The Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) Regulations 2020 – What Are The Implications For Charitable Incorporated Organisations (CIOs)?

With the introduction of the Corporate Insolvency and Governance Act 2020, a new moratorium procedure was introduced under Part A1 of the Insolvency Act 1986, which also applies to CIOs.

As a result, the Charitable Incorporated Organisations (Insolvency and Dissolution) (Amendment) Regulations 2020 (2020 Regulations) came into force on 7th July 2020 to amend the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 and to make appropriate transitional provisions.

Overview of the Part A1 moratorium and the implications for CIOs

The new Part A1 moratorium was introduced as an additional insolvency process, partly as a response to the COVID-19 pandemic and its impact on businesses, including charities.

Under the Part A1 moratorium, a CIO is given a ‘standstill’ period, during which some creditors cannot take specific types of enforcement and execution action without leave of the Court. The initial moratorium period is 20 business days, extendable with creditors’ consent or a Court order. This is designed to give financially distressed CIOs breathing space to organise their affairs and to increase the prospects of a rescue. However, certain financial creditors (e.g. lenders) are not prevented from taking enforcement action during the moratorium period. The CIO would also benefit from a payment holiday on certain debts.

In order to obtain the Part A1 moratorium, a Court filing can be made without the CIO’s creditors’ consent. However, unless such consent or a Court order is obtained, the moratorium can only last for a maximum of 40 business days.

A significant difference of this insolvency process is that during the moratorium period, the CIO’s trustees will remain in control of the CIO, rather than an administrator or other insolvency practitioner. However, an insolvency practitioner (a Monitor) will be appointed to oversee and supervise the process. The Monitor can end the moratorium if they consider the CIO is not paying critical debts when due or it is no longer financially viable.

In allowing a CIO to continue operating whilst insolvent, trustees could face potential personal liability for wrongful or fraudulent trading, the latter of which is also a criminal offence attracting a fine or potential imprisonment for up to 10 years. If trustees find their CIO in financial difficulties they should:

  • Receive regular up to date financial information and scrutinise this appropriately;
  • Analyse and review sources of income (including grants or borrowing) and planned expenditure and consider available options to maintain the CIO as a going concern and what that means;
  • Maintain written records of trustee decisions together with a rationale for those decisions;
  • Consider if a merger with another charity with similar objects is appropriate; and
  • Seek professional advice from an insolvency practitioner as soon as possible.

Trustees should note that under the 2020 Regulations they cannot apply for the CIO’s dissolution while a Part A1 moratorium is in force. They are required to notify the Monitor if, during a moratorium, they recommend a resolution for voluntary winding up to be passed.

Part A1 moratorium CIOHow can we help?

Isabelle Munyabarenzi is an Associate in our expert Corporate services team.

For any queries relating to the 2020 Regulations, please call Isabelle or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or contact us via our online form.