Guidance

What to do if your charitable company or CIO is insolvent or at risk of insolvency

Updated 23 September 2024

Applies to England and Wales

• Publication for Northern Ireland
• Publication for Scotland

This guidance is for trustees of charitable companies and Charitable Incorporated Organisations (CIOs).

If you are a trustee of an unincorporated association or trust, read the guidance on what to do if your charity is insolvent or at risk of insolvency.

If you are a trustee of a Royal Charter or statutory charity you should seek legal advice on how to deal with insolvency.

Check your governing document to understand what your charity’s structure is.

What is insolvency?

There is no statutory definition of insolvency although the Insolvency Act 1986, which applies to charitable companies and CIOs, uses the phrase ‘unable to pay its debts’.

In this guidance we use the term ‘insolvency’ to describe a situation where a charitable company or CIO:

• cannot pay its debts when they are due, or
• does not have enough assets to cover its liabilities

Insolvency is complicated. If you think your charity may be facing insolvency read this guidance. It is also vital that you get professional advice as soon as possible to help you understand your options, (for example from an insolvency practitioner), and to help you understand what you need to do.

You can search for an insolvency practitioner on the Insolvency Service website.

Read Companies House guidance on liquidation and insolvency.

Understanding your trustee duties and liabilities if your charity is insolvent

It is vital that you understand and manage your charity’s finances. This will help you meet your trustee duties, including your duty to manage your charity’s resources responsibly, act in its best interests and with reasonable care and skill.

By regularly monitoring your charity’s finances you will be able to:

• identify problems early and consider whether you can take action to improve the situation
• understand that your charity is insolvent or at risk of insolvency
• recognise that once the charity has reached the stage where it has to follow the legal processes to be closed, your primary duty is to the charity’s creditors (those who your charity owes money to)

Charitable companies and CIOs have a separate legal identity. This means that any debts and liabilities belong to the charity and the trustees are not usually personally liable for them. However, there may be some circumstances when they have personal liability, for example if the charity continues to trade when the trustees knew or ought to have known that there is no reasonable chance of avoiding insolvency. This is known as wrongful trading.

When the trustees of a charitable company or CIO know, or ought to know, that there is no reasonable prospect of avoiding insolvency they must take every step necessary to minimise the potential loss to the creditors. You can use the charity’s funds to pay professional fees for advice if this is to ensure the best outcome for the charity’s creditors.

How to tell if your charity is insolvent

In simple terms your charity may be insolvent if either:

• it cannot pay its debts when they are due (known as the cashflow test) or
• it does not have enough assets to cover its liabilities (known as the balance sheet test)

As well as these two tests, use our checklist as there may be other factors which show that your charity is at risk of insolvency.

When a charitable company or CIO is insolvent, legal processes can force the charity to close. This is known as liquidation or winding up. They can also receive legal demands for payment such as court orders from the charity’s creditors. If this happens take professional advice as soon as possible to help you understand what you need to do.

What you need to do if your charity is insolvent

Trustees of an insolvent charity should remember that:

• your duty is to pay your creditors. This takes priority over your duty to further your charity’s purposes
• your charity must stop trading if there is no reasonable chance of avoiding insolvency. The trustees could break the legal rules on insolvency, for example the rules on wrongful trading, if the charity continues providing services while creditors do not get paid. This includes making grants to beneficiaries or transferring assets to another charity
• you should keep a record of professional advice you take and the decisions you make based on that advice. Use our decision making guidance to help you make your decisions
• you may be able to use one of the options to rescue or restructure the charity; however you may have to close the charity because it is insolvent

Permanent endowment, designated land and special trusts

Understand if your charity has permanent endowment, designated land or special trust funds. If it does, these cannot usually be used to pay your charity’s general debts. However, they can be used to pay for any expenses properly incurred by the charity in connection with the permanent endowment, designated land or special trusts.

Identifying permanent endowment, designated land and special trusts, and if they can be used to meet the charity’s general debts, can be complex. You should take professional advice to help you if you need it.

Designated land is land that must be used for a particular purpose of your charity according to the document that explains how the land must be used. For example, property which must be used as a recreation ground.

Permanent endowment is property that your charity must keep rather than spend. Property given to your charity that must only be used for a particular purpose (such as designated land) is one example of permanent endowment. Another is money or other assets given to your charity for investment where only the investment income can be spent. Read our guidance on permanent endowment.

A special trust is money or assets that your charity must only use for specific purposes that are narrower than your charity’s purposes. Permanent endowment can be a special trust but not always.

