A charity which is an unincorporated association does not technically exist as a separate legal entity. This means that an unincorporated association cannot strictly enter into contracts, own property, and sue or be sued in its own name. There is also the risk that the trustees or members of the management committee (and sometimes even the members themselves) can become personally liable for the debts and liabilities incurred by an unincorporated association.
The Scottish Government introduced the Scottish Charitable Incorporated Organisation (SCIO) legal form in April 2011 to address some of these difficulties. There are 3 key advantages to being a SCIO as opposed to an unincorporated association:-
- SCIOs benefit from having separate legal personality which means a SCIO can undertake transactions directly and can enter into contracts, leases, employ staff and own property in its own name;
- the liability of the trustees of a SCIO is in most cases limited; and
- unlike charitable companies which are regulated by the Registrar of Companies and the Office of the Scottish Charity Regulator (OSCR), SCIOs are regulated only by OSCR and must comply with Scottish charity law.
Converting to a SCIO as a legal form can provide greater clarity (and indeed protection) for those running (and becoming members of) the organisation in relation to responsibility for the debts and liabilities of the charity. In terms of succession, using a SCIO means title to heritable property can run in the name of the SCIO as opposed to the names of individual trustees which will change over time.
An increasing number of charitable unincorporated associations are considering whether converting to a SCIO is right for them. This note is intended as a very brief guide on some of the things which you and your fellow trustees should consider if you too are thinking about this.
The OSCR process
The Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act) is the principal piece of legislation governing Scottish charity law and SCIOs. There is a way under the 2005 Act for a charitable unincorporated association to convert to a SCIO and keep the same charity name and the same charity number as the existing unincorporated association.
To be able to use this process, the first thing you must check is whether the constitution of the unincorporated association contains the power for its members to resolve to wind the unincorporated association up. If the constitution does not contain that power then it cannot proceed with the conversion process summarised in this note.
If the constitution does contain this power then, in summary, the process is to:-
- apply to OSCR for the incorporation of a new SCIO;
- put the proposal to convert to the members of the unincorporated association (it is ultimately their decision, not the trustees);
- if the proposal is approved by the members, apply to OSCR for the existing unincorporated association to be removed from the Scottish Charity Register; and
- arrange for the proper transfer of the unincorporated association's assets and liabilities to the new SCIO.
Changing legal form: the implications
Changing the legal form of your organisation will have legal implications, and so we would always advise trustees to seek legal advice before proposing or implementing any change. Trustees must always act in the charity's best interests so they should not propose a conversion simply to minimise their own potential personal liability. Each organisation's circumstances will be unique and it may be that conversion is not the most appropriate course of action in each case.
If the decision is taken to proceed with a conversion then here are some of the issues which, in our experience, tend to crop up most frequently (this list is not exhaustive):-
- employees - where an unincorporated association with employees converts, it is likely that the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply which means that certain processes will need to be followed to make sure employees' rights are protected;
- pensions - the position regarding employee pensions needs to be carefully considered. If the unincorporated association is a member of a multi-employer defined benefits pension scheme then care needs to be taken to consider if the conversion will result in the crystallisation of the 'employer debt' and to ascertain what steps need to be taken to deal with this;
- contracts - you should consider all of the different kinds of contracts the unincorporated association has entered into and whether the conversion could trigger default or early termination of those contracts and what the consequences of this could be;
- other regulators - if your organisation is regulated by other regulators such as the Care Inspectorate, do not overlook the position those other regulators may take. Consider what steps should be taken to transfer or renew (or re-apply for) such registrations;
- banking - speak to your bank well in advance of the conversion to ascertain if new accounts will need to be opened and what the implications will be for standing orders, direct debits and so forth and plan for this; and
- tax and accounting - speak to the organisation's accountant about the proposed conversion and seek their advice on the tax and accounting implications of converting.
Morton Fraser has advised on a significant number of conversions since SCIOs were introduced in 2011. If you'd like to find out more about how we can help you please get in touch either by email to firstname.lastname@example.org or email@example.com or by calling Lauren or Paul on 0131 247 1000.
You should be aware that there are significant legal and regulatory issues involved in converting to become a SCIO. It is not simply a case of signing new documents and carrying on as before. Consideration should be given to a number of areas, including registration with regulators over and above OSCR and employment law implications.
Each of the foregoing is a specialised area of law, which will require careful consideration. This note is intended only as a brief guide to the process to convert. It is not intended to be a thorough examination of the law in relation to unincorporated associations or SCIOS. Organisations are reminded that they should seek independent legal advice in relation to these, and any other, issues raised by a proposed conversion to become a SCIO, and in particular in relation to the specific facts and circumstances of their own situation.
You should also note that OSCR is currently considering whether to change the way it approves the conversions of charitable unincorporated associations to SCIOs. The result may be that the method set out in this note is not available in the future. Discussions on this are in the very early stages and so we are not able to provide more detail on this at this stage.
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