Scottish Charitable Incorporated Organisations (SCIOs) Working Group, Sixth Meeting
Tuesday 28th July 2009, 14.00 - 16.00, Conference Room A, St Andrew's House, Regent Road, Edinburgh, EH1 3DG
Adrienne Airlie, ICAS
David Brownlee, Citizens Advice Scotland
Ken Butler, Scottish Drugs Forum
Stuart Cross, University of Dundee
Richard Dennis (Chair), Scottish Government
Marieke Dwarshuis, Office of the Scottish Charity Regulator (OSCR)
Nancy Fancott, Scottish Council of Voluntary Organisations
Quentin Fisher, Office of the Scottish Charity Regulator
Steve Kent, Edinburgh Voluntary Organisations Council
Stuart Morrison, Scottish Government
Stephen Phillips, Law Society of Scotland
Anita Popplestone, Scottish Government
Simon Roberts, Accountant in Bankruptcy
Ross Rutherford, Accountant in Bankruptcy
Item 1 - Welcome and apologies
1. The Chair welcomed members of the Working Group to St Andrew's House and introduced Simon Roberts and Ross Rutherford from the Accountant in Bankruptcy (AiB), thanking them for the advice provided on SCIOs insolvency. Apologies were noted from Susan Deighan, Patrick Ford and Alex McDougall.
Item 2 - Minutes of 4th meeting
2. The minutes of the fifth meeting, which took place on Monday 9th March 2009 in the offices of OSCR, Dundee were approved. The Chair noted that the Consultation Report on the Charitable Incorporated Organisation for England and Wales had yet to be published and thus it was not possible to discuss further the developing regime south of the border.
3. SCIOs Consultation - Draft Document
3. Discussion then turned to the draft SCIO consultation document which had been circulated on 14 July. The Chair thanked Steve Kent for preparing and sharing a table comparing the regulatory provisions for each of the SCIO options, a copy of which had been circulated that morning and at the meeting.
4. Rather than undertaking a line by line analysis of the document it was agreed that discussion would focus on some of the key themes identified in the agenda which should provide a clear steer for the drafters to amend the document as required. Some initial comments had been received and corrections would be made to ensure correct usage of certain terms such as "charity trustees".
3.1 Target market for the SCIO - who are we designing this for?
5. Now that some of the key technical issues had been teased out and model options developed, the Chair wondered whether the Group had a view as to the target market for the SCIO, a question discussed previously on a number of occasions. Were the assumptions on size of potential SCIO, based on income, the right ones? Would it be possible to design one model of SCIO which would be appropriate for all charities or would this run the risk of meeting the needs of none? If the whole of market approach was not practicable, then who the SCIO be designed for?
6. There was broad agreement that the SCIO should be aimed primarily at charities at the lower end of the income/asset spectrum, since it appeared that here lay the greatest demand and likely take-up. Larger more complex organisation could still opt for charitable company form, which might cater better for their needs. Similarly, for charities with very low income and assets, exposed to minimal financial risk, incorporation might not be appropriate. However, there was no desire to explicitly exclude certain types or categories of charities from the SCIO.
7. There were other means of characterising the charity sector other than by income but this provided a useful tool for thinking about the sorts of organisations that might benefit from legal personality and limited liability. The importance of what the SCIO was intended to achieve in terms of support and administrative ease was also noted.
The Working Group agreed that the SCIO should be designed primarily for charities at the low to medium range of the income/asset spectrum, whilst not excluding any charity.
3.2 SCIO options/models
8. This led onto discussion on the four models which had been developed in the consultation paper. The Working Group had in the previous meeting proposed that three options should be developed, ranging from the company limited by guarantee template to a very basic charity model with a third option somewhere between the two. In drafting four options, the intention had been to avoid directing readers to the middle option, to provide more choice. However, some members of the Group did not think there was sufficient differentiation between options two and three, although the approach in moving from the company law model towards a charity law model was considered logical by others. With too subtle a distinction between options two and three, the need for four options was questioned.
