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The Charity Commission have published a rescue focused document which provides guidance to Trustees on their obligations when a charity suffers from financial problems. The document is entitled: "Managing Financial Difficulties and Insolvency in Charities - (CC12)." The insolvency part of the document notes:
"C1. What does insolvency mean in law?
The short answer
There is no statutory definition of 'insolvent' although the Insolvency Act 1986, when referring to a state of insolvency, uses the phrase "unable to pay its debts". In practice there are two separate tests for insolvency and failure of either might be an indication of insolvency:
Section 123 of the 1986 Act provides that a company is deemed to be unable to pay its debts where:
Generally insolvency law aims to rescue or restructure a business rather than liquidate it. A rescue can maximise the return for creditors. A rescue often involves selling a business (free of its liabilities) to another party and using the proceeds of sale to pay its creditors. This is not usually relevant to charitable companies as it is unlikely that an insolvent charity's 'business' will be sold to another party to pay off its creditors."
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