Scottish Charitable Incorporated Organisations – dissolution regulations amendments: consultation

Annex 4: Scottish Government response to the SCIO Dissolution Working Group

Below is the Scottish Governments response to the recommendations as reflected in the proposals for amendment regulations.

1. Working Group recommendation

Require a solvent SCIO to have ceased operation before making an application to OSCR for dissolution and removal.

• inactive (to be defined in guidance) for three months prior to an application (similar to the requirements for company voluntary strike offs)
• restrictions on activities following application
• OSCR power to reject premature applications

Scottish Government response

Accept in part.

• The working group suggested that a SCIO should be ‘inactive’ for three months prior to making a solvent dissolution application to OSCR. In discussions with OSCR it was felt that three months may be too long to wait before applying for dissolution and there is a danger that trustees could disengage from the process, especially where other trustees have walked away and there are minimal assets.
• We agree that there should be restrictions on activities following an application for dissolution which should be outlined in regulations and detailed in OSCR guidance.
• We agree that a SCIO should be required to inform OSCR of any new assets received after the application has been submitted.
• OSCR can already ‘reject’ premature applications under regulation 3(7), and there is no need to specify further in regulations.

2. Working Group recommendation

Remove the requirement for a ‘declaration of solvency’.

• charity trustees provide a statement that all debts have been settled or provided for in full, together with the proposed disposal of residual assets
• discretion for OSCR to request additional evidence of solvency

Scottish Government response

Accept in part.

• Rather than removing the current requirement for a ‘declaration of solvency’ in regulation 3(4)(c), we propose to amend the regulation to a ‘statement of solvency’. This addresses the concerns about trustees signing a declaration without necessarily having a detailed understanding of the SCIOs financial position.
• Under regulation 3 (4) (e) a SCIO must provide OSCR with a statement of all assets and liabilities as part of the dissolution application, including how debts will be settled and assets transferred.
• We propose to amend the regulations to allow for more informative and useful information within the published notices.
• Regulation 3(7), already provides OSCR with the discretion to request additional evidence and there is no need to specify further in regulations.

3. Working Group recommendation

Allow OSCR greater discretion with regard to timescales and provision of information in respect of solvent dissolution applications.

• relaxation of timescales for publishing notices and making decisions in respect of complete / competent applications
• greater discretion over the content of notices
• wider publication of notices and extended publication period

Scottish Government response

Accept in part.

• OSCR already has wide discretion under regulation 3 (7) to request additional information.
• As noted above we propose to amend the regulations to allow for more informative and useful information within the published notices.
• We propose that notices are published on the OSCR website and anywhere else OSCR considers appropriate to alert interested parties, for example a community website, sector press or the charities own website, where one exists.
• We agree that an extended publication period for the notices is required to allow greater opportunity for interested parties to make representations.

4. Working Group recommendation

Enhance the procedure for handling insolvent SCIO applications to improve protection for creditors.

• OSCR and the Accountant in Bankruptcy (AiB) to establish an information sharing agreement*
• OSCR to improve guidance for SCIO trustees*
• Trustee in bankruptcy required to report to OSCR on trustee behaviours or to have a general reporting duty
• consideration to creation of malfeasance offence akin to wrongful trading for other corporate bodies

*non legislative

Scottish Government response

Not taken forward.

• Trustee in bankruptcy required to report to OSCR on trustee behaviours or to have a general reporting duty.

OSCR and the AiB can establish an agreement to 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 confirmed this can be achieved using section 24 of the Charities and Trustee Investment (Scotland) 2005 Act. Agreement could specify that OSCR is provided with a copy of the sequestration no later than 28 days after it is awarded.

• Consideration to creation of malfeasance offence akin to wrongful trading for other corporate bodies.

OSCR’s casework data does not indicate that there is evidence of behaviour or activity that would meet the threshold for a criminal offence. OSCR’s enhanced inquiry powers under the Charities (Regulation and Administration) (Scotland) Act 2023 can ensure that any charity trustee misconduct in an insolvent SCIO is dealt with appropriately.

