Insolvency and Business Rescue for the Charity and Non-Profit Sector

Charities are being squeezed as demand for their help rises while the income to provide it falls. Grants and donations have tightened, costs have climbed, and reserves built up over years can be run down surprisingly quickly once spending outstrips income.

That can be deceptive. A charity can be busier than ever, doing vital work, and still be heading for insolvency, because activity is not income, and restricted funds given for a specific purpose cannot lawfully be used to pay the general running costs.

Trustees often keep going by drawing down unrestricted reserves, delaying suppliers or hoping the next grant lands, none of which addresses a structural gap between what the charity spends and what it can reliably raise.

The important question is not how much good work is being done. It is whether the charity can pay its debts as they fall due, and whether its income can sustainably cover its costs.

This guide explains the warning signs of insolvency in a charity, the duties that fall on you as a trustee, what happens to restricted funds, and the options open to you when a charity can no longer pay its way.

Insolvency in the Charity and Non-Profit Sector

Gauging the true scale of charity insolvency is harder than for any other sector, because the official figures were never built to show it. The Insolvency Service records companies, not causes, so a failed charitable company sits in the statistics beside a commercial firm with nothing to distinguish them, and unincorporated charities do not appear at all.

What the Charity Commission and sector data do show is a clear direction of travel. More charities are spending beyond their income, reserves for many have fallen to around two months of cover, and both insolvencies and major closures have risen sharply.

This is a structural shift, not a bad year, and it is why the boards that call us now are often ones that felt secure eighteen months ago. In the cases we handle, the loss of confidence is rarely mission or effort; it is the arithmetic underneath.

What’s Driving Charity Insolvencies

What is worth drawing out is how these pressures convert into insolvency, because a charity can appear soundly resourced, and strong in its mission, while its unrestricted position is quietly deteriorating. Three account for most of the failures.

Demand rising as income falls

The core bind is that need is rising while the means to meet it shrinks. Demand rose for the large majority of charities through 2024, while the number of people giving regularly fell by around four million against 2019. You are asked to do more with less, and the gap comes out of your own funds, month after month.

Inflation erodes what remains. A grant or a donation agreed a few years ago now buys noticeably less delivery than it did, so income that holds steady in cash terms still funds fewer services each year. That slow real-terms decline is easy to miss until it surfaces as a deficit in the annual accounts, and by then a good deal of ground has already gone.

Funding cuts and single-funder exposure

Public funding has contracted sharply. Government grants to the sector have fallen by around £1 billion a year in real terms since 2020, and councils under their own pressure have delayed multi-year settlements, leaving charities to bridge short-term gaps from reserves they can ill afford to spend.

Concentration turns that into a solvency risk you can measure. Where a large share of your income depends on one grant or one local-authority contract, its loss can move the charity from stretched to insolvent inside the notice period, unless the cost base can be cut just as fast, which it rarely can.

Relate lost a major delivery contract well before it eventually entered administration, and that sequence, one lost contract then a slow slide, is one we see repeatedly.

Rising costs against thin reserves

Charities carry the same cost inflation as any employer. Wages, the National Living Wage, higher employer National Insurance from April 2025, energy and rent have all risen, and because charitable work is labour-intensive, payroll pressure lands especially hard on you.

Years of covering deficits have left little in reserve. The Charity Commission found more than four in ten charities spending beyond their income in 2023, and average reserves across much of the sector are now around two months of operating cover.

With that little in hand, a single funding shock can move a charity into insolvency within weeks rather than months, and the board is often the last to be told how thin the cushion has become.

Warning Signs a Charity Is in Trouble

Financial distress in a charity usually shows well before the money runs out. As a trustee these are the signs to act on early, because they also mark the point where your legal duties begin to change.

• Reserves below your own policy. Free reserves falling under the level your reserves policy sets, with no credible plan to rebuild them.
• Payroll and pensions under strain. Relying on the overdraft to meet salaries or pension contributions on time, or stretching supplier payments to get through the month.
• Restricted funds flattering the picture. A comfortable-looking bank balance that is largely restricted grant money, masking an unrestricted position that is in deficit.
• Dependence on a single funder. One grant or contract sustaining the budget, so its loss or delay alone would be enough to make the charity insolvent.
• Going-concern doubts. Auditors raising concerns about the charity’s ability to continue as a going concern, or a board reluctant to confront the question.

