Scottish Charitable Incorporated Organisations – dissolution regulations amendments: consultation

Annex 3: Restoration of SCIOs following dissolution paper

The considerations relevant to the need for provision on restoration of dissolved SCIOs may be different depending on the circumstances in which the SCIO is dissolved and the circumstances in which somebody may want the SCIO to be restored.

Dissolution of solvent SCIOs

A solvent SCIO can be dissolved following an application under regulation 3 of the Dissolution Regulations. The application must be accompanied by, amongst other things, a declaration of solvency (see proposal A2 regarding the proposed changes to that requirement) and a statement outlining the proposed dissolution (including all assets and liabilities at the time the application is made).

If OSCR consents to the application then (following procedural requirements as to notice to creditors and publication, the fulfilment and confirmation of any imposed conditions and the transfer of surplus assets) OSCR will remove the SCIO from the Register. At that point the SCIO ceases to be a charity, ceases to be a SCIO and its body corporate is also dissolved and ceases to exist. The dissolution is contingent upon (amongst other things) the surplus assets of the SCIO having been transferred to a body or bodies identified in the resolution of the members of the SCIO giving rise to the application for dissolution.

OSCR relies upon the SCIO’s written confirmation that the surplus assets have been transferred. Beyond the usual duty to submit annual accounts (under section 44 of the 2005 Act) and any additional condition which OSCR might attach to its consent to a SCIO’s dissolution on a case by case basis, there is no specific requirement for the SCIO to submit final accounts covering the period between (a) the making of the application to dissolve and (b) it confirming to OSCR that the transfer of surplus assets has taken place and that any other conditions imposed by OSCR have been satisfied. However, final accounts may in some cases be required by OSCR as a condition of consent.

Proposal A1 (regarding SCIOs being inactive once an application has been made) should ensure that the financial situation and planned winding up arrangements stated at the time of the application more closely anticipate the situation up to the point of dissolution. Proposal A1 above (requiring SCIOs to inform OSCR of any post-application receipt of assets) should also ensure that OSCR is made aware of any such assets and consider whether this affects how the application should be dealt with.

Immediately before OSCR removes the SCIO from the Register, there is the possibility that (unbeknownst to OSCR and perhaps also to the SCIO’s trustees and members) the SCIO still owns assets. Those assets should (if known about) have been transferred in accordance with the SCIO’s dissolution resolution. Also, the SCIO may have liabilities which should have been discharged before OSCR removes the SCIO from the Register.

The application process under regulation 3 of the Dissolution Regulations (especially once amended in accordance with the proposals in section A) should minimise (but cannot eliminate) the circumstances in which a SCIO has assets or liabilities at the point when it falls to be removed from the Register and dissolved.

Dissolution of insolvent SCIOs and creditor-led sequestration

An insolvent SCIO with debts of over £1500 can apply for voluntary dissolution under regulations 4 to 6 of the Dissolution Regulations. This takes the form of a debtor application for sequestration made to the Accountant in Bankruptcy via OSCR. Likewise qualified creditors (those owed £5000 or more) can petition for the sequestration of a SCIO as a body corporate under section 6(7)(b) of the Bankruptcy (Scotland) Act 2016 as applied with modifications by regulation 7 of the Dissolution Regulations.

Note: When made, the Dissolution Regulations referred to provisions of the Bankruptcy (Scotland) Act 1985, but by virtue of section 235(4) of the Bankruptcy (Scotland) Act 2016 those references are now to be read as references to the corresponding provisions of the latter Act.

In either case the process of sequestration should identify and account for the assets and liabilities of the SCIO, and should result in any surplus assets being transferred to another body in accordance either (in the case of an application by the SCIO itself) with a resolution of the SCIO or (following on from a petition by qualified creditors) by the trustee in bankruptcy identifying a recipient body or bodies.

Because these routes to insolvent dissolution involve sequestration, there will generally be no assets which are owned by the SCIO immediately before it falls to be removed from the Register. The assets of the SCIO at the date of sequestration will vest in the trustee in the sequestration, as will any assets acquired after the date of sequestration. The discovery of assets after the discharge of the trustee in sequestration (but which will have vested in that trustee at the date of sequestration) may result in the sequestration recommencing (see B(S)A 2016 s.152 – assets discovered within 5 years of date of sequestration and over £1000).

As a debtor in a sequestration, the SCIO is likely to be discharged of its remaining debts at some point after 12 months following the date of its sequestration. (2016 Act section 137). This discharge is not automatic, and not all debts are discharged (although the exceptions are unlikely to apply to a SCIO – see B(S)A 2016 s.145)

The process of sequestration should again minimise (but cannot eliminate) the possibility of the SCIO having assets or liabilities at the point when it falls to be removed from the Register.

Treatment of liabilities upon dissolution

At present, where OSCR is unaware that a SCIO has liabilities immediately before it is to be dissolved, there is nothing to prevent OSCR removing it from the Register and for the SCIO to be dissolved as provided for in regulation 3(11)(b) or 6(9)(b) of the Dissolution Regulations. Unless there are guarantee arrangements in place the liabilities therefore become unenforceable. They do not transmit to anybody else upon the SCIO’s dissolution. In the absence of a mechanism for bringing the SCIO back into existence, there is no debtor for creditors to pursue for the debts owed to them. In any event, if a SCIO were to be restored it would not have any assets as any assets it held should have been distributed to creditors through the sequestration (where appropriate) and any surplus transferred to another body or bodies in accordance with the resolution referred to in regulation 3(2)(b) or with regulation 6(7).

