Charity Law: Government agrees Law Commission recommendations on changing governing documents for charitable incorporated organisations

The launch of the structure of the charitable incorporated organisation (CIO) in 2013 allowed unincorporated charity trustees to take advantage of the limited liability offered by a company, without the burden of dual registration. The optional, charitable company route of incorporating by guarantee with Companies House and registering with the Charity Commission, appears to provide more complexity and cost with no discernible benefits. The CIO has proven popular, with over 20,000 companies registered with the Charity Commission.

Amending governing documents

One anomaly between the CIO and the charitable company occurs if the trustees wish to amend their governing documents. Companies have articles of association (the company rule book) governed by company law. In contrast, CIOs are governed by a constitution. The charity commission prescribes two constitutions, dependent on the type of membership structure: the Foundation Model, where the trustees are also the members, or the Association Model, if the charity has a wider membership structure.

A CIO or charitable company may choose to amend its articles or constitution for various reasons, typically as the size of the charity grows, the trustees may wish to widen the process for electing a chair, trustees, and board or to expand their powers or purposes.

It should be noted that articles of association for companies may date back to the early 20th century and may contain anachronistic or offensively worded provisions.

How does a company or CIO change its articles/constitution?

Charitable companies and CIOs may amend their governing documents by passing a special resolution, subject to any provisions for entrenchment. The Companies Act 2006 allows charity members, who are unanimous, to override the entrenched provisions. However, if the amendment is a ‘regulated alteration’, the company must seek the consent of the Charity Commission.

What are regulated alterations?

A ‘regulated alteration’ is:

‘(1) an amendment to the charity’s purposes;

(2) an alteration to the provisions concerning the distribution of the charity’s property in the event of dissolution; or

(3) any alteration that would authorise a benefit to be obtained by the charity’s directors or members (or connected persons), unless that benefit is authorised by section 185 of the Charities Act 2011.’

Changing the articles/constitution for non-regulated alterations

For most simple procedural changes, a charitable company is required to send a copy of the amended articles, and previous articles (if applicable) together with a copy of the resolution within 15 days of the resolution taking effect to Companies House. In addition, the trustees must notify the Charity Commission of any changes of the particulars entered on the Companies House register.

The CIO procedure for notification, is less complicated but more restrictive. A copy of the resolution must be sent to the Charity Commission; however, the resolution does not take effect until it is registered by the Charity Commission and in certain cases the commission may refuse the amendment.

Law Commission: technical issues in Charity Law

To address this inconsistency, the Law Commission, (after consultation) in 2017 published recommendations on changing the law on amending charitable governing documents.

In terms of clarity for the trustees and members, when amending the constitution for a CIO, the time delay between the resolution being passed and gaining agreement from the charity commission may cause confusion (as the member may think the amendment has been passed) and generally the overall process is unhelpful and limiting.

Normally, resolutions to amend the governing documents will be passed at the annual general meeting, to defer the amendment being implemented prior to commission approval is considered unfair on the basis a charitable company would not suffer the same delay.

Definition of objects and purpose

In addition, the definitions of regulated activities are described differently in the same legislation: for CIOs, the Charities Act 2011, s 226(2)(a), and for companies, the Charities Act 2011, s 198(2)(a).

Charitable Companies - 198 Alteration of objects by companies and Commission's consent

(2) The following are regulated alterations—

(a) an amendment of the company's articles of association adding, removing or altering a statement of the company's objects,

 

Charitable Incorporated Organizations - Section 226 Amendment of constitution and Commission's consent

(2) The following are regulated alterations—

(a) any alteration of the CIO's purposes,

 

The Law Commission review commented on the language used in the legislation. The Charities Act 2011, s 198, is concerned with the company’s objects, and the Charities Act 2011, s 226, for CIO’s uses the term purposes. Section 226 is aligned to the definition of purposes used in defining a regulated activity. It was also noted, where the amendment or alteration is subject to only words changing, with the substance of the objects or purpose being constant, it should not be considered a regulated alteration.

Government Response 22 March 2021

The government published its response to the Law Commission review in March 2021, accepting the recommendations. Unfortunately, there is no timetable for implementation. Baroness Barran suggested the changes will occur when Parliamentary time allows. Broadly the following changes will be implemented:

  • an amendment to a CIO’s constitution by resolution of its members will take effect on the date the resolution is passed (or a future date).
  • Any regulated alteration should be ineffective unless the prior consent of the Charity Commission is sought.
  • A change of a CIO’s purposes should not take effect until it has been registered by the Charity Commission.
  • Section 198(2)(a) will be amended to the description in section 226(2)(a).

Richard C. Bishop is the author of Articles of Association: Guidance and Precedents and Articles of Association for Charities and Not for Profit Organisations: Guidance and Precedents.

Richard C. Bishop

Written by Richard C. Bishop

Richard is lecturer in finance at Leeds Beckett University teaching in the Centre for Tourism and Hospitality Management. Prior to working at Leeds Beckett, Richard taught marketing and business strategy at Wolverhampton University, specializing in delivering CIM modules and lead the financial service degree program at Coventry University College.

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