1. Charity law training on companies, SCIOs and conversions 11 November 2013

2. Summary of today’s format
2.00pm – 2.15pm    Introductions      
2.15pm – 2.45pm    Presentation on incorporation
2.45pm – 3.30pm Case Study
3.30pm pm Questions and answers/discussion

3. International Development Small Grants Programme
£500,000 per year
Types of grant:-
project (max 60k over 3 years)
feasibility (max 10k over one year)
capacity building (max 10k over one year)
Eligibility
annual 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 incorporated
been in existence for at least 12 months
Deadline for applications: 29 November 2013
SG 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’.

4. Incorporated structures

5. Incorporated v unincorporated
Unincorporated – low cost, little regulation (unless a charity), no registration but no separate legal personality so individuals can be personally liable
If the organisation has employees, owns or leases property, or is raising
finance…generally taking on risk, then it may make sense to use an
incorporated vehicle – this is because – in most cases –
incorporation and limited liability will provide some degree
of protection if things go wrong.

6. Incorporated structures
Companies
Company limited by guarantee
Community interest company (‘CIC’)
Scottish Charitable Incorporated Organisation (‘SCIO’)

7. Common features of incorporated options
Two tier – ‘managers’ and ‘members’
Directors/ trustees
Members
Constitution which sets out
what the organisation can do
who its members are
who its directors are/how they are appointed
powers and responsibilities

8. Company structure
Most 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).

9. Companies 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’ duties
Codified in Companies Act 2006
To act within the powers given in the company’s constitution
Promote the success of the company (includes obligation to consider long term consequences of decisions; interests of employees etc etc)
Exercise independent judgement
Exercise reasonable skill, care and diligence
Avoid conflicts of interest
Don’t accept benefits from third parties
Declare interests
Summary – act fairly, honestly and in the interests of the
company

10. Pros and cons of being a company
tried and tested
funders comfortable with this kind of vehicle
limited liability
directors’ duties
Cons
need to comply with Companies Act 2006 and other legislation
dual registration and regulation for charitable companies
reporting requirements
publicity (e.g. accounts are public documents)
directors’ duties

11. Community 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 Report
A CIC cannot be a charity.
Useful halfway house for social enterprise where charitable status not available.

12. Pros and cons of being a CIC
members enjoy limited liability
does not need to be (indeed cannot be) recognised as a charity and is therefore subject to less regulation
can act more commercially than charities (but remember grant criteria…?)
not the same tax benefits as a charity
regulation by CIC regulator
allows community benefit/ private gain
allows equity investment but caps on returns (for CICs with shares)
directors can all be paid
Cons
its 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 community
it cannot be a charity
it does not benefit from as favourable tax treatment as that applied to charities

13. SCIO
“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.

14. Where is the law?
The Charity and Trustee Investment (Scotland) Act 2005
sections 49 to 64 – contain authority for Scottish Ministers to make further provisions by regulation…
The Scottish Charitable Incorporated Organisations Regulations 2011
The Scottish Charitable Incorporated Organisations (Removal from Register and Dissolution) Regulations 2011
OSCR guidance – ‘SCIOs: A Guide’

15. SCIO minimum requirements
Section 49 - must:-
be a charity
have a constitution (which must include certain things)
have a principal office in Scotland
have at least 2 members (individuals)
Section 50 - constitution must:-
state name and purposes
provide for:-
who is eligible for membership and how to become a member
for the appointment of 3 or more persons to be trustees, and their eligibility
such other matters as may be required by the Regulations
Section 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”.

16. Constitution Minimum requirements
Regulations impose additional requirements on contents of constitution:-
restriction on powers
organisational structure
procedural rules including:-
how meetings are convened
records of meetings
quorum
voting rights of members and trustees
how resolutions are passed
processes for withdrawal and removal of members and trustees
Restrictions upon remuneration oftrustees which go beyond the restrictions in the Act
procedures for dealing with conflicts
how surplus assets must be used on winding up or dissolution

17. Other points to note
Some 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

18. Pros and cons of being a SCIO
separate legal personality
limited liability
only registered with OSCR
tax reliefs
Cons
uncertainty e.g. what happens on a winding up?
members have equivalent of some director’s duties?
needs to be a charity
other charity rules apply
unfamiliar, particularly abroad?

19. Conversions: practicalities and legal issues

20. Conversion = change in legal form
Essentially, conversion is a change in legal form, so could affect:-
existing contracts
employees/pensions
property (vehicles; bricks and mortar)
funding (bank & grants)
…need to do due diligence
Where a charity – is it in the best interests of the charity to convert?

21. Conversion: process
Conversion of unincorp to:-
SCIO
CIC
company limited by guarantee
Each has different process.

22. Case study: conversion of charitable unincorporated association to a SCIO

23. Check existing constitution to confirm that organisation has the power to convert to another legal form.

24. Conduct "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?

25. Have 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.

26. Assuming members approve the conversion, seek OSCR consent to changes ("Stage 1 consent"). Amend and finalise legal documentation accordingly.

27. Assuming OSCR issues "Stage 1" consent, submit "Stage 2" consent request to OSCR.

28. Assuming OSCR issues "Stage 2" consent, execute Transfer Agreement etc.

29. Notify OSCR that conversion has taken place
Notify OSCR that conversion has taken place. Deal with practical matters such as changing bank accounts, notifying suppliers and parents etc.

30. Don’t forget to notify HMRC of change
Update website, letterhead etc

31. Further information Contact details: adrian.bell@morton-fraser.com