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When is it the right time to wind up a charity?

Published: 09 November 2021
Time to read: 5 mins

There is so much good work done in Scotland and throughout the world by charitable organisations and volunteers.  The work of many of these charities is closely linked and often critical to many areas of our lives in continuing to provide key services.  But there are charities whose original aim has been satisfied, otherwise affected by change or the charity is perhaps no longer able to provide the service – it is therefore worthwhile considering whether now is the right time to wind up your charity.

Many charities were set up many years ago at moment in time when their aims and ambitions were deemed necessary relevant.  It is perhaps an understatement to say that the world and society has moved on.  In tandem with these changes, charities in Scotland have been subject to increasing administrative and regulatory requirements, while imposed for good reasons, these can be time- consuming and costly.  It seems unlikely that the regulatory landscape will change in the future, therefore it is worth going back to basics and revisiting your original strategy with a view to determining whether the operations are something that can and should continue.

It is sometimes viewed as a failure for a charity to wind up, however, I would suggest it is the opposite and could be a signal of success in achieving its original aims.  There can be a number of positive reasons for a charity to cease its operations and these include (a) having achieved its purpose (b) recognising that the money and assets can be used to better effect elsewhere or (c) recognising that the organisation is not best placed to fulfil its charitable objectives.  None of these should be viewed negatively and in fact, in terms of governance, it is very positive for this to have been reviewed and acted upon.

If a decision has been taken that it is no longer cost effective for the charity to continue, or efficient in any other way, what should the trustees do next?

The first thing is to review the wind up clause within the charity’s constitution.  If there is no wind up clause then, depending on the structure of the organisation, it may have to be referred to the Office of the Scottish Charity Regulator (OSCR) to ask for a reorganisation of the charity  in order to allow the charity to be wound up in the future.

A wind up clause should ideally be flexible. Some constitutions simply allow for any assets following the wind up to be transferred to any other charity or charitable organisation, while others state that any assets should go to another organisation with similar purposes.  If the basis for winding up the charity is that your purposes are no longer desirable, or that the particular project has been achieved, then providing money to another organisation doing the same thing may not be the best use of the assets. In cases such as this you may wish to change the wind up clause prior to asking for OSCRs consent to wind-up. Again, if you do not have the power to make such changes, depending on your structure an application may be made to OSCR to make the  changes. If you are a membership charity, it is important to remember that this is something the membership will be required to vote on under a special resolution.

OSCR’s consent will be required prior to any wind up and it is important that they are engaged relatively early in the process.  They will provide approval in respect of where the funds should be transferred on wind up. It is possible to make grants prior to the wind up application if there are other things that you would like to achieve which do not fall in line with the wind up itself, provided of course that they are within your charitable purposes.

Finally, care should be taken regarding the costs of winding up.  There may be financial obligations to staff in respect of any redundancies or, if you are transferring your operations to another organisation, will current staff move across under the TUPE regulations?  You should consider any contracts that may need to be brought to a close and the financial implications of doing so.   It is critical that the trustees assess all of these costs and include them in the OSCR application, in order to avoid the prospect of the charity becoming insolvent  on wind up which of course would be an undesirable outcome.

While it very much depends on the charity, a reasonable timescale for the completion of a wind up to be would be just over a year i.e. the decision taken, subject to membership and OSCR approval and then a year to carry out the due diligence required prior to the OSCR application and then a further few months to finalise matters.  It is also important to remember that final accounts may be required to be submitted to OSCR (depending on the timing in your financial year) so cash should be withheld for those purposes.

There is a lot to consider when winding up the organisation, however it should not be something that Trustees deliberately avoid or are scared of.  There is a lot of duplication in the sector in terms of aims and ambitions and streamlining can be an effective way of ensuring greater funds are directed towards achieving the charitable purpose rather than duplication of .  We have acted for a number of charities who have opted to wind up and successfully transferred their operations to another charitable organisation with the same or very similar aims.

If you have any questions about the issues raised in this article, please contact our Charities Team and we would be delighted to talk you through the process.

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