There are many reasons why a charity may be liquidated, such as financial difficulties, mismanagement, or criminal activity. There are many reasons why a charity may be liquidated, such as financial difficulties, mismanagement, or criminal activity.
The process of liquidating a charity can be complicated, and it is important to seek professional legal advice before taking any action.
Once a charity has been liquidated, its assets will be divided among its creditors. Any leftover funds will be distributed to other charities with similar objectives. It is important to note that liquidating a charity is not an easy process, and it should only be considered as a last resort.
What’s Process of Liquidating a Registered Charity
If a registered charity in the UK needs to be liquidated, the process depends on the charity’s structure. There are a number of different legal structures that can be used for charities, including incorporated structures and unincorporated organisations. Incorporated structures are set up in a similar way to limited companies, and unincorporated organisations include societies and sports clubs. The process of liquidating a charity also varies depending on the size of the organisation.
For example, small charities can often be wound up by their trustees, while larger organisations may need to go through the courts. In all cases, however, the liquidation of a charity must be carried out in accordance with UK law.
When a commercial enterprise is liquidated, the primary goal is to maximise the interests of the creditors. However, in the case of a charity, there is also an obligation to ensure that the charitable purpose is still being served. As a result, investigations are carried out by the Insolvency Service to determine whether the trustees have breached their legal duties.
If it is found that they have, they may be held personally liable for any loss the charity has incurred. In addition, the Charity Commission may order the dissolution of the charity if it is no longer serving its purpose. Therefore, when a charity is liquidated, it is important to ensure that all interested parties are protected.
When is a Charity Insolvent?
The two tests for insolvency are:
- The debts of the charity cannot be paid as and when they fall due.
- The value of its liabilities exceeds the value of its assets.
Should a charity fail either of these tests, then that is a good indication of insolvency. There are also other indicators that a charity should be aware of. That includes things like:
- Insufficient income to meet the charity’s commitments so regally using reserves.
- Additional security for long-term borrowings.
- Creditors chasing overdue payments with additional pressure.
- The day to day finance needs of the charity relies on cash from restricted funds.
- There’s a lack of financial reporting in place;
- The charity borrowing facilities has been reached to its maximum.
- The charity has large contingent liabilities.
If you believe that the charity could be insolvent, they directors or charity’s trustees should make contact with their accountant or speak to an insolvency practitioner or other professional advisers to discuss the options available to them immediately. To ensure clarity you may also wish to take careful note of the advice they are given.
Possible routes for insolvent charities
A number of potential routes are available for when a charity becomes insolvent – these include:
- Merger with another charity that has similar aims
- Company Voluntary Arrangement (CVA)
- Informal arrangement with creditors
- What is voluntary liquidation
- Compulsory liquidation
The charity’s structure will deemed the most appropriate turnaround solution, this is done on a case by case basis. It is crucial to ensure UK insolvency regulations are complied with by seeking the advice of a licensed insolvency practitioner.
The Liquidation Process for Charities
- Charitable Companies Limited by Guarantee
The trustees of the charity are responsible for its management and are accountable to the members. The company has a number of members who help to determine its aims and fundraising objectives. Unlike a limited company, any profits the charity makes are put towards its stated purpose rather than being distributed to members. Unless there’s any evidence of misconduct or mismanagement, the liability of trustees and members on the liquidation of the registered charity is limited to the value of the original guarantee.
This structure is most like that of a limited company as it provides accountability and transparency in how the charity is run. It also ensures that any money made by the charity is reinvested back into achieving its charitable purposes.
If a charity becomes insolvent, the liquidation processes that can be used is known as a creditors voluntary winding up (CVL). A registered insolvency practitioner will take over control of the company, realise its assets and distribute the funds to its creditors. Any staff will be made redundant and the charity will be removed from the register at Companies House and will cease to exist.
- Charitable Incorporated Organisations (CIOs)
The Charitable Incorporated Organisation (CIO) is a type of incorporated charity in the United Kingdom. It was introduced by the Charities Act 2006 and came into effect on 1 January 2013. A CIO can be either a charitable company limited by guarantee or an unincorporated association. A CIO must have at least two principal purposes which are charitable as defined by the Charities Act 2011. A CIO is not a separate legal entity from its members, but it does have legal personality, meaning that it can enter into contracts, employ staff and hold property in its own name.
A CIO cannot be wound up as above, but it can be wound up by the court if it is insolvent. The main advantage of forming a CIO is that it gives the charity limited liability protection for its members, meaning that they are not personally liable for the debts of the CIO.
- Charitable Trusts
Charitable trusts are unincorporated bodies that are set up for the purpose of supporting a charitable cause. The trustees of the trust are responsible for its operations and are also liable for the debts of the trust if it becomes insolvent. The procedure for winding up a charitable trust is typically included in the trust deeds. This provides guidance on how to wind up the trust and how any remaining funds should be distributed.
All debts and liabilities must be paid off before any funds can be used to achieve the objectives of the trust or given to another charitable trust. Charitable trusts play an important role in society by supporting worthy causes and helping to make the world a better place.
- Unincorporated Associations
Unincorporated associations are a type of charity structure that does not have a legal identity which is separate to its members. Formal liquidation procedures are not available for unincorporated associations and if they do become insolvent, its members could be held personally liable for its debts. While this type of charity structure may have some disadvantages, it can also be simpler and more flexible than incorporated charities.
Concerned your Registered Charity is Insolvent?
If you’re worried your charity and would like to have a conversation about liquidation, we can provide confidential, no-obligation advice about the next steps to take and your duties as a charity member, director or trustee. To find out more, please get in touch with our registered charity liquidation team. We have experienced consultants who can work with you to assess your options and build a plan for moving forward. We understand that this can be a difficult and stressful time, but we’re here to help. Please don’t hesitate to contact us.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.