Scottish Charitable Incorporated Organisations – dissolution regulations amendments: consultation

Annex 5: Summary of the SCIO Dissolution Working Group’s recommendations

You can also read the full report.

Proposal 1(a): Require a solvent SCIO to have ceased operation before making an application to be dissolved and removed from the Register

• A SCIO should be ‘inactive’ for three months prior to making a solvent dissolution application to OSCR. This should ensure the statement in respect of its solvency (see proposal 1(b) below) that the SCIO provides at the time of applying to OSCR remains accurate, and that the SCIO is unlikely to enter into credit agreements or take on further assets and liabilities. This in turn allows OSCR to make its decision to grant consent for a SCIO to dissolve based on accurate and up to date information.
• Restrictions on SCIO activities following application for dissolution should broadly follow the provisions as set out in Regulation 10 of the CIO Regulations – with the insertion ‘proceeding with the wind up’ rather than ‘proceeding with the application’ at regulation 10(a)(i).
• Requirements on a SCIO following application for dissolution to notify OSCR of any property received after making the application should broadly follow the provisions as set out in Regulation 11 of the CIO Regulations, with OSCR setting out in guidance the nature of notification.
• Broad criteria for what ‘inactive’ means should be set out in the Dissolution Regulations (as stated above) and OSCR should set out in guidance what ‘inactive’ may mean in practice. The Regulations need to be broadly worded to accommodate the wide range of operations charities undertake.
• Having made an application, a SCIO may not engage in any activity, except for residual activity that may be necessary to conclude its affairs.
• OSCR should be able to reject an application for dissolution from a SCIO which is still active on the grounds that the application is premature.

Proposal 1(b): Require a declaration of solvency to be validated by a supporting statement from a suitably qualified or experienced person

The current requirement for a ‘declaration of solvency’ in the Dissolution Regulations Regulation 3(4)(c) be removed.

Regulation 3(4)(e) be amended to encompass the existing statement of all assets and liabilities, a statement by or on behalf of the charity trustees that any debts and liabilities of the SCIO had been settled or otherwise provided for in full, together with the proposed disposal of residual assets in accordance with the SCIOs constitution– as per Regulation 5(b)(2ii) and (iii) of the CIO Regulations.

The Dissolution Regulations (Regulation 3(4)) be amended to allow OSCR discretion to specify any additional information it requires for applications to be made for solvent SCIO dissolutions. OSCR should specify in guidance what additional information may be required and under what circumstances, including when additional information would be required to confirm solvency, taking into account the requirement for OSCR to act proportionately.

The scope of OSCR’s discretion to require more information once an application has been received (Regulation 3(7)) should be clarified (bearing in mind the need for OSCR to act transparently and proportionately), to enable this discretion to be used effectively to assist decision making.

Proposal 2: Allow OSCR greater discretion with regard to timescales and provision of information in respect of solvent SCIO applications to dissolve

• OSCR should make greater use of the discretion it already has under the Dissolution Regulations (Regulation 3(7)) to request additional information once an application had been received, which may require clarification of the scope of this discretion (see also recommendation under proposal 1(b)).
• The timescales in the Dissolution Regulations for publishing notices and for making decisions on applications are relaxed and made explicitly to apply only in respect of complete/competent applications, so allowing OSCR the opportunity to request and receive information relevant and necessary to progress the application.
• The Dissolution Regulations be amended to give OSCR discretion over the format of notices, allowing these to be more informative for interested parties.
• The notices are published on the OSCR website (as is currently the case) and in the Edinburgh Gazette, as well as anywhere else OSCR considers appropriate in order to provide greater protection for creditors and inform beneficiaries and other stakeholders of the intended dissolution.
• The publication period for notices of applications for dissolution should be extended in the Dissolution Regulations from 28 days to three months.
• The provisions in the CIO Dissolution Regulations, giving the CCEW greater discretion over the format of published notices and flexibility in respect of publication and decision timescales are considered when amending the relevant provisions of the SCIO Dissolution Regulations.

Proposal 3: Develop a bespoke procedure for the dissolution of insolvent SCIOs that improves the protection afforded to creditors

The Group recommends that Option B is pursued, whereby the current insolvent SCIO dissolution procedure is maintained with a mixture of legislative and non-legislative enhancements. The Group noted that many of the issues that were identified with the current procedure can be (or have already been) addressed through non-legislative measures.

The Working Group therefore recommends the following:

• Non-legislative enhancements:
  • OSCR and the AiB establish an information sharing agreement. This should ensure that where the AiB has information that suggests trustee misconduct or mismanagement there is a clear pathway for the AiB to share the information with OSCR.
  • OSCR is clearer in guidance about the duties of SCIO trustees, and any penalties for misconduct and enforcement action that can be taken.
• Legislative enhancements:
  • Lengthen the publication times for insolvent dissolution applications and the places where applications should be published (as covered in proposal 2).
  • The Trustee in Bankruptcy handling the SCIO dissolution be required to report to OSCR any behaviours similar to those listed in s.156 of the Bankruptcy (Scotland) Act 2016. Alternatively, a general reporting duty should be created for the Trustee in Bankruptcy that could be specified in OSCR guidance.
  • The removal and restoration recommendations in proposal 4 should add to OSCR’s range of tools to address the different circumstances of insolvent SCIOs.
  • Scottish Government consider creating an offence akin to wrongful trading for SCIOs, as is in place for other corporate bodies – see section 4.

