8 Mins
Why some charities choose a solvent closure
Charities close for many reasons, mission achieved, loss of funding, strategic mergers, or a shift to more effective delivery through another organisation. Solvently winding up a charity is an option if the charity is solvent (able to pay all debts and closure costs), it may be possible to plan an orderly wind‑down that protects beneficiaries, staff, and reputation. In Scotland, you must obtain OSCR’s consent before winding up or dissolving a charity (different rules apply to SCIOs), and assets must remain for charitable purposes.
If your charity is based in England or Wales the Charity Commission provides separate guidance on closing a charity, including company/CIO routes and pre‑closure actions.
The headline risk: timing of advice
Two organisations can face the same funding shock and end in very different places depending on when trustees seek advice and how they act on it. The “twilight zone” before insolvency is when decisions are scrutinised most closely, and where early action preserves options (and minimises personal risk).
Case Studies: The Impact of Timing
Case Study 1 – Late Advice: Bankruptcy and Unpaid Staff
The Situation
A Scottish charity lost its core funding. Trustees believed there were enough funds to close solvently, but redundancy and notice costs for staff were overlooked.
What Happened ?
When payroll was finalised, there weren’t enough funds to pay staff. With no time to act, the charity entered immediate bankruptcy. Staff learned, just one day before payday, that they would not be paid.
Lesson learned
Late advice meant trustees lost control of the process. It was damaging for staff, beneficiaries, and reputation. This is consistent with sector warnings: redundancy liabilities, lease penalties and other “hidden costs” can tip a solvent plan into insolvency if not modelled early.
Case Study 2 – Early Advice: Negotiation and a Managed Transition
The situation
Another charity also faced funding withdrawal. On first review, trustees thought reserves were sufficient for closure, but they sought specialist advice early.
What happened
A contract review revealed significant termination clauses that could have made closure unaffordable. Spotting this in time allowed trustees to negotiate settlements. They also partnered with another charity to transfer projects and staff, protecting services and jobs.
Lesson learned
Early advice gave trustees time and options, negotiation, project transfer, and orderly closure, leading to better outcomes for staff, beneficiaries, and the wider sector. This aligns with best‑practice guidance on early diagnostics, more frequent financial reviews, and active creditor engagement.
Trustee duties and where personal liability can arise
Trustees must act in the charity’s best interests, comply with the constitution and law, manage resources responsibly, and exercise reasonable care and skill.
When financial distress emerges, duties sharpen:
- Monitor solvency continuously. Trustees must understand cash flow and balance‑sheet positions and review the going‑concern basis.
- Shift focus to creditors when insolvency is likely. Once insolvency is inevitable or highly probable, creditor interests take priority; failure to pivot can lead to claims (e.g., misfeasance, wrongful trading in company contexts).
- Avoid wrongful trading (charitable companies). Allowing a charity to continue incurring liabilities with no reasonable prospect of avoiding insolvency risks personal exposure. Keep records evidencing steps taken to minimise loss to creditors.
The hidden costs that derail “solvent” plans
A common reason solvent closures fail late in the process is underestimating closure costs. Model these early:
- Staff costs: Redundancy, notice pay, holiday pay and any TUPE/consultation implications on transfers.
- Contracts and leases: Early termination charges, minimum terms, dilapidations, equipment leases, software fixed term contract subscriptions.
- Pensions: Potential additional liabilities (e.g., defined benefit schemes) triggered on wind‑up, take specialist advice.
- Restricted funds and endowments: Ensure restricted monies are used/transferred in line with donor conditions and charity law.
- Asset realisations and fees: Realistic disposal values (often far lower than book values), plus legal, storage and agents’ fees.
Best practice for trustees
- Monitor finances regularly. Put clear, timely management accounts and rolling cash flow forecasts on every board agenda; ensure all trustees (not just the treasurer) understand them.
- Act early. Escalate when forecasts show pressure; earlier action = more options (renegotiate, restructure, merge, or plan a solvent wind‑down).
- Seek professional advice quickly. Engage accountants/insolvency practitioners and, where relevant, employment and pensions specialists. This helps evidence reasonable care and mitigates wrongful trading risk.
- Strengthen internal controls. Use checklists to safeguard assets, improve information quality and review contracts.
- Keep records. Minute decisions, alternatives considered, financial data relied upon, and reasons, this is crucial evidence of acting with care and skill.
- Trustee training. Free/low‑cost modules are available
Process overview in Scotland
All Scottish charities: You must obtain OSCR consent before winding up or dissolving (assets must stay charitable; follow your governing document). OSCR’s closing‑a‑charity pages set out what to do and the evidence you must file after dissolution.
SCIOs (Scottish Charitable Incorporated Organisations): The dissolution process is SCIO‑specific. OSCR publishes the notice of application (typically 14–28 days, depending on the context) and, for insolvent SCIOs, refers matters to the Accountant in Bankruptcy (AiB) for bankruptcy (also known as sequestration in Scotland); solvent SCIOs follow a separate consent route with a “notice of application” and post‑consent evidence requirements.
Charitable companies (Ltd by guarantee) – solvent wind‑up: Some choose a Members’ Voluntary Liquidation (MVL). Directors must swear a declaration of solvency; a licenced Insolvency Practitioner is appointed liquidator; creditors are paid with statutory interest; surplus is distributed in line with the articles and charity law. This is formal and can be costlier than alternatives, so weigh it against simpler strike‑off routes where available and appropriate.
See Charity Commission guidance or checklists for closing unincorporated charities, charitable companies and CIOs in England and Wales.
Communications, transition and legacy
Plan stakeholder communications (staff, volunteers, beneficiaries, funders, key partners) and consider service transfers to aligned charities where possible. Early dialogue smooths TUPE/HR and contract issues and helps preserve impact and reputation, exactly what Case Study 2 demonstrates.
Pulling it together: your action plan
- Run a solvency and closure‑cost model (redundancies, leases/penalties, pensions, asset realisations, professional and storage costs).
- Increase board cadence (cash flow reviews weekly/fortnightly if needed) and document decisions.
- Seek specialist advice early (accounting, insolvency, employment, pensions).
- Map the legal process for your structure: OSCR consent (all), SCIO specifics (AiB for insolvent), or MVL for companies where appropriate.
- Engage stakeholders and, where feasible, negotiate contract exits and explore project transfers to protect services.
Important legal note
This guide is general information. It is not legal advice. Charity law and insolvency routes differ by legal form and jurisdiction. Always take professional advice on your charity’s specific position, especially if insolvency risk is present.
If you’re weighing up options, need more information, or want a rapid, independent solvency and closure‑cost review, our team can help you assess viability, negotiate exits, and (where needed) manage solvent or insolvent wind‑downs with OSCR and other regulators.