When do we have to stop, and who do we call?

England and Wales: This page sets out the position in full — the regulator’s expectation, the statutory test, and who to call. Scotland: partly covered — the test is the same law, but the process is different: a SCIO’s insolvency goes to the Accountant in Bankruptcy, and other charities need OSCR’s consent to wind up; no Scottish guidance like CC12 was found. Northern Ireland: covered — a charitable company can be wound up now under Northern Ireland’s own Order, with the same safe harbour; whether insolvency practitioners need separate authorisation there is not confirmed.

Grants and transfers while creditors go unpaid

In England and Wales, the Charity Commission’s guidance warns about two acts while creditors go unpaid. Grants to beneficiaries and transfers to another charity can break the rules on wrongful trading. That runs against a decent instinct. A failing charity wants to keep helping people. This page assumes the board knows what its trustees are exposed to — if not, understand what you are personally liable for first.

If it must close, the instinct is to hand what it has to someone who will carry on the work. CC12 says, word for word:

your charity must stop trading if there is no reasonable chance of avoiding insolvency. The trustees could break the legal rules on insolvency, for example the rules on wrongful trading, if the charity continues providing services while creditors do not get paid. This includes making grants to beneficiaries or transferring assets to another charity.

This is where a good trustee is most likely to do the wrong thing for the right reason. Paying grants to beneficiaries feels like protecting the mission. So does passing equipment or cash to a partner charity. But while creditors go unpaid, both cut what is left for them.

The regulator’s expectation, then the law

CC12’s “must stop trading” is the regulator’s working shorthand. It is not the test in the Act. The two point different ways.

The test is in s.214(3) of the Insolvency Act 1986 (England, Wales and Scotland). Take the moment a trustee knew, or ought to have concluded, that the charity could not avoid going under. The court asks if, from then on, they took “every step with a view to minimising the potential loss to the company’s creditors” that they ought to have taken. If they did, the court cannot order them to pay.

Section 246ZB(3) says the same for a charity in administration. The table sets the two side by side.

	CC12 (Charity Commission, England and Wales)	Insolvency Act 1986 s.214(3) (England, Wales and Scotland)
What it asks	Did the charity stop trading?	Did the trustee take every step to minimise the loss to creditors?
Carrying on	Treated as a risk	Not ruled out: the question is whether each step minimised the loss to creditors
Stopping	Treated as the answer	Not a defence in itself: the same question applies to how the charity stops

The statute asks about steps taken to minimise the loss to creditors, not about stopping as such. CC12 adds that you should keep a record of professional advice you take and the decisions you make based on it.

The line about grants and transfers is CC12’s own. No statute says it in those words. But it fits s.214(3): both acts shrink the pot left for creditors. It is what the Commission expects. How it applies to a particular grant or transfer is a question for the insolvency practitioner.

What wrongful trading is not

It is not a crime. Wrongful trading is a trustee carrying on past a certain point. That point is when they knew, or ought to have concluded, that the charity could not avoid insolvent liquidation or administration. It reaches the trustees of a charitable company or a CIO.

But nothing in s.214 or s.246ZB of the Insolvency Act 1986 is an offence. The result is civil. The court can order a trustee to pay into the charity’s assets. The liquidator (s.214) or the administrator (s.246ZB) asks it to, or someone they have assigned the claim to (s.246ZD). Not a fine, and not prison.

Two nearby sections of the same Act work in another way. Neither is about this step. Section 216, on re-using the name of a company that went under, is an offence. Section 217 makes a person liable for debts if they break section 216. They are named here only so you do not mix them up with wrongful trading.

Who to call: a licensed insolvency practitioner

In England and Wales, CC12 says, word for word: “It is also vital that you get professional advice as soon as possible… for example from an insolvency practitioner.”

The formal routes need a licensed practitioner. Only a qualified insolvency practitioner may act as a company’s liquidator or administrator. Acting as one without being qualified is an offence (Insolvency Act 1986 ss.388 and 389, England, Wales and Scotland). CC12’s own routes, such as a members’ voluntary liquidation, each need one appointed. A helpful accountant friend or the treasurer’s usual adviser cannot fill that role unless they hold an insolvency licence.

The date you took advice is itself evidence. The test looks at what each trustee did, and when. An undated phone call in a crisis leaves no record. So:

1. Instruct the practitioner in writing, and keep the date.
2. Hold a trustee meeting — or call one urgently — and minute the advice.
3. Minute a decision on each activity: continue, pause or stop, and why each choice helps creditors.
4. Pause grants to beneficiaries and transfers to other charities until the practitioner has advised on them.
5. Do not pay one creditor ahead of others — even a trustee, a friendly supplier or a funder — without advice.
6. Keep the forecast and balance sheet up to date (see build a cashflow forecast), and minute each review.

Telling the Charity Commission

In England and Wales, the Commission’s serious incident guidance may also apply. Its guide for a financial loss is £25,000 or more, OR less than £25,000 but in excess of 20% of the charity's income. The guidance says falls in value, bad debts and pension deficits are not reportable “unless they pose a significant threat to the solvency of the charity”.

