Charities and Insolvency

Almost all charities rely heavily on donations, funding and grants to continue running so when these are cut without much warning, charities can end up on the brink of insolvency. The set up and structure of charities can also be different to companies. There is also a greater necessity for audit and transparency in cashflow and operations. 

Charities have found funding difficult in recent times due to restrictions on direct marketing and the ever changing digital marketing landscape.

When a charity can no longer meet its liabilities or make payments as and when they fall due, it is insolvent and advice should be sought as soon as possible.

It’s important to be aware of the different charity organisations and how they can be affected by insolvency. This is only a brief guide and should not be used at legal advice.

The different structures

Trusts

The trust is the traditional structure for a charity and it allows property to be given for charitable purposes by trust deed or will. The trust is usually chosen by a person who wishes to settle property on charitable trusts, or by a number of people who wish to hold specified property on charitable trusts.

A charitable trust has no independent legal personality and therefore a trustee who enters into a contract (for example a loan or employment contract) with a third party does so in his personal capacity and is personally liable.

Unincorporated associations

This is a group of individuals operating under one name. An unincorporated association does not have a legal status separate from its members. Therefore members are personally liable for the organisation’s debt. Contracts cannot be entered into with the association and property cannot be held by the association itself.

In terms of insolvency, it would be the individuals who’d need to take action, either in the form of an individual voluntary arrangement (IVA) or bankruptcy.

Community Interest Companies (CIC)

This is a public or private company designed to benefit a community or group, not just the owner or employees. Whilst this isn’t a charity, a charity can own a CIC to trade. As it is a limited company, debts belong to the company and individuals are not personally liable.

There is also the ‘asset lock’ which means a number of assets are kept separately to only be used in the event of a restructure or insolvency to raise money for creditors.

A CIC can be put into a creditors voluntary liquidation (CVL), compulsory liquidation, company voluntary arrangement (CVA) or administration.

Charitable Incorporated Organisations (CIO) – since 2013

This is not a company but does protect trustees against personal liability. There is no need to register at Companies House, just the Charities Commission. This type of charity can go into a CVL, administration or a CVA.

Company limited by guarantee

This type of charity has a board of directors or trustees with governing documents called the Articles of Association and Memorandum of Association. A requirement for all companies, the documents set out how the company is run and governed.

The directors are protected against personal liability as the company is its own entity and any debt belongs to the company.  Limited by guarantee means directors must contribute to the main debt or costs of winding up in the event of liquidation.

The company can enter a CVL, compulsory liquidation, CVA or administration.

Friendly society

A type of association created to provide life insurance, for example. It must be registered by the Financial Conduct Authority. The friendly society can either be incorporated or unincorporated depending on which Act it is registered under.

Those registered under the Friendly Society Act 1974 are unincorporated while those registered under the Friendly Society Act 1992 are incorporated.

Unincorporated organisations means trustees or members are personally liable for any debt incurred. An incorporated organisation is its own entity, giving a level of protection to its members.

So simply if you run a charity it is important to realise where your personal liability may be.  The rules governing companies and individuals are the same as for charities depending on their status and are covered by the Insolvency Act 1986.  

Since 6th April 2014, the Industrial and Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order 2014 amended previous regulations. All restructuring options, including a CVA, are now available.