The long awaited new legal form for Scottish charities came into force on 1 April, 2011, known as the Scottish Charitable Incorporated Organisation or SCIO.

The framework for SCIOs was set out in the Charities and Trustee Investment (Scotland) Act 2005. Following a period of consultation, the Scottish Ministers have now issued the more detailed regulations setting out how SCIOs will operate.

What makes SCIOs so unique?

• A SCIO is a body corporate, so it has its own legal personality. This means that a SCIO can carry out activities directly in its own name, such as buying and selling property, entering into contracts, employing staff etc. By comparison, trusts and unincorporated associations do not have separate legal personality, and must carry out these types of activities in the name of its charity trustees on behalf of the charity.
• As a body corporate, the charity trustees of a SCIO are protected by having limited liability. SCIO members do not have to financially contribute anything to meet the SCIO’s liabilities, if any, if it is wound up (members of a charitable company limited by guarantee normally contribute at least a £1). Individual liability can only occur where the trustees have been grossly negligent, reckless, or have committed a criminal act. By comparison, the trustees of an unincorporated charitable association or charitable trust face the potential risk of unlimited personal liability in certain circumstances. Limited liability protection should therefore make SCIOs a popular choice for many new charities and also existing charities which decide to convert to SCIO status.
• SCIOs will only be subject to the requirements of charity law, not company law. SCIOs will register directly with Office of the Scottish Charity Regulator (“OSCR”) to become a charity and not with Companies House.

How do I become a SCIO?

An application is made to OSCR to become a SCIO. It will be recognised as a SCIO once it is entered onto the Scottish Charity Register. If a SCIO is removed from the Scottish Charity Register it will cease to exist from that point. This is discussed further below.

The SCIO must have at least two initial members, who may also be charity trustees. Once set up it must have a minimum of at least three trustees. OSCR has confirmed that the charity trustees can be individuals and/or corporate bodies. The principal office must be in Scotland.

Who can become a SCIO?

From 1 April, all new entities wishing to become a charity can choose which legal form is appropriate for them. Both a charitable company limited by guarantee and a SCIO offer the protection of limited liability. OSCR can also take applications from unincorporated associations and trusts that want to change their legal form to become a SCIO. Charitable companies and Industrial and Provident Societies cannot convert to SCIO status until 1 January, 2012.

Being a member of SCIO

Members of a SCIO will be subject to some of the same statutory duties of care as charity trustees as set out in the Charities and Trustee Investment (Scotland) Act 2005 (“the 2005 Act). These duties are as follows:-

• To act in the interests of the SCIO; and
• To seek in good faith, to ensure that the SCIO act in a manner which is consistent with its charitable purposes.

Failure to comply with this will be regarded as misconduct in the administration of a charity, which could be subject to regulatory action by OSCR against the SCIO or its members. The membership will vote on key decisions such as the appointment and removal of charity trustees and whether or not to approve changes to the SCIO constitution. They should therefore ensure that they exercise their vote carefully and put the best interests of the SCIO first at all times.

A duty to keep appropriate registers

All SCIOs have a statutory duty to keep a register of their charity trustees. A separate register of members must also be kept if they are not also trustees. Interestingly, the register must also retain certain minimal information about former charity trustees and members for at least six years from the date on which they cease to act. Any interested member of the public can request a copy of the SCIO’s register of charity trustees without a charge being made. The SCIO is not obliged to release personal addresses if the applicant is not a charity trustee. If there is concern for the personal security of certain trustees the SCIO can omit their names entirely. Only a member or a charity trustee of a SCIO can request a copy of the SCIO’s register of members.

Are there any disadvantages to becoming a SCIO?

Once a SCIO has been entered onto the Scottish Charity Register, it cannot then convert to another legal form, for example that of a charitable company. It will not be allowed to amalgamate with any body which is not a SCIO. In addition, in order to be removed from the Scottish Charity Register a SCIO must dissolve itself. This is not the case for any other legal form, which could seek removal under section 18 of the 2005 Act, and would continue to exist as a trust or an unincorporated association or a company, even though it has ceased to have charitable status. The full implications of this remain to be seen, but will not, we suspect be without certain difficulties.

Removal from the Scottish Charity Register

An application will be made to OSCR for removal under the solvent or the insolvent dissolution procedures.

A merger with another SCIO will result in the removal of both SCIOs from the Scottish Charity Register and the setting up of a new SCIO with a new charity number. These merger provisions come into effect on 1 January, 2012.

A SCIO may also choose to transfer its undertakings to another SCIO and thereafter seek dissolution.

Summary

The decision about whether or not to opt for SCIO status must be taken on a case by case basis. The fact that unincorporated charitable bodies and trusts can now seek to convert to SCIO status in order to benefit from limited liability, with charitable companies limited by guarantee and the Industrial and Provident Societies having the option to follow from 1 January, 2012, may prove an attractive prospect for many. For those new bodies who wish to set up as a charity, there is now an additional choice of legal form. While it is anticipated that the charitable company limited by guarantee will remain the preferred model for many, there is merit in considering a SCIO structure which will not be subject to the regulatory requirements of the companies acts.

Further Information

For further information please contact Anne Swarbrick, Head of Charities or Victoria J W Simpson, Senior Associate or your usual contact at Anderson Strathern.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.