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How are charities treated differently to limited companies in a formal insolvency procedure?
Although many charities are structured in a similar way to limited companies, various types of charity formations exist. In some cases, however, the structure of the charity restricts the range of insolvency processes available should they suffer financial difficulties.
The recent demise of the Kids Company charity was blamed on financial mismanagement, and the charity was subject to investigation after it went under in August 2015. Its reliance on public money also became a political issue, after a £3 million government grant was provided one week before the charity closed.
Here we look at the different types of charity formations, the liability of trustees and directors, and how insolvency might affect each one.
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Many charities are set up like limited companies, with directors and members having limited liability. Any profits made by the charity are used specifically for charitable purposes, and are not distributed to members at any point.
The guarantee provided by each member determines their level of liability in insolvency, and this amount is generally very small - between £1 and £10. Directors of the guarantee company are also its trustees, and must comply with both company and charity law.
If the charity enters insolvency, the same options available to a limited company can be used, but it’s worth noting that directors of a company limited by guarantee also have the same duties and responsibilities of limited company directors.
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The business of a charitable trust is conducted in the name of its trustees, who become liable should the charity enter insolvency. Trust deeds have long been used in the formation of charities, and many modern trust deeds include the procedures to be used for winding-up in the event they become insolvent.
Trustees and members of CIOs enjoy limited liability, but the charity is not registered at Companies House. This type of charity is regulated by the Charity Commission only, and can be dissolved or voluntarily wound-up according to their constitution.
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Often called clubs or societies, unincorporated associations are not separate legal entities, and therefore members may become personal liable for the association’s debts in insolvency.
It is unlikely that a club or society will have been formed to make a profit, meaning that formal insolvency procedures do not apply in these cases.
These are bodies incorporated by charter rather than the Companies Act, and they have limited access to UK insolvency procedures. Pre pack administration may be available, but they are unable to use the company administration route, a Company Voluntary Arrangement, or voluntary liquidation.
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The majority of Industrial and Provident Societies are mutuals, and work on behalf of their members. Others are community-focused, and known as Community Benefit Societies. New legislation introduced in 2014 now allows most IPSs to enter administration, and opt for a CVA or scheme of arrangement.
The Charity Commission has extensive powers to act in the event of charity insolvency, and can call for an investigation into the charity’s management. They protect the interests of beneficiaries, and can order trustees to compensate the charity if it is found they have been negligent.
If you are involved in a charity and require more information on your potential liability in insolvency, and which procedures may be available, Real Business Rescue can help. Our expert team has vast experience in this area, and can guide you on the best way forward. Call any one of our nationwide offices around the UK to arrange a free same-day appointment.
Further Reading on How are charities treated differently to companies in a formal insolvency procedure?
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