Proposal 4(a): allow OSCR to remove inactive and unresponsive SCIOs from the Register

The Group recommends that:

• The Dissolution Regulations are amended to provide OSCR with the power to remove (and thereby dissolve) inactive and unresponsive SCIOs from the Register without the requirement to apply to the Court.
• This power should only be exercised following inquiries by OSCR to establish whether the SCIO is active, what assets (if any) the SCIO holds and whether the removal of the SCIO is the most appropriate course of action.
• The power for OSCR to remove may only be exercised if following such inquiries, OSCR considers the SCIO no longer meets the charity test and the SCIO has failed to comply with directions to take steps to meet the charity test and to apply to be dissolved and removed from the Register.
• The mechanism for serving notice on the SCIO of a direction under Regulation 8 of the Dissolution Regulations be expanded to include service on the trustees or members by publication on:
  • OSCR website
  • SCIO Register entry
  • Edinburgh Gazette, and
  • any other place it considers likely to be able to come to the attention of creditors, (former) charity trustees and beneficiaries, where attempts to serve a notice on the SCIO, Trustees and/or members has failed.

These publication requirements are to be consistent with those under proposal 2.

• Publication is for a minimum period of three months and shall be considered to effect the service of a direction.
• The Regulations make clear that a failure to respond to a direction as served (within a specified time) is treated as a failure to comply.
• OSCR produce guidance setting out the criteria under which it would commence inquiries that could lead to a direction to apply for dissolution.
• OSCR establish an MoU with QLTR regarding charitable assets, including an agreement that QLTR notify OSCR if charitable assets come to their attention within 6 year of the relevant SCIO having been removed from the Register.
• That Scottish Government consider changes to primary legislation to allow OSCR to hold contact information for all charity trustees^[1] in order that all efforts to contact a SCIOs trustees can be pursued.
• The Dissolution Regulations should specify that a de minimis level is to be set to determine the appropriate mechanism for dealing with remaining assets (prior to or after removal). The actual monetary figure should be set out in guidance by OSCR in order that it may be altered as appropriate over time.

The Group considers that the provisions of Regulation 16 to 19 of the CIO Dissolution Regulations could be used as a possible basis for new provisions.

The Group further recommends that:

• Scottish Government considers enacting the proposed Charities (Scheme for the Transfer of Assets) (Scotland) Regulations and developing Dormant Charity Account Regulations^[2].
• Scottish Government explore the possibility that any charitable assets having fallen to the Crown are ring-fenced (by the QLTR), to be applied for charitable projects.

SCIOs with debts of less than £1,500

• The Dissolution Regulations should be amended to remove the financial lower limit for applications for insolvent dissolution to be made to OSCR.
• The level of outstanding debts at which point OSCR must transmit an insolvent SCIO’s application to the AiB, should be linked to the provisions of the Bankruptcy Act in order to ensure that the Regulations mirror future changes in bankruptcy law.
• The Dissolution Regulations should be amended to give OSCR the power to remove a SCIO from the Register where:
  • an application for dissolution is made to OSCR
  • OSCR considers that the SCIO is insolvent
  • the SCIO has debts of less than the level (currently £1500, but note recommendation above) where applications must be transmitted to the AiB, and no assets.
• Further work needs to be done to clarify the wider implications of removal in these cases, in particular what happens to the debt that was outstanding at point of removal.
• The timescales, publication requirements and information gathering provisions as recommended under proposal 2 for solvent dissolutions should apply before removals of SCIOs with debts of less than £1500 (or another determined level) can be given effect.

Proposal 4(b): allow a removed SCIO to be restored to the Register

The Group recommends that:

• Provision is made in the Dissolution Regulations for the power to restore a SCIO to the Register.
• The power should allow a SCIO to be restored to the Register during a period of six years following its removal.
• OSCR should have the power of administrative restoration, with the criteria for exercising such a power set out in Dissolution Regulations.
• The Courts should have the power to restore, with the criteria for exercising such a power set out in Dissolution Regulations.
• New provisions to set out the information required for a SCIO to be restored, and timescales for providing the information.
• QLTR would have to consent to any administrative restoration of a SCIO (with provisions in Regulations that mirror conditions for administrative restoration set out in s.1025 of the Companies Act 2006).
• The Group considers that the provisions of Part 5 of the CIO Dissolution Regulations could be used as a basis for new provisions.

Additional proposed amendments to SCIO Dissolution

• Disposal of surplus assets: The Group recommends that the Dissolution Regulations are amended to allow a SCIO to transfer any remaining assets in a manner as set out in Regulations 2(g) of the General Regulations.
• Resolution for Dissolution: The Group recommends that options to relax the requirement for a members’ resolution be considered when amending the Dissolution Regulations.
• Trustee in Bankruptcy: The Group seeks to highlight this matter to Scottish Ministers to take a view on, as it did not agree on any recommendations in this respect.
• Offences and deterrents: The Group are keen to ensure provisions akin to wrongful trading be put in place for SCIOs, as with other corporate bodies. The Group recommend that a new provision is created on these lines (in primary legislation if it cannot be achieved through regulations) to address this and to align OSCR’s powers with those of other regulators of corporate bodies. The Group also recommend that consideration is given to section 212 of the Insolvency Act 1986 ‘Summary remedy against delinquent directors’ (i.e. misfeasance) as a useful model for the creation of a new offence for SCIOs.