Like any business, when a registered charity becomes insolvent, something has to be done.
Read our complete guide to the process of liquidating a registered charity which means to formally close it down when it has reached a state of insolvency.
When is a Charity Insolvent?
There are two separate tests for insolvency. They are:
- The charity cannot pay its debts as they fall due for payment;
- The value of its liabilities exceeds the value of its assets.
If you are a charity’s trustee or directors who believe it could be insolvent, you should contact an accountant or speak to an insolvency practitioner to discuss the options available immediately.
The correct process for closing down a non-profit depends upon the way it’s structured, as detailed below.
How to Liquidate or Close Down a Registered Charity
The process used to liquidate a registered charity depends initially on the charity’s structure.
There are a number of different legal structures that can be used for charities in the UK. These include incorporated structures, which are set up in a similar way to limited companies, and unincorporated organisations such as societies and sports clubs.
As is the case with the liquidation of of a limited company, the interests of the charity’s creditors come first.
Liquidating the charity will mean it is closed down, staff laid off, and any assets sold in order to provide the best return for creditors.
Investigations will also be carried out by the Insolvency Service into the running of the charity and trustees who have acted in breach of their legal duties could be held personally liable for any subsequent loss the charity has incurred.
What’s the Liquidation Process for Charities?
(1) Charitable Companies Limited by Guarantee
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 and will cease to exist.
Trustees won’t find themselves personally liable in any way, unless it is discovered they have acted inappropriately.
(2) Charitable Incorporated Organisations (CIOs)
This is another incorporated charity structure, but in this case, the charity is not registered at Companies House. The same insolvent liquidation procedures can be used as described above, although there are some small modifications.
The charity’s assets will be sold and distributed to its creditors and in almost all cases the members will be protected from any personal liability for its debts.
(3) 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.
(4) Unincorporated Associations
This type of charity structure is not unincorporated and so 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.
Expert Advice When You Need it
If you’re worried your charity is declining then 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.
» MORE Read our full article on Insolvency in the Charity and Non Profit Sector