Charity in financial difficulty? When trustees should contact the Charity Commission

The Charity Commission has expressed concern that some charities in serious financial difficulty are contacting it at a very late stage, which can limit the options open to them.

In a July letter to the Charity Law Association, reported by Civil Society on 21 September 2026, the Commission said a number of organisations had asked it to authorise urgent transactions, such as property disposals, late in the day to secure their continued operation. It said trustees of other financially challenged charities had sought its authorisation unnecessarily. It also said it was likely to have regulatory concerns, and could open a compliance case, where it found trustees who had “failed to take timely and appropriate steps”. Commission data seen by Civil Society shows the pressure it is under: it opened more than double the number of regulatory authority cases between April and June 2026 (1,731) compared with the same quarter in 2025 (840), and granted almost a third fewer permissions.

For trustees, the practical message is that understanding the financial position, acting early and knowing when the Commission needs to be involved can make a significant difference to a charity’s future.

Few trustees find themselves in this position easily. Most are unpaid volunteers who joined a board because they care about a cause, not because they expected to be making difficult decisions about cash flow, creditors or potential insolvency. When finances begin to deteriorate, it can be tempting to hope that the next grant will arrive, that a shortfall is temporary or that reducing services can be avoided. Raising concerns may feel uncomfortable, particularly when staff, beneficiaries and the charity’s reputation could be affected. There can be guilt about not spotting the problem sooner, worry about personal responsibility, and a reluctance to be the person who says it out loud. These reactions are understandable and common. They are also the reason it helps to know, before the pressure builds, what the guidance expects, because delaying difficult conversations can reduce the options available.

The Charity Commission’s guidance, Improving your charity’s finances (CC12), explains what trustees should do when financial difficulties arise, when professional advice is needed and when the regulator needs to be involved. For trustees in Liverpool, Manchester and across the North West, it is a sound place to start.

Key points for charity trustees

• All trustees share responsibility for understanding and overseeing the charity’s finances, even where financial management is delegated
• Financial difficulty does not automatically mean insolvency, but trustees should act promptly when warning signs emerge
• Insolvency, or financial pressure that forces the charity to stop some or all of its services, may need to be reported to the Commission as a serious incident
• Permanent endowment, designated land and special trust funds cannot simply be used to pay general debts, and changing their restrictions may need Commission authority
• Trustees of charitable companies and CIOs usually have limited liability, but personal liability can arise in some circumstances
• Take professional advice and keep a clear record of decisions

What should trustees do when a charity faces financial difficulties?

The first priority is an accurate, up-to-date picture of the charity’s financial position. CC12 says that even where an experienced treasurer or finance team manages the figures, every trustee is jointly accountable for understanding the charity’s financial position and performance. The financial position should be a standing item at trustee meetings, sent to each trustee beforehand, and a charity in difficulty may need to review it much more often.

Boards should consider:

• Cash flow: can the charity pay payroll, pension contributions, tax, suppliers and other commitments as they fall due?
• Income forecasts: are expected grants, donations and contract payments realistic, and what happens if they are delayed or withdrawn?
• Expenditure: which costs are essential, which can be reduced and what would reductions mean for beneficiaries?
• Assets and liabilities: are the charity’s assets enough to cover its liabilities?
• Reserves: how much of the reserves can actually be used to support operations?
• Financial risks: what would happen if income fell further or unexpected costs arose?

Preparing a downside cash flow forecast, as well as the most optimistic projection, is sensible practice.

Why a healthy bank balance does not always mean financial security

Cash held and funds available for general spending are different things. A charity might have £250,000 in its bank accounts, of which £180,000 is restricted to specific projects. Those funds cannot ordinarily be redirected to pay unrelated running costs because the charity is under pressure. Reserves shown in the accounts may also include assets that cannot readily be turned into cash.

The Commission’s reserves guidance, Charity reserves: building resilience (CC19), was updated on 16 September 2026. It says there is no single level of reserves that is right for all charities, and that any target, or decision not to hold reserves, should reflect the charity’s circumstances and be explained in a policy. Trustees need to know how much the charity holds, how much is available, what it can legally be used for and how long it will support operations. The questions trustees should ask about management accounts set out how a board can keep track of this.

