Closing Down CHARITABLE LIMITED COMPANIES There are three This information sheet is intended as a brief overview of the procedures available to organisations that wish to wind up or close down. It is not a statement of the law and organisations will need to get independent legal advice before they proceed to close down. There may be a number of reasons why an organisation may wish (or have to) wind up: Their funding has run out and no further funding is likely in the foreseeable future The need for the organisation no longer exists or it has fulfilled the purposes it was set up for The organisation is going to merge with another body The organisation is unincorporated and is to become a limited company There are two key factors in determining which procedures an organisation must use to wind up: Whether it is solvent (that is, able to pay off all its debts) or insolvent Whether or not it is incorporated (that is, a limited company or community benefit society) SOLVENCY There are two traditional tests used by accountants to determine whether an organisation is solvent or not: the cash flow test and the balance sheet test. In order to be solvent, an organisation must be able to pass both tests. If it cannot, then the organisation should seek legal advice and the advice of its accountants as soon as possible. 1
Cash Flow Test This means that the organisation has enough money or other assets to pay its debts as they become due in the short term or in the foreseeable future. An organisation might be in financial difficulties under the cash flow test because it: is having to spend from its reserves to meet its current commitments has to take out additional security to finance borrowings is being chased by creditors for overdue or unpaid bills. Balance Sheet Test This means estimating the true value of all the assets of the organisation and also the amount of its actual and potential debts (liabilities). If all its assets, when converted into cash, are able to meet its debts/liabilities (including likely future claims such as pending employment tribunal or court cases) then it will pass the balance sheet test. If the organisation is solvent but not a company or community benefit society, then it must follow the procedures in its constitution or deed of trust about winding up or dissolution. If the organisation is a charity, it must have final nil balance accounts prepared to show what assets were left and where they were transferred or donated. Once the charity has been dissolved, it must send a copy of the resolution to dissolve and the nil balance accounts to the Charity Commission. The Commission will then remove its name and details from the Register of Charities. For an unincorporated association, the winding up procedure will usually involve holding a general meeting and passing a resolution to dissolve once all the organisation s debts have been paid. The constitutions of unincorporated charities will require that any assets left over must be transferred to another charity with similar objects, or used for similar charitable purposes or applied according to the directions of the Charity Commission. For a trust, the resolution to dissolve must be passed by the trustees according to the procedure contained in its Deed of Trust. If the organisation s constitution or Deed of Trust does not enable it to dissolve, see under Particular Problems. If the organisation is solvent and a limited company, it can make use of the Voluntary Striking Off and Dissolution procedure under section 1003 of the Companies Act 2006 see the next section below on Winding up a solvent company for more information on this procedure. The company must also pass a special resolution in a general meeting of its members* to wind up as solvent. If it is also a charity, it must send a copy of this, plus final nil balance accounts to the Commission, which will then remove it from the Register of Charities. Alternatively a company can make use of a Members voluntary liquidation (see section below). 2
* the members of a limited company are those who have given members guarantees if it is a company limited by guarantee or the shareholders if it is company limited by shares. If the organisation is solvent and a community benefit society (formerly industrial and provident society), it can make use of the voluntary dissolution procedure under section 55 of the Industrial and Provident Societies Act 1965. You can find more information on this from the Financial Service Authority s website at or by contacting the Authority see details on page 12. http://www.fsa.gov.uk/pubs/forms/ms_dissolution_ip_notes.pdf WINDING UP A SOLVENT COMPANY Members voluntary liquidation This procedure allows a solvent company to put itself into liquidation where, for example, it is being sold off or the purposes of the company have come to an end. The members appoint their own choice of insolvency practitioner as liquidator (see below on page 8 for more information on insolvency practitioners). Creditors do not have to be notified. The company must be able to pay its debts in full within 12 months. If the liquidator considers that this will not be possible, a meeting of creditors must be