Close Up on the Model (Constitutions)

News

05 April, 2011

The Charity Commission has this week released both its guidance for the creation of a Charitable Incorporated Organisation (CIO) and the model constitutions they are to adopt. A CIO is a new legal entity, capable of entering into its own contracts and providing its trustees and members with limited or no liability for the charity's debts. Though having a corporate structure, the CIO will not be a company and thus the dual regulation imposed by both the Charities Commission and Companies House on trustees of charitable companies has been removed. Indeed, it was the desire to simplify the rules governing incorporated charities, as highlighted by the response to the previous public consultation held in late 2008, which has formed the basis of the model constitutions.

Trustees of new CIOs will be able to adopt one of two forms of model constitutions: the Foundation Model, aimed at much smaller charities whose only voting members will be the charity trustees; and the Association Model for larger charities with a wider membership.

Of key importance to trustees is the essence of the corporate structure limited liability. Under both models the constitution will provide either for the members to have no liability for the charity's debts, or liability limited to a certain nominated amount.

The new constitutions indicate that the Charity Commission has considered several of the changes as proposed in the consultation; the minimum age for trustees will be set at 16 and all trustees will owe to the CIO a general duty to exercise reasonable care and skill. To avoid uncertainty and mismanagement this standard cannot be lowered. Any conflict of interest will be dealt with in the standard charity law manner; trustees will have to declare any interest in proposed transactions and absent themselves from further discussion on the matter.

As a corporate structure, both of the CIO constitutions provide for members. Under the Foundation model all the members will also be the trustees, so there will still be a requirement to be aware of the capacity in which the individuals concerned are making any particular decision because some must be made by members.

The Association model allows for a much wider membership, potentially open to interested persons and is more like a traditional company structure in which a committee runs the entity under the ultimate control of the larger body of members. Such a CIO will be allowed to charge a reasonable membership fee and create different membership rights. Thus whilst all members will be able to enjoy any benefits of membership, only some may be entitled to vote. Such votes will have to be exercised to remove trustees, alter the constitution and dissolve the CIO much the same as in company law.

Though the regulations that are to further govern the operation of CIOs are yet to be discussed by Parliament, it is expected that any changes will be minor.

There will be no obligation on either the CIO or the Commission to keep a register of charges (such as mortgages) over CIO property. Nor will there be provision to issue debentures. Though, as for any corporate body, accounts will still be needed according to regulations, such regulation will now only come from the Charity Commission. Furthermore, it is expected that smaller CIOs will need only file much simpler receipts and payments accounts.

The fact that the regulations are expected to allow existing charitable companies to simply re-register as a CIO with a new consitution emphasises the Commission's view that the running charities should be made much easier for those trustees who feel limited liability protection is necessary. How re-registrations will work in terms of continuity of banking and insurance etc and the possible operation of the TUPE Regulations in relation to employee contracts will need to be clarified.

The CIO constitutions do now hold out the promise of a simpler regime for the administration of limited liability charities. The timescale for new formations and re-registrations to become available is not yet known so corporate charities planning to convert should keep up with all compliance requirements until actually becoming CIOs and not let problems arise which could get in the way of the conversion.

We will track the progress of the implementing regulations and provide more updates nearer to the time that CIOs become a reality at last.

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