The Office of the Third Sector has just issued its draft consultation on the new corporate form specifically designed for charities, the Charitable Incorporated Organisation or CIO. Helen Harvie explores the new proposed structure.
The deadline for responses to the consultation is 10 December 2008 and the response to the consultation is due to be published in March next year.
Currently charities may take various different forms, the most popular of which is the company limited by guarantee, largely because of the limited liability offered to its members. However, the fact that this vehicle was really designed for commercial companies who wish to benefit their members, rather than for charities who wish to benefit the public, has always created problems and confusion for charity directors. Not least of all is the terminology as those responsible can find themselves described as directors, charity trustees, members and subscribers. From a legal perspective, not only do they need to keep up-to-date with charity law, but also with company law.
The Charity Commission – the main regulator for charities – claims that there are a whole range of benefits associated with the introduction of CIOs, including single registration – it will no longer be necessary to register with Companies House as well as the Charity Commission - simpler reporting and filing, no filing charges, simpler constitutions with greater flexibility and specific provisions for conversion, mergers and restructuring. It is important to note that the CIO will be a corporate structure but it will not be a company.
There will, however, be some new concepts. The draft documents in the consultation include two model constitutions – the Foundation model which has trustees and no separate membership, and the Association model which has both trustees and members. In order to qualify as a CIO there is a prescribed content that is contained in section 69B Charities Act 1993 as amended. This includes reference to the name (including ‘CIO’), purposes, office in England or Wales, appointment of trustees, membership provisions and liability on winding up. It is possible to opt for zero liability on winding up or a fixed sum (usually no more than £10). The power section is likely to have broad blanket powers, in other words power to do anything to further the purposes of the CIO, in a similar way to standard trading companies.
CIOs will need to keep an open register of members and trustees and any breach of this provision will be subject to criminal sanctions. If there are more than 50 members there will also need to be an Index of members. It will be possible to have a CIO with one sole member. Members will be under a new duty to “exercise his or her powers as a member of the CIO in the way he or she decides in good faith would be most likely to further the purposes of the CIO.”
There will be no minimum income threshold for registration with the Charity Commission or for annual returns. Currently charities with an annual income below £5,000 are not required to register and, for those below £10,000, it is only necessary to submit a reduced annual return. As of 1 April 2009 the threshold for reduced annual returns will be lifted to £25,000.
The consultation specifically seeks views from the public on certain issues. These include the minimum age for trustees – for companies there is a new minimum age of 16 as of 1 October 2008 –the duty of care that should be applied to trustees of CIOs, the issue of private benefit and remuneration of trustees, and the most appropriate accounting regime for such a structure.
Whilst the CIO has been widely welcomed in principle, there has been concern about the ability of the Charity Commission to deal with the introduction of such a complex new structure. It must look like a company but not be a company. The Charity Commission will also need to provide a filing and information service that is as efficient as that of Companies House. The introduction of the CIO has already been significantly delayed – it was originally envisaged that it would be available this summer – and the Charity Commission has admitted that it is grappling with the practical implications of some of the concepts. It certainly will not now be available before the spring of 2009.
Indeed the Charity Commission’s new statutory objectives create even more difficulty. They must find a balance between making the most effective use of charitable resources and the necessary accountability owed to donors, beneficiaries and the general public. Their concern about the role they have to play is evidenced in the introduction of provisions to provide the new Charity Tribunal with jurisdiction over the decision-making process. When the CIO was first mooted there was a recommendation that the future CIO become the charity structure of choice and that all charities would be expected to convert within 5 years from the introduction of legislation. This idea is no longer being mentioned and indeed the Charity Commission themselves state that the CIO will not be suitable for all charities.
At a practical level, existing charities who are considering converting will be watching carefully to see what the conversion process will mean for them. It had been advertised as being a quick conversion process for existing charities. It is now clear that there will be a particular mechanism for existing charitable and non-charitable companies and Industrial and Provident Societies, but not for charitable trusts and associations, or for exempt charities. In the draft guidance notes the Charity Commission states that for companies there is no need to transfer assets as there is no new legal entity, the existing corporate body simply becomes registered under different legislation. It is hard to see exactly how this works. Presumably this deals with the issue of assets that cannot currently be transferred, such as permanent endowment.
Many existing charities believe that it may well not be worth converting as reporting to Companies House is not significantly costly or onerous. Wait and see appears to be the message of the day. The much-vaunted new charitable structure may not be as well received as originally envisaged. Like its social enterprise counterpart, the Community Interest Company or CIC, there may be a slow take-up, probably initially only by new charities seeking registration.