Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012

Lord Wallace of Saltaire Excerpts

Tuesday 27th November 2012 Grand Committee

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.

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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.