held and the liquidation becomes a creditors voluntary liquidation (see page 10). Voluntary Striking Off and Dissolution If a company wishes to cease to trade while still solvent, it can use the voluntary striking off and dissolution procedure through Companies House. In order to use the procedure it must be able to show that, in the 3 months prior to making its application for dissolution and striking off, it has not: traded or otherwise carried on business changed its name sold assets that it normally traded in. However it is allowed to dispose of capital assets used in running the business during that three-month period engaged in any other activity except one necessary or expedient for making a striking-off application, settling the company s affairs or meeting a statutory requirement (for example, a company may seek professional advice on the application, and pay the costs of copying the striking off application). What must the company do before applying? A company cannot apply for dissolution and striking off if it has settled trading or business debts in the previous three months. It is therefore very important that all business debts are settled before the application is made and that the directors are confident that there are no outstanding creditors or likely future claims against the company. NB Before submitting the application, the company should also have disposed of all its assets, including money in bank accounts, because from the date of dissolution, any assets held by a dissolved company will belong to the Crown. Any bank account held by the company (if still open) will be frozen and any credit balance in that account will be passed to the Crown. 3
Before making the application, the company must warn all those with whom it deals (for example, members, creditors, debtors, employees, contractors, the local authority or other partner organisations) that it is proposing to be voluntarily struck off. This is to give them the opportunity to object if they wish and have their objections dealt with. How do you make the application? The application is made on Companies form DS01 and it should be sent to Registrar of Companies Companies House Crown Way, Maindy Cardiff CF14 3UZ. It must be sworn by at least a majority of the directors of the company. The fee for submitting the application is 10 and will be used by Companies House to place an advertisement in the London Gazette. The directors must be confident that the statements they make on form DS01 are true, as making a false statement is a criminal offence carrying a heavy fine (up to 5,000 in a magistrates court or unlimited in Crown Court.) Within 7 days after submitting form DS01, the company must send copies to the following: the company s members its creditors including all contingent (existing) and prospective (likely) creditors such as banks, suppliers, former employees if they are owed money by the company, landlords, tenants (for example, where a bond is refundable), guarantors and personal injury claimants. Also, the company must notify the appropriate offices of the Benefits Agency and HM Revenue and Customs if there are outstanding, contingent or prospective liabilities its employees the managers or trustees of any employee pension fund any directors who have not signed the form. If, after a period of 3 months from the date the advertisement is placed in the London Gazette, the Registrar has not received any formal objections, then the company will be struck off on the date when the Registrar publishes a notice of this in the Gazette. Note though that the Registrar indicated in March 2009 that this period may be as long as 4 to 5 months, so check with Companies House As long as accounts for the last completed financial year have been filed at Companies House, no further accounts need be filed before dissolution. What are the grounds on which an interested party may object? The company has broken any of the conditions of its application (for example, it has traded, changed its name or become subject to insolvency proceedings) during the three-month period before the application, or afterwards. The directors have not informed all interested parties Any of the declarations on the form are false 4
Some form of action is being taken, or is pending, to recover any money owed (such as a winding-up petition or action in a small claims court) Other legal action is being taken against the company The directors have wrongfully traded or committed a tax fraud or some other offence. Can the company withdraw its application during the three-month period? Yes, if it decides to start trading again, or wishes to change its name or starts insolvency proceedings or makes an application for a voluntary arrangement with a creditor. Can the company be revived after it has been dissolved and struck off? Anyone who should have been sent a copy of the DS01 application form can apply to the Court within 20 years of dissolution for the name of the dissolved company to be restored to the register. The Court may order restoration if it is satisfied that: the person/organisation was not given a copy of the company s application the company s application involved a breach of the