How-are-charities-treated-differently-to-companies-in-a-formal-insolvency-procedure

How are charities treated differently to limited companies in a formal insolvency procedure?

While many charities share a structure similar to limited companies, there are various types of charity formations. However, the structure of a charity can limit the available insolvency processes in cases of financial difficulties.

The recent closure of the Kids Company charity, attributed to financial mismanagement, triggered an investigation after its demise in August 2015. The charity’s reliance on public funds also became a political concern, especially with a £3 million government grant provided just a week before its closure.

Let’s explore the different charity formations, the liability of trustees and directors, and how insolvency might impact each one.

 

Are companies limited by the guarantee?

Many charities adopt a structure similar to limited companies, where directors and members have limited liability. Profits generated by the charity are dedicated solely to charitable purposes and are not distributed to members.

In cases of insolvency, the level of liability for each member is determined by the guarantee they provide, typically a modest amount ranging from £1 to £10. Directors of the guarantee company also serve as its trustees, obligated to comply with both company and charity laws.

In the event of charity insolvency, similar options available to limited companies can be considered. However, it’s important to note that directors of a company limited by guarantee share the same duties and responsibilities as those of limited company directors.

 

Charitable Trusts

The business activities of a charitable trust are managed in the name of its trustees, who bear liability if the charity faces insolvency. Trust deeds, commonly employed in the establishment of charities, often outline the procedures for winding up in case of insolvency in many modern trust deeds.

 

Charitable Incorporated Organisations (CIOs)

Trustees and members of Charitable Incorporated Organisations (CIOs) benefit from limited liability, but these charities are not registered at Companies House. Regulated solely by the Charity Commission, CIOs can be dissolved or voluntarily wound up in accordance with their constitution.

 

Industrial and Provident Societies (IPSs)

The majority of Industrial and Provident Societies (IPSs) function as mutuals, working for the benefit of their members. Some are community-focused and referred to as Community Benefit Societies. The 2014 legislation now permits most IPSs to undergo administration, opt for a Company Voluntary Arrangement (CVA), or implement a scheme of arrangement.

In cases of charity insolvency, the Charity Commission wields extensive powers and can initiate investigations into the charity’s management. Their role is to safeguard the interests of beneficiaries and, if negligence is established, the commission can compel trustees to compensate the charity.

 

Unincorporated associations

Unincorporated associations, often referred to as clubs or societies, lack separate legal entities. Consequently, members may assume personal liability for the association’s debts in insolvency.

Typically formed without a profit motive, clubs or societies are unlikely to be subject to formal insolvency procedures in such cases.

 

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Royal Charter bodies

Entities incorporated by charter instead of the Companies Act have restricted access to UK insolvency procedures. While pre-pack administration might be an option, they are unable to utilise the company administration route, Company Voluntary Arrangement, or voluntary liquidation.

If you’re part of a charity and need details on your potential liability in insolvency and the available procedures, Vanguard Insolvency is here to assist. Our expert team holds extensive experience in this field and can provide guidance on the optimal path forward. Contact any of our nationwide offices across the UK to schedule a free same-day appointment.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.