There are few areas of insolvency law more fraught with pitfalls than the insolvency of unincorporated charities, in particular charitable trusts. From the preliminary and decision-making stages to the actual liquidation of the charity’s assets, it can pose unique challenges about which trustees and Insolvency Practitioners (IPs) must be aware.
Issues can arise from the outset. Unlike directors of companies, the trustees of a charitable trust do not automatically have authority to dissolve a charitable trust and liquidate its assets. The charity’s governing document (usually a deed of trust) will often set out the basis on which trustees have the power to bring the charity to an end. Sometimes, however, the governing document will be silent on dissolution. Where this is the case, the trustees’ ability to dissolve the trust may hinge upon whether they can dispose of the trust assets themselves (please see below).
Presuming the trustees do possess the requisite authority, they must then follow the correct decision-making procedure. The decision will often need to be agreed at a Special General Meeting (SGM). This will have its own particular procedural and administrative requirements, usually set out in the governing document. These must be complied with or else the decision to bring the charity to an end will not be effective.
A frequent problem which can arise during the decision-making process is that, due to a lack of trustees, the dissolution meeting lacks the minimum number of attendees for the decision to be effective (the quorum). The exact number of attendees required will depend upon the provisions of the charity’s governing document. If the meeting is, or is likely to be, inquorate, the advice of the Charity Commission will need to be obtained before any decision on dissolution can be made.
If trustees are able to hold the meeting and make a valid decision to bring the charity to an end, attention then turns to liquidation of the charity’s assets itself. Unsurprisingly, issues can also arise here, in particular if the charity holds in its possession any restricted assets.
There are two main types of restricted assets typically held by charities: permanent endowments and restricted funds. Permanent endowments are assets which, in theory, were donated to the charity on the basis that they would remain in the charity’s possession in perpetuity. As a result, unless the charity’s governing document specifically authorises their general disposal, permanent endowments may only be disposed of with consent of the Charity Commission. Usually, this will only be granted if the disposal would be in the best interests of the charity’s charitable purposes; the asset cannot simply be sold to satisfy the claims of creditors.
Restricted funds, meanwhile, are monies donated to the charity for a specific aspect of the charity’s purposes, for example money donated as part of a specific fundraising appeal. Where these exist, they may generally only be spent for the specific charitable purpose for which they were donated, or be returned to the donor.
It is clear that, at all levels of the process, conducting the insolvency of unincorporated charities can be a perilous exercise. Trustees and IPs, however, can mitigate risk by ensuring the governing document is fit for purpose, is complied with, and that any restricted assets in the charity’s possession are clearly ascertained.