Charities Facing
Insolvency
Charity Insolvency – What Should the Trustees Do?
If you need to close an insolvent charity the usual way to do that is using the Creditors Voluntary Liquidation process.
Liquidation takes about two weeks and:
- brings the charity to a formal end,
- removes the obligation of the Trustees to continue running the charity and,
- allows any unpaid employees to claim from the Government Redundancy Fund.
It also ends the need to complete annual accounts, file returns with Companies House and the Charity Commission.
You can only put a charity into liquidation if it is a company registered at Companies House, it is a Community Interest Company (known as a “CIC”) or is a Charitable Incorporated Organisation (known as a “CIO”).
Step one of the insolvency decision process.
The first task for the Trustees is to find out if the charity is by definition legally insolvent.
There are two definitions of insolvency and if you fail either one or both tests below then you are an insolvent charity.
- The balance sheet test – can all the charity assets pay off all the liabilities (including the closure costs like redundancy) in full?
- The trading test – can the charity pay all 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 like grant funding and you know that the bank balance is just going to keep dropping.
If the answer to test 1 or 2 above is yes (or you know it will be soon) then you should call an urgent Trustees meeting to discuss the charity’s insolvency options.
Step one of the insolvency decision process.
The first task for the Trustees is to find out if the charity is by definition legally insolvent.
There are two definitions of insolvency and if you fail either one or both tests below then you are an insolvent charity.
- The balance sheet test – can all the charity assets pay off all the liabilities (including the closure costs like redundancy) in full?
- The trading test – can the charity pay all 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 like grant funding and you know that the bank balance is just going to keep dropping.
If the answer to test 1 or 2 above is yes (or you know it will be soon) then you should call an urgent Trustees meeting to discuss the charity’s insolvency options.
Step three – the charity is insolvent what to do next.
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 meeting in person or by Teams/Zoom.
Some of the issues we will cover a that first meeting would be:
- What type of charity are you?
- If you have a membership is the list up to date?
- We will need to see the latest accounts and any financial projections (if they have been done).
- How many employees are there and their average length of service as this will impact redundancy costs.
- What are the options you have.
The advice will be confidential and is free of charge.
Step four – the process to liquidate a charity.
It is a Trustees decision first whether to liquidate. Once the Trustees decide that (usually by a simple majority of votes) then the next step is to notify members to vote and then creditors.
In some charities, the Trustees are the same people as the members. However, there may be a wider membership and they need to be notified and allowed to vote.
There isn’t necessarily a meeting of creditors unless creditors ask for one. Usually, the charity just goes into liquidation on a notified date in a week or two (if no one objects to the notices). This process is called deemed consent.
Step five – Who does the paperwork?
Charity liquidation is a legal process, and we do all the paperwork to liquidate including the Trustee board minutes, notifying all the members and then the creditors.
We then deal with closing any offices or sites and securing any records. In due course we will arrange the sale of the assets. We will also assist the employees in making their claims from the Redundancy Payments Service.
Attached is a useful guide showing what employees can claim.
When do we conclude liquidation is the right choice?
If the conclusion is that you are insolvent and it is getting worse, our likely recommendation is that you should stop trading and put the charity into liquidation. Liquidation (or Administration if more appropriate) will bring the charity to an end.
This decision to liquidate usually takes the pressure off the Trustees.
We will take over and help you close the charity down. This may mean involving other agencies if you were supplying an essential service to the community.
If the conclusion of our meeting is that 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 or societies 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.
- Liability of the Trustees What you do not want to do is take on personal liability for the debts of the charity. It is rare but this can happen if you know the charity finances are getting worse and you do nothing about it. Act now – do not wait.
Please contact me if you have any questions. You can do this by email if you prefer. My direct email is at the very top of this page. David Kirk
David Kirk
Kirks Insolvency
David qualified as a Chartered Accountant in 1990 and Licensed Insolvency Practitioner in 1996. David will give you clear and plain language advice about your business’s options and make a recommendation of which route he thinks will work best for you.
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I have found Kirks Insolvency to be very reliable in terms of their dealings with us as their customers. They are clear in terms of the process and what it entails and are very prompt when it comes to communications. I would recommend their services.
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