As a board member one of your key responsibilities is to ensure your not for profit organisation remains solvent which means the debts can be paid as they fall due.

As discussed in previous posts, if you do not discharge these responsibilities the penalties are significant.  Irrespective of the size of your not for profit or the fact you are a volunteer, you need to understand the ramifications.

For example, you may be a small local sporting club that makes a decision to take out a loan to upgrade or purchase new facilities.  The expected growth in members and maybe even an increase in membership fees may be the main source of income that will be used to re pay the loan.  You may find for the first couple of years these fees cover the repayments but in later years there may be a decrease in membership making payments more difficult.  In the extreme you are not able to make re payments as you have in adequate cash flow.

At this point you are likely to be insolvent and you may need to cease trading or face the possibility of fines.

Can you imagine what would happen if Robin Hood gave away all the money without paying for his last order of arrows?  He would be out of business and have an angry fletcher firing arrows at him.  Insolvency has a sting in its tale.

Often the perception is that this mainly applies to larger organisations and public companies that are covered under AISC legislation and as a small not for profit organisation it won’t happen to us.

Well it can happen to you.  Recent changes to legislation in Victoria which apply from 1 July 2012, highlight the concern of our legislators and the need to address this issue.  Under the Associations Incorporation Act (2010) board and committee members of incorporated associations face penalties of up to $20,000 for breaches of new legal duties, including allowing their organisation to trade while insolvent.

The key new duties of board and committee members have been clarified and added to.

The new fines will apply for breaches of these duties. The main defences would be ‘business judgement’ (informed decisions were made in good faith in the interests of the association) and ‘reliance on information’ (a decision relied on information provided by a competent person).

Whether you are a board member or volunteer treasurer how do you ensure your organisation is currently solvent and will be in the future?