Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012

Tuesday 27th November 2012 Grand Committee

Considered in Grand Committee

16:11

Moved by

[Lord Wallace of Saltaire]

That the Grand Committee do report to the House that it has considered the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012.

Relevant Documents: 10th Report from the Joint Committee on Statutory Instruments

[Lord Wallace of Saltaire]

My Lords, the next two instruments on the Order Paper form part of a package of secondary legislation that will enable the implementation of the long-awaited charitable incorporated organisation. The package builds on the framework introduced by the previous Government in the Charities Act 2006, which is now consolidated in the Charities Act 2011.

The CIO is the first legal structure in England and Wales designed specifically and only for charities. Just over 80% of registered charities currently have an unincorporated structure, either as a trust or unincorporated association. But an unincorporated structure exposes trustees to potentially unlimited financial liability and means that contracts have to be entered, and property held, in the names of individual trustees. Many charities have sought the benefits of incorporation through incorporating the charity as a company limited by guarantee. This brings the benefits of limited liability for members, protection for trustees and, as the company has its own legal personality, makes it easier to enter into contracts and to hold property. I have to say that, before I began to get into the whole charities world, I had not realised just how many charities hold property.

The downside of incorporating a charity as a company is that it results in dual-regulation and registration under company law and charity law. The CIO is a structure that has the benefits of incorporation but is registered and regulated solely under charity law by the Charity Commission. It will represent a significant reduction in red tape for charities that want the benefit of limited liability.

Although the CIO model is intended to be a relatively easy way to set up and run a charity, it also has to be robust enough to inspire public confidence. As it has the benefits of limited liability, the CIO framework needs to provide the right level of protections for third parties which may wish to do business with the CIO, in particular lenders and contracting authorities. We believe that the draft package of secondary legislation achieves the right balance between ease of operation on the one hand and third party protections on the other. I hope that it will help noble Lords if I give a brief explanation of the instruments before us today.

16:15

The draft Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012, as their name suggests, provide for the insolvency and dissolution of a CIO. The regulations apply the range of insolvency procedures that are available to companies under the Insolvency Act 1986, modified where necessary to work for CIOs. This means, for example, that a creditor can bring about the dissolution of an insolvent CIO through a creditors voluntary liquidation or by petitioning the court for compulsory liquidation. The decision was taken early on that it would be more sensible to rely on existing, tried and tested insolvency procedures under the Insolvency Act rather than attempt to reinvent the wheel and come up with new, bespoke procedures. However, the regulations provide for a non-Insolvency Act route to the dissolution of a solvent CIO. This is expected to be a popular method of dissolving a CIO, as it is simpler for the trustees of a solvent CIO than the options open under the Insolvency Act.

The draft Charitable Incorporated Organisations (Consequential Amendments) Order 2012 makes several changes to primary legislation. The order applies the disqualification regime under the Company Directors Disqualification Act 1986—the CDDA—to the trustees of CIOs. This means that a CIO trustee can be disqualified under the CDDA in the same way as a company director, and any trustee of a CIO disqualified under the CDDA is also disqualified from acting in positions, including as a company director and a trustee of a charity. The order ensures that employees of insolvent CIOs receive protections in line with European requirements enshrined in the Employment Rights Act 1996. The order makes provision for eight new specific rights of appeal or application to the First-tier Tribunal (Charity) where the Charity Commission has made a decision about the dissolution of a CIO.

The Charity Commission has been closely involved in the development of the CIO and the package of secondary legislation, and it is ready for and supports implementation. In developing the CIO framework, we have also consulted closely with the Insolvency Service and other experts in government, as well as private sector insolvency and charity law experts, to ensure that the CIO framework will be effective.

Subject to Parliament’s approval of these instruments, the intention is for implementation of the CIO to be phased, starting immediately. We need to be mindful of the Charity Commission’s limited resources, which will be overwhelmed if the anticipated flood of applications is not regulated. My honourable friend the Minister for Civil Society has agreed a phased implementation timetable with the Charity Commission, which was set out in a Written Ministerial Statement on 30 October. Separate regulations will be made next year to provide for corporate conversions into CIOs. This means that some charities will have to wait a little while longer before the CIO is available to them, but I hope that noble Lords will understand the rationale for this.

