Charities and Insolvency Procedures – How it Works

If your charity is facing financial difficulty, you may have looked into formal insolvency procedures, but are still left wondering. How do these work when the company is not-for-profit?

Many charities are structured similarly to limited companies, but the range of insolvency procedures available to them are somewhat limited.

The Kids Company charity is one example who’s demise was publicly advertised, especially because the directors’ conduct was under scrutiny in August 2015 after their closure. Financial mismanagement was to blame in this case; they became reliant on public money. You may remember that as a result of this, a government grant was issued to the tune of £3 million.

Below, we will go through several types of charity formations, and how insolvency will affect each one, including the liability of directors and trustees.

Companies limited by guarantee

In the case of companies limited by guarantee, directors and members enjoy limited liability, much like limited companies. The difference, of course, is that profits are not distributed to members, but used to charitable purposes.

Once the company has entered an insolvency procedure, the level of liability that each member is responsible for depends on the guarantee that they have provided – usually these are very small amounts up to £10.

Both company and charity laws must be adhered to by directors, who are also the company’s trustees;

The same options are open to companies limited by guarantee as limited companies. It is worth noting, however, that the directors also have the same responsibilities as limited company directors – so, if wrongful or fraudulent trading is found, they could become personally liable for unpaid debts.

Charitable incorporated organisations (CIOs)

Limited liability is also claimed by both directors and members of CIOs, but Companies House does not have them on their system because they are regulated by the Charity Commission.

A CIO’s constitution will dictate whether the company can be dissolved or voluntarily wound up when they have experienced financial difficulty.

Unincorporated associations

These companies are often called clubs and societies; they are not separately legal from company directors or members, much like sole proprietorships.

Therefore, when the company is unable to pay its debts, the associated parties automatically become personally liable for the amounts.

Formal insolvency procedures cannot be used in these cases, as they are very rarely formed to make a profit.

Charitable trusts

Similarly to the above, the trustees of a charitable trust have put their name to all business matters, and would therefore become liable for all debts if the company were to become insolvent.

Many modern trust deeds contain the appropriate winding-up procedures that are to be used if things were to go downhill.

Royal chartered bodies

These bodies are not incorporated according to the Companies Act but by charter, and they have limited access to UK insolvency procedures.

Pre pack administration could be possible, but company Administration isn’t, along with CVLs or CVAs.

Industrial and provident societies (IPSs)

IPSs can either work on behalf of their members, or they are community focused (although these are usually known as Community Benefit Societies).

In 2014, novel legislation was introduced, dictating that IPSs can now enter Administration or CVA (Company Voluntary Arrangement, link above).

If the charity is suspected as neglecting its responsibilities, IPSs are regulated by the Charity Commission, who has the power to call for an investigation into an insolvent charity if they see fit.

Next steps

If you are a director, trustee or member of a charitable organisation, and feel that things are going downhill, Forbes Burton can help.

One of our experienced advisers would be happy to talk you through your potential of becoming liable for company debts, and which procedures are available to your company as and when they may be needed. Call us today on 01472 254914.