How charities are treated differently in insolvency

Charities can be in the form of several different structures and as a result can be subject to different insolvency procedures. A charity’s structure is defined by its governing documents.

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How does a Charity or not for profit organisation handle insolvency?

Below are examples of the more typical structures adopted by charities and whether that structure is incorporated or not.

  • Charitable incorporated organisation (“CIO”) – incorporated.
  • Charitable company limited by guarantee – incorporated.
  • Unregistered company – unincorporated.
  • Unincorporated association (usually small charities) – unincorporated.
  • Trusts – unincorporated.

If we find the charity is insolvent and a formal insolvency procedure is unavoidable there are several insolvency procedures available dependent on the charity’s structure.  Below are the procedures available split between those applicable to incorporated and unincorporated entities.

Incorporated charities:

Unincorporated charities:

Anthony Davidson

Director

Anthony is a Certified Chartered Accountant and Licensed Insolvency Practitioner advising companies and individuals experiencing financial difficulties.

Works with a variety of stakeholders to establish and implement the best strategy for individuals and companies experiencing financial difficulties and acts as an Insolvency Practitioner in all forms of corporate and personal insolvency.

Anthony leads on complex investigation and forensic recovery engagements and has extensive knowledge and experience of advising charities, community interest companies and not for profit organisations.

Qualified as a Licensed Insolvency Practitioner in 2007, is a member of R3 and the ACCA.

Whilst Trustees have a duty to comply with the charity’s objectives they will also have a duty to the creditors of the charity in the event of insolvency. In some circumstances trustees can be held personally liable for the charity debts. These might include:

  • Wrongful trading – allowing the charity to continue to trade whilst insolvent resulting in an increase in amounts owed to creditors.
  • Breach of fiduciary duty or misfeasance.
  • Fraud.
  • Preferences.
  • Transactions at undervalue.
  • Limited by guarantee – if the charity is limited by guarantee Trustees will be required to repay the amount equivalent to the value of their guarantee when the charity enters an insolvency procedure.
  • Breach of trustee agreements.

We have extensive experience working with charities, not for profit organisations and charitable trusts and have a number of solutions available that trustees may not have even considered.  These restructuring solutions can often result in the charity avoiding having to enter any formal insolvency procedures, returning to solvency and continuing to operate in the future.

Take action and seek advice

 

As mentioned previously The Charity Commission states a charity must seek advice immediately if they are facing signs of insolvency as doing so will likely provide the best possible outcomes for creditors.  Call Anthony Davidson or Kelly Goodman on 0800 331 7417 or any of our senior team to discuss your individual circumstances.

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