Closing down of Charitable and Not for Profit Companies
Charitable and Not for Profit companies (NFPs) are usually set up by volunteers who want to make a difference to their community and achieve an objective for the public good. Once this objective has been achieved, the company can be wound up.
This article looks at the practical issues faced by Directors and how the Directors of the company should deal with the closing down of the company.
Is there an increase in the level of charities and NFPs which are closing down?
We have certainly seen a recent increase in the level of enquiries from charities and NFPs for advice on winding up the organisation. NICVA have also advised us that the impact of reductions in grant funding from Government organisations has led to an increase in the level of enquiries they are experiencing to their support lines.
How do charities and NFPs differ from most organisations?
Most companies have share capital and the liability of members is limited by the amount paid for the shares. Any surplus assets available on a winding up of a limited company will normally be paid to the shareholders. NFPs differ however, in that the liability of members is limited to the guarantee set out in the constitution of the company, usually £1. In addition, the constitution will prevent the members from personally benefitting in a winding up, and will usually require that any surplus is paid to another charitable organisation or NFPs with similar goals.
What practical issues do Directors of Companies Limited by Guarantee face in a winding up?
In our experience, there are a number of issues for Directors of companies limited by guarantee which are different from commercial entities:
1) Directors of NFPs are usually non-executive volunteers, with a day job and little involvement in the day to day running of the organisation. Closing down the charity will create significant demands on their time.
2) Directors of NFPs frequently have limited training or experience of dealing with the issues associated with closing down an organisation, and may need to rely heavily on professional advice to assist them in this case. Due to the sensitivities around involving staff in this process, they may not be able to involve the executive management of the charity fully in these discussions.
3) The winding up of the charity will require decisions to be ratified by the members. In our experience, companies limited by guarantee may not maintain full records of changes of members, and it may prove difficult to track down or obtain approval from individuals who are no longer involved in the organisation, but are still members.
4) The sale or transfer of assets in a wind-down may give rise to tax and/or VAT liabilities. The company may be able to avail of tax advantages if it is a charity or a mutual trading company; however care will need to be taken to avoid triggering avoidable tax or VAT charges.
What duties to the Directors of a charity or NFP have?
The duties of directors set out in s170-177 of the Companies Act 2006 apply to directors of all companies, including charities and NFPs. Professional advice should always be sought.
If you would like to discuss this with a member of our team, please contact: Brian Hegarty, Head of Business Recovery and Insolvency.
Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.