In January 2013, the charitable incorporated organisation (CIO) was introduced as a new legal structure. Since then, many Christian charities and churches that were previously operating as unincorporated organisations, as well as new charities or churches that are setting up for the first time, have chosen to adopt a CIO structure. For charities that were already established as a company limited by guarantee, the CIO model has not seemed particularly attractive. However, new legislation means that for these charities, conversion to a CIO has suddenly become much easier.
Until recently the process of converting from a charitable company to a CIO was relatively lengthy and costly, requiring the existing charity to be closed and a new charity to be registered with the Charity Commission. Since 1 January 2018, legislative changes have meant that charitable companies can now convert directly to CIOs. CIOs have a number of benefits, but the principle advantage of converting from a company to a CIO is that the charity will no longer be subject to dual regulation: CIOs only have to send their accounts and returns to the Charity Commission whereas a charitable company must also send its accounts and returns to Companies House. In addition, because company law does not apply to CIOs, the structure gives greater flexibility in relation to the rights exercisable by a CIO’s members, for example.
What happens to the charity on conversion?
When a charitable company converts to a CIO it is only changing its structure; there is no need for the charity to close completely and for a new entity to be created. Given that the CIO is not a new corporate body:
- the new CIO can keep the company’s name;
- the new CIO keeps the same charity number as the company;
- it should be possible to keep the charity’s existing bank accounts;
- legacies will automatically be payable to the new CIO;
- existing business relationships should not be affected;
- existing data consents (under data protection rules) will remain valid;
- no conflict of interest arises for the trustees; and
- there is no need to transfer assets and liabilities, including land and property, from one entity to another as the charity continues to exist albeit in a different form.
What about pensions and TUPE?
As the charity is not changing its legal status, a conversion from a charitable company to a CIO will not necessarily trigger an employer debt (provided certain conditions are met) and there should be limited implications under TUPE. However, it is advisable for the company directors to seek advice on these issues prior to any conversion application and we would be happy to help in this regard.
What happens to charges registered against the company?
Charitable companies must register certain charges over their assets at Companies House. Any fixed charges over land will also need to be registered at the Land Registry.
The charitable company will first need to ensure that there are no provisions within the charge documentation preventing it from converting to a CIO. Assuming there are none, the charge registered at the Land Registry would remain in place following conversion, and the Land Registry would require certain documents confirming the charitable company’s conversion to a CIO in order to amend the details on the register.
If a charitable company has a fixed or floating charge over its assets which is registered at Companies House and is unlikely to be satisfied prior to its conversion to a CIO, the position is rather more complicated and we would be happy to give further advice in this regard should you need it.
Eight things to check prior to conversion
1. Most charitable companies are limited by guarantee and do not, therefore, issue shares. However, if the charitable company has issued shares it must ensure that these are fully paid up prior to conversion.
2. Is the charity up to date with its Companies House or Charity Commission filing requirements? An application will be rejected if this is not the case.
- 3. Will the CIO meet the legal requirements for charitable status and registration? Ordinarily this shouldn’t be a problem as the charitable company will already be registered at the Charity Commission.
- 4. Will any director of the company be disqualified from acting as a charity trustee? If so, the application will be rejected. It is worth also bearing in mind that if the director is disqualified from acting as a charity trustee, they are also disqualified from holding a senior management position and continuing to act as a director. They would, therefore, be acting unlawfully if they remained in post (unless the Charity Commission issues a waiver).
- 5. Are there any legal proceedings against the charitable company, or is it in the process of being dissolved or in liquidation or administrative receivership? If so, the application will be rejected.
- 6. Does the new CIO constitution include all of the provisions required by law (eg eligibility, appointment and liability of members)? The relevant provisions will usually have been included in the charitable company’s articles, but we can help to ensure that the new CIO’s constitution meets the necessary requirements.
- 7. Does the charity want to change its constitution? Certain changes will require the Commission’s consent and should be made before the application to convert to a CIO:
- (a) Changing the name. The directors should check the similarity of the name to those of existing companies or CIOs, and whether the proposed name includes any “sensitive words or expressions” and so requires the prior approval of Companies House or other public authority. (Note that the consent of Companies House is not required in respect of (1) the sensitive words ‘charity’, ‘charitable’, ‘association’, ‘foundation’ or ‘trust’ where these are the only sensitive words used, or (2) minor change such as removing “limited” or “company” and replacing it with “CIO”.)
- (b) Changing the objects.
- (c) Widening the trustee benefits and payment provisions.
- (d) Amending the dissolution provisions.
- 8. Lastly, whilst the option of conversion is available to most charitable companies, an “exempt charity” cannot convert to a CIO. This is unlikely to be an issue for most churches or Christian organisations.
Which CIO structure should you choose (Association or Foundation)?
The first members of the CIO will be the members of the converting charitable company immediately before conversion and changes to the membership of a charitable company cannot be made on conversion. Therefore, if a charitable company has members which are not directors, it must convert as an Association CIO. If the members of the charitable company are the same as its directors, the company must convert to a Foundation CIO.
If the directors wish to make any changes to the membership structure of the charity, these should be made either before the conversion (by amending the company’s articles) or afterwards (by amending the CIO’s constitution). For instance, if a charitable company has members which are not also directors, it will convert to an Association CIO. The trustees can later decide to amend the CIOs constitution to that of a Foundation CIO if they think it is more suitable. Alternatively, the directors of the charitable company could amend the company’s articles before the conversion so that the only members of the charity are also directors of the company, and this would mean that the charity would convert directly to a Foundation CIO.
The conversion process
An application for conversion is made to the Charity Commission using a short, online application form including:
- basic information about the organisation;
- confirmation that the trustees have been properly appointed and each has signed a trustee eligibility declaration;
- a copy of a signed and dated special resolution (passed by a 75% majority in general meeting) or a unanimous written resolution of the members of the company, confirming the company’s decision to convert to a CIO (the resolution must contain the company number and the registered charity number or the request will be rejected);
- a copy of the resolution of the members adopting the proposed constitution of the CIO (the resolution must contain the company number and the registered charity number or the request will be rejected);
- a copy of the proposed CIO constitution, which must not be substantially different to the company articles:
- For a company limited by guarantee (CLG), the contribution that the CIO’s members are required to make upon winding up cannot be less than that which the members of the CLG would be required to make. If the liability of the members of the CLG is more than £10, the proposed CIO constitution must make provision for its members to be liable to contribute to the CIO’s assets if it is wound up. However, if the liability of each CLG member is £10 or less, the guarantee will be extinguished on conversion.
- If the CIO’s constitution will include provisions for entrenchment (restrictions on amendments which go beyond what the law requires), a statement specifying this and identifying the relevant provisions is required.
If the application is successful, the Commission will provisionally register the CIO in the register of charities and request the registrar of Companies House to remove the company from the register of companies. Once the company’s registration has been cancelled, the CIO will be incorporated. The date of conversion of the charitable company to a CIO as shown on the public register of charities should match the date of removal of the charitable company at Companies House.
After the conversion, the charity will need to ensure that it amends its website and stationery to reflect the charity’s changed name and status by removing references to the company and including reference to the new CIO; the legal obligations which CIOs must meet are similar to those required of companies and we can help to ensure that these are met.