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The Charity Write newsletter brings you the latest news, updates, analysis and reports from the charity world.
When it comes to setting up and managing a charity, there are a number of different legal structures which may be used. Serious consideration must be given as to the most appropriate vehicle for the charity, whether it be a brand new charity being formed from scratch or an existing charity. Issues, such as the implications for trustees and/or members, who may be bearing personal liability for the affairs and transactions of the charity, and the level of regulation and administration are all reasons to consider the charity’s legal structure.
The more traditional methods of setting up a charity have been to create a trust or an unincorporated association. Neither of these structures, have a separate legal identity, leaving trustees or agents of the members (respectively) exposed to personal liability, for such things as, liabilities under contracts entered into on behalf of the charity. Property will also need to be held in the name of specific individuals, rather than in the charity’s name, also imposing personal liability and onerous responsibilities on such individuals.
Many charities are now being set up or converted to legal structures with their own legal identity and limited liability. These include Industrial and Provident Societies and Charitable Corporations, but most commonly, charitable companies.
Most charitable companies are set up as companies limited by guarantee, meaning that there are no shareholders who have invested share capital for a specific number of shares, but rather there are members, who give a guarantee to contribute a certain amount of money (for example £1.00 each) to the company should it be wound up.
As with any other company, decisions will either be made at board level, by a board resolution, or by way of a resolution of the members either at general meeting or by written resolution. The charity’s constitution will consist of the company’s Articles of Association, although such Articles may provide that the charity shall be managed on a day to day basis in accordance with a separate set of rules of governance. The directors of a charitable company are effectively the charity “trustees”.
As companies have their own legal identity, they can enter into contracts, hold property and borrow money.
New structure available
A new structure for charities, which is in the process of being implemented, is the Charitable Incorporated Organisation (CIO).
CIOs were created by provisions in the Charities Act 2006, now consolidated into the Charities Act 2011, which came into force on 14 March 2012. They were created in response to requests from charities for a new structure which could provide some of the benefits of being a company, without some of the burdens.
They are a new incorporated structure, designed specifically for charities and will be an alternative legal structure for a charity to adopt. Implementation of the CIO is to be phased with new organisations being among the first to be able to register as CIOs and existing charitable companies able to convert to CIOs towards the end of the implementation period. Implementation is currently expected to start this year.
A CIO must be registered with and regulated by the Charity Commission but, unlike charitable companies, CIOs will not also be registered with and regulated by the Registrar of Companies. This single registration and regulation is intended to reduce regulation and administration for many charities.
Like any corporate structure, CIOs will have a separate legal identity allowing them to enter into contracts, to hold property in their own name, and to benefit from reduced personal liability for their trustees and members. As regards issuing security for monies borrowed, it is unclear at this stage whether there will be a register of charges, held by the Charity Commission, which will have the effect of regulating the priority of charges.
It will be relatively straightforward for a charity, which already has its own legal identity, such as a charitable company or a charitable industrial and provident society, to convert to a CIO.
Significantly, the CIO will not be a new corporate body to which the charitable company or society is transferred. The existing corporate body will simply need to be re-registered as a CIO. This conversion process will therefore not affect the contractual relationships of the charity or its legal personality.
For other, unincorporated forms of charities wishing to convert to a CIO (e.g. trusts and unincorporated associations), the procedure is less straightforward. Such charities will first have to set up a CIO, transfer the assets of the unincorporated association to the CIO, dissolve the unincorporated charity and then have the unincorporated charity removed from the register of charities at the Charity Commission.
Every CIO’s constitution must be in a form which accords with regulations made by the Charity Commission, or as near to that form as the circumstances allow. Charities wishing to set up a CIO will be able to comply with this by adopting a model form of constitution, which will be provided by the Charity Commission.
Despite the comparative lack of regulation and administration involved in running an unincorporated form of charity, the fact that incorporated status has the benefit of largely safeguarding trustees and members from the financial liabilities of the charity does make incorporation an attractive prospect, particularly in the current economic climate.
Regulations relating to CIO’s are still being finalised but it is looking like these could be a preferable structure for many charities, particularly those who want to avoid the risks of personal liability associated with unincorporated structures, but also avoid the additional regulation and administration that having a charitable company can bring. Having said this, charitable companies will still remain the preferable option for some charities, particularly larger charities and those who have issued, or still wish to issue charges and debentures.
We can offer advice to all sizes of charity as to the best legal structure for them, whether they are just setting up or whether they are looking to convert to an incorporated structure. We can also assist with all of the procedural elements of such set up or conversion.
