Updated: 26th February 2021
When a registered charity enters insolvency and has to be liquidated, the process used depends on the charity’s structure. A number of charitable legal structures exist in the UK, including the incorporated model set up in a similar way to a limited company, and unincorporated bodies such as sports clubs and societies.
Important factors within these processes include personal liability for the charity’s trustees, ensuring that creditor returns are maximised, and the potential for investigation by the insolvency service should they be concerned over pre-insolvency actions by those running the charity.
This is the structure most similar to that of a limited company, and is registered at Companies House. A charity limited by guarantee is run by directors, with members contributing to its aims and intentions via fundraising and other methods of support.
Any profits made by the charity are used for its stated purposes, rather than being distributed to members as with a limited company. The liability of directors and members on liquidation is limited to the original guarantee provided – usually £10 or less.
The Insolvency Act, 1986, allows for the same insolvent liquidation processes to be available as for a limited company - Creditors’ Voluntary Liquidation (CVL), and compulsory liquidation. The charity’s assets are sold, and creditors repaid as far as possible from the proceeds. Once the process is complete, the charity is removed from the register at Companies House.
These types of charity are incorporated, but are not registered with Companies House. Again, insolvent liquidation procedures available to the charity are the same as for limited companies, with appropriate modifications.
It should be noted that directors of CIOs and companies limited by guarantee, can become liable for the debts of their charity if financial mismanagement or misconduct is identified by the liquidator.
Charitable Trusts are unincorporated bodies. Their operations are conducted by appointed trustees, who are liable for the charity’s debts should it enter insolvency. Charitable Trusts aren’t treated as separate legal entities, as their incorporated counterparts mentioned above. Procedures for insolvent winding-up are generally included in their trust deeds.
As the name suggests, this type of charity structure is not a separate entity in law, and must use a constitution or set of rules in order to operate. Formal liquidation procedures under the Insolvency Act, 1986, are not available for this type of charitable club or society, and members may be held personally liable for its debts.
If you are a charity member, trustee, or director, and fear the charity is declining, Real Business Rescue can provide valuable professional advice on the next steps to take. Failing to minimise creditor losses can result in personal liability even the charity is incorporated, so it’s vital to understand your duties and responsibilities in this respect. With 101 offices across the UK, you’re never far away from expert and confidential advice.
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