There are only 3 principle types of insolvency procedure available to the trustees of a charity to use to deal with the financial position of their organisation. These are:
- Liquidation
- Administration
- Voluntary Arrangement
Liquidation is used where the charity really has reached the end of its life and it is not possible for whatever reason to continue.
Liquidation can be solvent or insolvent. The difference is down to whether the debts of the charity can be paid in full together with interest and costs or whether it cannot. Where it can the liquidation will be solvent, where it can’t it will be insolvent.
A solvent liquidation can be entered into voluntarily if the members of the organisation support the move.
An insolvent liquidation can be entered into voluntarily, which is the most common method. However, it is also possible to go through the courts, but it is uncommon for trustees to apply to court for a number of reasons, for example it has a detrimental impact on the funds available to creditors. Going to court to force the organisation into liquidation is the only route available to a creditor.
There are many names or titles that people give to the liquidation process (e.g. CVL, voluntary winding up, creditors liquidation, compulsory liquidation) but the title is of no real relevance, it is the underlying process that dictates what is happening.
For more information, click on one of the links at the side.
Administration is used where either the underlying business can be rescued or a better result can be achieved for creditors overall than would be achieved if the charity went into liquidation. Administration is only available to incorporated organisations.
Many people have heard the term prepack administration and think this is a different process. The underlying process isn’t - it’s still Administration.
The prepack term refers to the fact the plan of what will happen to the business – a sale – will have been researched and agreed before the event of Administration formally takes place. As you can see the sale is pre-packaged. A prepackaged sale is very useful to ensure continuity of services and avoid the fact the charity is in administration being made public before a purchaser is found as this can destroy the value in the business and unnerve users.
Administration is a relatively simple process and is often much quicker to enter than liquidation. For more information on the process, click on one of the links at the side.
A voluntary arrangement should be thought of as a contract between the charity, its creditors and a Licensed Insolvency Practitioner, such as Kevin Lucas of Lucas Ross.
It is designed to allow the Charity to work its way out of its current situation, often because it needs more than a few months to do it or it needs to agree a partial write off of some of its debt with too many creditors to seek informal equally fair settlements with each one.
A Voluntary Arrangement for an incorporated charity or not for profit organisation will always be known as a Company Voluntary Arrangement or CVA for short.
A CVA is a very misunderstood and underutilised tool to rescue an organisation. There are too many possible uses and benefits to describe here, and we would welcome your further queries on 0330 128 9489.
The debts are repaid by the charity making contributions, which are usually equal monthly payments, into the arrangement for a fixed period of time. The period of time is decided upon by the trustees. It tends to be 5 years or less, but if the debts cannot be repaid in full within the 5 year period then the trustees can either extend this period or receive some debt forgiveness because the debts haven’t been repaid in full.
To be successful in seeking a Company Voluntary Arrangement the creditors must vote to approve the proposal.
For more information on a CVA, click on one of the links at the side.