SCIOs and conversions_Morton Fraser

Charity law training on
companies, SCIOs and
11 November 2013
Summary of today’s format
2.00pm – 2.15pm
2.15pm – 2.45pm
Presentation on incorporation
2.45pm – 3.30pm
Case Study
3.30pm - 4.00pm
Questions and answers/discussion
International Development
Small Grants Programme
• £500,000 per year 2014-2017
• 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’.
Incorporated structures
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.
Incorporated structures
• Companies
• Company limited by guarantee
• Community interest company (‘CIC’)
• Scottish Charitable Incorporated Organisation
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
Company structure
Most common form of vehicle used – tried and tested. Considered to be
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).
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
Pros and cons of being a company
• tried and tested
• funders comfortable with this kind of
• limited liability
• directors’ duties
• 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
• directors’ duties
Community interest company (CIC)
Introduced 2005 to address the lack of an appropriate legal vehicle for noncharitable 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.
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
can act more commercially than
charities (but remember grant
not the same tax benefits as a
regulation by CIC regulator
allows community benefit/ private
allows equity investment but caps
on returns (for CICs with shares)
directors can all be paid
• 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
“A new legal form which will allow Scottish charities to incorporate without
having to become a company.”
Long time coming. Discussions started in 1996. 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.
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’
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
• 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”.
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
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
• insolvent winding up – treated like the bankruptcy of a person. OSCR to
refer such an application to Accountant in Bankruptcy
Pros and cons of being a SCIO
• separate legal personality
• limited liability
• only registered with OSCR
• tax reliefs
• 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?
practicalities and legal
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?
Conversion: process
• Conversion of unincorp to:• SCIO
• company limited by guarantee
• Each has different process.
Case study: conversion
of charitable
association to a SCIO
• Check existing constitution to confirm that
organisation has the power to convert to another
legal form.
• 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?
• 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.
• Assuming members approve the conversion,
seek OSCR consent to changes ("Stage 1
consent"). Amend and finalise legal
documentation accordingly.
• Assuming OSCR issues "Stage 1" consent,
submit "Stage 2" consent request to OSCR.
• Assuming OSCR issues "Stage 2" consent,
execute Transfer Agreement etc.
• Notify OSCR that conversion has taken place.
Deal with practical matters such as changing
bank accounts, notifying suppliers and parents
• Don’t forget to notify HMRC of change
• Update website, letterhead etc
Further information
Contact details:
[email protected]
[email protected]

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