Charities are not immune to the financial challenges and threats of liquidation that confront profit-driven businesses. If your organisation has become insolvent, liquidation is the legally appropriate way to close it down, ensuring fair treatment for creditors.
Liquidation may also be appropriate when a solvent charity has simply decided not to raise further funds, and wishes to close down appropriately.
This article clarifies the liquidation process for charities, explaining its causes, procedures, and how it varies for different types of charitable entities.
Liquidation marks the end of a charity’s journey. It involves dissolving the charity’s legal existence, ceasing operations, and distributing its remaining assets to creditors [1]Trusted Source – GOV.UK – How to close a charity. The decision to liquidate is never taken lightly, as it signifies the charity can no longer function, fundraise, or fulfil its mission.
For an insolvent charity, liquidation is usually the last resort after all other options to salvage the financial situation have been exhausted[2]Trusted Source – GOV.UK – What steps might a charity consider taking where insolvency is a possibility. This drastic step means its liabilities exceed its assets, and it cannot pay its debts as they fall due. The reasons leading to this point can vary widely, from failed fundraising efforts and declining donations to catastrophic events disrupting normal operations.
The impact of liquidation is profound. It affects the charity’s beneficiaries and employees, its donors, volunteers, and the broader community it serves.
What Is The Process Of Insolvent Liquidation For A Charity?
The liquidation of a charity involves several steps designed to ensure a fair and orderly winding down of operations.
The process typically starts with a resolution to liquidate, either made by the charity’s trustees or forced by creditors through a court order.
The first step is a formal decision to liquidate, either voluntarily by the charity’s governing body acknowledging their insolvency or involuntarily by creditors seeking repayment through legal means.
A licensed insolvency practitioner (IP) is appointed to oversee the process. This professional is responsible for valuing and selling the charity’s assets, settling legal disputes, and distributing the proceeds to creditors.
The IP sells the charity’s assets, which can include physical items, investments, and any intellectual property, to generate funds to pay off debts.
Creditors are paid in order of priority as defined by law, with secured creditors typically being paid first, followed by unsecured creditors and, if funds allow, any interest owed.
Once debts have been paid and remaining funds distributed, the charity is formally dissolved, ceasing to exist as a legal entity.
Different Types of Liquidation for Different Types of Charities
It’s important to note that the implications of liquidation vary significantly among different types of charities, primarily due to their legal structure. I’ll cover these differences below.
Limited Charitable Companies
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, the charity’s profits are used to further its stated purpose rather than being distributed to members. Unless there’s evidence of misconduct, trustees’ and members’ liability is limited to the value of the original guarantee during the liquidation.
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.
Charitable Incorporated Organisations (CIOs)
CIOs are a form of incorporated charity that is not registered with Companies House but is regulated by the Charity Commission. Like limited companies, they protect trustees from personal liability.
One critical aspect specific to CIOs is the level of oversight and support provided by the Charity Commission throughout the liquidation process.
The Commission’s involvement ensures that the liquidation adheres to charity law, protecting not only the creditors’ interests but also the charitable aims of the organisation. This oversight includes approving the appointment of the insolvency practitioner and reviewing the final accounts before the CIO is removed from the register of charities.
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.
Winding up a Solvent Charitable Company
If the charity has significant assets (above 25k) a Members’ Voluntary Liquidation (MVL) is a formal procedure that ensures the charity’s debts are settled before distributing any remaining assets to its beneficiaries.
To begin, the trustees must agree to dissolve the charity, making sure this decision aligns with the charity’s governing document. Once the decision is made, the trustees notify the Charity Commission of their intention to wind up.
The charity will then appoint a licensed Insolvency Practitioner (IP) to oversee the liquidation. The IP ensures that all creditors are paid, and any remaining assets are distributed appropriately, often to other charitable causes in line with the charity’s objectives.
Once all financial matters are settled, the charity is formally removed from the Charity Commission register, marking the official end of its operations.
Contact Company Debt Today for Expert Guidance
If you’re worried your charity is declining, 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.
We offer:
Tailored Solutions: We understand that each charity is unique, so we offer bespoke solutions designed to address specific challenges and objectives.
Legal Compliance: We ensure that your charity meets all legal obligations during the liquidation process, protecting trustees and directors from potential liabilities.
Support and Guidance: From the initial decision to liquidate to the final steps of dissolution, Company Debt provides support and guidance, helping you make informed decisions at every stage.
