If, for any number of reasons, the charity with which you are working is facing financial problems, are you worried what the implications of it becoming insolvent are for you personally? This article is intended to give you a brief overview of your situation depending on the different structures under which charities operate. However, these should not be regarded as any substitute for taking professional advice which should be sought as soon as possible, especially as in some cases the outcomes could prove very serious for you.
The following chart lists the range of charity organisational structures covered in this article and gives an idea of the potential level of personal financial risk to a trustee.
| Charity Structure | Potential Level of Personal Financial Risk |
| Trusts | High |
| Unincorporated Associations | High |
| Companies Limited by Guarantee | Minimal |
| Friendly Societies (Unincorporated) | High |
| Friendly Society (Incorporated) | Nil |
| Community Interest Companies (CIC) | Nil |
| Charitable Incorporated Organisations (CIO) | Nil |
Trusts
Traditionally the Trust structure has been used by individuals or groups of individuals to allow property assets to be given to charity by trust deed or will.
However it is essential to understand that a trust is not what is defined as an ‘independent legal personality’. This means it is not a legal entity and does not have the ability to enter into agreements or contracts, take on obligations, incur and pay debts, sue and be sued in its own right, or to be held responsible for its actions.
This means that a trustee will be personally liable for any of the above financial arrangements that they organise with a third party. These should not be entered into lightly and legal advice sought immediately if problems arise.
Unincorporated Associations
An ‘unincorporated association’ is an organisation set up through an agreement between a group of people who come together for a reason other than to make a profit (for example, a voluntary group or a sports club).
An unincorporated association does not need to be registered and importantly, similar to a trust, in itself has no legal status. Therefore the individual members are personally responsible for any debts and contractual obligations.
If an unincorporated association is facing insolvency than the members may need to seek their own advice which might entail entering individual voluntary arrangements (IVAs), a formal and legally binding agreement between the individual and their creditors to pay back the debts over a period of time, or even consider bankruptcy.
Company limited by guarantee
This type of charity has a board of directors or trustees with governing documents called the Articles of Association and Memorandum of Association. These documents set out how the company is run and governed.
Here the directors are protected against personal liability as the company is its own entity and any debt belongs to the company. Limited by guarantee means the liability of its members is limited to the amount each one of them undertakes to contribute at the time the firm is wound up and this amount is usually minimal.
In the event of becoming insolvent this structure is covered by the Insolvency Act 1986 and there are a wide range of alternative routes that can be considered. Because timely action delivers the best outcomes it essential you should seek advice from a specialist advisor as early as possible.
Friendly Society
A friendly society is form of corporate structure for the conduct of life or health insurance, pension fund or education-related business. It must be registered by the Financial Conduct Authority. The friendly society can either be incorporated or unincorporated depending on which Act it is registered under. Those registered under the Friendly Society Act 1974 are unincorporated while those registered under the Friendly Society Act 1992 are incorporated.
There are the following types of society registered under the Friendly Societies Act 1974:
- friendly societies
- working men’s clubs
- benevolent societies
- cattle insurance societies
- specially authorised societies
As these are unincorporated see this section above for the extent of members’ personal liabilities for the debts incurred.
It is no longer possible to register a new society under the 1974 Act. Friendly societies registered under the Friendly Societies Act 1992 are incorporated entities and are registered for effecting and carrying out contracts of insurance.
An incorporated organisation is its own legal entity, giving a level of protection to its members.
The rules for charities are the same as for companies and individuals and are covered by the Insolvency Act 1986.
As with companies limited by guarantee, in the event of the charity becoming insolvent there are a wide range of alternative routes that can be considered and it is essential to seek professional advice from a specialist and experienced legal advisor as early as possible.
Community Interest Companies (CIC)
This is a public or private company designed to benefit a community or group, not just the owner or employees. Whilst this isn’t a charity, a charity can own a CIC to trade. As it is a limited company, debts belong to the company and individuals are not personally liable.
Again as with companies limited by guarantee, in the event of the charity becoming insolvent there are a wide range of alternative routes that can be considered and it is essential to seek professional advice from a specialist and experienced legal advisor as early as possible.
There is also the ‘asset lock’ which means a number of assets are kept separately to only be used in the event of a restructure or insolvency to raise money for creditors.
Charitable Incorporated Organisations (CIO) – since January 2013
This is not a company but does protect trustees against personal liability. There is no need to register at Companies House, just with the Charities Commission. Here again there are a range of alternatives that can be considered with the help of expert advice if insolvency is on the cards.
While becoming involved in a charity is an excellent step to take, it is important that you understand the implications for you personally if serious financial problems arise. As you will have read above these could be very serious depending on what the structure of the charity’s.
Next Step
If you want to find out anything further about this subject then please feel free to call me on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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