A local financial journalist asked us recently to provide him with some information on charity insolvency, as source material for an article he was writing on the subject. It is an area we have a great deal of experience in, so we were happy to oblige. This article is a more detailed version.
Charities are not immune from financial distress. When a charity becomes insolvent, the same legal framework applies as with companies. Insolvency Practitioners play a central role in investigating the conduct of directors, safeguarding restricted funds, and ensuring creditors’ interests are protected. But what does this mean in practice, and how are issues such as criminality or director disqualification handled?
What role do Insolvency Practitioners play in Charity Administrations and Insolvent Liquidations?
In every administration and insolvent liquidation, the appointed Insolvency Practitioner has a statutory duty to investigate the conduct of the board of directors in the months and years leading up to insolvency. This duty applies equally to charities. If the insolvency has occurred simply because of difficult market conditions and despite the best efforts of directors, then the investigation into the duties of directors is often a formality.
Investigations focus on whether there has been misconduct or whether funds can be recovered for the insolvent estate. Typical areas examined include ‘the 4 sins’:
- Wrongful trading
- Transactions at an undervalue
- Preferential payments to certain creditors
- Fraudulent trading
For charities, there is an additional focus on restricted funds. Insolvency Practitioners must check whether these funds have been used for purposes other than those originally intended.
Hugh Jesseman, Licensed Insolvency Practitioner here at Antony Batty & Company, explains:
“With charities we also look at the use of restricted funds, whether they have been used for purposes other than the reason they were provided in the first place.”
How is alleged criminality detected and reported?
If, during the course of an investigation, evidence of potential criminal activity is uncovered, Insolvency Practitioners have a duty to report this to the relevant authorities. They will also assist those authorities where possible.
This ensures that misconduct is not only addressed through civil recovery actions but also referred for criminal investigation where appropriate. The Insolvency Practitioner’s role is therefore both protective and investigative, ensuring transparency and accountability in the charity sector.
What happens if a Director is found unfit?
The duty to investigate includes reporting findings to the Insolvency Service, the Government department responsible for insolvency matters, and an executive agency of the Department for Business and Trade. Reports are submitted in every case, even if no concerns are identified.
Where misconduct is suspected, the Insolvency Service may consider disqualification proceedings. This process is independent of the Insolvency Practitioner’s view. Even if the Practitioner believes disqualification is appropriate, the Insolvency Service will make its own decision.
If disqualification action is pursued, the Insolvency Service will most likely, first seek a voluntary undertaking from the director to be disqualified for a set period. If this is not agreed, court proceedings may follow.
A disqualified director cannot act as a director or be involved in the management of a company or charity for the duration of the ban. This protects the public and ensures that those who have failed in their duties cannot repeat the same mistakes in another organisation.
Does the Secretary of State have to act?
It is important to note that the Insolvency Service filters reports and decides which cases warrant further investigation.
This means that while Insolvency Practitioners have a duty to report, the decision to pursue disqualification or other sanctions rests with the Insolvency Service. They may decide to take no action if they consider the evidence insufficient or the circumstances do not justify intervention.
Why is this important for charities?
Charities rely on public trust and donor confidence. Insolvency investigations ensure that restricted funds are used properly and that directors are held accountable for their conduct.
For directors, the message is clear: the same standards apply to charities as to companies. Misuse of funds, wrongful trading, or misconduct can lead to personal consequences, including disqualification.
For creditors and beneficiaries, the process provides reassurance that Insolvency Practitioners are working to recover funds where possible and to protect the integrity of the charity sector.
Talk to us for advice on Charity Insolvencies
Charity insolvency is complex, but the framework is clear. Insolvency Practitioners investigate director conduct, report findings to the Insolvency Service, and refer criminal matters to the authorities. Where directors are found unfit, disqualification can follow, preventing them from managing charities or companies in the future.
At Antony Batty & Company, our team, including specialists such as Hugh Jesseman, has extensive experience in charity administrations and insolvent liquidations.
When approached by any charity that is facing financial difficulties, our first goal is to see if there is any chance to turn the business around. If already insolvent, we will work to see if a recovery procedure, such as an Administration is appropriate. If, however, liquidation is the only option, we will ensure the process is completed as professionally and in as orderly way as possible.
We provide clear guidance and practical support to ensure that the process is handled professionally, transparently, and in line with the law. Take a look at some of our work in the sector.
Contact us for a free of charge initial discussion if you are a charity in financial difficulties.
Frequently Asked Questions About Charity Insolvency
What is charity insolvency?
Charity insolvency occurs when a charity cannot pay its debts as they fall due, or when its liabilities exceed its assets. The same legal tests apply as for companies, and formal procedures such as administration or liquidation may follow.
Can a charity go into administration?
Yes. Administration is available to incorporated charities (usually companies limited by guarantee). An administration protects the charity from creditor action while options for rescue, restructuring, sale of the core “business” or orderly wind‑down are explored.
What happens to restricted funds in charity insolvency?
Restricted funds must only be used for the purposes for which they were given. Insolvency Practitioners investigate whether restricted funds have been misapplied. If they have, recovery action may be taken to protect the interests of donors and beneficiaries.
Are charity trustees treated the same as company directors?
Incorporated charities have directors who are also trustees. Their conduct is investigated in the same way as company directors. If misconduct is found, they may face disqualification from acting as directors or trustees in the future.
What if criminal activity is suspected?
If evidence of criminal activity is uncovered during an investigation, Insolvency Practitioners have a duty to report it to the relevant authorities. Civil recovery may also be pursued where appropriate.
Can a disqualified director still be a charity trustee?
No. A disqualification order or undertaking prevents an individual from acting as a director or being involved in the management of a company or charity for the period of disqualification.
Who decides whether a director is disqualified?
The Insolvency Practitioner reports findings to the Insolvency Service. The Insolvency Service then decides whether to pursue disqualification proceedings.
How does charity insolvency affect donors and beneficiaries?
Donors and beneficiaries rely on charities to use funds properly. Insolvency investigations provide reassurance that restricted funds are safeguarded and that directors are held accountable for their conduct.
Where can charities get advice if they are facing insolvency?
Specialist Insolvency Practitioners, such as Antony Batty & Company, provide advice on charity administrations and liquidations. Early consultation can protect directors’ options and help stabilise the charity’s position.
