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 enactment of the Insolvency Rules 2016 (“2016 Rules”). For companies, the 2016 Rules marked a welcome and pragmatic departure from some of the more inflexible requirements within the Insolvency Rules 1986 (“1986 Rules”).

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

The continuing application of the 1986 Rules to CIOs is an important point of caution for trustees, insolvency practitioners and their advisers generally. Specifically, a repealed provision within the Insolvency Act 1986 (“IA86”) has created a lacuna in the legislation, and uncertainty as to the specific procedure that is required to appoint liquidators when a CIO enters creditors’ voluntary liquidation.

CIOs and insolvency

When a CIO enters a period of financial difficulty, its trustees will need to carefully analyse its 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.

The Charity Commission’s guidance (published in September 2024) provides that trustees should “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 option available to trustees when a CIO is facing insolvency is to place it into creditors’ voluntary liquidation. Following the Savings Rules, this process has been made inherently more difficult and uncertain because of the gap created by statute in the rules for appointing a liquidator.

Section 98 of the Insolvency Act 1986 (“IA86”) provided that a company (and CIOs) shall cause a meeting of its creditors to be summoned no later than the 14^th day after a company’s general meeting resolving to enter voluntary winding-up. It was at this meeting that creditors either provided their consent to the company’s proposed liquidator or nominated their own choice of liquidator in substitution. 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.

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 IA1986.

In substitution for section 98 IA86, rule 6.14 of the 2016 Rules provided that creditors would decide on the nomination of a liquidator by the deemed consent procedure, or at a virtual meeting. However, in line with the Savings Rules, voluntary liquidations of CIOs were still subject to the procedure prescribed within the 1986 Rules, which assumed the presence of (and relied upon) section 98 IA86 as the procedure for determining the liquidator’s appointment.

Considering 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 IA 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);
• Rule 3(h) of the 2017 Savings Rules explicitly preserves the application of the 1986 Rules for proceedings falling under the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012;
• However, the repeal of Section 98 of the IA 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.

The 2012 Regulations apply the relevant provisions of the IA86 and 1986 Rules “with any necessary modifications”. However, there is no guidance on the extent to which a court would be willing to read-in either the repealed procedure within s.98 IA86, or the new procedure for a nomination by deemed consent in rule 6.14 of the 2016 Rules. Neither suggestion sits particularly comfortably with the apparent intention by Parliament to, respectively, repeal section 98 IA86 and preserve the 1986 Rules for CIOs.

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 and, similarly, practitioners and advisers will also need to await judicial guidance before this gap in the law is bridged.

If you are a trustee of a charity or require advice in relation to an insolvent charity, 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. For all other charities related advice, please contact David Goepel in the Private Client team at Edwin Coe.

Sophia Bompas Edwin Coe

Archie Broomfield Edwin Coe

Alex Morris Edwin Coe

Jonathan Reason Moore Kingston Smith