Some liabilities may exist without having been known to the SCIO. For example, a SCIO may be vicariously liable for personal injuries caused by its employees or officers. The claim for damages in relation to those injuries might not be notified to the SCIO for a number of years after the injurious event took place (and the liability arose), and the SCIO’s financial records may not show any provision for this liability. If the SCIO is dissolved before the claim is intimated to it and any action raised against the SCIO, then the injured person would not be able to raise proceedings against the SCIO. (The injured person may separately have claims against individuals involved in the running of the SCIO, but those claims would fall to be paid out of those individual’s resources rather than those of the (by then dissolved) SCIO).

Again, if the SCIO’s surplus assets have been transferred to another body or bodies in accordance with the resolution referred to in regulation 3(2)(b) or with regulation 6(7), the SCIO would have no assets with which to pay damages. If the SCIO had been dissolved following sequestration then the SCIO’s discharge from that sequestration may in any event have extinguished the SCIO’s liability to the injured person. If the injuries were covered by an appropriate insurance policy, then the injured person may be able to make their claim directly against the relevant insurer, under the Third Parties (Rights Against Insurers) Act 2010 without the need to restore the SCIO. There may therefore be limited utility in bringing a dissolved SCIO back into existence in order to pursue it for a liability.

We do not propose to make any specific provision to allow the reversal of a transfer of surplus assets from a SCIO.

Treatment of assets upon dissolution under existing Dissolution Regulations arrangements

Regulations 3 and 7 of the Dissolution Regulations presuppose that a SCIO will not be dissolved unless and until any surplus assets have been transferred to a different body or bodies to be used for the same (or similar) charitable purposes to those of the SCIO. Although in the case of the dissolution of a solvent SCIO under regulation 3 there is no blanket requirement for detailed final accounts, the requirements for statements of the financial position and dissolution plan, or the accounts required as part of sequestration proceedings help to minimise the possibility that a SCIO owns assets at the point when it falls to be removed from the Register and dissolved. It is nonetheless possible that assets may come to light after the SCIO has been removed from the Register.

Unlike the duties associated with SCIO’s liabilities, the ownership of assets would be capable of transmitting to another person in the event of the SCIO being dissolved (and ceasing to exist) without that person taking steps to accept ownership. The Dissolution Regulations presently contain no provision on this. There is, though, a general rule of Scots law that where property becomes ownerless, it vests in the Crown as “bona vacantia”.

Treatment of assets and liabilities upon administrative removal

Proposal B above would allow OSCR to remove a SCIO from the Register where the SCIO has failed to comply with certain directions. Unlike under the procedures leading to removal (and dissolution) under regulation 3 or 6, OSCR would not have the benefit of an application from the SCIO accompanied by a statement of the SCIO’s financial affairs. It is also possible that the SCIO may not have submitted annual accounts for some time (if ever), given that Proposal B covers failure to provide statements of account. OSCR may therefore have little or no up to date information as to the financial position of the SCIO when considering whether to remove it from the Register. The working group recognised that there could be problems with removing a SCIO from the Register in these circumstances and recommended the following (amongst other things):

• The power to remove (and thereby dissolve) inactive and unresponsive SCIOs from the Register without the requirement to apply to the Court 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.

Nonetheless, it is more likely (compared to one being dissolved under the current Dissolution Regulations) that a SCIO which is dissolved through action under Proposal B will have assets or liabilities which are affected by the dissolution. There would not have been a resolution of the SCIO followed by winding up and transfer of surplus assets to a body or bodies as would be the case in dissolution under regulations 3, 6 or 7. There would not have been the extinction of liabilities through discharge from sequestration as would usually be the case under regulations 6 or 7.

The working group recommended basing SCIO restoration provisions on the model for restoring CIOs in England and Wales in Part 5 of the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012 (The CIO Dissolution Regulations).

The Charity Commission for England and Wales (CCEW) maintains the Register of CIOs. CCEW can only administratively restore CIOs which were removed from its Register by CCEW itself, and then only where the removal was on the grounds of the CIO not being in operation (see regulation 16 of the Dissolution CIO Regulations) or on grounds connected with incomplete winding up under the Insolvency Act 1986 (see regulation 18). The former are broadly equivalent to removal of SCIOs under section 45A of the 2005 Act and Proposal B (unresponsive SCIOs). The latter grounds are not relevant to SCIOs.

In addition to the circumstances in which CCEW can administratively restore CIOs to its Register, the CIO Dissolution Regulations allow a range of interested persons to apply to the court (the High Court of England and Wales) for the court to order the restoration of a CIO dissolved under relevant provisions of the Insolvency Act 1986 as applied to CIOs. The 1986 Act does not apply to SCIOs, but the SCIO Dissolution Regulations (regulations 4 to 7) allow for the sequestration of SCIOs and their consequent dissolution. As noted above, SCIOs dissolved at the conclusion of sequestration proceedings will not generally have had any assets or liabilities, and there is no mechanism for the transfer of surplus assets (to another charitable body) to be reversed so as to make those transferred assets available for any creditors who could establish a claim against a restored SCIO.

CCEW can only restore CIOs, and applications for court ordered restoration must ordinarily be made, in the period of 6 years following the CIO’s dissolution (regulation 35). Six years is also the period relevant to the retention of charities’ accounting records etc Scotland and in England and Wales (2005 Act, s.44; 2011 Act, section 131, 134, 140, 165). The six-year time for applying to court to restore a CIO does not apply where the purpose of the application is to allow a personal injury claim to be made against the CIO.

Links to legislation

• Insolvency Act 1986
• Third Parties (Rights Against Insurers) Act 2010
• Charities Act 2011
• The Scottish Charitable Incorporated Organisations (Removal from Register and Dissolution) Regulations 2011
• The Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012