The guidance says the Commission “requires charities to report serious incidents”, and that as a matter of good practice all charities should report them promptly. If trustees fail to report one that later comes to light, it says it may consider this mismanagement. Ask your practitioner whether yours is one. The reporting hub covers this in recognise a serious incident.

Scotland: the same test, a different process

The insolvency tests and wrongful trading apply to a Scottish charitable company in the same way. Insolvency of companies and bodies like them is reserved to Westminster (Scotland Act 1998, Schedule 5, Part II, Head C2). But the process of winding up is not. That is why Scotland’s route differs.

• A SCIO has its own rules, in the Scottish Charitable Incorporated Organisations (Removal from Register and Dissolution) Regulations 2011 (SSI 2011/237). Regulation 3 deals with a solvent SCIO. Its members resolve to dissolve, and the resolution names in advance where the assets will go. Regulations 4 to 6 deal with an insolvent SCIO whose debts are above a set floor. That figure sits in the record’s prose and is not given here. The insolvent route goes through OSCR to the Accountant in Bankruptcy, not to an independent liquidator.
• A Scottish charitable company or trust needs the Office of the Scottish Charity Regulator’s consent before winding up or dissolving. Section 16(1) of the Charities and Trustee Investment (Scotland) Act 2005 says a charity may take that step “only with OSCR’s consent”. Consent is treated as given unless OSCR acts within a set period. OSCR can consent, refuse, or direct the charity to take no action for a set time. The next step, How do we decide to close a charity properly?, covers the consent process.

No OSCR guide like CC12 was found. CC12 is a guide to financial difficulty that names an insolvency practitioner as the person to call. The regulation of insolvency practitioners is reserved too, so the same qualification applies in Scotland.

Northern Ireland: the route already works

A common worry is that Northern Ireland charities cannot be wound up. The reason given is that section 95 of the Charities Act (Northern Ireland) 2008 is not in force. The worry is misplaced. Section 95 was never the way in. It only adds who may ask the court.

A Northern Ireland charitable company can be wound up now under the Insolvency (Northern Ireland) Order 1989:

• compulsorily, by the High Court, on grounds including that the company “is unable to pay its debts” (Article 102)
• voluntarily, by a members’ or creditors’ voluntary winding up (Articles 70 to 101)
• if solvent with no debts, by strike-off under the Companies Act 2006, which applies to Northern Ireland companies directly

The two insolvency tests are near word for word Great Britain’s (Article 103). The safe harbour in Article 178(3) is the same. The court must not make an order against a director who “took every step with a view to minimising the potential loss to the company’s creditors”. No guidance like CC12 was found from the Charity Commission for Northern Ireland.

Who to call: an insolvency practitioner qualified to act in Northern Ireland. Whether Northern Ireland has separate authorisation from Great Britain was not confirmed.

An unincorporated Northern Ireland charity has no formal insolvency regime at all — as in England and Wales. The trustees settle what they can and stay personally liable.

If the advice is that the charity should close, the next step is to decide to close. If it can carry on, keep the two tests on every agenda, as recognise financial distress early sets out.

Common mistake: keeping grants going, or handing assets to a successor charity “so the work continues”

It is every decent trustee’s instinct. In England and Wales, CC12 says, word for word, that this “includes making grants to beneficiaries or transferring assets to another charity”. That sentence is CC12’s, not the statute’s. The statutory test in s.214(3) is whether the trustee took every step to minimise the loss to creditors. Both acts reduce what creditors receive.

Common mistake: treating “stop” as the safe answer

CC12’s “must stop trading” is the regulator’s shorthand. The law does not reward stopping as such. Finishing a contract that brings money in can meet the test. Stopping while paying favoured creditors, or giving assets away, does not.

Common mistake: using a helpful accountant instead of a licensed insolvency practitioner

The treasurer already has someone they trust. CC12 names an insolvency practitioner. Only a qualified (licensed) practitioner can act as liquidator or administrator, so a members’ voluntary liquidation needs one.

Common mistake: not minuting the date the trustees took advice

The conversation happens by phone, in a crisis. The wrongful-trading test looks at what each trustee did and when. The date you took advice is evidence in your favour. An undated, unminuted decision leaves no record of when you acted.

Worked example

Tollgate Youth CIO’s forecast shows it cannot meet the next payroll and rent, with no funding in sight. The cashflow test is failed.

The trustees instruct a licensed insolvency practitioner that week, in writing, and minute the date. At the same meeting they minute two holds.

The small youth-activity grants to families are paused. The planned gift of equipment to a neighbouring youth club is held back. Both wait for the practitioner’s advice. While creditors go unpaid, both would cut what creditors get.

The practitioner advises finishing one paid contract that brings in money. The trustees minute that decision too, and the reason: it helps creditors.

If Tollgate were a SCIO in Scotland, the insolvent route would run through OSCR. It would lead to the Accountant in Bankruptcy, not an independent liquidator. In Northern Ireland, Tollgate could not be a CIO at all.

The outcome: a dated instruction to a licensed insolvency practitioner, and a minuted decision on whether the charity keeps going.