5. Working Group recommendation

Allow OSCR to remove inactive and unresponsive charities from the Register.

• power to OSCR without the requirement to apply to Court
• power exercisable following inquiries to establish inactivity, level of assets, failure to comply with directions to take steps to meet the charity test and to apply to be dissolved and removed from the Register
• methods of serving notice to be expanded in scope and timescale
• OSCR to establish agreement with the King’s and Lord Treasurer’s Remembrancer (KLTR) regarding treatment of residual assets and possible ring-fencing for charitable purposes
• de minimis level for determining the mechanism for dealing with remaining assets

Scottish Government response

Accept in part.

• We accept the premise of the removal of inactive and unresponsive SCIOs from the Register.
• Many of the working groups recommendations on SCIO removals and the steps to be taken have been superseded by the new section 45A of the 2005 Act, which allows OSCR to remove from the Register non-responsive charities which fail to submit accounts.
• Additional steps are required in amendment regulations to implement the section 45A provisions by dissolving a SCIO as well as removing it from the Register. The reason for removal is the same for any other legal form of the charity, it is the manner of removal which is different for SCIOs. However, the process needs to be as similar as possible so that all charities can understand and are treated fairly.
• It should be noted that the section 45A process is not automatic. OSCR may or may not decide to proceed with removal on a case-by-case basis.
• We understand that OSCR are in discussion with KLTR about establishing an agreement.

6. Working Group recommendation

Remove the financial lower limit for applications for insolvent dissolutions to be made to OSCR (there is currently no mechanism to remove an insolvent SCIO with debts of less than £1500).

• level of debt at which applications must be transmitted to AiB linked to provisions in bankruptcy law
• OSCR’s power of removal will apply where level of debt is below the threshold for transmission to AiB
• information, notice and publication mechanisms to be expanded as above

Scottish Government response

Not taken forward.

Various options have been explored with OSCR and AiB on:

a) how to deal with insolvent SCIOs with debts of less than £1500 and

b) on amending the regulations to link to the level in the Bankruptcy Act for personal insolvency to ensure future changes are updated automatically in the Regulations.

OSCR’s data indicates that it has not received any cases involving SCIOs with debts of less than £1500. If OSCR did receive insolvent dissolution applications from SCIOs with debts of less than £1500 the numbers would be very small.

As we are exploring other mechanisms for removal and given the potentially very low numbers of SCIOs this issue effects we do not believe it is proportionate to create a bespoke process at this time.

As a result, we do not intend to link the insolvent SCIO threshold to the Bankruptcy Act, as this would have the effect of increasing the likelihood of SCIOs having debts below the limit for applications.

7. Working Group recommendation

Allow a removed SCIO to be restored to the Register (similar to provisions in company law).

• OSCR power of administrative restoration up to six years after removal on application of a former charity trustee
• Court power of judicial restoration on application of a creditor or other interested party
• Requirement for KLTR consent to restoration

Scottish Government response

Requires further consideration via consultation.

8. Working Group recommendation

Minor technical amendments.

• Ensure consistency between SCIO general and dissolution regulations with regard to the transfer of residual assets
• Relax the requirement for a members’ resolution to dissolve in circumstances where it could not be obtained

Scottish Government response

Accept in full.

9. Working Group recommendation

Other matters considered by the Working Group:

• Trustee in Bankruptcy: Currently the AiB is appointed as trustee in bankruptcy, and they outsource this work to firms who they have contractual arrangement with. Some on the Working Group were keen that a SCIO be able to appoint its own Insolvency Practitioner particularly where advice had been obtained from them prior to a decision to dissolve and in large or complex insolvency cases. 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.

Scottish Government response

• Trustee in Bankruptcy: At present there is no evidence to indicate that insolvent SCIOs are being put at a disadvantage by the current arrangement.
• Offences and deterrents: As noted above OSCR’s casework data does not indicate that there is evidence of behaviour or activity that would meet the threshold for a criminal offence. OSCR’s enhanced inquiry powers under the Charities (Regulation and Administration) (Scotland) Act 2023 can ensure that any charity trustee misconduct in a SCIO is dealt with appropriately.