conditions of the application or for some other reason it is just to do so. The Secretary of State may also apply to the Court for restoration if this is justified in the public interest. INSOLVENCY If the organisation is insolvent, then the legal position depends on whether it is an unincorporated body (unincorporated association or trust) or a corporate body (limited company or community benefit society). Unincorporated bodies Because there are no statutory procedures for winding these up, it is up to the management committees or trustees to take the necessary steps themselves, with professional advice if needed. This means identifying all the assets and liabilities and using the assets to meet as many of the liabilities as possible. Creditors who are still unpaid once all the assets have been exhausted, have the right to sue the management committee members either individually or collectively, to recover payment. It is possible for management committees or trustees whose organisations are facing insolvency to enter into an informal arrangement with some or all of their creditors. This might mean that the creditors agree to defer payment of the debts they are owed by the organisation, and/or agree to reduce the size of their claims. These agreements are not covered by the Insolvency Act and will only bind those creditors who sign them. Management committees and trustees should take appropriate professional advice before going ahead with making arrangements with creditors. If the organisation is a registered charity, the management committee should ensure that they send the Charity Commission: 5
a copy of the resolution passed at a general meeting to wind up the charity the final set of accounts. Charities whose income or expenditure is above 10,000 for the period to which the accounts relate, will have to have those accounts audited or independently examined. The auditor/independent examiner must notify the Commission if there are insufficient funds to meet the costs of audit/examination if the organisation is winding up insolvent a statement of the final distribution of assets if this is not shown in the accounts: this should be signed by the charity s trustees and, preferably, the auditor or independent examiner. Once the Commission is satisfied with the information sent to it, it will remove the charity from the Register. However, the Commission also has a regulatory function to ensure that the charity s trustees have had proper control and management over it. Because the reasons for insolvency may not always be clear, the Commission can request detailed financial and administrative information in order to determine whether: sound financial and administrative controls exist prompt and accurate information is available on which the trustees can base their decisions the charity trustees have a clear plan as to how the insolvency problem will be addressed proper professional advice has been appropriately taken any cessation or winding up is conducted in a proper and orderly manner any assets left over after all debts are paid have been properly applied for charitable purposes. Where the Commission believe that there has been misconduct or mismanagement or there is a need to protect a charity s property, it has power under section 18 of the 1993 Charities Act to: suspend or remove a trustee appoint new trustees, or receivers or managers transfer a charity s property to another charity make orders restricting payments into or out of a charity s funds establish a scheme for administering a charity s funds. If the organisation has employees who are owed arrears of pay and/or statutory redundancy payments and it cannot afford to pay them, the employees can apply for payment from the Redundancy Payments Office (RPO) see page 10. The RPO can then sue the management committee members of the organisation or charity personally for reimbursement of the payments made to the employees. 6
Corporate Bodies Companies and Community Benefit Societies (CBSs) The winding up of insolvent companies (including charitable companies) is carried out under the Insolvency Act 1986. The winding up of CBSs is carried out under section 55 of the Industrial and Provident Societies Act 1965, which contains similar procedures to those in the Insolvency Act. For brevity, all references to company in this section also refer to CBSs. Once the directors or members of a company (or its creditors) suspect that it may be insolvent, there are a number of procedures open to them. These are: Compulsory Liquidation Administration Administrative Receivership Company Voluntary Arrangement (CVA) Creditors Voluntary Liquidation Members Voluntary Liquidation. The Government Department responsible for dealing with bankrupt individuals and insolvent companies is the Insolvency Service (see contact details on page 12). Its team of Official Receivers (ORs) handle compulsory liquidations that is, where the company is being wound up by Court order. They investigate the circumstances behind an insolvency and make reports on the conduct of the company s directors and other officers. These reports can lead to prosecutions under the Act (see below under wrongful and fraudulent