Charity Law: Which articles of association does a charitable company use?

Introduction

Charity trustees that operate using trusts or unincorporated associations leave themselves open to liability for the actions of the charity. In addition, they may be restricted when entering contracts and, in some cases, cannot engage employees or hold property in the charity’s name. As charities grow, the trustee’s ought to consider a more formal company structure under which to operate.

The Charity Commission provides two types of charitable company structure:

  • Charitable incorporated organisation.
  • Charitable company limited by guarantee.

For larger charities, a corporate company structure is usually preferable. Until 2013 with the introduction of the Charitable Incorporated Organisation (CIO), the only option was to incorporate with Companies House and register with the charity commission.

The complexity of dual regulation and falling under the requirements of the Companies Act 2006, in addition to the rules of the various charity acts, led to the creation of the CIO, which has proved very popular. They are simple to set up, require registration with the Charity Commission only and do not suffer the onerous requirements of the Companies Act 2006. The CIO operates under a constitution (template is available from the Charity Commission), a company limited by guarantee must use articles of association.

What are the new model articles, and can a charitable company limited by guarantee use them?

The Companies Act 2006 provides a rule book for a company incorporating by guarantee, which deals with matters concerning the directors (trustees), members, and administration of the company.

For larger charities, incorporation by guarantee and forming a legal company through registration with Companies House is still the preferred option, however a charitable company cannot use the model articles prescribed by the Companies Act 2006.

Which articles of association should a charitable company use?

Companies incorporated prior to 1 October 2009 were obliged to include provisions in the memorandum of association, stating what the company was set up to do (its purpose or objects) which then restricted the company to that specific purpose. This requirement was removed by the Companies Act 2006 and the memorandum of association incorporated into the articles of association.

Charitable companies (GD1)

For charitable companies, the charity commission prescribes the articles of association, referred to as GD1. It is not compulsory to use the wording of GD1, however, charitable articles must contain additional provisions not found in the Companies Act 2006 prescribed model articles, in particular objects (purpose) and powers provisions.

The charity commission recommends using GD1 as a template, it should be noted a text or Word version is not available, and to create the articles of association requires copying and pasting (or conversion) of the PDF. It is feasible to start in reverse with the new model articles for a company incorporated by guarantee and use GD1 as a reference to ensure they contain the additional provisions required.

What are the additional provisions the Charity Commission require?

  • There is no general requirement for a company to details its purposes, but a charitable company must include its purposes or objects in the articles of association.
  • The Companies Act 2006 has no requirement for a company to appoint a secretary: GD1 includes provisions for a secretary, these may require amendment.
  • The GD1 articles includes 12 specific powers that may only be used to further the objects of the charity; it is possible to amend to exclude certain powers to suit the charity’s needs.
  • Who can be a trustee, their appointment and removal, and can they change the articles of association.
  • Detailed membership provisions, classes of membership and the process for termination.
  • How meetings are called and held, does the chair have a casting vote and what constitutes a meeting in terms of the number of members required to form a quorum.

Can I amend the articles of association in the future?

The simple answer is yes. Both charity and company law allow the articles to be changed by passing a special resolution, which requires 75% of the voting membership to agree. In certain cases, the percentage required to amend the articles maybe higher (referred to as entrenched provisions) or the articles may state any amendment requires the approval of a third party, this could include the Charity Commission or another charitable company.

Regulated Alterations

An important exception to the process of changing the articles of association for a charitable company is if any proposed change to the articles falls under the definition of a regulated alteration.

Broadly, if the company requires a change to its objects, or any procedural change on winding up the charity or an authorisation of payments to directors or connected parties, then consent in writing is required from the Charity Commission before the resolution is proposed.

How do I tell the Companies House and the Charity Commission I have altered the articles of association?

On the basis any regulated alteration has been approved and the resolution has been passed at a general meeting of the company, then a copy of the resolution and the amended articles must be filed with Companies House within 15 days of the resolution being passed. In addition, the company should notify the Charity Commission using the online submission form so it may update the charity register.

Do the changes to the articles of association take effect immediately?

Once the resolution has been passed the amended articles take effect on that date, if the objects have been amended and approved in writing by the Charity Commission, then the company will only act under the new objects when registered with Companies House.

This contrasts to a CIO where a proposal passed at a general meeting to amend the articles, on the assumption no regulated alteration was undertaken, will only take effect once approved by the Charity Commission. It should be noted this rather unfair anomaly was recently addressed by the Law Commission and the government has agreed to change the law to allow CIO amendments to align with charitable companies.

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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