6 Charitable Incorporated Organisations
Current Position
242. There is no legal structure specifically for
charities. Charities use a variety of legal structures (which
is beneficial to them) but they have to be adapted and this can
present problems for charities. Charitable trusts and unincorporated
associations place personal liability on trustees in respect of
any dealings with third parties. This is a particular problem
for charities involved with service delivery. Many charities are
companies limited by guarantee to limit liability but they face
the disadvantage of dual registration, regulation and reporting
between the Charity Commission and Companies House. In addition,
company law is designed for profit-making enterprises and subject
to European Union law, which does not fit easily with charities
and charity law.
Draft Bill Changes
243. Clause 26 and Schedule 6 of the Bill provide
a completely new legal structure for charities; the Charitable
Incorporated Organisation (CIO). The CIO will be a corporate body
with limited liability with one or more members and registered
with the Charity Commission. Provision is also made for the conversion
of a charitable company or registered friendly society to a CIO
by application to the Charity Commission.
244. Any two or more CIOs will be able to apply to
the Charity Commission to be amalgamated but the Commission will
have power to refuse amalgamation if it considers that there is
a serious risk that the new CIO will be unable properly to pursue
its purposes - section 69J(9). The Secretary of State will be
also be given wide power to make regulations about the administration
of CIOs generally by section 69P.
Evidence
245. There was general welcome for the CIO as a useful
means of incorporation[266]
and of easing the burden of dual registration.[267]
The Local Government Association considered that the CIO would
make it easier for charities to develop partnership approaches
with local authorities and other voluntary and community organisations.[268]
However, many organisations noted that the lack of detail about
the CIO made it difficult to judge its ultimate benefit.[269]
246. A number of charities and their professional
advisers did comment on specific clauses in the Bill. There was
particular objection to the power to be given to the Charity Commission
to control mergers in section 69J(9).[270]
The Joseph Rowntree Charitable Trust was disappointed that the
recommendation from Private Action, Public Benefit that
this should be available in a foundation form (without members)
as well as a membership form, is not included in the bill: "The
likely outcome of this omission is that a number of CIOs will
go through the motions of maintaining a nominal membership structure,
simply to secure limited liability, which is precisely the sort
of inappropriate and wasteful governance arrangement that the
CIO was designed to remove".[271]
The Charity Finance Directors Group said there was a marked lack
of detail about the rules relating to insolvency, winding up and
dissolution and charges for converting to a CIO.[272]
247. Perhaps a typical response from existing charities
to the new legal form was given by Mr Finney of the Myasthenia
Gravis Association:
"The CIO, in principle, we are interested in,
but we are unlikely to rush into that because we are incorporated
already as a company limited by guarantee and I think we would
be very cautious about seeing how the new CIO operates before
we leap into that one."[273]
248. One question that we had in considering the
proposals for the CIO was that of its distinctiveness from the
Community Interest Company (CIC). The Companies (Audit, Investigations
and Community Enterprise) Bill contains proposals to establish
a CIC. Mr Lloyd of the Charity Law Association made clear that
a CIC was a very different structure from a CIO and was designed
to serve a different purpose. [274]
His evidence also brought out the advantages to charities of the
CIO. We found the following summary very helpful:
"The CIO, the Charitable Incorporated Organisation,
is designed as a one-stop shop exclusively for charities to be
able to get the benefits of limited liability by registering with
the Charity Commission and obviating the need to undergo dual
registration in order to obtain limited liability by registering
as a company with the Registrar of Companies and as a charity
with the Charity Commission. It is a method of giving a simple
form of limited liability status exclusively to charities. That
is that packet. The Community Interest Company has been designed
in order to allow limited liability for companies, whether limited
by shares or by guarantee, to be established as generally not-for-profit
companies under English law with a not-for-profit status that
means they cannot be privatised once they have been set up; like
a charity, they are there for the long term. It is to stop demutualisation
and that sort of privatisation. They are aimed at organisations
principally that are not charities".
249. The evidence showed that the CIO is a very welcome
development for charities, that it will be deregulatory and that
it will go a long way to alleviate the problem of personal liability
for trustees. The evidence also showed that the precise form of
the CIO and the detailed provisions in the Bill are not well understood.
The concern over the effect of the provisions is understandable
when the explanatory note to the Bill for the proposed sixteen
new sections and a new Schedule to the 1993 Act dealing with the
CIO consists of five lines of text with no explanation of individual
sections.
250. We conclude that the new legal form of a Charitable
Incorporated Organisation is welcome but that the real Bill will
need to be accompanied by more detail in the explanatory notes
on how it will operate in practice.
251. We recommend that clause 26 and Schedule
6 are redrafted to reflect the intended elements of the Charitable
Incorporated Organisation and in a far more understandable form.
266 Ev 3, para 2.20 Back
267
Ev 35, para 3.5 Back
268
Ev 103, para 3 Back
269
Ev 127, para 3.7 Back
270
Ev 9, para 2 Back
271
Ev 460, para 12 Back
272
Ev 127, para 3.7 Back
273
Q811 Back
274
Q270 (Mr Lloyd) Back
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