When should trustees notify the Charity Commission?

Not every financial difficulty needs to be reported. A temporary cash flow problem, a fall in donations or unexpected spending does not automatically trigger a reporting obligation. Trustees do need to consider whether the circumstances amount to a serious incident, whether a proposed transaction needs Commission authority and whether formal insolvency or closure procedures apply.

1. A serious incident

The Commission requires charities to report serious incidents, and the responsibility rests with the trustees. A serious incident is an adverse event, actual or alleged, that results in or risks significant harm to people who come into contact with the charity, loss of its money or assets, damage to its property, or harm to its work or reputation. What counts as significant depends on the charity.

The Commission’s serious incident guidance lists examples that matter to a charity in difficulty:

• insolvency, or something that forces the charity to wind up, such as unmanageable debts or reduced income streams
• loss of significant institutional donors, public funding or key delivery contracts that threatens the charity’s ability to operate, where the income cannot be replaced
• significant financial penalties imposed by regulators
• other significant financial loss that the charity’s reserves cannot cover

As a guide for other significant losses, the Commission expects a report where the loss of funds or property totals £25,000 or more, or is under £25,000 but exceeds 20% of the charity’s income. Below that, trustees decide whether the loss is significant, taking the charity’s income, work and circumstances into account. Falls in the value of investments, impairments, write-downs, pension deficits and bad debts need reporting only if they pose a significant threat to solvency. Fraud and theft are treated differently: there is no minimum loss figure, and repeated low-value incidents can still be reportable.

Reports should be made promptly, as soon as reasonably possible after the trustees become aware of the incident. If trustees decide not to report something serious and the Commission later becomes involved, they will need to explain why. A charity with income over £25,000 also signs a declaration in its annual return that there were no unreported serious incidents in the year, and the Commission may treat a failure to report as mismanagement.

2. Using permanent endowment or other legally restricted assets

Some assets are subject to restrictions that stop them being used freely to meet general liabilities. These include permanent endowment, designated land and special trust funds. Ordinary restricted income funds are also limited to their purposes, although the rules differ. Trustees cannot assume that money or property the charity holds can pay general debts.

Changing the restrictions or purposes attached to these assets may need Commission authority, and the Commission says it may not always give it. Because the Commission has also said some trustees applied unnecessarily, take specialist charity law advice first on whether authority is needed at all.

3. Closing the charity

Where trustees decide the charity must close, they should plan an orderly closure and follow the procedure for the charity’s legal structure. The Commission must be told when a registered charity closes so that it can be removed from the register. For a charitable company or CIO in liquidation, the liquidator, or the Official Receiver in some compulsory liquidations, contacts the Commission when the process is complete.

4. Regulatory concern

If a charity is insolvent or at risk of insolvency, the Commission may have a regulatory interest, depending on the reason. It may open a statutory inquiry where there are serious concerns about misconduct or mismanagement.

Contacting the Commission does not replace legal, financial or insolvency advice. The Commission is a regulator, not the charity’s professional adviser.

When is a charity insolvent?

Financial difficulty and insolvency are not the same thing. A charity may have falling income, reduced reserves or temporary cash flow pressure without being insolvent. For charitable companies and CIOs, CC12 identifies two tests:

• The cash flow test: can the charity pay its debts when they are due? A charity can fail this test even with substantial assets, if they cannot readily be turned into cash or are restricted.
• The balance sheet test: are the charity’s assets enough to cover its liabilities? If liabilities exceed assets, the charity may be insolvent even if it can currently meet some payments.

Trustees should consider both tests and take professional advice, for example from an insolvency practitioner, if insolvency is suspected. The Commission also provides an insolvency checklist through CC12.

What changes when insolvency becomes unavoidable?