I am confident that the CIO will be a very popular and beneficial legal structure for charities, and I therefore commend these instruments to the Committee. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, I welcome the regulations. They are an extremely useful and important addition to the charity regulation framework. I have carried out two reports for the Government, the first called Unshackling Good Neighbours and the second the review of the Charities Act, Trusted and Independent—I should like to say to the Minister how helpful his staff were in the preparation of that; they worked very on it and were of great assistance. In both those reports, it was clear that the absence of any legal air cover was a considerable deterrent to people serving as trustees. People feel, rightly or wrongly—despite the lawyers saying that there are no cases—that there is a risk. The regulations provide an important bit of air cover that will encourage them to come forward and serve as trustees.

I hope, however, that the Government will not forget about the importance of finding ways in future to afford additional protection to volunteers. I know that the provision of protection is not part of these statutory instruments and I understand why it could not be included. However, volunteers remain concerned about what they see as counterintuitive judicial decisions that leave people feeling exposed when they are undertaking one sort of volunteering activity or another.

These statutory instruments are important, valuable and welcome. As my noble friend on the Front Bench said, the protection carries with it privileges—and with privileges comes responsibility. We need to stress this is because there cannot be a register of charges. Therefore, to some extent creditors between each annual report are flying blind. That is inevitable; we cannot get round it. We must emphasise to trustees of CIOs that they have a responsibility to behave properly. It would be a terrible shame if this new and very valuable corporate form were to be damaged by early malfeasance and misadventure. Equally, it would be helpful if the Minister would confirm that the normal provisions of corporate behaviour will apply to trustees of CIOs. As any director of a limited company knows, trading while insolvent is the most serious thing for which you are personally liable. This should apply to CIOs that act improperly.

I was pleased to hear the Minister talk about the ability to disqualify trustees of CIOs, and to apply the disqualification regulations to them. Perhaps I could nudge his elbow again. The Charity Commission is very limited in its powers to stop trustees of charities—not CIOs—who have behaved badly from becoming trustees of other charities. Trustees can move around quite easily. We need to find ways to ensure that the Charity Commission can keep the rotten apple out of the barrel, and prevent it finding somewhere else in the barrel a bit later.

I share the Minister’s view that this has been a long time coming. The Charities Act became law in November 2006. It is now the end of November 2012. Even by the standards of Whitehall, progress can best be described as glacial. As he warned us, some timetabling issues lie ahead. The Explanatory Notes make it clear that new CIOs will come into force reasonably quickly. Perhaps the Minister will confirm when the commencement provisions will be laid. Obviously we are some way away from the conversion of existing CIOs. After six years it is not surprising that there is a certain amount of pent-up water behind the dam. I hope that the Government will find ways to encourage the Charity Commission to use modern, online techniques and proceed as quickly as possible to a situation where every trust that wishes to convert to a CIO is able to do so.

Perhaps I may raise with the Minister another bee in my bonnet. It concerns repetitive, duplicative and overlapping returns. I am not sure where we are on the return that a CIO will make to the Charity Commission. We want to make sure that it is as focused as possible. Less is often more. There is the example where we have our credit cards changed and we get four pages of closely packed type telling us that there have been changes, not particularly identifying what is what and what has been changed.

I hope that when the new forms are prepared, we really focus on what is needed, not just have a splash of paint across the whole of the subject. Information takes a lot of getting together for charities; it is a great source of economic friction for them. Sometimes they feel that a hell of a lot of information has to be collected for not much purpose other than ticking a box. We want to ensure that we are gathering information that really helps the monitoring—for the public and the supporters of those organisations to decide whether they are good and worth while.

The Minister will not expect me to leave the subject without saying that, for a year and a half now, we have been pressing the Charity Commission and Companies House to find a way to agree an individual return. There are more than 30,000 charitable companies who are making two separate returns. It cannot be beyond the wit of man, let alone the wit of Companies House and the Charity Commission, to find a single form that could serve both purposes. That would be 30,000 forms in the bin.

With that rather disobliging remark at the end, I entirely welcome the regulations, but they will reach their full flowering only when every charitable trust that wishes to convert anywhere in the country, whether old or new, big or small, rich or poor, can do so. I hope that the Government will ensure that pressure is kept on the Charity Commission so that that happens as soon as possible.

[Lord Methuen]

My Lords, as chairman of the trustees of an almshouse trust, we have been considering going the alternative way of incorporation. We welcome the measures and shall be examining them at our meeting on 7 December. We think that this is a much better way to go than the current incorporation methods. We welcome the protection that this will give our trustees and hope, as the noble Lord said, that it will encourage more people to come forward as trustees.

[Baroness Hayter of Kentish Town]

My Lords, I will try to resist the temptation to say that if the wit of man cannot get those two bodies to work together, perhaps the wit of women in the two organisations may be able to achieve that.

