How to wind up a solvent charitable company

Thankfully, so far at least, we have not seen an especially high number of charities finding it necessary to close, despite the prevailing state of affairs with Covid-19. But there are various reasons that the trustees of a charity might decide to close it – even in less turbulent times. They might decide, for example, that the charity's services would be better carried out by a larger, better-funded organisation, or it might simply be that, having been established to meet a particular need, the charity's services are no longer required.

We will focus in this issue on two ways in which a solvent charitable company may be wound up – one rather more involved and, potentially, much more expensive than the other.

The complicated route: members' voluntary liquidation

If a charitable company is no longer needed but remains solvent, one way to wind it up would be to follow the members' voluntary liquidation ("MVL") procedure set out in the Insolvency Act 1986. As it is only available to a solvent company, the procedure requires the charity's trustees (in their capacity as company directors) to swear a declaration of solvency – a statutory declaration to the effect that they have made full inquiry into the company’s affairs and that, having done so, they have formed the opinion that the company will be able to pay its debts (actual and contingent) in full, together with interest, within a period not exceeding twelve months from the commencement of the winding up. The statutory declaration must include a statement of the company’s assets and liabilities.

The Insolvency Act procedure also requires the charity's members to pass a special resolution confirming that, in light of the declaration of solvency, the company should proceed with an MVL. The members will also need to appoint one or more liquidators by means of an ordinary resolution – usually passed at the same time as the special resolution to wind up. Notice of the appointment must by filed at Companies House and advertised in the London Gazette within 14 days. Within 28 days of appointment, the liquidator must also give notice to all the creditors of whom he is aware.

During the course of the MVL, the liquidator(s) will seek to identify and pay all creditors of the charity and, having done so, distribute any surplus assets in accordance with the winding-up or dissolution provisions of its articles of association. If the MVL is not completed within twelve months, there are a number of additional formalities that need to be dealt with.

As soon as the charity's affairs are fully wound up, the liquidator(s) will prepare a final account disclosing how the MVL has been conducted and how the charity's property has been disposed of, a copy of which must be sent to each member within 14 days. The liquidator must send a copy of the final account to Companies House within the same period, but not before he has sent copies to the members. Notice of receipt of the final account will be published in the London Gazette by the Registrar of Companies and, assuming that this does not unearth any creditors who have been overlooked, the charity is deemed to be dissolved three months later.

The less complicated route: striking off

The main drawback of an MVL is that, because it has to be dealt with by one or more liquidators, who take over the role of the trustees in the company structure, there are fees involved, and these can sometimes be substantial – and, potentially, disproportionate. An MVL will often be the most appropriate route for a trading company, the shareholders of which will want to ensure that they receive their full entitlement to the company's surplus assets once its liabilities have all been met, but the members of charitable companies have no such entitlement, as any surplus must be applied for the charitable purposes dictated by the winding-up provisions of the charity's articles.

As a consequence, in many cases, it is more appropriate for charitable companies to put themselves in a position whereby they can take advantage of the striking-off provisions contained in chapter 1 of Part 31 of the Companies Act 2006.  These enable a private company that has become dormant (but is not subject to any insolvency proceedings) to apply to the Registrar simply to be removed from the register of companies. In such cases, the winding-up provisions of the charity's articles of association will be of no relevance because, by the time that the charity is dissolved, it will already have satisfied all of its debts and will have no surplus assets available for distribution.

A charitable company has an automatic right to apply its assets in furtherance of its objects and so, depending on the wording of its objects clause, the best option for a charity that is planning to close may be to make itself dormant simply by transferring all of its assets (and any remaining liabilities) to one or more charities with similar objects, and then apply to be struck off. There is no need for a liquidator to be appointed and so this route to closure is usually cheaper, although there is likely to be more for the trustees to deal with themselves.

It is important to note, however, that any assets that remain in a company when it is struck off automatically vest in the Crown. This means that care must be taken to ensure that, when the striking-off application is made, the charity truly is left as a shell with no assets and that there are no outstanding liabilities.

Once the charity has divested itself of its assets and liabilities, it must be retained as a shell for at least three months. Once this period has elapsed, the charity must lodge an application with the Registrar confirming that, within the previous three months, it has not:

• changed its name;
• traded or otherwise carried on its business;
• disposed of, for value, property or rights which it held for the purpose of disposal in the normal course of its business (which will be the case if the whole of the charity's undertaking has been transferred to another charity without charge); or
• engaged in any activity other than one which is necessary for concluding the affairs of the charity or for compliance with the statutory requirements.

The application to strike off, for which there is currently a fee of £10, is made using Companies House form DS01, copies of which must also be sent to various interested parties.  When the form is received by the Registrar of Companies, it will be filed on the company’s public record at Companies House and the Registrar will then advertise the application in the London Gazette, inviting objections to the proposed striking off. Any interested party may object to the application in writing to the Registrar of Companies.

No less than three months following the date of the advertisement, the charity will be struck from the register of companies, provided that the Registrar sees no reason for it not to be. The charity will be formally dissolved when the Registrar subsequently publishes a further notice in the London Gazette to that effect.

Charity Commission requirements

Once a charity has been wound up following an MVL or struck from the register, the former trustees must inform the Charity Commission that the company has ceased to exist using its dedicated online form. The Commission will want to know the value of the charity's remaining assets and what happened to them when the charity was closed, including the registered charity number of any recipient charity. On receipt of the form, the Commission will normally remove the charity from the register within 15 working days.

Post-closure, the former trustees must arrange for the charity's accounting records to be kept for at least three years after they were made and, notwithstanding the closure, they remain responsible for the decisions they made while they were in office.