Charity ends when the debts become personal

Hilary Hay could be a few hundred pounds poorer in a few days thanks to helping out with a local voluntary group. Ms Hay is one of half a million people in this country on the management committees of local charities, youth clubs, sports clubs and the like who could face personal bills if their groups run out of money while in debt.

When Ms Hay became involved with the Belgrave Residents' Association in Leicester she did not consider the legal and financial risks of joining its committee. Now the dangers have surfaced, with demands from the Inland Revenue for tax and national insurance arrears, and a pending court action about printers' bills. "The letter from the Inland Revenue does imply that all members of the management committee are liable," says Ms Hay. "But as far as I am concerned, the Belgrave Residents' Association doesn't exist once it has lost council funding."

Hundreds more community groups across the country have lost their grants this month because of spending cuts by local authorities at the end of the financial year. And for committee members, losing funding may not end the liabilities.

A spokeswoman for Leicester City Council, which funded the Belgrave group until last year, says: "The responsibilities lie with the management committee. The City Council does not accept any liability. However, the council may consider assisting independent organisations with legitimate winding-up costs."

Sandy Adirondack is co-author of The Voluntary Sector Handbook, published by the Directory of Social Change, and a trainer of management committee members. She says: "In some situations it may be possible to negotiate with creditors to cut the amount that is due from individuals. Where an organisation becomes insolvent the members may become liable if it is an unincorporated association. If it is incorporated, the members are protected in many but not all situations."

The status of incorporation can be achieved by converting an association into a company or an industrial and provident society, both of which give members limited liability. But the Inland Revenue makes it clear that even with limited liability, committee members or directors will still be pursued for any tax or national insurance outstanding. Members should take legal advice on how to handle a group's closure or its insolvency, says Ms Adirondack.

The main way to reduce the risks of a personal financial comeback is incorporation, she says. "But most importantly, always ask appropriate questions, go to all meetings, monitor the finances, look at the accounts, ensure they are properly audited by people with experience of the voluntary sector. Also make sure the organisation has a regular review of its insurances. Finally, get training for committee members."

As well as properly insuring vehicles, groups should also have employers' liability (if they have staff) and public liability cover. Those groups that give advice should also consider having professional indemnity cover.

Alexander and Alexander (01737 774177) and First City (0171 247 6595) are among the insurance brokers specialising in suitable policies likely to start at about pounds 250 for cover for all committee members. Consent from the Charity Commission will normally be needed before a charity's income can be used for this purpose.

Governors of schools face fewer personal risks since state schools, including those grant-maintained, are treated as incorporated bodies. Walter Ulrich, information officer for the National Association of Governors, says: "Provided they act reasonably and in good faith, any loss that arises is charged not to them but to the school's budget."

The exception, says Joan Sallis, who is on the management committee of Action for Governors - which trains school governors - is that professionals, such as accountants and lawyers, will be expected to exercise the same duty of care in giving specialist advice as governors as when they are conducting professional business.

Sometimes the slide into insolvency can begin with a relatively small incident. Part of the problem for the Belgrave Residents' Association, for instance, was the demand for interest on a grant given for a magazine that was never produced.

"That is when the financial problems started," says Ms Hay. "I am on a low income, and I'd never have taken on anything with these legal implications if I had realised. I do think it's unfair - you end up finding yourself liable for lapses which aren't very serious. The management committee members were just not vigilant enough."