Presentation on theme: "Summary of today’s format"— Presentation transcript:
1Charity law training on companies, SCIOs and conversions 11 November 2013
2Summary of today’s format 2.00pm – 2.15pm Introductions 2.15pm – 2.45pm Presentation on incorporation2.45pm – 3.30pm Case Study3.30pm pm Questions and answers/discussion
3International Development Small Grants Programme £500,000 per yearTypes of grant:-project (max 60k over 3 years)feasibility (max 10k over one year)capacity building (max 10k over one year)Eligibilityannual turnover of less than £150,000‘Scottish based organisation’must be established as ‘not for profit’ (CICs??)must constitute a ‘legal person’ i.e. be incorporatedbeen in existence for at least 12 monthsDeadline for applications: 29 November 2013SG will accept applications from organisations ‘who will be incorporated by 1 March 2014’.‘In subsequent years, only organisations which are already incorporated will be eligible to apply’.
5Incorporated v unincorporated Unincorporated – low cost, little regulation (unless a charity), no registration but no separate legal personality so individuals can be personally liableIf the organisation has employees, owns or leases property, or is raisingfinance…generally taking on risk, then it may make sense to use anincorporated vehicle – this is because – in most cases –incorporation and limited liability will provide some degreeof protection if things go wrong.
6Incorporated structures CompaniesCompany limited by guaranteeCommunity interest company (‘CIC’)Scottish Charitable Incorporated Organisation (‘SCIO’)
7Common features of incorporated options Two tier – ‘managers’ and ‘members’Directors/ trusteesMembersConstitution which sets outwhat the organisation can dowho its members arewho its directors are/how they are appointedpowers and responsibilities
8Company structureMost common form of vehicle used – tried and tested. Considered to be flexible.Company limited by guarantee – each member gives a guarantee that he will pay a certain sum to the company in the event that the company is wound up. A guarantee company cannot pay dividends to its members.Separate legal entity - so can enter into contracts in its own name; sue and be sued etc.Governing document – the articles of association (the ‘constitution’).Objects clause of the articles states what the company can do – its purpose. Social mission can be provided for here (or not).
9Companies contd. Regulation – Registrar of Companies Annual filing requirements (accounts; Annual Return)Event driven requirements (change of articles; resignation of directors)Limited liability – for the benefit of the members, not the directors.Directors’ dutiesCodified in Companies Act 2006To act within the powers given in the company’s constitutionPromote the success of the company (includes obligation to consider long term consequences of decisions; interests of employees etc etc)Exercise independent judgementExercise reasonable skill, care and diligenceAvoid conflicts of interestDon’t accept benefits from third partiesDeclare interestsSummary – act fairly, honestly and in the interests of thecompany
10Pros and cons of being a company tried and testedfunders comfortable with this kind of vehiclelimited liabilitydirectors’ dutiesConsneed to comply with Companies Act 2006 and other legislationdual registration and regulation for charitable companiesreporting requirementspublicity (e.g. accounts are public documents)directors’ duties
11Community interest company (CIC) Introduced 2005 to address the lack of an appropriate legal vehicle for non-charitable social enterprises.Just like a company (shares/guarantee), with some special features.A CIC must have a ‘social objective’ or rather must meet the ‘community interest test’ – this means that the CIC regulator must be satisfied that its purposes could be regarded by a reasonable person as being for the benefit of the community.And it must also have an ‘asset lock’ – means the CIC cannot generally transfer its business or assets for less than full market value or to another asset locked body. Also protection in the event that the CIC is wound up. Can be attractive to funders.CIC with shares can pay dividends to members – but there is a cap on how much can be paid out. Surplus assets must be recycled into CIC or to another charity. 20% of paid up value. Max 35% distributable profits.CIC without a share capital cannot pay dividends.Regulated by the CIC Regulator (effectively, Companies House).Compliance with company law and CIC Regulations.Annual accounts and Annual Community Interest Company ReportA CIC cannot be a charity.Useful halfway house for social enterprise where charitable status not available.
