Charitable Incorporated Organisations

Of the reforms brought in by the Charities Act 2006 (now absorbed into the Charities act 2011) the introduction of a new legal form the Charitable Incorporated Organisation, (“CIO”) is one of the most daring. The concept is simple, at present Charities can operate in a number of different forms trust, companies both limited by guarantee and more rarely limited by shares, or even as a simple unincorporated association. In addition to these are corporate bodies such as industrial and provident societies. The basic idea of introducing a bespoke corporate form designed for charities is sound. The difficulty with new ideas including this one, is that it is very difficult to design something new without reference to all that has gone before.

The desire to introduce a new form originated from the perception that charities often had to accept a dual regulatory burden if they wanted to have corporate personality. Compliance with charity law and companies legislation amounted to an undesirable administrative burden. The basic idea is now at least 6 years old and there are now some commentators who suggest that the opportunity for this initiative have passed.

The pioneers of actually introducing this form are the Scots. New Scottish charities have been able to adopt this legal form since April 2011. Some existing charities have also been able to convert from April 2011 and Scottish charitable companies are also now able to apply. Larger charities may, however, find conversion less attractive as they are familiar with and used to the current level of regulation and have adopted systems to cope. It is also possible that converting two charitable incorporated organisations may create problems of differing nature. Firstly there may be problems with credibility in that the form of charity will not be familiar to the public, so the words “CIO” may take some time to become familiar. Apart from these difficulties there may also be some underlying technical difficulties with the law.

It is thought that the success of the CIO will lie in its simplicity and its treatment to light touch regulation. However, such simplicity might actually create problems in that there may be gaps in the law. This simplicity and reduced regulation may be superficially attractive, but might masquerade major gaps in the law which have yet to be filled in, at least in England and Wales. Filling the gaps can be done by case law or by the passing of regulations.

In my experience another area of law where large scale conversion from one legal form to another was envisaged is that of industrial provident societies. The Industrial and Provident Societies Act 1965 also has deceptively simple provisions for conversion or transferring of engagements between companies or other industrial and provident societies with one another. In the 1965 Act there are only 5 sections which deal with conversion. These sections are drafted very simply and very widely. There are a few examples of cases where the transfer of engagement has been challenged and given rise to the principle that statutory assignment by operation of law overrides contractual agreements agreed between the parties. The case law under the Industrial and Provident Societies Act 1965 has established that the statutory transfer is an overriding transfer capable of overriding the usual procedure for transferring property. The overriding nature of statutory transfer is reflected in the new Part 11 to the Charities Act 2011, specifically Section 250. That Section provides that if the power of statutory transfer is used there will be no breach of covenant or condition or forfeiture under any contract or lease as a result of using this power. In this way Part 11 of the Charities Act 2011 does attempt to address gaps in the law that became obvious under the Industrial and Provident Societies Act 1965. Whether it does so remains to be seen.

The remaining gaps in the law are subject to the drafting and passing of regulations. Those regulations have been prepared, but are not yet in force. They are voluminous in nature and address much of the detail which is lacking in the statutory provisions. The fact that the regulations are so voluminous demonstrates how difficult it is to truly invent a radical new form for charities. The aim of the CIO was to design a simple new form. However, the CIO may evolve into a vehicle which resembles a company just because the natural instinct is to keep familiar provisions if possible and close off any legislative gaps. One has to ask that if the CIO in England and Wales begins to resemble a charitable company limited by guarantee, what is the point? The amount of regulations required to establish an entrenched procedure for converting to a CIO may well be the reason why the English and Welsh CIO is trailing behind the Scottish version.

In summary, new forms often create new problems, the new CIO may lack public awareness and credibility, and the radical new form may end up looking suspiciously similar to a charitable company limited by guarantee. The simplicity may be compromised by an effort to regulate away the uncertainty inherent in producing new forms.