trading), to directors being made personally liable for their company s debts and/or being disqualified under the Company Directors Disqualification Act 1986. Directors disqualified under this Act are also disqualified from acting as charity trustees and can be made personally liable for a company s debts if they act as trustees or directors while disqualified. The other professionals who can become involved if a company is insolvent are Insolvency Practitioners (IPs). They are accountants or solicitors who are specially licensed to act as administrative receivers, administrators or liquidators in creditors voluntary liquidations. Compulsory liquidation This process is usually started when a creditor who is owed 750 or more, petitions the County Court or High Court for a winding up order. The Court can make an order even if the company has no assets or disputes the debt. The directors should try to agree any debts with the creditor(s) before an order is made because of the severe effects it will have on the company. So, if your company is facing financial problems, even temporarily, you should consider seeking advice from your professional adviser, a solicitor, a qualified accountant or a licensed insolvency practitioner. Failing to do this can have serious consequences see the section on wrongful trading below. Other organisations also offer insolvency advice and debt counselling: some of them are reputable and offer a professional service. However, some may be run by people with no obvious qualifications who appear to be motivated mainly by a desire to exploit vulnerable businesses. Use a licensed practitioner and avoid unsolicited approaches through the post or by telephone. 7
For information on finding a licensed insolvency practitioner see page 12. Within a few days after the Court order for compulsory liquidation is made, the OR will contact the company s directors and members to notify them of this and to arrange to interview the directors. If the company has significantly large assets, an IP may be appointed as liquidator instead of the OR. The directors will be required to complete a questionnaire and co-operate with the OR in providing information, handing over books and accounts, disposing of the company s assets and discharging its liabilities. The directors may also be required to submit a sworn statement of the company s affairs. Once the winding up order is made, the employees are automatically dismissed and they will be told how to claim unpaid wages and redundancy or other payments due to them (see page 10 on the Redundancy Payments Office). The effect of a winding up order is to remove all powers from the directors and other officers of the company and place them with the OR. The OR will aim to issue a report to the shareholders and creditors of the company within 8 weeks after the order has been made. If the company has no substantial assets, the OR will remain as liquidator and notify the creditors of the winding up within 12 weeks after the order has been made. If the company has substantial assets, an IP will be appointed as liquidator and will call a meeting of the company s creditors. If the OR or IP discovers evidence of misconduct or mismanagement by the directors or other officers, then s/he will report this to the Secretary of State within 6 months after the order is made and will report suspected criminal conduct within 10 months. This may well result in personal liability orders being made against the directors (for e.g. wrongful trading or acting while disqualified see below) and/or criminal prosecutions. Once the creditors have been notified of the winding up/liquidation, the liquidator will begin disposing of the company s assets and discharging its liabilities. The liquidator does this according to priorities set in the Insolvency Act and the flow chart below describes the process. If there are not sufficient assets to meet the liabilities and debts of the company, then the creditors will be paid pro rata. This means that, if for example, the assets are only sufficient to meet 50% of the debts, then creditors will be paid 50% of their claims. The Charity Commission s powers under section 18 of the Charities Act 1993 (see page 6) apply to limited companies that are registered as charities and their directors, but not to CBSs and their directors. Directors who are disqualified under the Company Directors Disqualification Act 1986 (see page 11) will also be disqualified from acting as charity trustees. Secured assets (those subject to mortgages or legal charges) are sold off. Secured creditors are paid. If insufficient funds from secured assets remain to pay secured creditors in full, the balance of their claims becomes unsecured 8
