build your balance sheet). Include the lease, repairs, pension and repayable grants.
3. Tax and payroll status: whether every PAYE payment is up to date. If not, say so on the agenda.
4. Both tests, asked out loud: whether the charity can pay its debts as they fall due. And whether its assets cover its liabilities, including the ones still to come.
5. A minuted answer to each test, with the date.
6. If either answer is “no” or “not sure”, move to the next steps now. They cover personal liability, and when to take formal advice. Do not wait for the next quarter’s meeting.

Your reserves work supports this. See calculate your free reserves and write your reserves policy. Whether the accounts can be prepared as a going concern is a separate question. The money hub’s assess going concern covers it.

If either test gives a “no” or “not sure”, the next step is to understand what you are personally liable for. After that, take formal insolvency advice and know when to stop.

Common mistake: waiting for a single number to say you are in trouble

Trustees expect a threshold, but none exists. The law sets two tests, and failing either may mean insolvency. The inquiry reports show what failure looked like: unpaid PAYE, missing controls and years of weak governance. It was not a bold bet.

Common mistake: leaving finance off the agenda when the news is bad

Nobody wants to table it. In England and Wales, CC12 says the charity’s financial position should be a standing item at every trustee meeting. For a company or CIO, wrongful trading is measured from the moment a trustee “knew or ought to have concluded” there was no reasonable prospect of avoiding insolvency. The minutes show when that was.

Common mistake: letting HMRC arrears run as a temporary measure

Tax arrears can build while other bills are paid. The Kids Company inquiry treated late payments to HMRC, workers and other creditors as evidence of mismanagement. Newham’s winding up followed long-term debts. The gap between what the board was told and what the bank statement said is the warning.

Common mistake: reading the balance sheet test without the future

CC12’s summary asks whether assets cover liabilities. The statute adds “taking into account its contingent and prospective liabilities”. A lease, a pension scheme or a repayable grant can put a charity on the wrong side of the test. That is true even with a healthy bank balance.

Worked example

Tollgate Youth CIO’s main grant ends. The treasurer’s new cashflow forecast shows the youth worker’s salary cannot be met within the forecast period.

The board asks both tests at its next meeting, as a standing item. On cashflow, the answer is “not sure”: payments are up to date today, but not after the grant ends. On the balance sheet, the treasurer adds the notice pay the charity would owe and the repair cost under its hall lease. With those, the liabilities are larger than they looked.

The minutes record both answers and the date. They also record a decision to move straight to the next steps, not wait a quarter. The outcome is a cashflow forecast and current balance sheet on every agenda, and a minuted answer to both tests.