Dissolution Clauses

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Many charity trustees understandably don’t often refer to the dissolution clause in their charity’s constitution, because the dissolution of their charity is an event they hope doesn’t happen.

However, it’s inevitable that some charities will ultimately have to apply to OSCR for consent to wind up or dissolve and it’s important that charities understand what their dissolution clause means.   

Most constitutions contain a dissolution clause that describes how the charity is to distribute any assets or property that remains after any outstanding debts and liabilities are met. There are instances however where a charity’s constitution does not contain a dissolution clause and there are no other powers at their disposal allowing them to wind up the charity. In such cases, the charity may consider whether they have the power to amend their constitution to include a dissolution clause.  

In 2018, OSCR received 441 applications from charities for consent to wind up. The most common reason why OSCR was not able to grant consent was where the charity proposed to distribute its remaining assets in a way that their dissolution clause did not permit. . OSCR cannot give consent to an action that the charity’s own rules do not allow it to do.  

Many constitutions have a dissolution clause that requires any remaining assets of the charity to be transferred to another charity with similar purposes. This means that as well as the recipient having to be a registered charity, the purposes (as set out in the constitution) of the proposed recipient must be similar to the purposes set out in the constitution of the charity winding up.

Some charities may have reasons why they would like to give some or all of their assets to a charity that does not have similar purposes. - Perhaps they have shared premises with the recipient charity or have worked closely alongside the other charity. Regardless of the reasons, if the dissolution clause states that assets must go to a charity with similar purposes, then that what the charity trustees must do.

There is no requirement in charity law for a charity’s dissolution clause to provide that any remaining assets are transferred to another charity with similar purposes. Sometimes dissolution clauses are much less specific- for example it might simply be the case that assets have to be transferred to another charity (regardless of its purposes) or in some cases a dissolution clause might only require that assets have to be distributed for charitable purposes.

No matter what your dissolution clause says, charity trustees should make sure that:

  1. it does not permit assets to be used for anything other than a charitable purpose
  2. it accurately reflects and details how the charity trustees would like any remaining assets to be distributed if the charity is wound up
  3. any application for consent to wind up, the proposed distribution of remaining assets must be in line with the charity’s dissolution clause.

Providing the charity has the power to make amendments to its constitution, charity trustees will be able to amend their charity’s dissolution clause if need be. Charities that are SCIO’s however will be limited in terms of how they might amend their dissolution clause, as charity law provides that SCIO’s `are to distribute any remaining assets for purposes which are the same as or which resemble closely the purposes of the SCIO.