Liquidation of Charities or Not for Profit’s

Liquidation of Charities or Not for Profit’s

Many Charities and NFP organisations are facing reduced income as a result of the current economic conditions and government changes to grants making fund raising more difficult. We thought it was timely to look at the steps to take when a charity is no longer able to meet its intended purpose and mission statement.

There are several critical steps and legal obligations a Charity must consider to wind up responsibly and protect its charitable status:

Legal and Governance Considerations

• Review the charity’s rules or trust deed: Most registered charities have a wind-up clause that outlines how assets should be distributed and what procedures must be followed.
• Comply with the Charities Act 2005: Officers must ensure the charity continues to meet its obligations under the Act, even during insolvency.
• Notify Charities Services: The charity must inform Charities Services of its intention to wind up so it can be deregistered from the Charities Register.
• Inform the Companies Office: If the charity is incorporated (e.g. as a Charitable Trust or Incorporated Society), it must also notify the Companies Office and follow the correct dissolution process.

Financial Responsibilities

• Settle all creditor claims and collect outstanding debtors: Before distributing any assets, the charity must pay off creditors and recover any money owed to it.
• Avoid premature asset distribution: Distributing assets before settling debts can lead to legal complications, including clawback actions and open the board to risk.
• Tax implications: Deregistration may trigger tax liabilities, including a one-off tax on accumulated assets unless they’re transferred to another registered charity within a specific timeframe.

Liquidation Process

• Voluntary liquidation: A charitable trust board can initiate liquidation via resolution, often requiring two general meetings to confirm the decision.
• Court-ordered liquidation: Creditors or other parties (including the Attorney-General) may apply to the High Court if it’s deemed “just and equitable” to liquidate the charity.
• Licensed liquidator: A Licensed Insolvency Practitioner must be appointed to oversee the process.

Liquidation in New Zealand varies depending on whether the charity is structured as a charitable trust, incorporated society, or company. Each has its own legal framework and procedural nuances. Here's a breakdown:

Charitable Trusts

• Legal basis: Governed by the Charitable Trusts Act 1957 and Companies Act 1993 (Parts 16 & 17).
• Voluntary liquidation: Requires two general meetings to pass and confirm a resolution to liquidate.
• High Court liquidation: Can be initiated by trustees, creditors, the Registrar, or the Attorney-General if deemed “just and equitable”.
• Asset distribution: Surplus assets must go to another registered charity with similar purposes unless detailed otherwise in the deed.
• Officer liability: Trustees may be personally liable if proper records weren’t kept or duties were breached.

Incorporated Societies

• Legal basis: Governed by the Incorporated Societies Act 2022 and Companies Act 1993. Many Incorporated Societies are in the process of becoming compliant with the 2022 Act by 5 April 2026, so it is timely to have a clear view on what the organisation wants to occur on winding up.
• Voluntary liquidation: Members vote at a general meeting, then confirm at a second meeting. A licensed insolvency practitioner is appointed.
• Registrar dissolution: Registrar may strike off the society if it’s inactive or fails to file annual returns.
• High Court liquidation: Can be initiated by members, creditors, or the Registrar.
• Asset distribution: Must follow the society’s constitution.

Companies (with charitable status)

• Legal basis: Governed by the Companies Act 1993.
• Voluntary liquidation: Initiated by shareholders or directors.
• High Court liquidation: Can be triggered by creditors, shareholders, or the Registrar.

Each structure has its own quirks, especially when it comes to governance and asset handling. If you’re working with a specific type of Charity or Not For Profit we can assist with more specific advice.

For a more detailed breakdown of how it works see below:

1. Determine the appropriate method for liquidation:

By members' resolution (for societies):

A society incorporated as a charitable trust board can be put into liquidation by a resolution of its members. This requires two general meetings to confirm the decision. 

By application to the High Court:

Both societies and charitable trust boards can be liquidated by applying to the High Court. This can be done by the society itself, a member, a creditor, or the Registrar of Incorporated Societies. 

By the Registrar of Incorporated Societies:

If a society fails to meet its obligations (e.g., annual financial statements), the Registrar can issue a notice striking it off the register.

2. If liquidating by members' resolution (for societies):

First general meeting: Members must resolve to appoint a liquidator, following the society's rules. 

Second general meeting: The resolution must be confirmed at a second meeting, held at least 30 days after the first. 

Appointment of a liquidator: A licensed insolvency practitioner must be appointed as the liquidator. 

3. Once liquidation is commenced:

Notify Charities Register:

If the charity is incorporated, notify the Companies Office and Charities Register to begin formal dissolution.

The Inland Revenue should also be contacted to file a claim in the liquidation.

Notify creditors and realise assets:

Realise all assets and pay all creditors’ claims based on their priority.

Distribute assets:

Any surplus assets after payment of creditor claims must be distributed to other charitable organizations within New Zealand that have similar aims, in accordance with the charity's rules or trust deed unless advised otherwise in the rules or deed. This ensures compliance with the charity’s wind-up clause.

File Liquidation Documents

The liquidator must file a Notice of Appointment and subsequent reports with the applicable register similar to a company liquidation.

Once the liquidation is complete, the Liquidator will follow a prescribed process resulting in the charity being removed from the register and ceasing to exist as a legal entity.

4. Potential implications of deregistration without liquidation:

Liability for income tax:

Deregistered charities may become liable for income tax unless they qualify for another tax exemption. 

Potential tax on accumulated assets:

Depending on the circumstances, there might be a requirement to pay a one-off tax on the charity's accumulated assets at the time of deregistration. 

5. Considerations:

Winding-up clauses:

Ensure your charity's rules or trust deed include a winding-up clause that directs assets to charitable purposes. 

Liquidation appointment process:

Follow the correct appointment process and timeframes so that the subsequent liquidation cannot be invalidated.

Consult with professionals:

It's advisable to seek legal and accounting advice from professionals experienced in charity law and insolvency to navigate the process effectively.