The winding down of your charity or non-for-profit organisation could take 3 primary forms:
- Insolvent Liquidation
- Solvent Liquidation
- Dissolution and/or cessation
Under the Insolvency Act, the formal liquidation of your charity or not-for-profit organisation will fall under the category of one of 2 principle types – a solvent liquidation or an insolvent liquidation.
Broadly speaking, an insolvent liquidation happens where a not-for profit organisation or charity has come to the end of its lifespan or is facing insolvency, and can no longer go on without incurring further losses. A liquidator is assigned in order to deal with the winding down – also technically known as 'winding up' – of the charity and making sure that all the relevant legislation, in dealing with creditors, is adhered to.
A solvent liquidation occurs where an organisation is able, in full, to pay all of its debts along with the costs of liquidation and statutory interest. This is often useful when trustees wish to gain the comfort afforded by a legal mechanism which shields them from claims arising that may disrupt what they have previously done, which may also follow on to personal liability claims.
At the point when an organisation knows that it is solvent but also sees that its reserves are diminishing without a reasonable, foreseeable turnaround in its fortunes, should strongly consider whether closing at that moment in time is in everyone's best interests. It may sound odd, however, trustees/committee members/directors should be aware that closing now may possibly mean, with the surplus available, another organisation could benefit financially. Continuing operating and reducing reserves in order to only maintain employment (a common desire) may not be in the best interests of those concerned and increases the risk of an insolvent charity situation – for example, notice pay entitlements and redundancy may rise as the days go on.
More detailed information can be found on each type of liquidation in the section concerning solvent liquidations and insolvent liquidations.
It may not be desirable to go through a liquidation exercise, and in some cases it is not possible (for example, if your organisation is unincorporated). In such instances you can look at dissolving your organisation or, once all its assets have been sold and its liabilities paid, ceasing operations.
You will need to take into account the following factors for this non-formal option to be considered:
- Ensuring employment legislation is fully adhered to
- Identifying all liabilities – actual, contingent, prospective
- Ensuring recovery action is not taken by any creditor before funds are available to pay them as any formal recovery action will entitle them to claim costs and/or interest for late payment
- Care will need to be taken to not be in breach of any trust(s) in relation to restricted funds
- Completion of all deregistrations – for example, Companies House, FCA, Charity Commission
It may be difficult and take time to undertake this task alone, but it is not impossible. We can aid you with anything ranging from simple pointers and tips to taking complete control of the task. Contact us today for more information and help.