Insolvency for Charities, Societies and Other Unincorporated Organisations

When an unincorporated organisation or group finds itself in a position where it cannot pay its debts, it is sadly considered insolvent. Practically speaking, this will usually be a charity, trust, or voluntary group that can no longer afford the bills. At that point, you should look at your financial situation and if there is no version of the future where you can realistically and legally remain operating, you probably need to close down the organisation as insolvent.

Whatever the situation though, we also know that you are dealing with a difficult and often emotional situation. Third-sector groups tend to be run by people who hold the reason the group exists close to their heart. So, we promise to keep things as clear and straightforward as we can to minimise the emotional impact.

What kinds of organisations are likely to be unincorporated?

The most likely groups to be unincorporated organisations would be charities, voluntary groups, and social enterprises. These would include:

• Unincorporated Associations – Informal groups run by members. They will usually operate under a constitution. So, we are usually talking about local clubs or community groups and similar.
• Partnerships and Sole Traders – Some third-sector initiatives, particularly social enterprises, operate as partnerships or sole traders.
• Trusts – Organisations governed by a trust deed which is typically used for charitable purposes. Trustees hold assets on behalf of beneficiaries.

Unlike a limited company, for example, these kinds of organisations are not considered separate legal entities. That means the members, trustees, partners, and so forth, could potentially be responsible for the organisation’s debts.

If your unincorporated organisation becomes financially unstable, we advise you to contact us as soon as you become concerned about insolvency.

What are the Legal Requirements?

Unlike companies or charitable incorporated organisations (CIOs), unincorporated organisations do not have a formal insolvency framework under the Insolvency Act 1986. However, they are still subject to what are known as the general principles of insolvency law and contractual obligations.

What that usually comes down to is the need for an unincorporated third-sector body that cannot meet its financial commitments to take action. Its leaders therefore must act responsibly to avoid wrongful trading or personal liability.

This is one of the reasons we advise you to contact us as soon as you think insolvency is likely.

As a licenced Insolvency Practitioner, we are in a position to help by providing advice on options such as:

• Ceasing trading to prevent further debt accumulation
• Negotiating with creditors to restructure debts
• Managing asset sales to repay liabilities
• Guiding trustees or members through voluntary or compulsory insolvency procedures

It is very important that you take advice and do not continue operating if you know you are insolvent as this could be considered mismanagement. 

What will insolvency involve?

You will need to go through a series of steps. Some are quick and easy others may take a little time. They will be some, and usually all, of the following:

Assessing the Financial Position - The financial situation needs to be clear. That will involve assessing liabilities, assets, and cash flow. If debts exceed assets and cannot be repaid, insolvency is likely. You may have already done this before we talk, but if not, we can help you.

Seeking Professional Advice - We will explore available options, these may include informal arrangements, debt restructuring, or formal closure.

Informing Creditors and Stakeholders - If insolvency is unavoidable, we must notify creditors, donors, and other stakeholders. Remember - continuing to trade while insolvent could lead to personal liability for debts.

Choosing an Insolvency Procedure(s) - Options depend on the organisation’s structure and liabilities:

• Informal negotiations – We may agree with creditors on repayment plans.
• Voluntary liquidation – Assets are sold to settle debts, with any surplus distributed according to the organisation’s rules.
• Bankruptcy (for individuals or trustees) – If trustees or members are personally liable, they may need to file for bankruptcy under the Insolvency Act 1986. This is relatively rare but still needs to be considered legally.

The final step will be closing the organisation. Once debts are settled, the organisation must formally dissolve, following its governing document and notifying relevant authorities. This will include the Charity Commission if you are a registered charity.

These steps need to be followed properly so that you remain within the requirements of the legal framework and have a clear resolution to your financial problem.

How Smart Business Recovery Can Help

We will be with you to guide you down the right path to the best solution and support you by:

• Advising on your legal responsibilities to make sure you avoid potential wrongful trading
• Negotiating with creditors to perhaps reduce liabilities or extend repayment terms
• Handling asset liquidation to help repay debts in a structured manner
• Ensuring full compliance with relevant laws and regulations
• Managing formal closure procedures to protect you or the members from legal repercussions as much as possible.

For unincorporated third-sector organisations, seeking early advice from insolvency professionals such as Smart Business Recovery can help minimise risks, protect stakeholders, and ensure a legally compliant resolution to financial difficulties.