Despite working towards good causes, non-profit charities face the threat of liquidation just as much as profit-driven companies do.
Poor business decisions, a lack of funding, or unprecedented events such as Covid-19 can all lead charities towards insolvency – and if the charity’s finances can’t be saved, then the final step is liquidation.
The liquidation process varies from one charity to the next, as it depends on the charity’s structure and resulting legal obligations. In this article, we examine what the process of liquidation is for a charity, and how it can differ from one organisation to the next.
What Is Liquidation and When Does It Occur?
Liquidation is an insolvency procedure that’s only ever used as a last resort. Liquidation involves the complete closure of a business, company or, in this case, charity. The charity can no longer trade, fundraise or operate in any shape or form once liquidation has been completed.
Liquidation occurs when a charity has become insolvent. Insolvency means that the charity is no longer able to pay off its debts. Fundraising might have failed or sales of products to customers might be down significantly. This results in the charity’s expenses being higher than the money coming into the accounts, leaving the charity’s finances in the red. Insolvency can occur for any number of reasons, including bad management, political or economic events, or catastrophes such as a worldwide pandemic.
Before liquidation, the charity has several options available to save itself. These insolvency procedures include raising more funds to pay off its debts, going into administration, or entering into a company voluntary arrangement (CVA). If all other processes fail, then an insolvency practitioner can liquidate the charity.
Liquidation sees the charity closed down, as all remaining assets are sold off in order to raise the funds needed to pay off its creditors. Liquidation is the last stage of insolvency, so it takes a long time for a charity to reach this undesirable outcome.
Different Types of Liquidation for Different Types of Charities
The overall goal of any liquidation process is to sell the charity’s assets in order to pay off as many creditors as possible. It’s the last resort, and liquidation is used as the only remaining option that gives creditors at least a portion of the money they are owed back.
But while the end goal is the same, different types of charity are treated differently by the UK’s insolvency rules and regulations. Some charities are treated just like companies, while others hold the trustees directly accountable in the event of insolvency.
The distinctions are important, particularly if you’re a charity trustee or director who may find themselves personally liable for debts should the charity be liquidated. The liquidation process a charity goes through is determined by its legal structure. In the UK, there are four major types of charitable structure. These are:
- Limited charitable companies
- Charitable incorporated organisations
- Charitable trusts
- Unincorporated charities
Let’s take a look at the insolvency process for each of these different charitable structures in more detail.
Limited Charitable Companies
Limited charitable companies are treated just like regular limited companies in the UK when it comes to liquidation. They are run by a board of trustees and directors. Because of the ‘limited’ nature of the organisation, the board has limited liability.
This means that the trustees aren’t held personally liable for the charity’s debts, should the charity become insolvent (as long as they aren’t deemed to have deliberately mismanaged the charity or misappropriated funds). If a charity becomes insolvent and the directors see no other alternative to liquidation, they can appoint an insolvency practitioner to oversee a company voluntary liquidation process. This will see the charity’s assets sold off in order to pay its debts, staff will be laid off and, ultimately, the charity will be struck from the register and cease to exist.
It also means that creditors can chase the charity for payments they are owed and, if necessary, they can force the charity into compulsory liquidation against the wishes of its directors. This only occurs in extreme circumstances, when the creditors have exhausted all other avenues.
Charitable Incorporated Organisations
Charitable incorporated organisations are very similar to limited charitable companies, with the biggest difference being that charitable incorporated organisations aren’t registered as companies with Companies House.
Despite this, charitable incorporated organisations are still treated the same way as companies when it comes to liquidation. Assets will be sold off in order to raise funds that go towards paying creditors who are owed money by the charity.
The trustees of a charitable incorporated organisation have limited liability, so they aren’t personally responsible for any debts that the charity has accrued.
Charitable trusts are a simpler form of charitable organisation, whereby trustees act on behalf of the trust, following the directives and goals laid down in the trust’s charter. The trustees have personal liability for the trust’s debts, because charitable trusts aren’t incorporated or given limited liability.
This means that a charitable trust can’t be liquidated through formal insolvency proceedings, but if the charity is dissolved, then all assets will be sold off and any remaining debts may need to be covered by the trustees.
Unincorporated charities are the simplest forms of charitable organisation – they are the sole traders of the charity world. This means that an unincorporated charity isn’t treated as a company if it becomes insolvent.
The trustees or members of the charity all have collective responsibility for the charity’s debts, and they can be held personally liable for debts if the charity becomes insolvent. If the charity’s assets don’t cover the cost of the debts owed, then the trustees will have to pay those debts using their own personal assets or funds.
Contact Irwin Insolvency Today for Your Free Consultation
With decades of experience providing charities across the UK with expert advice on insolvency and liquidation, our team of licensed insolvency practitioners can offer impartial expertise to help you through tough times.