What Happens To An Insolvent Charity? A Guide For Directors & Trustees

person holding open empty wallet

In spite of the best efforts and forward planning of directors and trustees, unfortunately charities can still become insolvent. Often this is due to factors outside of anyone’s control. Charities rely on funding, which is influenced by the current economic climate, as well as unprecedented events that may cause funding to dry up. 

There’s a difference between a charity that’s facing financial difficulty and an insolvent charity. Albeit the former may of course lead to the latter. A charity is considered ‘insolvent’ when it cannot pay its debts as they fall due. Signs of charity insolvency may include late VAT/PAYE payments, increasing creditor pressure or seeking overdraft facilities. As trustee or director, what should you do if any of these signs look familiar? The first step is to be proactive in seeking professional advice.

Contact An Insolvency Practitioner

If your charity has been struggling financially and you’re concerned that it may now be an insolvent charity, it’s important to contact a licensed insolvency practitioner as soon as you can. They will be able to confirm whether or not the charity is in fact insolvent, assess where the main issues are stemming from, and suggest a path forward based upon this assessment. Depending on the circumstances of the individual charity, there are a few different options available for closing or recovering the organisation. These include:


When a charity becomes insolvent, it’s the duty of trustees and directors to prioritise the interests of creditors above the objectives of the charity. In many cases this will mean that liquidation is the best option. This can be done via a Creditors Voluntary Liquidation (CVL) which will remove creditor pressure quickly and ensure all the affairs of the organisation are wound up correctly by an insolvency practitioner. If problems are not addressed face on, the charity may be forced to liquidate in due course, providing far less control to directors and trustees. 


Another potential option for an insolvent charity is to enter administration. In this scenario, control of the organisation is handed over to an insolvency practitioner who will act as administrator. When charities are in administration, it prevents further legal action from being taken against them. This provides the necessary breathing space to implement a recovery plan to repay the money owed to creditors, or to organise the sale of the charity. 

Company Voluntary Arrangement (CVA)

This is a binding contract between an organisation and its creditors to pay back some or all of its debts over a specified period of time. This is a very useful process for removing creditor pressure and enabling directors and trustees of an insolvent charity to remain in control as they work on re-stabilising funds. 

Merging With Another Charity

Another option for an insolvent charity may be to merge with another charity that has similar aims and objectives. This enables the organisation to continue, albeit in a different way, with the financial assistance of another party. 

These are just  a few of the routes that an insolvent charity may be able to take. Our experienced team of insolvency practitioners can talk you through the best options for your individual circumstances. 

Are Trustees/Directors Personally Liable?

As the director or trustee of an insolvent charity, one of the main concerns you’re likely to have is, “am I personally liable for the charity’s debts?” Trustees/ directors of incorporated charities are treated similarly to company directors. This means that they are not personally liable unless they have not followed their duties as a director e.g continued to trade while insolvent, or engaged in wrongful training. Unincorporated charities on the other hand, are not treated as separate legal entities, and therefore directors/trustees can be personally liable for any debts incurred by the charity.

If you are the director or trustee of an insolvent charity or one that is starting to fail, our experienced team at My Liquidation can help advise you on the next steps, whether that’s recovery or liquidation. Don’t hesitate to get in touch to arrange an initial consultation. 

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