12Pros and cons of being a CIC members enjoy limited liabilitydoes not need to be (indeed cannot be) recognised as a charity and is therefore subject to less regulationcan act more commercially than charities (but remember grant criteria…?)not the same tax benefits as a charityregulation by CIC regulatorallows community benefit/ private gainallows equity investment but caps on returns (for CICs with shares)directors can all be paidConsits assets are subject to a ‘asset lock’ which means that all surplus assets must be retained for use for the company’s social or community purpose, and if transferred out of a CIC, the transfer must either (a) be made for full consideration; (b) generally be made to another asset locked body (a CIC or charity); or (c) be otherwise made for the benefit of the communityit cannot be a charityit does not benefit from as favourable tax treatment as that applied to charities
13SCIO“A new legal form which will allow Scottish charities to incorporate without having to become a company.”Long time coming. Discussions started in Came into force 1 April 2011.The main purpose of a SCIO is to give a charity the benefits and legal protection of an incorporated body - but without the perceived disadvantages associated with being a limited company or some other type of incorporated body.The SCIO is a form exclusive to Scotland, and will be subject to Scottish Charities legislation and regulation by OSCR (not the Registrar of Companies).A SCIO must meet the charity test.A company, charity or a CIC will be able to convert to a SCIO.Not to be confused with CIOs – the English equivalent.
14Where is the law?The Charity and Trustee Investment (Scotland) Act 2005sections 49 to 64 – contain authority for Scottish Ministers to make further provisions by regulation…The Scottish Charitable Incorporated Organisations Regulations 2011The Scottish Charitable Incorporated Organisations (Removal from Register and Dissolution) Regulations 2011OSCR guidance – ‘SCIOs: A Guide’
15SCIO minimum requirements Section 49 - must:-be a charityhave a constitution (which must include certain things)have a principal office in Scotlandhave at least 2 members (individuals)Section 50 - constitution must:-state name and purposesprovide for:-who is eligible for membership and how to become a memberfor the appointment of 3 or more persons to be trustees, and their eligibilitysuch other matters as may be required by the RegulationsSection 50(5) - subject to anything in its constitution, a SCIO has the power to do anything which is calculated to “further its purposes or is conducive or incidental to doing so”.
16Constitution Minimum requirements Regulations impose additional requirements on contents of constitution:-restriction on powersorganisational structureprocedural rules including:-how meetings are convenedrecords of meetingsquorumvoting rights of members and trusteeshow resolutions are passedprocesses for withdrawal and removal of members and trusteesRestrictions upon remuneration oftrustees which go beyond the restrictions in the Actprocedures for dealing with conflictshow surplus assets must be used on winding up or dissolution
17Other points to noteSome of the duties which apply to trustees of a charity will apply to members of a SCIO e.g. must act in interests of SCIO and with care and diligence of person managing the affairs of another person. Breach = misconduct in the administration of the SCIO.If SCIO ceases to be a charity, then it ceases to be a SCIO. What does this mean in practice?Winding up regulations provide for:-solvent winding up – like a ‘striking off’ of a company. Surplus assets must be transferred to another charitable organisation (in terms of SCIO’s constitution).insolvent winding up – treated like the bankruptcy of a person. OSCR to refer such an application to Accountant in Bankruptcy
18Pros and cons of being a SCIO separate legal personalitylimited liabilityonly registered with OSCRtax reliefsConsuncertainty e.g. what happens on a winding up?members have equivalent of some director’s duties?needs to be a charityother charity rules applyunfamiliar, particularly abroad?
20Conversion = change in legal form Essentially, conversion is a change in legal form, so could affect:-existing contractsemployees/pensionsproperty (vehicles; bricks and mortar)funding (bank & grants)…need to do due diligenceWhere a charity – is it in the best interests of the charity to convert?
21Conversion: processConversion of unincorp to:-SCIOCICcompany limited by guaranteeEach has different process.
22Case study: conversion of charitable unincorporated association to a SCIO
23Check existing constitution to confirm that organisation has the power to convert to another legal form.
24Conduct "due diligence" on existing organisation (e. g Conduct "due diligence" on existing organisation (e.g. identifying contracts, employees and assets and whether any third parties such as lenders will need to consent to the change).Draft up legal documents including new constitution (what works/doesn’t work with existing constitution?), OSCR forms and Transfer Agreement.Think about practicalities e.g. will bank insist on new accounts?
25Have members approve the "conversion" [subject to OSCR's consent] Have members approve the "conversion" [subject to OSCR's consent]. This is usually done at a meeting of the members, so bear in mind notice periods.
26Assuming members approve the conversion, seek OSCR consent to changes ("Stage 1 consent"). Amend and finalise legal documentation accordingly.