Charities close for a range of reasons. In some cases, they have successfully fulfilled their mission or believe another organisation is better positioned to carry it forward. In others, financial pressures, governance or operational difficulties, or shifts in the external environment may render their activities unsustainable or ineffective.
Charities exist to advance their charitable purposes, not to perpetuate themselves, and it is good governance for boards to periodically reflect on whether change is needed in order to do this effectively.
That change might involve amending your charity’s purposes. The Charity Commission acknowledges that charitable purposes may need to evolve so that they continue to be suitable and effective in light of today’s social and economic circumstances.
In some instances, closure may be the right course of action.
If you are considering closing your charity, take a look at our checklist of the key legal and regulatory steps which you will need to consider.
1. Is your charity experiencing financial difficulties? It is essential to have a clear picture of your charity’s finances at this time and if your charity is in financial difficulty, there will be additional steps for you to take. The Charity Commission’s guidance ‘Improving your charity’s finances (CC12)’ includes a checklist to help you determine if your charity is insolvent or at risk of insolvency. If it is, you should take professional advice as soon as possible to ensure you are meeting the specific legal obligations which apply in this situation and which are not covered here.
2. What does closure look like for your charity? There are two main options for closing a solvent charity. One is to find a charity with compatible objects to merge with and the other is to wind up or strike off the charity once all outstanding liabilities have been settled and assets distributed. Merger may be appropriate if you would like your charity’s activities to continue and have found another charity which is willing to take them on. If structured appropriately, it can also provide a measure of protection for the name of your charity and any future legacies which may have been left to it. For more information on mergers, see our guide ‘Need to know: About mergers’.
3. Making the decision to close. Your charity may have special rules to follow in relation to who should be involved in the decision to close and how (see 4.) but it is typical for the trustees to play a key role in decision-making relating to a charity’s closure. When making significant decisions such as this, following the Charity Commission’s guidance ‘Decision-making for charity trustees’ can help trustees to make (and record) an informed and considered decision in line with their trustee duties.
4. What steps do you need to take? The route to closure will depend on your charity’s legal form and the rules set out in your governing document. This may require you to take particular steps, such as obtaining the consent of the Charity Commission or a third party, or distributing remaining assets in a particular way.
5. Getting your house in order. Before closing the charity, it is important to identify all the assets, liabilities and relationships of the charity and this is usually achieved through a due diligence exercise. Once this exercise is complete, you can put a plan in place to settle your charity’s debts, comply with its obligations (for example, under leases, to suppliers and employees, and under data privacy laws) and deal with any assets in accordance with due process, taking particular care around assets which have restrictions attached (such as permanent endowment or designated land). It will also give you a clearer idea of the time that it will take to close the charity in an orderly way.
6. Notifying regulators. Your regulatory notification requirements will depend on your charity’s legal form (for example, a company must comply with Companies House requirements) and activities. As a minimum, it is likely that you will need to notify the Charity Commission and HMRC that you have closed. Depending on how your charity’s closure is structured (see 2. above), there may be advantages to registering the merger/transfer of assets on the Commission’s register of mergers.
7. Accounts and records. It is sensible to let your accountant know of your plans to close the charity at an early stage so that they can help you consider any accounting implications, including the preparation of final accounts. You will need to retain these, along with the charity’s other accounts, books and records, for at least six years from the end of the financial year to which they relate. If your charity is closing as part of a merger, you can ask your charity’s merger partner to look after these documents instead.
Alongside these steps, there will be practical issues for you to address, such as how to resource the work involved in closing on top of your charity’s day-to-day workload, where to place the charity’s assets, whether to obtain ‘run off’ insurance and how to communicate the closure to employees and stakeholders.
Deciding to close a charity is rarely easy and may feel counterintuitive when there is still work to be done to ‘achieve’ its charitable objects. If the trustees have determined it to be the best course of action, however, taking time to carefully plan, execute and communicate the charity’s closure can help to minimise disruption to its beneficiaries and continue its legacy and impact long after it has ceased to exist.
Our team of specialist charity lawyers provides expert guidance on the closure and merger of charities. For assistance, please contact Lucy Rhodes or your usual advisor, who would be happy to help.
The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.