Analysing the foundation model for charitable incorporated organisations

In my last article on this topic (Solicitors Journal, Vol 156 No 45, 27 November 2012) I reported that the requisite secondary legislation was before parliament and that it was expected to become law by the beginning of this year. All three statutory instruments (the General Regulations (No 3012) 2012; the Insolvency and Dissolution Regulations (No 3013) 2012 and the Consequential Amendments Order (No 3014) 2012 are now operative.

Charitable incorporated organisations (CIOs) have arrived at last. It has been a long and wholly unjustified wait but CIOs will be welcomed by anyone wishing to establish a charity in corporate form. It is reasonable to assume that in time very few new charities will be formed by way of a company limited by guarantee. We have yet to see how many existing companies will decide to convert.

Patience is still necessary as the Charity Commission is processing CIO applications only in accordance with a timetable based on the nature and size of the charity concerned. Applications are now being accepted for completely new charities with anticipated annual income in excess of £5,000. Starting in March 2013, applications will be taken from the largest existing unincorporated charities that wish to transfer their activities to a CIO and by early next year that facility should be available to all existing unincorporated charities, even those with an annual income of less than £5,000.
Charitable companies will have to wait until an as yet unspecified date in 2014 before they can convert. The ability to become a CIO is available only to charities subject to regulation by the commission so that exempt charities are excluded.

Creating a constitution

The online application process is similar to that for any other charity but, unlike other forms of charity, a CIO comes into being only when it is registered. Trustees must make the usual declaration but the key document is the constitution, the applicable statutory requirements for which are contained in section 206 of the Charities Act 2011 and in regulations 13-15 of the ?General Regulations.

The commission has published two models. One is the foundation model where the only members are the charity trustees. In the association model there is provision for a separate membership.

It is unfortunate that having helpfully classified the foundation CIO as one whose constitution requires its members and its charity trustees to be one and the same persons, statute requires that certain decisions must be made by the members as such. This necessitates the constitution setting out the procedural requirements for meetings of members in addition to those for meetings of the charity trustees.

Section 206 requires the constitution to be in the form specified by the commission or 'as near to that form as the circumstances admit'. It seems that the commission will not insist on its models being used, which is just as well as many practitioners will want to develop their own precedents. The present model can be criticised on drafting grounds. For example, the interpretation clause comes at the very end and defined terms are not indicated in the text.
The arrangement of clauses is unsatisfactory and there are some actual errors euphemistically described in the trade as 'typos'. Clause 26 empowers the charity trustees to make rules stating that they must be made available to any member on request. The inclusion of this provision is surely a mistake as by definition all members are themselves charity trustees.

Perhaps of more concern is the use of the term 'objects'. These are to be set out in clause 3. The Act, however, refers to 'purposes', and although a marginal note to the model implies that objects mean more than just purposes, this seems to be a distinction without a difference.

Overloaded

On the one-size-fits-all basis, the model comes with a range of options that lay people are likely to find confusing. For example, clause 8 offers the opportunity to provide for members to contribute on winding up but unlike the case of a company limited by guarantee there is no obligation to do so.

It is hard to see why anyone should seek the reincarnation of what was always a fiction just as it is hard to imagine that a CIO would wish to use a seal. There is provision for the creation of what is described as an 'informal or associate (non-voting) membership'. This seems completely at odds with the basic concept ?of the foundation CIO.

My main criticism based on years of trying to persuade clients to take an interest in even the simplest form of legal agreement is that the model is overloaded with clauses which have nothing to do with the constitution as such.
The commission justifies this on the grounds that these clauses act as a prompt to good practice, completely overlooking the reality that the longer the document the less the chance of any of it being read.
I hope that before long the commission will produce, as it has indicated it will consider, either a range of models that can be selected according to circumstances or a very simple basic model to which additional clauses can be attached.