First, I should declare my interest as a trustee of various charities now and of even more over many years previously. Indeed, I have been caused much pain at earlier times by running non-incorporated charities, which often meant scuttling around London trying to get trustees’ signatures on property deals and, sadly, occasionally, trying to get death certificates for recently deceased trustees, often at a very sensitive time for the family, because there was some urgent legal or Charity Commission document that needed completing. In one case, I was dealing with a potential £1 million liability on individual trustees—one of them at that time a Member of your Lordships’ House—who, before I had advised them, had signed a document for a rather silly 25-year lease with, I believe, the Duke of Westminster, on a rather large property in Grosvenor Crescent. I should add that, once I took over, we rapidly incorporated it and that was the end of that.

I very much welcome the introduction of the charitable incorporated organisation structure, which, as has been said, will make this easier to access and cut out dual regulation on SORPs as well, on all the accounting rules which are also not quite the same for the two types of organisation.

As both the Minister and the noble Lord, Lord Hodgson of Astley Abbotts, said, the regulations are long overdue in introducing the new regime. They were legislated for in 2011, but the first will roll off the assembly line only early in spring of 2013. Given the Government’s desire, I am sure, to champion enterprise and the big society, we hope that they will move as fast as they can to facilitate the work of charities.

As the noble Lord, Lord Hodgson of Astley Abbotts, has said, the slow introduction has been a source of frustration for many charities, some of which unfortunately could no longer afford the wait or uncertainty and have had to incur the expense of becoming a company limited by guarantee under the existing rules. Nevertheless, single registration will undoubtedly reduce administration time and costs, with only one annual report and all that sort of thing, so we welcome it.

16:30

The regulations achieve, as the Minister said, a fair balance between the advantages of limited liability and the need for administrative ease with a regulation to protect charities’ assets and encourage public confidence. Indeed we have seen in Scotland, which I think is slightly ahead of us—not for the first time—that there is clearly demand for this model; in the first year, take-up was around 20% to 30% of new registrations there. We will watch with interest what happens in England and Wales, and we encourage the commission actively to promote the benefits of incorporation through this method to new registrants.

It is regrettable, though, that there is no actual conversion process for unincorporated charities, meaning that those charities will need to create a new CIO, transfer assets and wind up their existing charity. Where a permanent endowment is involved, that may not be straightforward. In fact, until rules regarding the register of mergers are resolved, the shell charity may need to be retained in order to guarantee future legacies. I am sure that people are aware of that and are looking into it.

The Minister will expect me to have one or two questions and I will not let him down. First, Regulation 11 states that if property is received by the CIO prior to dissolution but after the application for dissolution has been made, the trustees must either withdraw the application or send a statement to the commission explaining how the property has been or is to be applied on dissolution, in accordance with the charity’s aims. However, it will not have escaped the Minister’s notice that it is possible that the charity is seeking dissolution because the original purposes for which it was set up no longer exists, or the charity may be in a state where it does not have a functioning infrastructure. In either case, it is hard to see how the new property could be applied in accordance with the charity’s constitution. Perhaps, therefore, just as Regulation 23 establishes that on dissolution the property of the charity vests in the official custodian, there could be a similar option for new property in the circumstances that I have outlined.

Secondly, Regulation 14 requires trustees, in circumstances where an “insolvency event” occurs between an application for dissolution and the dissolution itself, to inform the commission on the day that the event occurs and withdraw the application for dissolution. If I have read this correctly, they will be guilty of an offence if they do not do so that day, unless they were unaware of the application for dissolution or took reasonable steps to fulfil their duty. However, that is not quite sufficient for these cases. Given that volunteer trustees are very part-time and often based some way away, it could easily be the case that there would be a delay between the insolvency event and the charity trustee becoming aware of it, especially if the administration application was made by a third party. As the regulation stands, while being unaware of the application for dissolution provides a defence, there appears to be no such defence based on being unaware of the insolvency event. It is also difficult to see how the “reasonable steps” defence could work, as one cannot take reasonable steps in response to an event that one is not aware of. I therefore wonder whether the Government considered that the duty on the trustee should be to inform the commission and withdraw the application on the day they became aware of the insolvency event. That might actually be a slightly more reasonable wording.

Thirdly, Regulation 40, on page 16 of this document, states that where the commission restores a previously dissolved CIO to the register, any property vested with the official custodian reverts to the CIO from the date of restoration. However, it is quite likely or possible that some property may have been disclaimed by the official custodian under Regulation 27. Have the Government considered clarifying the regulation to specify that only property which vests in the official custodian on the date of restoration should be restored to the CIO?