If more than one of these is true, the charity may be approaching insolvency. That is the point to take advice from a licensed insolvency practitioner, while options are open, rather than waiting for a creditor or the bank to force the timing. Acting early is also what best protects you as a trustee, which matters more here than the board often realises.

Trustee Duties When Insolvency Looms

This is where charity insolvency departs furthest from an ordinary company failure, and where the trustees we act for are most often caught out. As insolvency becomes probable, what the law expects of you changes, and so does what you may lawfully do with the charity’s money.

Getting that sequence wrong is what turns a hard closure into personal exposure, and it is the single thing worth understanding before anything else.

Your duty shifts towards creditors

Ordinarily your overriding duty is to the charity’s beneficiaries and its purposes. Once insolvency becomes likely, that duty shifts: for a charitable company or a CIO, protecting creditors from further loss comes first.

In practice it can mean pausing grants or asset transfers that would otherwise be exactly what your mission calls for, because carrying them out would leave creditors unpaid, and that is a genuinely hard thing for a committed board to accept.

Continuing to operate regardless is where the personal risk sits. If the charity keeps incurring debts when there is no reasonable prospect of avoiding insolvent liquidation, trustees can be found to have traded wrongfully and asked to contribute personally.

Taking advice early, minuting your decisions, and treating all creditors even-handedly are what protect you, and in our experience a board that does those three things is rarely the one that ends up exposed.

Restricted funds are not a lifeline

You already treat restricted funds as ring-fenced; in insolvency that ring holds. Money given for a specific purpose cannot be used to meet core costs or pay general creditors without permission from the Charity Commission or the original donor, which is rarely given.

It is why a charity can look solvent right up to the day it is not, because the healthy-looking balance is someone else’s restricted money, and why reaching for those funds to keep going is a serious misstep.

Permanent endowment is more protected again, and generally stays outside the pool available to creditors. On top of this, insolvency is a notifiable event: the Commission expects a serious incident report, and any assets left once creditors are met must pass to another charity with similar objects, never to members.

These rules are why specialist handling matters here more than in most sectors, and why we bring the regulatory steps into the plan from day one rather than treating them as paperwork for later.

Your Options if a Charity Can’t Pay

The route open to you depends heavily on how the charity is constituted. A charitable company or a CIO can use formal rescue and insolvency processes; an unincorporated charity or trust cannot, and there the exposure falls on the trustees personally, which makes early advice all the more important.

None of the routes below is a defeat, and we talk boards through each of them every week. Once insolvency is likely, keep operating only on informed advice.

• Time to Pay arrangement. Where the charity is viable and the issue is a defined HMRC arrears, a Time to Pay arrangement spreads PAYE or VAT over a manageable period and keeps you operating.
• Company Voluntary Arrangement. A CVA lets a viable charitable company compromise its debts and continue its work, where the underlying model can be made sustainable.
• Administration and rescue. Administration protects the charity from creditor action and can support a rescue, including a transfer of services to another charity, as when Family Action took on Relate’s operations.
• Creditors’ Voluntary Liquidation. Where a charitable company cannot be saved, a CVL winds it up in an orderly way and deals with creditors, while restricted funds and any endowment are handled under charity law.

Two things shape the outcome. The charity’s legal form decides which routes are open and where personal liability sits, so establish it first. And the regulatory layer, from serious incident reporting to the treatment of restricted funds, has to be run alongside the insolvency rather than picked up afterwards, which is why a practitioner used to charities is worth seeking out.

Even where the organisation itself cannot be saved, its work and many of its jobs often can, as Relate’s counselling services were, and that is usually the outcome worth fighting for.

Frequently Asked Questions About Charity Insolvency

Related Guides: Charities and Insolvency

• Company Voluntary Arrangements: compromising debt while continuing to operate.
• Company Administration: protection, rescue and transfer of services.
• Creditors’ Voluntary Liquidation: the orderly route to close an insolvent charitable company.
• HMRC Time to Pay Arrangements: spreading PAYE and VAT arrears.
• Are Directors Personally Liable for Company Debts?: how personal liability arises, including for trustees.
• Can’t Afford to Pay Suppliers: managing creditor pressure fairly.