What Should Trustees Do When a SCIO Is in Financial Difficulty?

Written by: Shona Campbell

Partner & Head of Business Recovery and Insolvency

Last reviewed: 25 September 2026

Most charity trustees do not join a board expecting to deal with insolvency. Their focus is usually on delivering charitable objectives, supporting beneficiaries and ensuring the charity is well governed. However, changing funding conditions, rising costs and growing demand for services can place significant pressure on even well-run organisations. 

For trustees of Scottish Charitable Incorporated Organisations (SCIOs), financial difficulties can feel particularly challenging. SCIO insolvencies are relatively uncommon, and many trustees struggle to find clear advice that combines charity sector knowledge with specialist insolvency expertise. 

Understanding your responsibilities early and seeking appropriate advice can help protect the charity, its beneficiaries, staff, creditors and trustees themselves. 

Why Financial Difficulties Can Develop Gradually 

Financial problems within charities rarely appear overnight. More often, they emerge over months or even years as financial pressures slowly build. 

Common causes include: 

• Delayed or unsuccessful funding applications 

• Reduced grant income 

• Loss of a key contract or donor 

• Increased demand for services 

• Rising employment and operating costs 

• Diminishing unrestricted reserves 

• Cashflow pressures caused by timing differences between income and expenditure 

Because charities frequently operate in uncertain funding environments, trustees sometimes view these challenges as temporary setbacks. While optimism is understandable, financial decisions should be based on current facts rather than anticipated funding that has not yet been secured. 

A charity can become insolvent despite having promising funding opportunities in the pipeline. 

How Do Trustees Know If a SCIO May Be Insolvent?

A SCIO may be insolvent if it cannot pay its debts as they fall due or if its liabilities exceed the value of its assets. 

While a formal assessment may be required in some cases, trustees should pay close attention to emerging warning signs. 

Common Warning Signs 

Trustees should investigate if they notice: 

• Difficulty paying staff on time 

• Growing arrears with HMRC 

• Increasing pressure from suppliers or creditors 

• Persistent operating deficits 

• Reliance on reserves to fund routine expenditure 

• Borrowing to cover day-to-day costs 

• Use of restricted funds to support general operations 

• Loss of a significant funding source 

No single indicator automatically means a charity is insolvent. However, multiple warning signs often suggest that trustees should review the charity’s financial position urgently. 

The Most Common Trustee Mistake: Waiting Too Long 

One of the most frequent issues encountered in charity insolvency situations is delay. 

Trustees are often focused on securing new funding, winning grants or launching fundraising campaigns. While these efforts may eventually improve the charity’s position, they might not address immediate financial pressures. 

Seeking advice early can create additional options, including: 

• Cost reduction programmes 

• Service restructuring 

• Organisational mergers 

• New funding strategies 

• Solvent wind-down options 

• Formal insolvency procedures where appropriate 

When available cash is exhausted, the choices available to trustees are often more limited. 

Seeking advice should not be viewed as a sign of failure. It demonstrates responsible governance and a commitment to protecting the charity’s stakeholders. 

Understanding Trustee Responsibilities During Financial Distress 

When a SCIO experiences financial difficulties, trustees remain responsible for governing the organisation and acting in its best interests. 

This includes ensuring decisions are informed, reasonable and properly documented. 

Trustee Duties May Include:

• Reviewing up-to-date management accounts and cashflow forecasts 

• Holding regular board meetings 

• Keeping detailed records of decisions 

• Considering the interests of creditors where insolvency is a possibility 

• Taking professional advice when appropriate 

• Avoiding actions that could worsen the charity’s financial position 

• Ensuring compliance with regulatory requirements 

Trustees are not expected to have specialist insolvency knowledge. However, they are expected to understand the information available to them and make decisions that are in the best interests of the charity and its stakeholders. 

Why SCIO Insolvency Is Different 

Many trustees assume that a SCIO follows the same insolvency processes as a limited company. In reality, SCIOs are subject to a distinct legal and regulatory framework. 

The involvement of the Office of the Scottish Charity Regulator (OSCR), combined with the charity’s obligations to beneficiaries and funders, creates additional considerations beyond those typically seen in commercial insolvencies. 

Issues Often Unique to Charity Insolvency 

Trustees may need to consider: 

• Restrictions attached to grant funding 

• The treatment of restricted funds 

• Ongoing delivery of charitable services 

• Support for beneficiaries 

• Volunteer involvement 

• Regulatory reporting obligations 

• Community and stakeholder communications 

• Reputational considerations 

The insolvency process is only part of the challenge. Trustees must also manage governance, communication and stakeholder expectations throughout the process. 