Reporting insolvency in accounts

If you prepare SORP based accounts you must declare in the accounts when your charity is not a going concern. A charity is a going concern if it is able to continue operating for the foreseeable future and the trustees intend to continue operating the charity. You may also face extra rules on reporting. You should get advice from your accountant or financial adviser.

Options to rescue or restructure the charity

You may be able to use one of the following options to help you rescue or restructure the charity.

Moratorium

Trustees of charitable companies and CIOs may be able to use a legal process under Part A1 of the Insolvency Act 1986, known as a ‘moratorium’.

The moratorium gives trustees a short time to explore whether the charity can be rescued or restructured by putting a temporary stop on creditors:

• taking action to recover their money, and
• taking certain other actions against the charity as a result of the debt

The trustees remain in control of the charity but they must appoint an insolvency practitioner, known as a ‘monitor,’ The monitor will oversee the charity during the moratorium to decide if the charity can be rescued or restructured.

During the moratorium, the charity will still need to:

• pay for any goods and services that your charity gets during the moratorium
• pay what is due under existing contracts, for example loan repayments
• pay what is due under any contract you enter into during the moratorium, for example rent

During a moratorium it is an offence to carry out some activities. You should seek advice from the monitor about these.

The monitor can end the process if they think the charity:

• cannot be rescued or restructured as a going concern or is unable to pay its debts when they are due, or
• the trustees have not provided them with information they need to carry out their role

This moratorium process is not available when (amongst other circumstances):

• a charitable company or CIO is already in voluntary or compulsory liquidation
• a charitable company or CIO has been subject to an insolvency procedure in the previous 12 months. What is an insolvency procedure is explained below.
• a charitable company or CIO has a moratorium already in force, or where one was in force in the previous 12 months
• a charitable company or CIO is a private provider of social housing in England or registered as social landlords in Wales

An insolvency procedure includes a voluntary arrangement, administration, interim moratorium, appointment of an interim receiver or provisional liquidator or where a petition has been filed for the winding up of the charity and has not been withdrawn or determined.

You can search for an insolvency practitioner on the Insolvency Service website.

Read Companies House guidance for information on applying for a moratorium and the role of the monitor.

Administration orders

Trustees of a charitable company or CIO can apply to the court for an order to give their charity some breathing space from any action by the charity’s creditors, by putting in place a moratorium under Schedule B1 of the Insolvency Act 1986. There is also an out-of-court procedure for obtaining an administration order.

If an administration order is granted, an administrator is appointed to act for the creditors and to take control of the charity from the trustees. The administrator is an insolvency practitioner. Their aim is to:

• try to find a way for the charity to continue as a going concern, or
• achieve a better result for the charity’s creditors than if the charity was wound up
• sell some or all of the charity’s assets to pay certain creditors

There is a separate process for CIOs that are registered providers of social housing to apply for a housing administration order.

Read Companies House guidance for more information on administration.

Company Voluntary Arrangements

A charitable company or CIO may be able to enter into an agreement, known as a Company Voluntary Arrangement (CVA) with the charity’s creditors where creditors:

• agree to reduce the amount they are owed and/or
• agree to the charity delaying its repayment of their debts

You can only enter into a CVA with unsecured creditors. Unsecured creditors do not have rights over any of the charity’s assets, for example suppliers and landlords.

A CIO which is a private registered provider of social housing must inform the Regulator of Social Housing if it enters into a voluntary arrangement.

You must appoint an insolvency practitioner if you want to enter into this type of agreement.

Read Companies House guidance on Company Voluntary Arrangements.

Restructuring plans and schemes of arrangement for charitable companies

Charitable companies may be able to use a restructuring plan or a scheme of arrangement to ensure that the charity can continue operating. CIOs cannot do this.

Read Companies House guidance about this.

Liquidation or winding up of charitable companies or CIOs

There are legal processes for charitable companies or CIOs to be closed, known as liquidation or winding up.

Charitable companies may also be subject to a process known as receivership.

Liquidation of an insolvent charitable company or CIO

An insolvent charity can be liquidated using the following options.

1. Creditors’ voluntary liquidation

This is when the members of a charitable company or CIO voluntarily place the charity into liquidation by passing a resolution to liquidate the charity.

The members must pass a special resolution to wind up the charitable company or CIO and appoint an insolvency practitioner.

2. Compulsory liquidation

This is when a creditor, the trustees or the members of a charitable company or CIO ask the court to wind up the charity if it is unable to pay its debts. Read Companies House guidance for a complete list of who can ask the court to wind up the charity.

