Charitable Incorporated Organisations and CVLs: A Lacuna in the Law

This article was co-authored between Edwin Coe and Jonathan Reason of Moore Kingston Smith.

More than nine years have passed since the comprehensive overhaul of the Insolvency Rules 1986 (“1986 Rules”) came into force in the form of the Insolvency Rules 2016 (“2016 Rules”). For companies, the 2016 Rules provide a pragmatic approach to procedural insolvency law, which marked a welcome departure from the inflexible requirements in the 1986 Rules.

For Charitable Incorporated Organisations however, pursuant to rule 3(h) of the Insolvency (England and Wales) Rules 2016 (Consequential Amendments and Savings) Rules 2017/369 (“Savings Rules”), the 1986 Rules continue to apply. As per rule 3(h) of the Savings Rules, the 1986 Rules would apply to CIOs as they had effect immediately before 6 April 2017.

Whilst the continuing application of the 1986 Rules to CIOs is generally an important point of caution for Insolvency Practitioners and their advisers in itself, the current law also creates a lacuna in the process of CIO trustees appointing liquidators when entering creditors voluntary liquidation.

CIOs and insolvency

When a CIO enters a period of financial difficulty, trustees of a CIO will need to carefully analyse the CIOs financial position and consider whether insolvency is a probability.  Like directors of limited companies, CIO trustees could be held personally liable for wrongful and fraudulent trading under sections 214 and 213 respectively of the Insolvency Act 1986.

Further, the Charity Commission’s guidance (published in September 2024) provides that trustees must (emphasis added) “recognise that once the charity has reached the stage where it has to follow the legal processes to be closed, your primary duty is to the charity’s creditors (those who your charity owes money to)”.

The “lacuna” and its legislative background

One of the options available to trustees when a charitable organisation is facing insolvency is to place the CIO into creditors voluntary liquidation. This process is made inherently more difficult by the seemingly unintended gap in the relevant statute when seeking to appoint a voluntary liquidator.

Section 98 of the Insolvency Act 1986 (now repealed) mandated that a company (and CIOs) shall cause a meeting of its creditors to be summoned no later than the 14^th day after the day on which the company held the meeting at which the resolution to enter voluntary winding up was proposed. It was at this creditors meeting that creditors either provided their consent to the company’s proposed appointment as liquidator, or they would seek to make their own nomination. Further to the meeting of creditors held pursuant to section 98, a liquidator would be appointed in accordance with section 100 of the Insolvency Act 1986.

The introduction of the 2016 Rules sought to remove a layer of burden from companies entering a creditors voluntary liquidation whereby r.6.14 of the 2016 Rules shifted the emphasis of the appointment process away from physical meetings and toward a deemed consent procedure (set out under s.246ZF IA 1986) or decision by way of a virtual meeting.

Pursuant to the Savings Rules however, CIOs were still required to follow the relevant process dictated by the 1986 Rules.

In addition to the above legislative developments, on the same date that 2016 Rules came into effect (6 April 2017), the Small Business, Enterprise and Employment Act 2015 repealed Section 98 of the Insolvency Act 1986.

Digging into the practical effect of these developments:

• Schedule 1 (paragraphs 1 and 2) of the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 (“2012 Regulations”) applied certain provisions (including sections 98-100, amongst others) of the Insolvency Act 1986 and its subordinate legislation (including the Insolvency Rules 1986) to CIOs;
• The Savings Rules provide that, when trustees put a CIO into creditors voluntary liquidation (or another form of insolvency process), the 1986 Rules should be applied as they had effect immediately before 6 April 2017 (and therefore the 2016 Rules would not apply);
• Importantly, rule 3(h) of the Savings Rules does not make any specific reference to the continuing applicability of the Insolvency Act 1986 to CIO’s, such that the provisions of the Insolvency Act 1986 continue to apply;
• However, the repeal of Section 98 of the Insolvency Act 1986 removes the requirement for a physical creditor meeting from the CVL process;
• And because the 2016 Rules do not apply to CIOs, there is currently no equivalent provision for seeking creditor consent or nomination of a proposed liquidator to a CIO in place of the now repealed section 98.

Until there are further legislative reforms or judicial guidance on this point, trustees and advisers of CIOs will need to navigate the potential pitfalls of placing a CIO into creditors voluntary liquidation with considerable care.

The current lacuna in the law places CIO trustees in an inherently difficult position when seeking to appoint a liquidator to a CIO. Unfortunately, practitioners and advisers will most likely need to await judicial guidance before this problematic “gap” in the law is bridged.

If you are a trustee of a CIO or require advice in relation to an insolvent CIO, please do not hesitate to contact Sophia Bompas or any other member of the Restructuring & Insolvency team at Edwin Coe or Jonathan Reason at Moore Kingston Smith.

Sophia Bompas Edwin Coe

Archie Broomfield Edwin Coe

Jonathan Reason Moore Kingston Smith