Distressed charities - insolvency
Distressed charities - insolvency

The following Private Client practice note provides comprehensive and up to date legal information covering:

  • Distressed charities - insolvency
  • Definition of insolvency
  • Winding up an insolvent unincorporated charity
  • Unincorporated Associations
  • Trusts
  • Charitable incorporated organisations (CIOs)
  • Charities established by Royal Charter
  • Incorporated Charities
  • Voluntary arrangements
  • Administration
  • More...

With many charities facing financial issues such as an inability to raise finance, reducing levels of donations, diminishing returns from funds held as investments, cancellations or defaults of material contracts, government funding cuts or accrued pension liabilities some may be tipped into insolvency.

Definition of insolvency

The Insolvency Act 1986 (IA 1986) does not provide an express definition of insolvency. However, two definitions are generally accepted:

  1. where liabilities exceed assets (“balance sheet” insolvency)

  2. where debts cannot be paid as and when they fall due (“cash flow” insolvency)

Most charities are either incorporated (usually taking the form of a company limited by guarantee) or unincorporated. Others may be established under an Act of Parliament or Royal Charter.

The rules relating to incorporated and unincorporated charities are different. So far as an incorporated charity is concerned it will be deemed to be “unable to pay its debts” where:

  1. it has not paid , secured or settled a claim from a creditor exceeding £750 within three weeks of receiving a statutory demand

  2. a creditor has been unsuccessful in pursuing enforcement process against it

  3. it fails the “cash flow” test

  4. it fails the “balance sheet” test

One important issue to note in respect of charitable organisations is that such entities often hold assets to which they are not beneficially entitled. Such assets are known as “restricted funds” which are assets that are held

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