The Working Group agreed that in the interests of clarity, the consultation document should put forward only three options but with greater emphasis on a central option (see below).
3.3 Do we have preferred option?
9. Turning to the options themselves, it was noted that the company model in option one and the very basic model in option four were convincing both logically and in terms of familiarity. However, neither was considered an ideal model for the SCIO. A middle option, combining the best elements of options two and three was agreed to be the preferred option of the Group. Singling out a preferred option could also enhance the consultation process. As currently drafted the options were too generic to elicit useful responses in a consultation. If one option was worked up in more detail and contrasted with two other options whose advantages and disadvantages were more clearly brought out, the reader might have a clearer understanding of the choices and hence better equipped to respond. A more detailed middle option might also be better suited to the target market identified earlier in the discussion but one that begins from the perspective of charity law, akin to option 3, with further detail.
The Working Group agreed that the consultation document should be restructured to put forward a middle option as the preferred implementation route.
3.4 SCIO as a vehicle of best practice?
10. The Chair noted that in previous discussions the Group had suggested that the SCIO could become a vehicle of best practice, with principles of good governance built into its structure and regulatory framework. There were still those among the Group who carried this ambition for the SCIO, while others suggested that good governance should grow organically within third sector organisations rather than be imposed from above. Should minimum standards be laid down in regulations or left to OSCR and SCVO guidance? This inevitably led to a discussion of constitutions.
Whilst there was a tension between building minimum standards into the regulatory framework and encouraging more organic development of good governance practices, there was broad agreement that the ideal route for instilling best practice was non-statutory guidance.
3.5 Model constitutions
11. When the SCIO subgroup on constitutions met in December 2008, it came up with an approach based on model constitutions with mandatory and optional clauses. This could provide a useful basis from which to start thinking about constitutions and the degree to which their form and content is dictated in regulations. Reference was made to the approach taken by the Scottish Law Commission in its proposals on the reform of the law of unincorporated associations, which set out six basic constitutional requirements necessary for those organisations wishing to assume legal personality and limited liability.
12. The Group then discussed whether a list of minimum requirements should be spelt out. Should the regulations simply list those elements which a SCIO constitution must contain or should they also stipulate how these must be covered in constitutions? The danger inherent in the latter approach would be the risk of getting it wrong in regulations which would then require further parliamentary time to put right. Listing the essential areas to be covered without detailing them would allow greater flexibility for the different types of charitable organisation that might seek SCIO form. Guidance could then be developed by OSCR and SCVO which could be amended and corrected as required.
The Working Group agreed that the SCIO regulations should list the elements to be covered in SCIO constitutions but leave detailed drafting of model clauses to OSCR and SCVO.
13. Discussion turned to the question of whether model constitutions should be reinserted into the consultation document it was agreed that, while extremely useful in providing a potential structure and clauses, illustrating some of the governance issues in detail, it might confuse readers, who may think them to be the subject of consultation. They would, however, be clearly signposted and available on the SG website [and in hard copy?].
3.6 Raising finance
14. When discussing what assumptions should be made about the need for SCIOs to raise finance, it was noted that earlier reference had been made to the confidence that many lenders already had in the charitable sector in Scotland, in light of its regulation by OSCR. Initial pre-consultation with funders and focus group discussions with charities suggested that a charity's form was rarely a matter of consideration. Given the target market identified earlier this issue was not thought to be of paramount importance and if SCIOs were to be precluded from certain forms of borrowing, the charitable company would still be available as a form for those organisations who wished to grant charges, etc.
The Working Group agreed that the issue of raising finance was not a priority in the design of the SCIO.