For a charitable company or CIO, once the charity has reached the point of having to follow legal closure processes, the trustees’ primary duty is to its creditors. Where trustees know, or ought to know, that there is no reasonable prospect of avoiding insolvency, they must take every step necessary to minimise loss to creditors. Continuing to trade while creditors go unpaid can expose trustees to wrongful trading, and CC12 says the charity must stop trading if there is no reasonable chance of avoiding insolvency. That includes making grants or transferring assets to another charity. The charity’s funds can be used to pay for professional advice if that serves the creditors’ interests.

Charities preparing accounts under the SORP must keep under review whether they are a going concern and confirm this in the accounts. Where the charity is not a going concern, the accounts must say so.

Can charity trustees be personally liable for debts?

Charitable companies and CIOs

These have a separate legal identity, so debts and liabilities generally belong to the charity and not to the trustees. Limited liability is not absolute. Personal liability can arise, for example, from wrongful trading, and trustees who are also company directors have further statutory responsibilities.

Unincorporated charities

Unincorporated associations and charitable trusts have no limited liability, so trustees can be personally liable for the charity’s financial commitments. CC12 says taking professional advice before making significant financial commitments is vital for these trustees. The legal position is complex, and the different structures do not carry the same risks.

What options are available to a charity facing insolvency?

Financial difficulty does not mean closure is inevitable. Where problems are identified early, trustees may be able to reduce costs, speak to funders and lenders, raise further income, review funds and assets, or team up with another charity. They should be realistic about the difference between a real recovery option and a measure that postpones an unavoidable failure.

Charitable companies and CIOs may also be able to use formal rescue procedures. CC12 describes four:

• Moratorium: a short, temporary stop on creditor action while rescue or restructuring is explored, overseen by an insolvency practitioner as monitor
• Administration: an administrator takes control of the charity, aiming to keep it going as a going concern or to get a better result for creditors than winding up
• Company Voluntary Arrangement: an agreement with unsecured creditors to reduce or delay what they are owed
• Restructuring plans and schemes of arrangement: available to charitable companies but not to CIOs

Not every procedure suits every charity, and some are unavailable in certain circumstances. Take specialist advice before pursuing any of them.

Records that show a board acted responsibly

A board is in a stronger position when it can produce the current cash position, cash flow forecast and balance sheet, a clear split between restricted and unrestricted funds, a record of the professional advice it took, and minutes showing the options considered and the reasons for decisions. CC12 says trustees should keep a record of advice and the reasons for their decisions. Good governance includes reaching a sound decision and being able to show the board acted on appropriate information, with due regard to its legal duties.

Seven questions trustees should be asking now

1. Do we know our unrestricted cash position? How long could the charity meet essential spending if expected income were delayed?
2. Are our forecasts realistic? Have we considered losing a major grant, contract or funding stream?
3. Do we understand our reserves? Which funds are available for general spending, and which are restricted or otherwise unavailable?
4. Can we meet our commitments? Will payroll, pension contributions, tax and supplier payments be made when due?
5. Have we identified our warning signs? What would trigger an urgent board meeting, closer monitoring or professional advice?
6. Do we understand our reporting responsibilities? Would trustees recognise when a financial difficulty might be a serious incident?
7. Could we show how decisions were made? Are concerns, advice and reasons properly documented?

These questions belong in an ongoing governance process, not only when a charity is approaching insolvency. The warning signs that trustees should be reviewing in 2026 are covered separately.

Frequently asked questions

Concerned about your charity’s financial position?

Financial difficulty does not necessarily mean a charity must close, but early action can widen the options. UHY Williamson Croft’s charities and not-for-profit team works with trustees across Liverpool, Manchester, the Wirral and the wider North West on financial reporting, audit and advisory support. To discuss your charity’s circumstances in confidence, get in touch or call Taylor Rogers on 0161 399 0121 (Manchester) or 0151 303 3112 (Liverpool).

Sources: Charity Commission, Improving your charity’s finances (CC12), CC12: what to do if your charity is in financial difficulty, CC12: charitable company or CIO insolvent or at risk of insolvency, Charity Commission, how to report a serious incident, Charity Commission, CC19, Civil Society, 21 September 2026.

This article provides general information for charities in England and Wales and is not legal or insolvency advice. Trustees should take professional advice appropriate to their charity’s circumstances and legal structure.