Winding up a not-for-profit organisation

If the organisation is closing voluntarily, it's simply a matter of procedures; informing the relevant government departments, closing the bank account, and deciding which organisation will receive any remaining funds (if the organisation is registered as a charity in any Australian state or federally, the constitution will have a clause in it saying that the money must be transferred to another charity in the same field).

If, however, your group is closing involuntarily - if you've been unable to raise money or cut costs fast enough to keep the budget afloat - then it is important to realise the situation far enough in advance to be able to plan a dignified close while you're still solvent.

It's sometimes a difficult matter to know whether you're past the point of no return. You can get caught out between sure things that don't work out and promised donations that don't come in, so it's wise to start cutting down your obligations as soon as you're not certain you'll survive. Calculate what you would need to pay off all your obligations, and work to get that figure down. You may have to trim staff, or services.

You should pay off old debts and avoid new ones. This will be painful, and may seem pointless, but you will have read enough about corporate crashes to know what to avoid; disappearing with overhanging debts, enraged creditors, and unpaid staff risks a firestorm of bad publicity that may spoil things for everybody for quite a while, and you don't want that.

Make sure that you have enough money in the kitty to cover staff entitlements, and don't draw these funds down to prolong the inevitable.

Trading while insolvent is illegal, whether you're a for-profit business or a charity or a volunteer-dominated community organisation, and it's one of the few things that can get you into trouble legally. The insolvent trading provisions are some of the most important in the current company law. These provisions compel board members not to allow the organisation to trade while insolvent (unable to pay debts as and when they fall due) and not to allow the organisation to become insolvent.

You will breach this duty if you fail to prevent your organisation from incurring a debt when a reasonable board member would have been aware that there were reasonable grounds for suspecting the organisation's debts could not be paid as and when they fell due. Even if the organisation was solvent at the time of incurring the debt, an offence is committed if the organisation becomes insolvent by incurring the debt in question. In other words, if the organisation is in a death spiral, you have to close down while there's still enough money in hand to pay everybody what they're owed.

Penalties for insolvent trading are particularly severe. Civil penalties of up to $200,000 or disqualification from directorship may be imposed. They also apply to community sector organisations, though in practice the penalties may not be as severe. In very serious cases, board members may be criminally liable, which can mean a prison sentence. For this reason, it's vital that legal and financial advice is sought at the slightest hint of danger. Not knowing is no excuse. As a board member you have a duty to understand the financials.