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Charity Insolvency

The first task is you need to find out if your charity is legally insolvent.

There are two definitions of insolvency. If you fail either one or both, you are by law an insolvent charity.

  1. The balance sheet test – can all the charity assets pay off all the liabilities (including the closure costs like redundancy)?
  2. The trading test – can the charity pay its liabilities on time as they fall due?

You may also be in the position of solvent now but making losses with the knowledge that you will become insolvent. This can be common for a charity that loses a major income stream. If the answer is yes to any of these, then you should call an urgent Trustees meeting to discuss the charity’s options.


The Trustees have a duty to comply with the charity’s objectives, but they also have a duty to the creditors of the charity.

Trustees should arrange to meet and discuss:

  1. The latest financial management information including the last year end accounts and a profit and loss account and balance sheet to date.
  2. Some realistic financial forecasts. Are the finances improving or getting worse?
  3. What are the possible outcomes? They may be to close and pay everyone off and then hand the remaining funds to another charity or it may be to stop trading and go into liquidation.

Whatever is decided the Trustees should keep a written record of the meeting and reasons why they are carrying on if that is the conclusion. Trustees can be liable for the charity debts if they have acted wrongly and allowed the financial position to get worse. You may need these records or minutes at a later date to defend yourself if you are taken to Court as a Trustee for allowing wrongful trading.

Act Now

You need to get some independent professional advice. We can help you and have dealt with a wide range of charities. We can give you that advice at a first meeting or by telephone or Zoom.

If the conclusion is you are insolvent, and it is getting worse our likely recommendation is that you should stop trading and put the charity into liquidation. Liquidation will bring the charity to an end and allow employees to make claims from the Government Redundancy Payments Service.

If the conclusion is you should carry on, then you can do so knowing you have a defence if someone later accuses you or the other trustees of acting improperly.

Some common issues and questions for charities facing financial difficulties

  • Employees If the charity goes into liquidation the employees can claim their arrears of pay, notice pay, redundancy and pay in lieu of notice from the Government. The charity does not have to find this money.
  • Designated funds Charities often have separate designated funds for projects. In insolvency these will usually get mixed into the other assets unless they have been kept separately in a trust. Creditors can usually make a claim on these designated funds.
  • Preferences When a charity is insolvent you cannot decide to pay some creditors above others (even for example if they are local suppliers). All creditors must be treated equally whomever they are. Any payments made as a preference can be reversed under the Insolvency Act.
  • Property If the charity owns a freehold but does not have enough cash to pay all liabilities or creditors as they fall due it is still insolvent. If you as Trustees do not deal with this swiftly a creditor can force the charity into Compulsory Liquidation.

Contact Us Today

Please do contact me if you have any questions? We deal with charities based anywhere in England and Wales.



0808 1961496


Across the South West, London & Wales

Just a quick email to say a heartfelt thank you for your very calm, considered, expert advice regarding my circumstances on Tuesday. Things looked bleak before you explained my options much more clearly, in simple layman’s terms.
Rob Elliott (14th December 2021)



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David Kirk Portrait

David Kirk

Licensed Insolvency Practitioner