Keep an eye on Charitable Incorporated Organisations and FE colleges

Charitable Incorporated Organisations (CIOs) are a corporate structure designed for the specific and sole use of charities. Introduced by the Charities Act 2011, this corporate vehicle seeks to provide eligible organisations with the corporate tools likely to help a charitable organisation become more effective. The concept is not yet a live one but is expected to be so in the coming months.

Registered in the Register of Charities and regulated by the Charity Commission, this vehicle provides eligible organisations with a separate legal personality, allowing these to be able to contract and hold property in their own name. In the same way as for limited liability companies, registration with the Charity Commission will provide protection from liability to an organisation’s trustees and members.

Unlike limited companies, however, CIOs will not have to be registered with Companies House and company law regulations will not apply. Therefore, CIOs have less onerous reporting and accounting requirements than limited companies, subject to the only requirements of preparing an annual report and an annual return to be filed with the Register of Charities.

The Charity Commission is the body responsible for filing the details of a CIO, including its financial standing and details of the trustees and members. Unlike Companies House, however, it will not have a web-based public register of charges over the properties owned by a CIO and of the particulars of debentures issued.  This limited transparency could therefore make CIOs less attractive to large charities and, in particular, charities that seek to raise funds through issuing debentures and those that routinely borrow money against the security of their property.

In fact, the organisations most likely to be interested in this corporate model are brand-new charities and existing medium-sized unincorporated charities that would like to convert to a CIO to acquire the benefits under the Charities Act 2011. From 2013, provisions will also be made to allow industrial and provident societies and Community Interest Companies (CIC), a model typically used for social enterprises, to convert into a CIO. The Act provides that both directors and members of a CIO are required to act in a way that is most likely to further the charitable purposes of the organisation, a duty which is likely to help mitigating the commercial outlook of a newly acquired corporate structure.

Applicants should also consider that incorporation or conversion to a CIO may take longer than the incorporation procedure of a limited company. As a matter of fact, an organisation will have to prove eligible to register as a CIO and the Commission usually takes up to 40 days to evaluate the application. On the other hand, registration and filing of the information to the Register of Charities is free, making this a relatively affordable exercise. To avoid disappointment, the Act provides a check-list of all the constitution documents necessary to apply to the Charity Commission, conscious that failure to satisfy these requirements will likely lead to the Commission rejecting the application.

A CIO could become a vehicle of great interest for FE Colleges set up as a charitable company, which, through a relatively straightforward procedure, would be able to gain charitable status while maintaining its corporate body. In essence, the conversion process will not affect the business relationships of the organisation or its legal personality and will see the properties of the company simply being transferred to the newly formed CIO.

An FE College will, however, have to set a CIO before any property can be transferred to this. The process will also require that all suppliers, banks and funders of the transferring charity are notified of the transfer and of the new entity. Consequently, novation of all agreements is likely to be necessary in favour of the newly registered CIO.

Once approved as a CIO, the Act provides that a charity can amalgamate with one or more other CIOs as long as a qualified majority of 75% is achieved at a general meeting or a written resolution agrees unanimously to the amalgamation. The same procedure would apply if a CIO wishes to transfer all of its property, rights and liabilities to another CIO. This provides a more onerous requirement compared to that for a limited company, which would be satisfied with a written resolution with a qualified majority.

FE Colleges will be able to submit applications to register as CIOs from March 2013, while FE Colleges operating in the form of existing charitable companies will have to wait until 2014 to be able to convert to a CIO. With these deadline fast approaching, the Ministry of Civil Society is expected to be releasing in the New Year further statutory instruments regulating the conversion procedure, instruments that are likely to call to action FE Colleges in a wide spread reform of their corporate structure.

Matthew Kelly is a partner at law firm Thomas Eggar, which handles a wide range of related litigation, such as issues relating to FE governance and capital projects