Unsecured assets (i.e. those not subject to any mortgage or legal charge) are sold off OR/IPs fees and expenses paid first. If any funds left, preferential creditors paid off in full or pro rata. If funds still remain, unsecured creditors paid off in full or pro rata. Preferential creditors are: (1) employees for o arrears of pay* for between 1 and 8 weeks (certain statutory payments are treated as arrears of pay for these purposes) o holiday pay* for up to 6 weeks in all during the 12 months ending on the date of the insolvency o payment for notice given* or for an employer s failure to give proper notice, for the minimum periods required law (1 week for each completed year of service up to a maximum of 12 weeks) o a basic award of compensation for unfair dismissal made by an employment tribunal o reasonable repayment of any fee or premium paid by an apprentice or articled clerk. *in each case a week s pay is capped at the regulatory maximum ( 400 for 2010/11) (2) occupational pension schemes for contributions due from the employer (3) the Redundancy Payments Office if it has made payments to employees of redundancy and other payments due to them from the insolvent employer. Employees in Yorkshire or Humberside who may need to make claims from the Redundancy Payments Office should contact the office in Edinburgh at: Department of Business, Enterprise and Regulatory Reform Redundancy Payments Office Ladywell House Ladywell Road Edinburgh EH12 7UR 0131 316 5600 edinburgh.rpo@dti.gsi.gov.uk OTHER PROCEDURES This is a general outline of the insolvency procedures handled by IPs only (not ORs). You should contact your solicitor, accountant/ auditor, an IP or your professional adviser for further information. Alternatively, contact your local Business Link Office (see local telephone book or telephone 0345 567 765) who will be able to provide help or direct you to someone who can advise you. If your company is in financial difficulty and contemplating an attempt at rescue, you should seek advice as early as possible to improve the chances that the rescue attempt will be successful. 9
Administration This is a rescue procedure designed to achieve a better result for the company s creditors (especially secured or preferential creditors) than if it were wound up immediately. The company or its directors can begin it by filing a notice at Court in the appropriate form and the Court will appoint an IP as administrator. The administrator puts forward proposals for the creditors to consider, which might include: (1) Restoring the company s financial viability (2) Coming to an arrangement for payment of creditors (3) Selling the business as a going concern (4) Sell some assets of the business to pay off a preferential or secured creditor. (5) Administrative receivership This results from a holder of a floating charge* (usually a bank) appointing an administrative receiver (an IP) to recover money owed to it. The court is not usually involved. The term in receivership also refers to a company in administrative receivership. The administrative receiver s task is to recover enough money to pay his or her costs the preferential creditors the floating charge holder s debt. An administrative receiver does not make payments to unsecured creditors. Legislation in force from September 2003 means that, in future, holders of floating charges will only be able to appoint an administrative receiver in a limited number of circumstances. * a floating charge is a legal charge over all the company s assets, often used as a security for a loan. Company voluntary arrangement (CVA) This enables a company in serious financial difficulties to reach a binding agreement with its creditors to pay some or all of its debts over an agreed period of time. If the company is already in administration, a CVA can be proposed by the administrator or by the liquidator. The directors can also request one in certain circumstances, but the creditors and members of the company cannot. Before making a proposal for a CVA, the liquidator or the directors can apply to the Court for a moratorium (a suspending or delay of action) which will prevent creditors from suing the company or seizing its property for up to 28 days. (If the company already has an administrator, it will be covered by an automatic moratorium arising from the administration.) Once a CVA has been proposed, a nominated IP must report to the Court on whether a creditors and members meeting should be held to consider it. If, at this meeting, 75% of the creditors who had notice of the meeting and were entitled to vote agree the proposal, then it becomes binding on all the creditors. When a CVA is agreed, the nominated IP will supervise it and once it has been carried out, the company s liability to its creditors will be discharged. A company can continue to trade both during and after a CVA. Creditors voluntary liquidation This procedure allows an insolvent company to put itself into liquidation and rarely involves the Court. It is started by the directors (not the creditors) calling a meeting of the company s members who agree to wind up the company. The members can nominate an IP as liquidator, but the creditors have the final choice of liquidator at their meeting. 10