This process may be used when:

• the charitable company or CIO has not paid or settled a claim of more than £750 made by a creditor within 3 weeks of being served a statutory demand
• a creditor has obtained a court judgment against the charity in relation to a claim against the charity and that claim has not been met
• the court is satisfied that the charitable company or CIO is unable to pay its debts when they are due
• the court is satisfied that the value of the charitable company’s or CIO’s assets is less than the amount of its liabilities
• the members of the charity consider that the charitable company or CIO is unable to pay its debts when they are due and/or the value of its assets is less than the amount of its liabilities

If the court makes a winding up order it will appoint an Official Receiver (a specialist insolvency practitioner) as liquidator to investigate why the charity cannot pay its debts.

The Official Receiver will collect the assets of the charitable company or CIO and use them to pay off the charity’s debts and then take steps to wind it up.

Read Companies House guidance on insolvency and liquidation.

When you need to involve the Charity Commission

When you need authority from the Charity Commission

You can use permanent endowment, designated land or special trusts to pay expenses properly incurred by the charity in connection with these funds. However, if you want to use these funds to pay off your charity’s general debts you need to be very careful about this and take specialist charity law advice.

These funds have restrictions and/or narrower purposes than your charitable company or CIO. You may need to change the restrictions or purposes of the permanent endowment or special trusts funds before you can sell or spend them and we may not always give authority for you to do so. Read guidance to understand the rules on changing purposes.

Read Permanent endowment: rules for charities if you want to seek our authority to spend more than £25,000 or borrow more than 25% of the value of your charity’s permanent endowment fund (which excludes designated land).

Read our guidance about disposing of designated land to understand when you need Commission authority and when you do not.

Other issues you may need to tell us about

If your charity is insolvent or has to stop some or all of its services, you may need to report this to us as a serious incident. For more information read serious incidents and how to report them.

If you are an auditor or independent examiner, you have separate legal duties to report certain matters. For more information, read reporting matters of material significance and reporting relevant matters of interest to UK charity regulators.

Coming out of an insolvency situation

If, for example, you have successfully used one of the rescue procedures and you are no longer at risk of insolvency you can decide either to:

• continue as a charity
• close the charity

If you decide to continue, check if you have done enough to minimise the risks of your charity experiencing the same situation again.

If you decide to close the charity, you can either:

• use the process for closing a charitable company or CIO as set out in our guidance How to close a charity or
• use the members’ liquidation process

You may choose the members’ liquidation process if your charity has lots of assets and liabilities. It involves the charity’s members voluntarily placing the charity into liquidation by passing a resolution to liquidate it. And you must do the following:

• the trustees must declare the charity is solvent by swearing a statutory declaration of solvency, and
• the members must then pass a special resolution to wind up the charity and appoint an insolvency practitioner

Whichever option you choose, you must tell the Charity Commission that your charity has closed so that we can remove it from the register.

Read Companies House guidance on insolvency and liquidation.

Charitable companies that have been liquidated or wound up

The liquidator (or the Official Receiver in some cases where a charitable company is in compulsory liquidation) will need to provide information to Companies House so that the company can be removed from the companies register.

When the charitable company has been removed from the Companies House register, the liquidator should contact the Charity Commission so that we can remove the charitable company from the register of charities.

CIOs that have been liquidated or wound up

The liquidator (or the Official Receiver in some cases where the CIO is in compulsory liquidation) should contact the Charity Commission when the liquidation process is complete so that the Commission can remove the CIO from the register of charities.

A CIO is dissolved when it is removed from the register of charities.

When the Commission may take regulatory action

If a charity is insolvent or at risk of insolvency the Charity Commission may have a regulatory interest, depending on the reason for the insolvency. Read about how we will assess any concerns that come to our attention.  The Commission may open a statutory inquiry if there are serious concerns about misconduct and/or mismanagement.

Other organisations that can help

A number of organisations provide guidance and help on insolvency. For example, Charity Finance Group provide information for small charities.

Legal note

The main source of law relevant to this guidance is the Insolvency Act 1986.

There are other legal rules that apply to charitable companies and CIOs:

• if your charity is a CIO, you must also follow the rules set out in the Insolvency Act 1986 as modified by The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012
• if your charity is a company or a CIO you must follow rules set out in the Corporate Insolvency and Governance Act 2020
• if your charity is a company, you must also follow the rules set out in the Companies Act 2006,  the Insolvency Act 2000 (as amended) and the Company Directors Disqualification Act 1986
• if your charity is a company or CIO and a private registered provider of social housing, you must follow rules set out in the Housing Act 1996 and Regulation 8 of The Charitable Incorporated Organisations (Notification Requirements: Social Housing) Regulations 2023