New Legal Structure for Charities

After a wait of over six years the “New Legal Structure for Charities” has finally arrived.

The new structure has been created by the Charities Act 2006 and I am given to understand one of the main reasons for the lengthy delay related to the provisions for insolvency. 

Until the advent of the CIO there were three methods of charity formation – the simple Trust – the Unincorporated Association and the Company Limited by Guarantee. One of the problems involved with the first two types of charity was that there was no limited liability which is not the case with the guarantee company. However, registration and regulation of a charitable guarantee company is not only dealt with by the Charity Commission but also by Companies House.  The CIO has the advantage of limited liability and only one regulator, the Charity Commission. 

The Charity Commission have promulgated two types of CIO’s – a “Foundation” model and an “Association” model. The former is for charities whose only voting members will be the charity trustees whilst the “Association” model is for charities with a wider membership including voting members. One will be able to change from one to the other and vice versa.  It is important to remember that each of the two promulgated models do contain various alternative provisions so it is essential that anyone contemplating a new CIO or converting to one must be aware of these and take appropriate advice as to which alternatives to include. For example in the “Association Model” there are alternative provisions relating to “Members decisions” as to whether or not they can be taken not only by a vote at a general meeting but also by way of written resolution without a general meeting. This would seem to be particularly important in the case of conversion where presumably the desire will be to follow as far as possible the existing constitution. 

The CIO should reflect “good practice” a reminder of the legal requirements to the trustees hence  the use of the Charity Commission standard models.  I think at this early stage in the life of the CIO one would be very ill advised to use anything other than one of these standard documents. 

 Also the CIO must contain certain provisions to comply with the 1993 Charities Act and the General Regulations. 

Some readers may recall that the Charity Law Association had acceptable models of the Trust Unincorporated Association & Guarantee Company charities which in my opinion were generally shorter and more easily understood than the Charity Commission models. These forms were accepted by the Charity Commission and I am hoping that the Charity Law Association will produce similar models for the CIO.  

The current models issued by the Charity Commission are quite lengthy running to some 20 pages not including the explanatory notes. 

General advice from the Charity Commission seems to imply that the CIO is a suitable vehicle for small to medium sizes would be charities.  They further imply that it is simpler to run a simple Trust or Unincorporated Association. However, in an increasing litigious world, the Trustees may feel and indeed be advised to convert to a CIO to obtain the additional protection from liability that the new CIO affords without the additional complications of Companies House. 

One point that is worth bearing in mind was the rules that a “charity” with an income of less than £5000 per annum could not register with the Charity Commission although it would need to register (for gift aid for example) with the HM Revenue and Customs. 

In the case of a CIO registration is possible (and must be done) even if the income is less than the £5000 per annum figure. This may be useful in the case of people wanting to register a small charity for say a single artefact with a current low income stream, for example, a locomotive. Having had some experience of registering this small income type of charity I feel that this is a very welcome step forward. 

It follows that a CIO does not come into existence until it is registered with the Charity Commission. 

Unfortunately the process of conversion does not appear to be seamless!  With an existing Charitable Unincorporated Association a new CIO has to be formed, the assets of the Unincorporated Association transferred to the CIO then the existing charity can be wound up in accordance with its constitution and an application made to have it removed from the Register. 

In addition to those already mentioned what are some other advantages of a CIO over an Unincorporated Association and, therefore why convert? 

The main advantages would be the ability to conduct business in its own name rather than in the name of the Trustees and there is more protection from liabilities for the Trustees. 

A possible advantage for a body wishing to become a new charity is that there is always a “chicken and egg” situation when going down the route of the Guarantee Company insofar as the Company is formed first and then registered with the Charity Commission.  There is always the risk that the Commission will ask for an alteration, particularly in the objects clause, so then there is the problem of amending the already extant company at Companies House. Therefore this risk is avoided with the formation of a CIO because as we have seen previously the CIO does not come into existence until registered with the Commission and in the case of conversion the new CIO is formed and in being before the transfer of the old charities assets takes place.  

At present, the provisions in the Charities Act for conversion of an existing Charitable Company to convert to a CIO are not in place!  

The Charity Commission state that such a conversion process should enable the existing Company to register as a CIO with a new constitution. 

The Charity Commission also state that the process for this type of conversion may not be ready until 2014 but judging by the delays in implementing CIO’s this may be optimistic! 

The current position is that there is a timetable for both registration of new CIO’s and conversions from unincorporated associations and this timetable is published on the Commission’s website. It seems a little obtuse in my opinion for the timetable to allow conversion on a sliding scale with the bigger incomes first in the queue and, for example, registration with income of less than £5000.00 not being able to take place till early in 2014. I say this in view of the Commissions advice that the CIO, as already mentioned, could be suitable for small or medium sized charities! 

In conclusion it remains to be seen how effective and popular the CIO will become. As a lawyer I have a distinct dislike of the automatic penalties imposed by Companies House, for late filing for example, and particularly with the smaller charities this has I feel always been a bit of a burden to ensure that strict deadlines were adhered to. I would therefore welcome the advent of the CIO as removing one regulatory regime from the burden of paperwork now imposed on charities. 

What, if, any are the disadvantages of a CIO? 

Possibly an untried and untested format. Will it be the subject of any litigation; early days to tell?

The Commission’s standard documents are in my opinion rather lengthy compared  with some of the existing formats for charities but once some of the alternatives have been weeded out they become a more manageable size. 

All in all the CIO has been a long time in coming, but hopefully, it heralds a new and less complex era for those charities that do not want the encumbrance of Company Law and Trustees’ liabilities so I feel that they are long overdue and very welcome.

Nigel Ward is a trustee for several local charities and is the advisor on charity law matters in England and Wales for the Heritage Railways Association.  If you would like any further information pleae contact Nigel  on 01943 61173.