Navigating restricted assets and permanent endowment in charity insolvencies

Charity insolvency brings together two distinct legal regimes. While any insolvency process — whether liquidation or administration — prioritises creditor returns, charity law restricts how certain categories of assets with no corporate equivalent can be used.

Written from the combined perspectives of a restructuring and insolvency lawyer and a charity law specialist, this article explores the issues that arise when a charity holds restricted assets (including designated land) or permanent endowment, and how office holders should approach them in practice.

The insolvency imperative

A liquidator’s principal duty is to collect and realise assets for the benefit of creditors, distributing proceeds in accordance with the statutory order of priority under the Insolvency Act 1986. An administrator must likewise act in the interests of creditors as a whole, guided by the objectives in paragraph 3 of Schedule B1 to the 1986 Act.

In both cases, the office holder is expected to achieve the best possible realisations. For an ordinary trading company, the assumption that every balance sheet asset is available for distribution would generally be sound. For a charity, that assumption may be fundamentally misconceived.

Restricted assets and permanent endowment: why the distinction matters

Charity law distinguishes between a charity’s unrestricted assets — which trustees may apply at their discretion in furtherance of the charity’s objects — and two further categories.

Restricted assets (including designated land) are those given for a specific purpose or subject to donor-imposed conditions. Trustees have no authority to apply them for the charity’s general purposes, however pressing the need.

Permanent endowment is more constrained still. It’s an asset the charity must hold and invest rather than expend, either in perpetuity or for a defined period, with only the income available for spending. The concept reflects the donor’s intention that the gift should provide a lasting benefit.

The insolvency implications are significant. Restricted assets and permanent endowment may not, as a matter of charity law, be available for distribution to the charity’s general creditors. An office holder can’t simply collapse all assets into a single pool for realisation.

The legal framework: Charities Act 2011 and the Insolvency Act 1986

The Charities Act 2011 provides the principal statutory framework. Sections 281 to 283 give charity trustees a limited power to resolve to spend permanent endowment capital in certain circumstances, subject to prescribed conditions and, for larger endowments, the Charity Commission’s consent.

Neither statute expressly addresses how the two regimes interact. The 1986 Act contains no provision disapplying charity law restrictions, and the 2011 Act is silent on formal insolvency proceedings. The two must therefore be reconciled by reference to general legal principles.

The prevailing view is that charity law restrictions continue to bind assets even after a liquidator or administrator is appointed. The office holder steps into the shoes of the charity’s trustees and remains subject to the same obligations in relation to restricted and endowed assets.

This approach is supported by trust law. Where assets are held on trust for a specific charitable purpose, they don’t form part of the general estate available for distribution, just as creditors of a trustee company can’t ordinarily access trust assets.

Practical implications for office holders

Before realising any assets, an office holder must carefully classify the charity’s asset base, distinguishing unrestricted assets from restricted assets (including designated land) and permanent endowment. This requires a thorough review of the governing document, gift instruments, donor correspondence and accounting records.

Where restrictions are identified, the office holder should consider whether any lawful basis exists for their release or modification. The Charity Commission may make schemes under the 2011 Act altering the purposes for which charitable assets are held. However, its willingness to sanction the release of restrictions for the benefit of commercial creditors is likely to be limited, and the process is neither swift nor certain.

The role of the Charity Commission

Any disposal of charity land must comply with sections 117 to 121 of the 2011 Act, which require charity trustees to obtain professional advice and, in some cases, the Charity Commission’s consent before disposal.

The Charities Act 2022 introduced helpful provisions exempting dispositions made by office holders from these restrictions. That exemption doesn’t remove other obligations relating to restricted assets (including designated land) and permanent endowment.

The Commission’s involvement is likely to be required where an office holder seeks to modify restrictions, change purposes or where questions arise about the proper application of restricted or endowed funds.

Early engagement with the Commission is strongly advisable. In practice, it’s accustomed to working with insolvency practitioners and can provide valuable guidance.

Practical takeaways

• Insolvency practitioners acting for an insolvent charity should classify the charity’s assets at the earliest opportunity, obtaining specialist charity law advice where the position is unclear
• Don’t assume all balance sheet assets are available for distribution. Restricted assets (including designated land) and permanent endowment may fall outside the distributable estate
• Engage with the Charity Commission early to ensure statutory compliance and explore any scope for releasing restrictions.

Conclusion

The intersection of insolvency law and charity law remains complex and, in some areas, uncertain. Office holders who approach a charity insolvency without appreciating the constraints of charity law risk acting in breach of trust and exposing themselves to personal liability. A collaborative approach, drawing on expertise in both disciplines, is not just desirable but essential.