Specialist Insolvency Support for Charities

A charity with financial issues is more than just an organisation. It represents a cause, a mission, and it is a testament to the dedication of the people who run it.

It can be an emotional and deeply personal challenge for trustees, staff, and beneficiaries of a charity when the money simply isn't there to pay the bills anymore and insolvency is the likely outcome. Our experienced team approaches every case with empathy, professionalism, and a commitment to finding the best solution, ensuring that the charity’s insolvency and mission are both handled with care and respect.

Insolvency for a Charity

Charities, like any other organisation, can face financial difficulties due to factors such as declining donations, increased costs, or loss of grant funding.

Charity insolvency occurs when:

• The charity cannot pay its debts as they fall due (cash flow insolvency).
• The charity’s liabilities exceed its assets, making it financially unsustainable (balance sheet insolvency).

Because charities exist for the public benefit, insolvency must be managed in a way that protects donors, beneficiaries, and the charity’s legacy. The Charity Commission, Companies House (if applicable), and creditors must be informed, and trustees must ensure they are complying with their legal duties to avoid personal liability.

What Kinds of Organisations Are Likely to Be Considered a Charity?

A charity is legally defined as an organisation that is exclusively charitable in its purposes and operates for public benefit.

Charities come in many forms, including:

• Registered charities – Organisations regulated by the Charity Commission.
• Charitable Incorporated Organisations (CIOs) – A legal structure offering trustees limited liability while focusing on charitable objectives.
• Charitable Companies Limited by Guarantee – Registered with both Companies House and the Charity Commission.
• Unincorporated Charities and Trusts – Run under a trust deed or constitution but without a separate legal identity, meaning the trustees are responsible for the financial aspects of the charity.
• Community and voluntary groups – Informal organisations that rely on donations and grants to support their work.

No matter the structure, all charities must follow strict legal and ethical obligations when facing financial distress.

What Are the Legal Requirements of an Insolvent Charity?

When a charity becomes insolvent, trustees must ensure they act in the best interests of creditors while complying with UK charity and insolvency law.

The key legal requirements include:

1. Trustees' Duties - Under the Charities Act 2011 and Companies Act 2006 (for charitable companies), trustees must:

• Stop trading if insolvency is likely, unless advised otherwise by an insolvency practitioner.
• Seek professional advice to ensure compliance with legal responsibilities.
• Prioritise creditors over the charity’s ongoing activities, as failing to do so may result in personal liability.

2. Informing the Charity Commission and Other Authorities - If the charity is registered, the Charity Commission must be informed if:

• The charity cannot meet its financial obligations.
• There is a serious risk to beneficiaries or public trust.
• The charity needs to enter liquidation or administration.

For charitable companies, Companies House must also be notified.

3. Avoiding Wrongful Trading and Personal Liability - Trustees and directors who continue operating while knowing the charity is insolvent could be held personally responsible for debts under the Insolvency Act 1986. If misconduct is suspected, they could face director disqualification or financial penalties.

It is vital that you take the right steps if insolvency is unavoidable. Taking early action and working with an insolvency practitioner, means trustees can reduce personal risk and ensure compliance with legal obligations.

What Will Insolvency Involve for a Charity?

If insolvency cannot be avoided, the charity will need to follow a structured process to settle debts, protect stakeholders, and close responsibly.

1. Financial Assessment

The charity must review its financial position, considering:

• Liabilities vs. assets – Can debts be repaid?
• Restricted funds – Some funds may be legally protected and cannot be used to pay creditors.
• Ongoing contracts – What commitments must be settled?

2. Seeking Advice from an Insolvency Practitioner

A licensed insolvency practitioner (IP), like Smart Business Recovery, will explore:

• Rescue and restructuring options, such as a Company Voluntary Arrangement (CVA).
• Voluntary liquidation, if the charity cannot continue.

3. Informing Stakeholders

Trustees must inform employees, donors, grant providers, and creditors, ensuring transparency while preventing financial misconduct.

4. Choosing an Insolvency Procedure

Depending on the charity’s structure and financial position, insolvency may involve:

• Creditors' Voluntary Liquidation (CVL) – Used if the charity cannot be saved. The charity closes, and an insolvency practitioner uses its assets to repay debts.
• Company Voluntary Arrangement (CVA) – If the charity can continue, a structured repayment plan is agreed upon with creditors.
• Administration – In the event that there is a clear chance of recovery, an administrator takes over to restructure the charity’s operations.
• Dissolution – For smaller charities or unincorporated associations, dissolution may be the best option.

5. Closing the Charity

If liquidation is necessary, the charity’s:

• Assets must be used according to its governing document or transferred to a similar charitable purpose.
• Regulatory registrations must be cancelled (e.g., with the Charity Commission and Companies House).
• Final financial statements must be prepared to show how debts were handled.

For trustees, ensuring the charity closes ethically and legally will be the first priority, so the sooner we can start to help, the better for everyone.

How Smart Business Recovery Can Help with Charity Insolvency

At Smart Business Recovery, we recognise that closing a charity is not just a financial decision, it is an emotional one. Charities have often been built over years of dedication, and trustees will feel a deep sense of responsibility to their beneficiaries and supporters. We get that, we understand, so we will do everything we can to make the process as clear and stress-free as possible.

Our expert team provides:

• Compassionate, Professional Guidance – We handle insolvency with empathy, ensuring you have the support you need.
• Specialist Charity Insolvency Advice – We help trustees understand their legal responsibilities and available options.
• Rescue & Restructuring Solutions – If possible, we explore ways to keep the charity running.
• Creditors’ Voluntary Liquidation (CVL) – Managing the charity’s closure ethically and legally.
• Company Voluntary Arrangements (CVA) – Helping viable charities restructure debts.
• Regulatory Compliance Support – Ensuring all Charity Commission and Companies House requirements are met.

We are here to guide you through every step with clear language and the right advice to make sure you are meeting your legal and ethical duties.

Need Help?

If your charity is struggling financially, don’t face it without guidance. Contact us for confidential, expert insolvency advice. Your first consultation is free.

We will help you find the best solution for your charity, its trustees, and its beneficiaries.