A new identity…
December 2008
Chris Priestly gives a practical guide to the long-awaited charitable incorporated organisation (CIO)...
The development of the charitable incorporated organisation (CIO), a new corporate structure designed exclusively for charities, and instituted by the Charities Act 2006 is welcome recognition by the Government of the importance of charities in society. It is also a welcome development for charities that will for the first time be able to enjoy the benefits of limited liability without the burden of dual regulation.
The draft regulations which will form the legal framework for CIOs were published for consultation in September by the Charity Commission and the Cabinet Office[1]. They contain draft statutory instruments with detailed provisions regarding the governance and activities of CIOs and two forms of model constitution:
- foundation model – where there are to be no members of the CIO other than its trustees; and
- association model – where the CIO will have members who are not trustees.
The regulations contain three draft statutory instruments:
- the Charitable Incorporated Organisations (General) Regulations;
- the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations; and
- the Charity Tribunal (Amendment) Order.
Copies of these documents and the consultation questions are available on the website of the Office of the Third Sector. The consultation closes on 10 December.
Establishment
CIOs must be registered with the Charity Commission even if their income is below the threshold at which other charities are required to register. This may be an advantage for those that wish to obtain the reputational benefits of registered charity status but cannot satisfy the Commission that their income in the first year will exceed the registration threshold.
New charities
The procedure for establishing a new charity as a CIO, in brief, is as follows:
- A formal application (comprising the proposed constitution of the CIO, the trustee declaration and the prescribed application form) must be submitted to the Charity Commission.
- The Commission will respond to the applicant to deal with any follow-up queries or requests for more information.
- If the Commission approves the application, it will add the new CIO to the register of charities at which point the organisation will come into legal existence as a body corporate.
The Commission will be obliged to refuse an application if it is not satisfied that the CIO would be a charity at the time of registration or if its constitution does not satisfy the requirements and it may refuse it if the proposed name is the same as, or too similar to, an existing charity.
Establishing a CIO differs from establishing a charitable company limited by guarantee as a CIO only comes into existence as a legal person when it is registered by the Commission, whereas a company is established as an organisation with its own legal identity when it is incorporated at Companies House.
As a CIO will not exist until it is registered by the Charity Commission, it cannot enter into contracts, open a bank account or own property in its own name until the application for charity registration has been approved. While this may not be a problem for straightforward CIO applications, where the issues surrounding the application are more complex, there may be an extended period before the charity can take even preliminary steps towards becoming active.
Conversion of existing charities
The Act provides for existing charitable companies to convert into CIOs. Exempt charities, on the other hand, will not be able to convert. The trustees should submit a copy of the proposed constitution and two resolutions of the members:
- resolution one – approve the conversion of the existing charity to CIO status; and
- resolution two – adopt the CIO constitution.
These resolutions must be special resolutions passed at a meeting or written resolutions passed by all the members entitled to vote (unlike most other written resolutions of companies which may be passed by 75 per cent of such members).
Where an application for conversion is approved, the Commission will register the converted CIO in the register of charities. However, the conversion only takes legal effect once the Registrar of Companies has registered the conversion resolution and cancelled the registration of the company.
Converting unincorporated charities
The Act provides no mechanism for conversion of unincorporated charities to CIOs. However, the Charity Commission has published brief guidance stating that trustees of unincorporated charities wishing to convert must first establish a CIO then transfer the unincorporated charity’s assets and liabilities to the CIO.
The new CIO will have the same name as its predecessor but a different registered charity number so the ‘incorporation’ should be recorded on the Charity Commission’s Register of Mergers[2] to protect future gifts or legacies made with reference to the number of the unincorporated charity (see also Andrew Hind article, Mergers register).
Constitution and members
A CIO must have a constitution, which will in many ways be similar to the memorandum and articles of association of a charitable company. It is important to note that the Act obliges promoters of CIOs ‘as near as the circumstances admit’ to adopt a constitution in the form of one of the Charity Commission’s model constitutions. The Charity Commission has indicated that promoters of CIOs can add additional terms and adapt some of the provisions in the model constitutions but has warned that such amendments may delay the registration of a CIO as the Commission will have to satisfy itself that the changes do not fail to comply with the requirements of the legislation.
An interesting aspect of the current consultation is going to be the debate as to whether or not the statutory rights of members of a charitable company should be replicated for CIO members since unlike members of companies they will have no personal financial interest in the CIO and are going to be obliged to exercise their rights in the interests of the CIO. The draft CIO regulations therefore largely do not protect particular rights of CIO members.
More importantly, members of a CIO will only have a right to convene a members’ meeting and resolve by simple majority to remove a trustee if those drafting the CIO constitution have expressly included an appropriate provision.
Similarly, it will be possible for those preparing a CIO’s constitution to impose more restrictive procedural requirements that must be satisfied before future amendments can be made. Such a power of entrenchment would need to be added since it is not envisaged in the model constitutions and further, it must be drawn to the attention of the Charity Commission in the application for registration.
The members of a CIO can, however, amend the constitution (provided that the amendments do not result in the CIO ceasing to be a charity) at a general meeting where 75 per cent of those voting must be in favour of the amendments or by written resolution of all the members.
As for other charities, the Charity Commission’s prior written consent is required for constitutional amendments that would alter the CIO’s purposes or any provision regarding the application of the CIO’s property on its dissolution or authorisation of any benefit to members, trustees or anyone connected with them.
Regulation
Although the CIO is a new corporate form, the requirements contained in the Act and the draft regulations largely resemble the regulations governing companies. Some of the key regulations governing CIOs are:
- Names. If the actual name of the CIO does not include ‘charitable incorporated organisation’ or ‘CIO’, documents and letters must state that it is a CIO.
- Registers. A CIO must keep registers of its members and its trustees. The draft regulations provide for these to be accessible to the general public.
- Contracts. Contracts may be made either by a CIO in writing or on its behalf by a person acting under its authority.
- Insolvency. The full range of procedures under the Insolvency Act 1986 will be available, i.e. liquidation and so on.
Advantages of CIO status
The trustees of unincorporated charities whose activities are mainly restricted to making grants and which do not enter into significant contracts may take the view that the additional obligations following conversion to a CIO outweigh the benefits.
The real benefits will be for charities set up as companies. The Commission currently estimates that only around 1 per cent of registered charities operating as companies will seek to convert into a CIO each year. This seems rather conservative considering the obvious attraction of the removal of the dual regulation burden. Currently, companies are regulated by both the Commission and the Registrar of Companies, but CIOs will only be regulated by the Commission.
The Act gives CIOs the power to do anything ‘which is calculated to further its purposes or is conducive or incidental in doing so’, which will be useful to trustees.
An additional advantage is that while the Companies Act does not require the members of companies to act in the best interests of the company, the Act imposes such a duty on the members of CIOs.
Other jurisdictions
Scottish legislation provides for the establishment of Scottish CIOs (SCIOs) and the Northern Ireland Charities Act (which received Royal Assent on 9 September – see News review from November 2008) provides for NICIOs. The Charity Commission has announced that it is in discussions with its counterparts to ensure the systems work harmoniously together.
Future developments
The future popularity of the CIO is still an unknown quantity, but it is fair to say that the relatively straightforward registration process and the advantages for charities should ensure that it is more than just a topic for discussion.
Author: Chris Priestley
Chris Priestley is a partner in the charities and philanthropy team at Withers LLP.
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