Charities are not immune to the financial challenges and threats of liquidation that confront profit-driven businesses. If the organisation has become insolvent, liquidation is the legally appropriate way to close it down, ensuring fair treatment for creditors.

This article clarifies the liquidation process for charities, explaining its causes, procedures, and how it varies for different types of charitable entities.


What Does Liquidation Mean for a Non-Profit?

Liquidation marks the end of a charity’s journey, a process initiated when an organisation can no longer meet its financial obligations. It involves dissolving the charity’s legal existence, ceasing operations, and distributing its remaining assets to creditors. The decision to liquidate is never taken lightly, as it signifies the charity can no longer function, fundraise, or fulfil its mission.

For a charity, liquidation is the last resort after all other options to salvage the financial situation have been exhausted. This drastic step is considered only when the charity is insolvent, meaning its liabilities exceed its assets and it cannot pay its debts as they fall due. The reasons leading to this point can vary widely, from failed fundraising efforts and declining donations to catastrophic events disrupting normal operations.

The impact of liquidation is profound. It not only affects the charity’s beneficiaries and employees but also its donors, volunteers, and the broader community it serves.

What Is The Process Of Liquidation For A Charity?

The liquidation of a charity involves several steps designed to ensure a fair and orderly winding down of operations. The process typically starts with a resolution to liquidate, either made by the charity’s trustees or forced by creditors through a court order.

  1. The first step is a formal decision to liquidate, either voluntarily by the charity’s governing body acknowledging their insolvency or involuntarily by creditors seeking repayment through legal means.
  2. A licensed insolvency practitioner (IP) is appointed to oversee the process. This professional is responsible for valuing and selling the charity’s assets, settling legal disputes, and distributing the proceeds to creditors.
  3. The IP sells the charity’s assets, which can include physical items, investments, and any intellectual property, to generate funds to pay off debts.
  4. Creditors are paid in order of priority as defined by law, with secured creditors typically being paid first, followed by unsecured creditors and, if funds allow, any interest owed.
  5. Once debts have been paid and remaining funds distributed, the charity is formally dissolved, ceasing to exist as a legal entity.

Liquidation Options for Charities

Charities facing liquidation have a few paths they can take, depending on their financial situation and legal structure:

Each option has implications for how assets are liquidated, how creditors are paid, and the level of control trustees retain over the process. Choosing the right path requires careful consideration of the charity’s specific circumstances and the advice of an insolvency practitioner.

Different Types of Liquidation for Different Types of Charities

The implications of liquidation vary significantly among different types of charities, primarily due to their legal structure. Understanding these distinctions is crucial for trustees and directors, as it influences the liquidation process and their responsibilities.

Limited Charitable Companies

This is the structure most like that of a limited company as the charity is registered at Companies House, is run by directors (trustees), is limited by guarantee and has members that 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.

If this type of charity becomes insolvent then the liquidation processes that can be used, namely a Creditors’ Voluntary Liquidation (CVL) or compulsory liquidation, are the same as in the insolvency of a limited company.

In both cases, 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.   

Trustees won’t find themselves personally liable in any way, unless it is discovered they have acted inappropriately. 

Charitable Incorporated Organisations (CIOs)

CIOs are a form of incorporated charity that is not registered with Companies House but is regulated by the Charity Commission. Like limited companies, they provide trustees with protection from personal liability.

One critical aspect specific to CIOs is the level of oversight and support provided by the Charity Commission throughout the liquidation process. The Commission’s involvement ensures that the liquidation adheres to charity law, protecting not only the creditors’ interests but also the charitable aims of the organization. This oversight includes approving the appointment of the insolvency practitioner and reviewing the final accounts before the CIO is removed from the register of charities.

Charitable Trusts

Charitable Trusts are unincorporated bodies and as such, the trustees who conduct their operations are also responsible for the charity’s debts if it becomes insolvent.

The procedure for winding up a Charitable Trust will usually be included in the trust deeds. That will provide guidance on the winding up of the trust and dictate how any funds should be distributed. All debts and liabilities will need to be cleared before they can be put towards the charity’s objectives or given to some other charitable trust.   

Unincorporated Charities

Unincorporated charities are the most vulnerable in terms of personal liability. They operate without a separate legal identity, meaning trustees or members could be personally liable for the charity’s debts. Liquidation of unincorporated charities thus requires a meticulous process to ensure debts are settled in a way that minimises personal financial risks to trustees.

The type of charity significantly influences the approach to liquidation, the responsibilities of trustees, and the protection of their personal assets. These distinctions underline the importance of legal structure in determining the best course of action during financial distress.

Contact Company Debt Today for Expert Guidance

If you’re worried your charity is declining, whatever its structure, 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 team.

We offer:

  • Tailored Solutions: We understand that each charity is unique, so we offer bespoke solutions designed to address specific challenges and objectives.
  • Legal Compliance: We ensure that your charity meets all legal obligations during the liquidation process, protecting trustees and directors from potential liabilities.
  • Asset Maximization: Our experts work to maximize the value of your charity’s assets, ensuring that creditors are paid as fully as possible and that the process is as smooth and beneficial for all parties involved.
  • Support and Guidance: From the initial decision to liquidate to the final steps of dissolution, Company Debt provides support and guidance, helping you make informed decisions at every stage.

» MORE Read our full article on Insolvency in the Charity and Non Profit Sector