5 things to think about when considering solvently winding up a charity

Some charities are finding things tough at the moment, particularly charities which were heavily reliant on local authority grants which have been cut, compounded with the challenges of COVID.

Charity trustees are responsible for the safeguarding of charitable funds which are given to a charity to fulfil a charitable purpose.  The trustees should ensure that those funds are used for the purpose for which they were given. Where the future is uncertain with no clarity over longer-term funding, one option which should be kept under regular consideration is an orderly wind up of the charity. Early consideration of this option means that surplus remaining funds can be paid over to another charity that will fulfil the purposes for which the money was given. The alternative may be a less than orderly insolvent wind up that exposes the trustees to personal liability issues.

Charity trustees should be assessing the financial position of the charity regularly. This should include a review of the current financial performance, cash flow going forward and discussion around whether it is appropriate to wind up.

We have been speaking to a number of charities recently in this situation helping them weigh up options. We provide advice around and assist with solvent and insolvent winding ups. Here are 5 key things to look at when considering winding up:

1. What is the asset and liability position?

There may be a decent cash balance in the account and a sizable net asset position. However, this may not be the outcome in a winding up because of the following reasons:

  • The balance sheet does not take account of employee termination costs. If there is a high number of employees with long service, this could be a very large number.
  • If there is a defined benefit pension scheme there could be a significant additional liability triggered by winding up. If there is a defined benefit pension scheme the trustees should take specialist pensions advice on the implications of winding up.  
  • Long term contracts –how many years are left on the lease where a property is rented? Also, check contracts and leased equipment terms and conditions for minimum terms, notice periods and penalties. 
  • Asset values per the accounts may not be what they will actually realise. For example, office furniture is likely to realise very little if it is to be sold but may be included in the balance sheet at a much higher amount. There may be agents fees to be incurred.
  • In addition to agents’ fees, there may be other costs of the winding up. For example legal costs, storage costs. These need to be taken into account.

If all the liabilities cannot be met then this means that the charity is insolvent. There may be personal liability for the trustees and they should speak with an insolvency practitioner immediately.  If there are sufficient funds to meet all liabilities and costs of the winding-up then it is likely to be a solvent winding up. Solvent means that all liabilities will be met.

When a charity is facing uncertainty we recommend that they calculate the costs of redundancy and long term contracts and include this figure in the board papers for consideration by the trustees along with a 13-week cash flow forecast.

2. What is the legal entity?

There are a number of different types of legal entity that a charity can be e.g. a company limited by guarantee, a trust, a Scottish Charitable Incorporated Organisation (“SCIO”). The constitution should be checked for any conditions or requirements in the constitution regarding winding up.  It may be that the constitution contains certain voting provisions around the winding up or specifies how remaining funds are to be dealt with. There are different ways to solvently wind up the various entities. The trustees may be able to do this themselves but should take advice from an insolvency practitioner (even if solvent) or a lawyer.

3. What will happen with the remaining funds?

Any remaining funds should be transferred to a charity with the same or similar charitable purposes. The trustees may have several potential charities in mind and funds can be split between different charities, if there are restricted funds, then any charity that takes those funds must be fully appraised and confirm in writing the understanding of the requirements around the restrictions. If a charity is unclear on who might be suitable the OSCR register of charities can be searched. For very specific purposes and restrictions, OSCR can provide support and guidance.

OSCR will need to be satisfied with the proposed choice, which leads on to the next key consideration.

4. OSCR Consent

No matter what type of entity a charity is, in Scotland, consent to wind up must be applied for from OSCR before any winding up is commenced. The application needs to be made 42 days in advance of the proposed commencement, so this is an important consideration for timing. OSCR has 28 days to respond and will look at what does the constitution say with regards to the winding-up (point 2 above) and what is happening with any residual funds (will they be used for the same charitable purpose as they were given). If these are both in order and OSCR has no other concerns consent will be granted.

5. Stakeholder considerations

Some specific things to note:

  1. Other regulatory bodies involved – make sure they are notified in accordance with requirements.
  2. Employees – observe contractual or statutory notice periods where appliable.
  3. Check notice periods on leases and contracts and issue formal notice in plenty of time.
  4. Books and records – financial records and charitable records need to be kept for 6 years (for HMRC and OSCR), arrange for back up of computer files, accounting system and storage of paper records.
  5. Consideration to be given to whether there is a need or desire to advise service users, funders, beneficiaries, open funding applications?

Get in touch

This is intended to be a general guide and you should take advice if you wish to consider winding up a charity. For more information get in touch with the team at Henderson Loggie.