What Options May Be Available? 

The most appropriate solution will depend on the charity’s circumstances, financial position and future viability. 

Potential options may include: 

Continuing Through Recovery Measures 

Where difficulties are temporary, trustees may be able to: 

• Reduce costs 

• Reorganise services 

• Improve financial controls 

• Secure new income streams 

• Strengthen contingency planning 

Trustees looking to improve financial resilience may find our guide on contingency planning helpful.

Merger With Another Charity 

In some situations, combining operations with another organisation may help preserve charitable services while strengthening financial sustainability. 

Solvent Closure 

Where trustees conclude that the charity’s objectives have been fulfilled or are no longer achievable, a planned solvent wind-down may be appropriate. 

Formal Insolvency Procedures 

Where insolvency cannot be avoided, formal processes may be necessary to protect creditors and bring the charity’s affairs to an orderly conclusion. 

Specialist advice can help trustees understand which options are realistically available and the advantages and disadvantages of each approach. 

A Real-Life Challenge Facing Trustees 

A situation we regularly encounter involves trustees who have already spent weeks seeking answers. 

They may have spoken with funders, professional advisers, regulators and representative bodies. While each source provides valuable information, trustees are often left trying to piece together a complex situation themselves. 

Common questions include: 

• Are we insolvent? 

• Can the charity continue operating? 

• What happens to employees? 

• How should creditors be treated? 

• Are trustees personally exposed to risk? 

• What role does OSCR play? 

• What does a winding-up process involve? 

Having a clear understanding of the charity’s position allows trustees to move from uncertainty to informed decision-making. 

Practical Recommendations for Trustees

If your SCIO is experiencing financial difficulties, consider the following steps: 

1. Obtain accurate and up-to-date financial information. 

2. Review short-term cashflow forecasts. 

3. Identify any restricted funding and associated obligations. 

4. Convene regular trustee meetings. 

5. Record all key decisions and supporting information. 

6. Communicate appropriately with stakeholders. 

7. Seek specialist charity and insolvency advice at an early stage. 

Early professional advice can help trustees understand their responsibilities, evaluate options and reduce uncertainty. 

Who Deals With an Insolvent SCIO? 

One of the reasons trustees often struggle to find clear advice is that SCIO insolvency follows a different process from company insolvency. Unlike a limited company, an insolvent SCIO cannot simply enter liquidation through an insolvency practitioner appointed by the trustees. Specific statutory processes apply, involving OSCR and the Accountant in Bankruptcy. Understanding which process applies and when specialist advice is required is crucial. 

How Henderson Loggie Can Support 

Henderson Loggie’s Business Recovery & Insolvency team advises charities, trustees, directors and stakeholders facing financial challenges. 

Our team helps organisations understand their financial position, evaluate recovery and restructuring options, navigate formal insolvency procedures where necessary and make informed decisions based on their specific circumstances. 

Learn more about our Business Recovery & Insolvency services.

Case Study: Finding Clarity During a Challenging Period 

A trustee board approached Henderson Loggie after several months of growing financial pressure caused by rising costs and funding challenges. 

The trustees had already sought advice from a range of organisations but remained uncertain about their responsibilities and available options. 

Their concerns were typical: 

• Could the charity continue trading? 

• What did they need to do about staff? 

• Were trustees personally at risk? 

• What would happen if the charity became insolvent? 

Following an initial review, the trustees received a clear action plan. We helped them assess the organisation’s financial position, understand their duties, improve stakeholder communications and navigate the processes applicable to an insolvent SCIO. 

While the circumstances remained difficult, greater clarity allowed the board to make informed decisions and plan the next steps with confidence. 

Key lesson: Seeking specialist advice early gave trustees a clearer understanding of their responsibilities and the options available to the charity. 

Conclusion 

Financial difficulties can be stressful for any trustee board, particularly when the future of a charity and its beneficiaries may be affected. 

The good news is that trustees do not need to navigate these challenges alone. Understanding the warning signs, maintaining strong governance and seeking professional advice early can help boards make informed decisions and preserve as many options as possible. 

Whether the outcome involves recovery, restructuring, merger or closure, early action typically leads to better-informed decisions and improved outcomes for stakeholders. 

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