3.7 Insolvency sections
15. As the Group moved on to consider the end of a SCIO's life, the Chair invited Stuart Morrison and Simon Roberts to outline their thinking on the options developed for solvent and insolvent dissolutions. It was noted that the option of importing most of the Insolvency Act 1986, could be extremely complex, particularly for those not expert in insolvency, to understand; neither was it considered entirely relevant to the winding up of a SCIO. Why would it be necessary to have a process for Members' Voluntary Liquidation, for example? Given that the experience of many charities in closing down their operations is that it is a process largely managed internally, without third party involvement, the application of the full complex machinery of corporate insolvency to the SCIO end of life process seemed perhaps unnecessary. Thus it was proposed to develop an insolvency process which need only be brought to bear for the small minority of cases which required third party involvement, specifically a Judicial Factor in this instance.
16. Some reservations were expressed around the Judicial Factor (JF) proposal. It was noted that the Scottish Law Commission was currently looking at the law surrounding JFs, which it considered to be unclear. Would it be wise to make new provisions concerning the appointment of JFs whilst the law remained unclear? Questions were asked about complexity and cost. Who would meet the costs of appointing a JF if there weren't sufficient assets left to pay the fees. However, it was observed that traditional corporate insolvency could be much more expensive. The key questions underlying this element of the consultation were:
- What is the price of limited liability?
- Who are we trying to protect in an insolvency process?
- What is to be left for creditors?
17 The Group agreed that the paramount concerns must be to protect creditors and minimise costs. It also recognised that many winding up processed could be managed by the charities themselves, working amicably with creditors to reach a fair and acceptable conclusion. The JF option would only be used as a last resort. The other middle option would be to retain the corporate insolvency regime as a foundation but strip away the unnecessary elements, such as those relating to administration and receivership, as well as some of the procedural requirements around meetings.
18. The Group agreed that none of the options were ideal. However, it was also noted that the regulations could not be silent on winding up. Neither should they require the construction of an entirely new insolvency regime, which would be very complex and time-consuming, if not confusing for those familiar with existing processes. The JF option might represent a more proportionate approach, a flexible compromise option but questions remained about the role of the JF, the role of OSCR and costs. It was not thought appropriate for OSCR to have a role in assessing whether or not to seek third party involvement in insolvency procedures but there could be requirements to publish the intended winding-up on the OSCR website, allowing creditors and other interested parties ample opportunity to object. Other operational issues around wind-up and dissolution remained to be resolved. Parallels could be drawn with the company striking off process although there were no equivalent provisions for restoration of a SCIO to the register.
19. The Working Group did not feel there was an obvious front-runner among the insolvency options which it would prefer but recognised that there needed to be some way of protecting a SCIO's creditors in complex insolvency situations. If a third party were to be involved, the Group still had questions about:
- who the third party should be;
- who should be tasked with appointing the third party;
- who should pay.
Working Group agreed that consultation document should seek views on a straight choice of options without having a "preferred" one.
3.8 Overall structure of the document
20. The decisions outlined above would necessitate a reshaping of the consultation document but should improve the overall structure and help to sharpen the questions. It was noted that the consultation was silent on the possibility of a SCIO converting to a company, which might be desirable if it grew significantly. However, the primary legislation was also silent on this matter and questions were raised about whether this would fall outwith devolved competence. Legal advice on this issue would be sought and the position clarified in the consultation paper.
Action: Charity Law Team to redraft the consultation document to reflect comments received and further develop the Working Group's preferred option.
3.9 Target audience for the consultation and accessibility
21. The Group agreed that it would be useful to meet again six to eight weeks to consider the redrafted consultation paper at which time further consideration could also be given to the consultation and engagement process, as well as the Working Group's future involvement.
Action: Charity Law Team to circulate dates and seek a venue for a further Working Group meeting in September.
22. In advance of that discussion, it was recognised that the document as currently drafted was rather long and complex. Whilst this might be appropriate for professional advisors it might be accessible for others and thus it was agreed that a shorter version, more like an executive summary in leaflet form, would be produced as well.
Action: Charity Law Team to draft shorter executive summary for consultation.
4. Any other business
23. The Chair thanked members for coming and for their continued participation in the development of the SCIO.