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Introduction
If an organisation is unable to provide its services due to a disaster, this can have serious consequences, both for the organisation itself and for the people who rely on its services.
Sometimes other organisations or government agencies can step in to provide emergency services to people affected by the disaster.
It is important for organisations to have contingency plans in place to address the potential impact of service disruptions. These plans may include measures to reduce costs, increase revenue, secure financial assistance, and ensure continuity of essential services.
Legal consequences
Legal consequences that may follow if an organisation can't provide its services due to a disaster include:
- breach of contract – an organisation may be in breach of contracts with other parties if it cannot fulfill its obligations due to a disaster. This could lead to claims for damages, termination of contract, or other legal remedies
- non-compliance with laws, such as governance or fundraising laws. Failure to comply with these requirements could result in fines, penalties, or other legal actions
- negligence – if the organisation's failure to provide services results in harm to third parties, it may be liable for negligence. This could include claims for personal injury, property damage, or economic loss
- financial implications, such as loss of revenue – a service disruption can lead to a significant loss of revenue, which can put the organisation's financial health at risk. This may result in difficulty meeting financial obligations, including paying bills, salaries, and debts. If an organisation has difficulty meeting financial obligations, it could face insolvency
Remember
Actions an organisation can take to mitigate the risks associated with a disaster to minimise service disruption include:
- planning for a disaster – having a plan for how the organisation will respond to a disaster and continue to provide essential services
- reviewing insurance – considering whether the organisation has adequate insurance coverage to protect against losses due to disasters
An organisation may be able to recover some of its financial losses through insurance claims. However, the coverage provided by insurance policies can vary, and there may be limitations or exclusions that apply.
Case study – inaccessible warehouses after a flood
Food Relief Victoria, an organisation that distributes food aid state-wide can’t provide its services because its warehouses are not accessible after a flood.
In addition to the organisation’s reduced ability to provide food assistance, it may face the following financial implications:
- loss of food supplies (due to perishable food becoming unsafe to consume), reduced donations (donors may be facing their own financial hardship) and higher costs to replace food (due to increased demand)
- increased operational costs (for clean-up efforts, temporary storage solutions, transportation expenses for sourcing replacement food and increased demand for service)
- delays processing insurance claims and short-falls in claims
In these circumstances, Food Relief Victoria may struggle to pay bills, salaries, and debts. If the organisation is unable manage the financial situation, it may face the risk of insolvency.
Risk of insolvency
The inability of a not-for-profit organisation to provide its services due to a disaster could potentially expose the organisation to the risk of insolvency. An organisation is insolvent if it cannot pay its debts as and when they become due and payable.
Under laws that apply to certain legal structures (such as incorporated associations, companies limited by guarantee and partnerships) and organisations registered as a charity with the ACNC, a director, committee member or office holder has a duty to avoid insolvent trading (as part of the duty to act with reasonable care, skill and diligence).
When a disaster or emergency has impacted an organisation’s usual activities (such as fundraising and service delivery), the organisation must proceed with caution.
It is important that organisations recognise the warning signs of insolvency such as:
- difficulty paying bills
- consecutive financial periods of loss
- loan applications being declined, and
- trouble paying staff
If an organisation can recognise warning signs of insolvency, it can take action to guard against insolvency. Such action could include:
- not taking on excessive debt
- reducing costs and expenditure
- ensuring budgets are accurate and well considered
- maintaining transparent decision making
- considering what non-essential expenses can temporarily be suspended, and
- seeking additional funding sources such as through a fundraising appeal
During a disaster, action that organisations can take to avoid the risk of insolvency includes:
- ensuring any distribution of funds continues to go through the proper processes before payment is made
- communicating your disaster situation to creditors and asking if they can provide any assistance such as a discount or payment plan, and
- consultation of disaster plans that the organisation has in place for such situations
If you are concerned that your organisation is facing insolvency, it is important to seek external professional advice including from an accountant or lawyer. There are specific processes that can be followed if an organisation is at risk of insolvency. These processes can be highly technical, so a professional adviser should be engaged to guide an organisation through the process.
For more information, see our fact sheet on Insolvency and incorporated associations and CLGs and our resources on Ending your organisation.
Disclaimer: These resources provide general information about legal issues that may arise for not-for-profit organisations in managing disasters. This information is a guide only and is not legal advice. If you or your organisation has a specific legal issue, you should seek legal advice before deciding what to do. See full disclaimer and copyright notice.
The content on this webpage was last updated in December 2024.
