Readers will be aware there has been a consultation on a review of Scottish charity law. We have blogged on the consultation topics. We have also blogged on one topic that was not in the consultation. We now look at another issue we think is very much worth an update to the current legislation. The matter is the process by which trusts and unincorporated associations can transform into more modern, better and safer legal structures: incorporation.
We have talked about this before. The benefits include:-
- Limited liability. It avoids the risks of unlimited personal liability for trustees and members. And these are real risks that we do see come home to roost sometimes.
- It is the corporate entity rather than the trustees/members who enter into contracts, employ people etc.
- It is the corporate entity that holds title to property rather than trustees from time to time holding it for the trust/unincorporated association.
- It is easier and more cost-effective to document the change of trustees of a corporate entity.
- There are quirks of trust law that can be unhelpful for charities.
- Funders tend to prefer incorporated charities. Indeed, some funders exclude trusts and unincorporated associations.
- Prospective, quality trustees can be put off from becoming a trustee due to unlimited personal liability risks.
What is an incorporated legal structure?
It will be typically either a company limited by guarantee or a Scottish Charitable Incorporated Organisation (aka a SCIO). The latter is now far and away the most popular legal vehicle choice for new charities. Don't believe us, see the stats below. There are other more bespoke incorporated legal vehicles that might be used in particular circumstances. But for most, incorporation means becoming a company or a SCIO.
The current process
The current process is a bit cumbersome. It involves the setting up of a brand new charity and the transfer of assets from the unincorporated 'old' charity to the new incorporated charity.
The transfer of assets can, in some circumstances, be tricky. There can also be (significant) costs if the assets are more complex such as land. It might also be that third parties need to agree or consent to the transfer.
Where contracts are involved (with commercial parties or public sector), the proposed changes might trigger change of control provisions that mean consent is needed or it opens up an opportunity for the other party to try and renegotiate terms.
There might also be other regulators to deal with over and above OSCR.
There can also be the legal and practical fears attached to a loss of history or track record as the charity starts afresh as a brand new charity (number).
Of the c.24,000 charities registered in Scotland, the vast majority of those organisations have an income of less than £25,000. Streamlining and further simplifying the current path to incorporation for such smaller unincorporated charities would provide benefit to organisations who perhaps need it the most, and in doing so will introduce a much stronger and resilient basis for governance.
Others don't have to do this
There are processes whereby some existing charities (that do happen to have an incorporated status), do not have as cumbersome a process to go through. For example, a company or community benefit society that wishes to become a SCIO can 'convert'. That is a somewhat magical process.
The current e.g. company converts into the SCIO, it retains the same charity number and there is no need to transfer assets as it automatically happens under charities legislation. A much smoother, easier and cost-effective process.
And of course, for these charities, it will be a decision around future administrative ease of being a SCIO rather than the desire to move to a safer incorporated structure - they already had that advantage.
Was it meant to be thus and what could be changed?
The legislation perhaps was intended to give trusts and unincorporated associations a smoother path to incorporation and the movement of assets into the name and hands of a SCIO. But it has not ultimately played out that way and unincorporated charities do have a potentially cumbersome - and sometimes off-putting- journey to undertake to reach the 'safe haven' of incorporation.
The changes needed would be updated legislation to essentially reflect what happens for those already existing incorporated charities that want to be SCIOs. There should be a similarly magical process that 'converts' the trust or unincorporated association into a company or SCIO. A process that enables the same charity number to be kept, automatically transfers assets and rights without further work and generally means there is legal genealogical link from 'old' unincorporated charity to the 'new' incorporated format.
There is also the unimplemented Scottish Law Commission proposals on affording unincorporated associations a form of limited liability protection. That would be welcomed in many quarters. But that alone would be not sufficient. A smoother process for incorporation should also be put into legislation as the advantages of companies and SCIOs are not just about limiting liability.
Even with the current rules incorporation is a good thing
All existing trusts and unincorporated associations should consider incorporating. On the whole trusts and unincorporated associations are not good legal vehicles for any charity. Even with the current process, many, many trusts and unincorporated associations would conclude that incorporation is better for the charity.