1. Timetable
1.1 The Office of the Third Sector and the Charity Commission are carrying out a dual consultation which ends on 10 December 2008. The consultation relates to (a) draft regulations setting out some of the detail of how CIOs will be run; (b) some model constitutions and (c) draft Commission guidance.
1.2 The current predictions are for the CIO regulations to be made in the Spring/Summer 2009.
1.3 CIOs are expected to be available from early 2010.
2. Key features which are set in the 2006 Act (and therefore not subject to the consultation)
2.1 A CIO is a new corporate entity, created on registration by the Charity Commission.
2.2 It is subject to a single regulator – the Charity Commission.
2.3 It is not available to exempt charities.
2.4 A CIO must have two tiers of people involved – trustees and members. The trustees and members can be the same.
2.5 A CIO can have a sole trustee and one member.
2.6 There is an express duty for members to act in the interests of the charity.
2.7 Amendments to a CIO’s constitution can be made:
2.7.1 at a meeting, by a 75% majority of those attending
2.7.2 by written resolution, which must be unanimous
2.8 Amendments do not take effect until registered with the Charity Commission.
2.9 There is a conversion procedure for corporate charities which retain the same legal personality and charity number.
2.10 There is a similar conversion procedure for CICs.
2.11 There is no conversion procedure for unincorporated charities – a new CIO must be set up and there has to be a transfer process. The transfer will trigger TUPE and is likely to trigger a “cessation event” for defined benefit multi-employer pension schemes.
3. Issues arising from the consultation
3.1 Register of members
3.1.1 There are requirements to maintain a register of members which are more onerous than for a company;
3.1.2 Failure to properly maintain and update the register carries similar criminal offences to company law; and
3.1.3 The draft Regulations contain as strict time limits as company law, notwithstanding that many CIOs may not have paid staff.
3.2 Model constitutions
The consultation includes two model constitutions:
3.2.1 A “Foundation” model (where the only members are the trustees from time to time) and an “Association” model (where there is a wider membership). There is the possibility in future of additional sector specific models.
3.2.2 S69B(5) of the 1993 Act states “A CIO’s constitution shall be in the form specified in regulations made by the Commission, or as near to that form as the circumstances admit.” The Commission has indicated it will not interpret this strictly.
3.2.3 The models cover some issues with a light touch, e.g. written resolutions, trustee decision making by virtual meetings or email.
3.2.4 The models do not cover some key areas e.g. indemnity of trustees or removal of trustees by members or the Board.
3.3 Conversion from charitable company
3.3.1 The draft Regulations include complicated requirements for final accounts to be prepared for the financial year before conversion and for a specific statement to be prepared showing the charity’s finances on the date of conversion.
3.3.2 A charitable company cannot convert if any documents are outstanding to Companies House or the Commission for the last completed financial year – so this potentially creates a restricted window during which conversions can take place
3.4 Offences
There are many offences relating to maintaining the registers of members/directors – which mirror the Companies Act provisions. We will be submitting that these are unnecessary and offputting.
4. Who will the CIO appeal to?
4.1 The Charity Commission has expressed the view that it will not suit all charities and particularly may not be suitable for very large and very small charities.
4.2 Our view:
For new charities
4.2.1 Advantages:
(a) The fact that there is a single regulator means there is no need for dual returns to the Charity Commission and Companies House.
(b) We regard it as a major advantage that a CIO has to comply just with the Charities Acts – as opposed to a charitable company which also has to comply with company legislation. In practice we think some trustees of charitable companies find their role as both charity trustee and company director confusing. Trustees of CIOs will not have this dual role.
(c) A CIO is a bespoke vehicle for charities.
4.2.2 Disadvantages:
(a) If a registration is not straightforward, the “charity” has no legal personality until registered. This means the organisation is “in limbo” during the registration process (unlike a charitable company which has legal personality from the date of registration of the company).
(b) There is less certainty about the date constitutional changes take effect as this depends on the date of registration by the Commission.
(c) If members’ written resolutions will be used a lot in practice, the company structure gives more flexibility.
Conversion
4.2.3 For large corporate membership charities – the removal of the need to comply with company legislation is potentially an advantage but if the charity is making use of the Companies Act provisions to pass written resolutions by 75%, then converting would have the disadvantage of having to revert to unanimous written resolutions.
4.2.4 For existing unincorporated community organisations – e.g. CVS – the CIO probably has the most appeal. The main advantages are: limited liability, single regulator no need to comply with company legislation. The issue of making alterations to the constitution is probably not relevant if there is an active membership to attend meetings.
4.2.5 Trusts – The main advantage is of limited liability. The disadvantages include the requirement to introduce two tiers of involvement (trustees and members) and the need to carry out more detailed record keeping.
Prepared by Bates Wells & Braithwaite London LLP
© Bates Wells & Braithwaite London LLP, November 2008
The information contained within this note is necessarily of a general nature. Specific advice should be sought for specific situations.
