Guidance

What to do if your unincorporated association or trust 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 unincorporated associations and trusts (unincorporated charities).

If you are a trustee of a charitable company or a Charitable Incorporated Organisation (CIO) 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?

An unincorporated charity cannot technically be insolvent as it has no legal personality separate from its trustees and members (where the charity has members). In this guidance we use the term ‘insolvency’ to describe a situation where an unincorporated charity:

• 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 is or may become insolvent read this guidance. It is also vital that you get professional advice as soon as possible (for example from an insolvency practitioner), to help you understand what you need to do.

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

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 actions to improve the situation
• understand that your charity has become insolvent

The trustees of an unincorporated charity are personally liable for the charity’s debts and liabilities. This is because unincorporated charities do not have a legal personality separate from its trustees and members (where it has members).

Trustees can claim back any properly incurred costs from their charity. However, if your charity is facing insolvency or is insolvent there may not be enough money for the trustees after the charity has paid its other creditors (those it owes money to) who take priority.

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 cash flow 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.

It is important to understand if the charity is, or is not, insolvent or at risk of becoming insolvent. Remember, you can use the charity’s reserves and/or sell assets to pay the charity’s debts. Read our guidance for other suggestions.

If your charity is insolvent – because it is unincorporated – it will be for you as trustees to decide to close it. However, if the charity owes money, you as trustees may still face legal demands to pay the charity’s debts.

If the charity is insolvent, read the next section to understand your legal duties. You should also get professional advice to help you.

What you need to do if your charity is insolvent or at risk of insolvency

If your charity is insolvent or you cannot avoid insolvency you have a duty to act responsibly, reasonably and honestly in order to pay as much as possible to your charity’s creditors.

You should consider whether the trustees need to meet more regularly. Make sure you keep a written record of any advice you receive and the decisions you make based on this advice. Use our decision making guidance to help you make your decisions.

If your charity is insolvent, you: 

• should remember that your main responsibility is to pay the charity’s creditors
• may need to stop some or all of the charity’s activities to ensure that creditors get paid
• should not remove any of the charity’s assets – although you can sell non-cash assets if this increases the money available to pay the charity’s creditors
• should seek professional advice, for example from an insolvency practitioner
• could seek to reach an informal arrangement with your charity’s creditors about the debts

Understand if your charity has permanent endowment, designated land or special trusts funds. These can be used to pay for any expenses properly incurred by the charity in connection with these funds. Read guidance if you want to spend these funds on your charity’s general debts.

Identifying whether property is held on separate trusts and can be used to pay the charity’s debts can be complex and you should get legal advice.

Designated land is land that must only 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.

When your charity closes

As trustees of an unincorporated charity, you are responsible for closing your charity.

If your charity has the funds, one option is to appoint an insolvency practitioner to help you close it. Another option is to seek to reach an informal arrangement with the charity’s creditors yourself. The terms of the arrangement should be set out in writing. For example:

• a reduced amount of debt that your creditors have agreed the charity will repay and/or
• a timetable for repayment

If you prepare SORP based accounts you must declare in the accounts if 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.

You can search for an insolvency practitioner on the Insolvency Service website.
You must tell the Charity Commission when your charity closes so it can be removed from the register of charities. Read guidance on closing a charity.

When you need to involve 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 unincorporated charity. 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.

When the Charity Commission may take regulatory action

If a charity is insolvent or at risk of insolvency the 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.