This is a quick guide for trustees and directors of public service mutuals and co-operatives concerned about solvency and wondering how to approach it in the immediate crisis caused by the coronavirus shutdown.

  1. Legal form matters –  insolvency and personal liability
  • Mutuals usually fall into two broad types of legal structure:
    • Charities such as charitable companies limited by guarantee, charitable incorporated organisations, and charitable community benefit societies.
    • Non-charitable entities such as community interest companies (“CIC”s), co-operatives and community benefit societies.
    • A “corporate” entity is a legal ‘person’ and has its own debts and liabilities. Its directors or trustees will not be personally liable for the mutual’s debts unless they behave in any of the ways described in paragraph 6 below.
    • Less commonly, some public service mutuals may be unincorporated charities (i.e. unincorporated associations or trusts). Most of what is said in this brief guide about managing solvency applies to all types of mutual but the personal liability stakes are much higher for trustees of unincorporated charities. This is because unincorporated charities are not legal persons and so the debts of the charity are the debts of the people who incurred them – the trustees. If there is not enough money in the charity to pay the debts, the trustees may be personally liable.


  • Create a crisis team to lead the way. If you have a large board, planning cannot be done effectively with all trustees or directors closely involved and the full board will not be able to grapple with all the detail quickly enough to reach quick decisions. Not all decisions can or should be made quickly but be sure that some will need to be.
    • Board meetings need to become more regular (probably at least weekly for many organisations) and those meetings need to be presented with clear options, recommendations and reasoning in order to make their decisions. That is the job of the crisis team. Trying to manage complex and fast moving issues over video or telephone conferences is otherwise too difficult.
    • It is important that the crisis team reflects the interests of the mutual’s stakeholders. Many mutuals will have member groups and/or board representatives from the various stakeholder groups (such as staff, volunteers, service users and local council). During this crisis, you may find that new stakeholder groups should be identified and their interests heard, such as elderly or pregnant service users. Ensure that your crisis team engages with all groups, for example by including representatives in the team itself, or by communicating regularly.
    • The crisis team will be closer to the detail and will have had much more time to form opinions. Steps and outcomes may appear more obvious to the team than to other trustees because their thinking is further ahead. This is difficult for the Chair to manage, especially as very hard decisions may need to be taken in relation to staff, beneficiaries and services, and resistance may, quite naturally, be strong. Also, emotions may be running high.
    • If you are unsure about how you can hold board meetings, please see our separate guide for charity trustees here:
    • Minute meetings carefully. See the above guide.
    • Not every decision you take will be taken at a board meeting. Keep a short diary each day reminding yourself of the decisions taken and the reasons why. You might find this very useful later.
    • Overall, remember that while your mutual is solvent, your duty is to act in the way you consider, in good faith, most likely to achieve its charitable purposes, or the “community interest” in the case of a CIC; or the benefit of members in a co-operative. In doing that, you are expected to act with reasonable care, skill and diligence; you are not required to be perfect. Other people might make decisions differently from you but that does not mean your decision is wrong or (even if it turned out to be wrong) that you were in breach of duty. Make the best decisions you can based on the best information you can get. And be ready to explain why.
    • If your mutual is insolvent then your duty might change; instead of seeking to achieve your charity or community interest purposes, your duty may switch to protecting the interests of creditors – see paragraph 6.1 on wrongful trading below.
    • Charities should keep in mind the need to report serious incidents to the Charity Commission and OSCR (if registered in Scotland). Insolvency and risks to beneficiaries (especially vulnerable ones) will certainly be reportable.
    • Take professional advice from lawyers and / or accountants, particularly if you are concerned the mutual may be insolvent. It is an added cost but they may be able to help you save the mutual and save you from any personal liability.

3. Is your mutual solvent?

The Insolvency Act 1986 provides two tests for solvency:

Cash flow test

  • Can the mutual pay its debts as they fall due?

Balance sheet test

  • Is the value of the assets more than the value of the liabilities, taking into account contingent and prospective liabilities?
    • If the mutual fails either test, it is insolvent.

4. Keeping on top of things

Getting the right information is vital. If you are lucky enough to have them in post, you are likely never to have needed your finance director, finance team, treasurer and CEO more than you do now.

Crisis plan

  • Create a plan based on the best information you can put together and taking account of the financial issues mentioned below. Your plan will change but it will help you to focus. Include milestones for anticipated decisions.

Cash flow forecast

  • Produce a cash flow forecast as soon as possible or review your existing one. This shows amounts and timings of anticipated inflows and outflows of cash and helps you work out if, and at what point, you may be insolvent on the cash flow test.
    • Your cash flow forecast will almost certainly be wrong. Do it anyway and keep it under constant review as the assumptions in it change.

Risk analysis

  • Review your risk matrix and prepare a short risk analysis based only on the vital current issues. Keep it updated as circumstances change.

Statement of affairs

  • Prepare a statement of affairs. This will be similar to a balance sheet except that it will include any realisable assets which are not necessarily on the balance sheet (for example intellectual property), and any liabilities (including contingent and prospective ones) which may also not necessarily appear on the balance sheet.


