Introduction You may recall that in April 2010 we reported on the Scottish Government’s consultation paper on Scottish Charitable Incorporated Organisations (“SCIOs”), and the feedback the Government had received on that consultation. To re-cap, a SCIO a new type of legal entity – it is a charity which attracts limited liability, but which is not a company. The Consultation Paper set out options for the legal form and regulation of SCIOs.

Another important stage has now been reached with the publication in October of draft Regulations which flesh out the provisions dealing with SCIOs which are contained in the Charities and Trustees Investment (Scotland) Act 2005 (the “2005 Act”). The draft Regulations are:-

  • the draft Scottish Charitable Incorporated Organisations (General) Regulations 2011; and
  • the draft Scottish Charitable Incorporated Organisations (Removal from Register and Dissolution) Regulations 2011.

The Government is now seeking views on these drafts, before they are laid before the Scottish Parliament. The approach adopted in both drafts is supplementary as opposed to exhaustive. That is, they are intended to be read in conjunction with the 2005 Act (and in addition to guidance which is also to be published in course).

What follows is a brief survey of the draft Regulations, highlighting the areas on which the Scottish Government has indicated a desire for feedback.

The Draft SCIO (General) Regulations 2011

The General Regulations are short, following a recommendation in the Consultation Paper that administrative detail on applications, conversions and amalgamations should be covered in guidance as opposed to the Regulations.

Draft Regulation 3 sets out a list of requirements which a SCIO’s constitution must include, in addition to those set out in section 50 of the 2005 Act. This approach is in line with the outcomes of the consultation, namely that the Regulations should set out the basic elements which a SCIO’s constitution must cover, rather than setting out the exact form and content in the shape of a model constitution, or putting in place a model constitution. The Government would like to know if the requirements are reasonable and workable.

Draft Regulations 4-7 require a SCIO to maintain registers of their trustees and members respectively. They also propose regulated access to these registers. The inclusion of registers and regulated access was supported during the consultation process and has been included in the draft Regulations as an attempt to build transparency while protecting the personal information of those on the Registers. It is proposed that the names of charity trustees will be available to the public upon a reasonable request, however addresses of trustees may be withheld. Further, registers of members will not be made public, however reasonable access to the register will be given to other members or trustees of the SCIO. The SCIO will also be able to redact (or censure) the addresses of members listed in the register of members. The Scottish Government has highlighted the absence of a provision allowing SCIOs to charge fees for processing a register request and welcomes views on this aspect.

The transfer of membership of a SCIO is prohibited by draft Regulation 8. The Scottish Government understands that membership of a charity is often linked to a particular condition, such as tenancy of a property which transfers from one resident to another. The Scottish Government takes the view that this is not a transfer; rather it is a case of one member leaving and another joining. The prohibition on transfers of membership is proposed in the interests of good governance in order that accurate records of membership can be kept. The Government seeks views on whether this is a reasonable provision.

Also in the interests of good governance, the Scottish Government proposes in draft Regulation 9 that a SCIO must hold a meeting of its members once a year.

Draft Regulation 10 requires a SCIO to include its name and status on an exhaustive list of documents signed and issued by them. During the consultation there was wide support for SCIOs to be in an equivalent position to other Scottish charities in this respect, therefore the draft Regulation attempts to mirror section 15 of the 2005 Act and the Charities References in Documents (Scotland) Regulations 2007 which regulates Scottish charities in this respect. Curiously, there is no obligation on a SCIO to publish its charity number on such documents.

The Draft SCIO (Removal from Register and Dissolution) Regulations 2011

Draft Regulation 2 disapplies in relation to SCIOs the sections of the 2005 Act which require OSCR to consent to amalgamations, wind-ups and dissolutions. This to avoid duplication of regulation as the process for SCIOs is dealt with elsewhere in the 2005 Act and the present draft Regulations.

Further, it is proposed that section 18 of the 2005 Act, which provides for charities to be removed from the OSCR Register of Charities, is disapplied in relation to SCIOs. The Government maintains that there is a strong policy imperative for this, namely that a former SCIO should not be able to avoid its obligations with regard to its outstanding undertakings by simply lodging a winding-up form. Otherwise a SCIO could apply to be removed from the register, cease to be a charity and accordingly – under section 55(7) of the 2005 Act – also cease to be a SCIO. The Scottish Government proposes that formal dissolution procedures are required to balance the protection of limited liability.

With regard to the dissolution of solvent SCIOs, support was shown during the consultation process for a “striking off” option similar to that for solvent companies. The proposals for solvent dissolution reflect this, and provide that a SCIO must apply to OSCR to be struck off, following which it can be dissolved (Regulation 3). A resolution must be passed by members of the SCIO approving its winding-up. In order to provide protection for creditors, a SCIO must also fulfil certain conditions before starting the solvent dissolution process, and during the process it must publicise its intended dissolution. In particular, the Scottish Government highlights that the proposed Regulation requires the notice of a proposed dissolution be published on the OSCR website for a period of 28 days and invites comments on whether this time period is sufficient. As to be expected, any surplus assets must be transferred to another organisation with charitable purposes.

Draft Regulations 4 to 7 set out proposed processes for the dissolution of an insolvent SCIO based on sequestration under section 6 of the Bankruptcy (Scotland) Act 1985. This involves the Accountant in Bankruptcy. The Government hopes this represents a reasonable compromise (formal corporate insolvency processes were seen as overly complex). Draft Regulation 4 provides that the trustees of a SCIO may make an application for it to be removed from the register and dissolved on the grounds that it is unable to pay its debts; draft Regulation 6 allows a creditor to make such an application too. Regulation 5 sets out a list of documents which should accompany an application and is relevant to both routes. The draft Regulations currently provide that if a SCIO owes more that £1,500 and is unable to pay, then an insolvent dissolution application may be made. An application made under these Regulations is made first to OSCR, who will only refer the application on to the Accountant in Bankruptcy if OSCR is satisfied that all the requirements have been met.

What Next?

The Government has posed the following questions in respect of the two sets of draft Regulations:-

  • Are the requirements for SCIO constitutions reasonable and workable?
  • Is it reasonable to include a provision barring the transfer of membership in the interests of good governance?
  • Will the Regulations work for you?
  • Is the notification period for the dissolution of a solvent SCIO enough?

The Scottish Government requests feedback by 26 November 2010. Final draft Regulations will then be laid before the Scottish Parliament to go through the legislative process. The hope is that initial aspects of SCIO regulation will be in force by 1 April 2011 (with a phased implementation following that), but the Scottish Executive has recognised that the timetable will be influenced by parliamentary priorities, and next year’s general election.