I know the Minister will have answers to these questions; I have seen the pieces of paper going towards him. The queries do not undermine our support for this, but having been involved in insolvencies—as he will have gathered—for a bit of time, one cannot help but notice the small print.

[Lord Wallace of Saltaire]

My Lords, I thank the noble Baroness, Lady Hayter, for her questions. She asks fewer questions than many Front-Benchers from the Opposition, and they are always extremely well thought through. She explains what she is asking, so it is possible to write down each question as she asks it—unlike some of her colleagues, who fire questions so rapidly that it is impossible to write them down or remember them afterwards.

I am extremely grateful that, some years ago, I became a trustee of two musical charities before I realised that I would have to learn so much about the enormously complicated world of charities. I am even more surprised to discover now as I read through the material that what I thought were two small charities—one with a turnover just short of £500,000 and the other with a turnover of about £250,000 a year—rank as medium, or even on the fringes of large charities. There are many that are much smaller than that in terms of their turnover.

I apologise that it has taken so long to come to this, but if the Government are at fault, it is partly because they have spent such a long time consulting all the affected parties. It is also the case that the insolvency issues have been extremely complicated, and getting the question of insolvency and dissolution right—which involved an external review by insolvency and charity law specialists—was something that we wanted to make sure we achieved. Charities law, as Members of the Committee will know, is a very complex and specialised field—it is only about 500 years old as it has slowly developed—so when we make changes, we want to make sure that what we are doing will stand for a considerable period.

I take the point made by the noble Lords, Lord Hodgson and Lord Methuen, about encouraging volunteers to come forward and limiting the liability of trustees and other volunteers. We note and welcome the two reports by the noble Lord, Lord Hodgson, Unshackling Good Neighbours and his very large and worthwhile review of the Charities Act 2006. We are alive to his concerns and, while we cannot at this point say anything specific, we hope that there will be a response to this in reasonable time.

The noble Lord, Lord Hodgson, also raised the question of powers to ban trustees. The Charity Commission has very wide powers to suspend or remove trustees; we nevertheless recognise, as he pointed out in his Charities Act review, that there are one or two gaps in the Charity Commission’s powers, and this is something that we look to address. Of course, the conversion into charitable incorporated organisations will do something to resolve this issue.

The noble Lord, Lord Hodgson, also raised the provision of training for trustees of charitable incorporated organisations. That is something on which we will have to consult the Charity Commission. I take the point, however, that if company directors are now to receive more effective training, that should apply also to trustees. From my own limited experience, I have learnt that one needs someone with considerable legal skills as well as someone with very useful accounting skills on any board of trustees of a charity with a reasonable turnover.

The question of when charitable companies will be able to convert to charitable incorporated organisations has been left to the last phase. According to my notes, charitable companies will be able to convert in the course of 2014, which will also be phased in by size of turnover. Separate conversion regulations will be laid in 2013.

The noble Lord’s point about repetitive reports and returns will of course be eased by the transition; indeed, part of the purpose of moving towards charitable incorporated organisations is precisely to simplify the level of returns that charities and charitable companies have to provide and to reduce duplication.

The noble Baroness, Lady Hayter, raised the question of shell charities and their necessary continuation. This is a very complex area, particularly, as she remarks, because of the issue of legacies and wills that have been written a very long time before. I am not entirely sure what the answer to this is, and I will write to her with more detailed concerns.

I am very struck by the issue of what one might call moribund charities. I am struck by the fact that some of the new community foundations in Yorkshire have been doing useful work in discovering charities that are in effect simply sitting on assets that are no longer used, and persuading them to dissolve or merge into the community foundations and use those assets now for more appropriate, but related, functions.

The noble Lord, Lord Hodgson, asked why we do not have the general regulations and the commencement order, and how that will all be brought into force. The general regulations are subject to the negative resolution procedure and therefore cannot be laid in draft. They, along with the commencement order and the draft instruments that we are considering today, will all be made at the same time once both Houses have approved these affirmative instruments. A draft copy of the general regulations is annexed to the Explanatory Memorandum to the dissolution regulations.

I hope that I have covered all the necessary points. On the question of criminal liability if, on the dissolution of a CIO, one of the trustees is unaware of an insolvency event, I congratulate the noble Baroness on the detail and technicality of her question, and I hope she will accept that I will have to write to her with the answer.

Having answered those points, I hope that all Members of this Committee will welcome this order; it has taken rather longer than many of us would have liked but it is now coming in. It is actually a major and very constructive development for the charity sector. I therefore hope that it will receive a welcome and that we will begin to see this new form of charitable status taking effect over the next three to four years.

Motion agreed.