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What happens when a charity is insolvent?

When a charity becomes insolvent, it means that it cannot pay its bills as they fall due.  The actions of the charity’s directors and trustees leading up to insolvency will come under scrutiny to establish the cause of its downfall, and allow for any necessary action to be taken.

A number of different charity structures are available in the UK, and in this respect, the ramifications for those involved in setting up and running each charity depend on the structure chosen.

Possible routes for insolvent charities

A number of potential solutions are available when a charity becomes insolvent – these could include:

  • Refinancing
  • Merging with another charity that has similar aims
  • Administration
  • Company Voluntary Arrangement (CVA)
  • Informal arrangement with creditors
  • Sale of the charity
  • Dissolution
  • Voluntary winding-up
  • Liquidation

Which measure is deemed most appropriate depends on the charity’s structure, and circumstances of each case. The advice of a licensed insolvency practitioner is crucial to ensure UK insolvency regulations are complied with, however.

Is personal liability an issue for members of an incorporated charity?

There are two forms of incorporated charitable body in the UK:

  • Charitable companies (limited by guarantee)
  • Charitable Incorporated Organisations (CIOs)

For the most part, charitable companies limited by guarantee, and the relatively new CIO charitable structure, provide protection from personal liability for directors and members. Each member provides a guarantee – a minimal amount, usually between £1 and £10 – for which they are liable in the event of insolvency.

But in the same way that, under certain circumstances, a limited company’s directors may be held responsible for some or all of the company’s debts on liquidation, directors of these charitable structures can also become liable if they have failed to maximise creditor interests due to negligence or wrongful behaviour, including:

  • Transactions at an undervalue
  • Wrongful trading
  • Breach of trust
  • Fraud

Unincorporated charities and personal liability

The main unincorporated UK charity structures are:

  • Charitable trusts
  • Unincorporated associations

Charitable trusts are not regarded as separate entities in law. They use a trust deed (or sometimes a will) to conduct their business, and the charity’s trustees are named on the deed. This means the trustees are personally liable for any debts incurred by the charity that cannot be repaid.

Similarly, those involved in the formation and running of an unincorporated association, often a club or society that uses a constitution or rules in order to operate, become liable for its debts in insolvency.

If you are involved in the running of a charity that has become insolvent, or is failing financially, Begbies Traynor can advise on insolvency and the next steps to take. We are insolvency specialists with extensive experience in the charitable sector. Please contact one of our expert team to arrange a free same-day consultation – we work from over 40 offices around the UK.

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