Dealing with Disputes
Charities live in the real world and are therefore by no means immune from disputes which can readily distract Trustees/ Directors/Managers from running the Charity and providing the service or other charitable aim which the Charity was set up for. Disputes can also be a drain on financial resources. In some cases a dispute may threaten the existence of the Charity itself.
Disputes can be external disputes with third parties as a consequence of entering into contracts to provide or receive services, acquire or hold land and buildings, purchase goods, inherit property or engage in other activities which could lead to disagreement.
Disputes may also be internal either with employees or disputes within the trustee body. Disputes within the management structure which nearly always involves some kind of personality clash are among the most damaging which a Charity can suffer.
There can also be disputes with authorities where there is an increased risk of conflict with local or central government or other public authorities. Charities, like any commercial organisation, have the opportunity to minimise the possible consequences of disputes with external third parties by having terms and conditions subject to which they will provide the charitable service or acquire goods or services from a third party. Even if, as is common, the third party requires you to conduct business on their terms and conditions, those terms and conditions can sometimes be negotiated particularly if the provider wants your business. Contracts involving repeat supplies involving a substantial expenditure (in proportion to the Charity’s overall financial position) should certainly be considered very carefully and areas of possible dispute identified so that the risk can be minimised. A report on the potential consequences of liability under a particular contract or series of contracts should always be commissioned where there is potential substantial exposure putting the Charity’s assets at risk.
It is advisable to consider whether there should be included in the contract a dispute resolution clause which requires the parties to conduct any dispute which might arise through a particular process rather than allowing one of the parties to resort to court proceedings. One of the most cost effective and common ways of dealing with disputes is by mediation. Mediation is where the parties to a dispute meet usually with their legal advisers with a third party neutral mediator. The purpose of the mediation is to try to work out a solution to the problem rather than have a decision imposed upon the parties by a Court or adjudicating authority. The intention is that the parties will reach an agreement so that both parties can move on with their respective businesses and possibly actually continue to do business with each other notwithstanding the dispute.
Our litigation Department has extensive experience of resolving disputes by mediation. However, if Court proceedings are required either by the Charity or against the Charity the Charity would be well advised to make an application to the Court for approval to take or defend the legal proceedings. If the Court gives the necessary approval it will be on the basis that Trustees will be indemnified as to any costs from the Charity’s funds.
Litigation should be regarded as a last resort in view of the inevitable costs and the uncertainty of the outcome but disputes will arise, as they do in all commercial organisations and advice should be sought both in connection with the Charity’s terms and conditions of business, its constitutional documents and as soon as possible when a dispute looks as if it is about to arise.
Employment law issues to consider when engaging volunteers
Volunteers frequently play a crucial role in helping charities function. However, charities need to take care to ensure that their relationships with volunteers do not become, by accident, contractual relationships. If a worker or employee relationship is created then the individual will become entitled to certain rights, for example the minimum wage, paid annual leave, rest breaks and (for employees) protection from unfair dismissal.
Whether a contractual relationship exists essentially comes down to whether there is a legally binding contract between the organisation and the volunteer. Practically, to avoid this from occurring, organisations should:
- Avoid making payments to volunteers that could be viewed as being a wage. If an individual needs to be reimbursed for their expenses, then the payment needs to clearly be identified as being an expenses payment. These payments should generally only be made if an appropriate receipt has been submitted (which then needs to be retained in the organisation’s records);
- Avoid (or minimise) any perks that could potentially be interpreted as consideration for services;
- Provide the volunteer with the clear right to refuse tasks and when they work. This reduces their obligations and helps show that there is no binding contract;
- Avoid the use of contractual language in correspondence with the volunteer (for example, use terms such as “usually” or “we suggest”);
- Have clear procedures and policies in place for dealing with any problems or complaints. These should be distinct from those policies applying to the charity’s employees. This will help ensure that volunteers are treated fairly, and will reduce the potential for disputes arising; and
- Only provide uniforms and equipment for a volunteer to use if it is reasonable and required for them to be able to perform their role.
It is always sensible to consider whether it is appropriate to put in place a “Volunteer Agreement” to confirm the volunteer’s role, induction and training, any supervision, support, expenses, insurance and health and safety. Extreme care needs to be taken with drafting such documents to ensure that they cannot be interpreted as giving rise to a contractual relationship (see point 4 above!).
A further point to consider when utilising volunteers is the Data Protection Act 1998. Organisations utilising volunteers will frequently have the same responsibilities toward their volunteers as employers have toward their employees. Consequently, any personal or sensitive personal data (for example their name, date of birth or address) must be processed by the organisation in accordance with the Data Protection Act 1998. The requirements of the Data Protection Act 1998 are complex, so advice should always be sought.