  • Review all your funding streams, whatever their source. Mutuals that are reliant on trading income and certain types of fundraised income will most likely be more vulnerable than those reliant on grants from local authorities, NHS or other funders. Lots of trading income will be hit by inability to trade or deliver services, and a lack of demand caused by people cutting back and hoarding cash.
    • Meanwhile, many grant funders are changing their rules to allow project funding to be used as general funds and they are recognising the need to keep grantees afloat.  Local authorities may use their portions of the Spring budget’s £5 billion COVID-19 response fund to increase funding for certain key services, for example to enable service providers to source additional staff. What is your best guess for the income in each stream? Will the income be lost or just delayed?
    • Keep in close touch with commissioners and other funders to make sure they understand your situation. Commissioners may be able to adjust invoicing and payment structures to allow for the new ways in which your services are delivered, and they need to be made aware if you are simply unable to continue delivering your service effectively, so that contracts can be reviewed and negotiated as needed. You may also need to discuss with other funders about using project funding as general funds and about being relieved from other grant obligations.
    • If funders or contract counterparties call for a return of funds, you will need to resist this if the mutual may be insolvent as it may amount to a preference payment. Advice is needed.
    • Review demand expectations: with businesses cutting expenditure and hoarding cash, and certain public services significantly over-stretched while others are temporarily closed, what are your best guess income projections in relation to contractual income?
    • Consider how you can take advantage of the Government’s loan scheme to cover cash flow. Start talking to your bank now.
    • Obviously, a loan is not a gift and must be repaid so it is only a cash flow support. Do not take out a loan if there is no reasonable prospect of repaying it.
    • Unlike other businesses, charities cannot seek equity investment to cover their working capital in times of need. There are methods by which loan instruments for charities can be made to behave like equity investment but these are complex and beyond this brief guide. For non-charitable entities such as CICs, certain social finance initiatives may provide investment, which is again beyond the scope of this guide.


  • Review all expenditure and work out what is essential and what is discretionary. Although everyone cutting expenditure is what makes the economy freeze up, making the financial crisis worse, if your income is not certain you will inevitably freeze or delay such expenditure as you can.
    • Talk to creditors about having more time to pay.
    • Talk to HMRC about having time to pay. Do not treat HMRC as a creditor that afford not to be paid.
    • If you think the mutual may be insolvent, take great care in paying creditors to ensure that you do not make unlawful preference payments (see below).

5. Using assets


  • This moment is, obviously, what your reserves are for. It’s time to plan to use them. However, bear in mind that you may need them in order to wind up the mutual solvently if all else fails. And you need to bear in mind that the asset : liability ratio may look very different on a winding up than it looks on a business as usual basis. For example, it may not be possible to liquidate all the assets quickly; debts (e.g. redundancy costs and pension liabilities) may increase; and assets may become less valuable if a quick sale is needed.

Designated and restricted funds, and the ‘asset lock’

  • All types of mutual covered in this guide must spend their funds towards their charitable objects;for the community benefit or the benefit of their members. CICs are subject to an “asset lock” which requires them to dispose of their assets only in furtherance of their community benefit objects, to another asset-locked body, or for the community benefit more widely. This leaves them more or less free to use their assets as needed in order to keep running.  

Charities, meanwhile, should note the difference between designated funds and restricted funds. Designated funds are those that the trustees have designated for a particular purpose. They can be undesignated and used for the general purposes. Restricted funds have been given to the charity for a particular purpose and the trustees cannot unrestrict them. As to whether the donor can unrestrict them, this depends on the terms of the gift. Charity Commission intervention may be needed if statutory methods of releasing restrictions are not available. You will need legal advice on this.

Charities: Separate trusts and permanent endowment

  • For charities, some assets (and probably restricted funds) will be held on separate trusts and cannot be used for general purposes. Charities may also have “permanent endowment” assets, that cannot be spent on the charity’s purposes; the capital must be retained. In some circumstances, permanent endowment restrictions can be released. Again, you will need legal advice on removing restrictions.

6. Things you must not do

This section does not apply to unincorporated associations or charitable trusts.

Wrongful trading

    • Essentially, your duty to further the purposes of the mutual in the interests of service users is trumped by your duty to protect creditors. If you fail in that duty, you can be required by the Court to contribute to the assets of the charity on winding up. This can be particularly difficult if you have to balance other duties that the mutual owes to protect vulnerable beneficiaries, for example.
    • You should take professional advice if you have any concern that the mutual might go bust.

Preferring creditors

  • You must not prefer one creditor over another. Such payments can be set aside by the Court and can be a ground for disqualification as a director.
    • That does not mean you have to suddenly stop paying all creditors or only pay them the same proportion of the debts. For example, you can choose to pay a creditor whose continued support is vital to the survival of the mutual (where that survival is genuinely in prospect). You can also pay for professional advice to guide you through the situation.

Transactions at undervalue

  • For CICs, the “asset lock”, which protects the company’s community benefit focus, prevents transactions at undervalue (e.g. selling an asset to someone at less than market value) except where this is for the community benefit, and for all corporate entities certain transactions at undervalue can be set aside by the Court and can be a ground for disqualification as a director.

7. Rescue mechanisms – administration and company voluntary arrangements

These are beyond the scope of this brief guide. If you have reached the need for these, you will most likely have already appointed an insolvency practitioner or taken legal advice.

For further information, please contact your usual adviser at Bates Wells or Abbie Rumbold, Head of Public Services and Mutuals ([email protected])