PARTICULAR PROBLEMS The governing document of an unincorporated organisation has no dissolution clause. This is more likely to occur where an unincorporated association or trust had adopted a governing document years ago before standard models became readily available and will present difficulties if the organisation is dissolving or winding up voluntarily. It will have to call a general meeting to pass a resolution to amend its governing document to include a dissolution clause. If it is a registered charity, it should consult the Charity Support Division (see page 12 under More information and guidance) for advice before going ahead. An unincorporated organisation is unable to call a quorate general meeting to pass a resolution to dissolve If the organisation is a charity, it should contact the Charity Support Division (see page 12) for advice and assistance. If it is not a registered charity, the management committee should arrange for a meeting of all interested parties (such as the members, and any funders, stakeholders, volunteers and employees) to agree the dissolution. A copy of the resolution to dissolve should be sent to all those who were invited to the meeting. If the organisation has a small membership that is unwilling or unable to attend a meeting, then the committee should attempt to obtain their agreement in writing to dissolve the organisation. Wrongful trading and fraudulent trading by company directors The Insolvency Act 1989 contains a number of sanctions against directors of companies who act dishonestly or negligently while the company is trading or during its winding up. Wrongful trading is not a criminal offence: it occurs when one or more of the directors carry on the company s business when they know (or ought to know) that it is insolvent or heading for insolvency. The liquidator of an insolvent company can pursue a director for payment of its debts if s/he has been found to have traded wrongfully. Fraudulent trading is a criminal offence as it involves carrying on the business while it is insolvent or heading for insolvency and with the intention of cheating creditors. Directors can be fined, imprisoned and disqualified under the Company Directors Disqualification Act 1986 if they are found guilty of fraudulent trading. Disqualifying directors Under the Company Directors Disqualification Act 1986, directors can be disqualified for between 2 and 15 years for: wrongful or fraudulent trading or misconduct or unfitness in the running or winding up of a company persistent breaches of the Companies Act Individuals who are undischarged bankrupts are automatically disqualified from being company directors or charity trustees and can be made liable for all a company s debts if they act as directors while bankrupt. 11
MORE GUIDANCE AND INFORMATION Procedures for winding up a solvent company Companies House website has an information booklet GP4 entitled Strike-Off, Dissolution and Restoration which can be downloaded from http://www.companies-house.gov.uk/about/pdf/gp4.pdf You can also order free copies by telephoning the Companies House helpline on 0303 1234500 Procedures for winding up a community benefit society The Financial Services Authority 25 The North Colonnade, Canary Wharf, London E14 5HS Telephone 0845 606 1234 Email: via website www.fsa.gov.uk General information on all aspects of insolvency: The Insolvency Service has a telephone enquiry line for general enquiries on 0845 602 9848 and for redundancy queries on 0330 331 0020. Website: www.insolvency.gov.uk Email: Insolvency.EnquiryLine@insolvency.gsi.gov.uk Finding a licensed insolvency practitioner http://www.bis.gov.uk/insolvency/insolvency-profession/find%20an%20ip Procedures for winding up an insolvent company: Companies House website has an information booklet GP08 entitled Liquidation and Insolvency which can be downloaded from http://www.companieshouse.gov.uk/about/gbhtml/gpo8.shtml You can also order free copies by telephoning the Companies House helpline on 0303 1234500 Guidance on handling financial problems Charity Commission booklet CC12 Managing Financial Difficulties and Insolvency in Charities You can download it from http://www.charitycommission.gov.uk/publ ications/cc12.aspx or phone 0845 300 0218 The NCVO s website has a section called Financial Difficulties: Facing Insolvency at http://www.ncvo.org.uk/practicalsupport/financial-management Charity Support Division for charities in the north of England Charity Commission, Charities Support Division Liverpool Office (for charities in Yorkshire and Humber) PO Box 1227 Liverpool L69 3UG Tel: 0845 300 0218 Textphone: 0845 300 0219 Email: fcemailteam@charitycommission.gsi.gov.uk 12
INFORMATION SHEETS available from VAS: Accessible Organisations Acquiring and Managing Premises Action Planning Business Planning Campaigning and Lobbying Charitable Incorporated Organisations Closing Down Community Interest Companies Constitutions Contracts and Procurement Data Protection Disciplinary and Grievance Procedures Due Diligence Employing a Worker Equality and Diversity Guarantee Companies Handling Redundancies Health and Safety Incorporated Charities Insuring your Organisation Involving Volunteers Legal Structures Management Committees Monitoring and Evaluation Parents and Carers at Work Quality Assurance Safeguarding Vulnerable People Sickness Absence Management Starting Up Trading and Fund-raising The Circle 33 Rockingham Lane Sheffield S1 4FW Tel: 0114 253 6600 Fax: 0114 253 6601 Email: info@vas.org.uk Website: www.vas.org.uk Registered charity no: 223007 Company limited by guarantee no: 215695 13