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House adjourned at eight minutes before nine o'clock.
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Official Report of the Grand Committee on the
Charities Bill [HL]
[The Deputy Chairman of Committees (Baroness Gould of Potternewton) in the Chair.]
Schedule 6 [Charitable incorporated organisations]:
Lord Hodgson of Astley Abbotts moved Amendment No. 149:
"( ) A CIO will not be subject to provisions of company law."
The noble Lord said: The amendment seeks to add a new subsection (7) to new Clause 69A in Schedule 6. I shall be brief, as this amendment was tabled before the draft charitable incorporated organisation regulations were issued by the Home Office. These draft regulations make it clear that provisions of company law will apply to CIOs, which is exactly the opposite of what we propose in the amendment. It is interesting to note that in the interpretation section of the draft SI there are references to only three Acts—the Companies Acts 1985 and 1993 and the Insolvency Act 1986. There is a view in the charitable sector that the opportunity for a really innovative approach has been missed. Indeed, some of the amendments that have been tabled by the noble Lord, Lord Phillips of Sudbury, followed this line.
The concept of a CIO gave us an opportunity to think de novo about how best to structure it for its specific charitable purpose. If one accepts that view, then falling back on a company law framework represents an opportunity missed. Our amendment was tabled to try to encourage the Government to think more creatively about the structuring of CIOs. I fear that our encouragement will not be enough, but perhaps the Minister will surprise me. I beg to move.
Lord Bassam of Brighton: The noble Lord, Lord Hodgson of Astley Abbotts, has correctly spotted that there is no language that gives effect to the fact that CIOs should not be subject to the provisions of company law. That is because under Section 718 of the Companies Act 1985, the provisions of that Act do not apply to,
"any body not formed for the purpose of carrying on a business which has for its object the acquisition of gain by the body or its individual members".
The CIO is an example of such a body, so the provisions of the Companies Act do not apply to it. Having heard what the noble Lord said, I am not sure
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how helpful he will feel this is, but we cannot do much more than we have done and I hope that the noble Lord understands that.
Lord Hodgson of Astley Abbotts: It is rather as I anticipated, particularly given the way in which the SI is drafted. We are disappointed that we have not thought round this in the way in which I think the CICs were slightly more creatively constructed. In the circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts moved Amendment No. 150:
"( ) The liability of directors and members of a CIO to any third party shall be limited to the assets of that CIO."
The noble Lord said: Amendment No. 150 is in the same part of Schedule 6. It adds another provision to proposed new Section 69A, which concerns the nature and constitution of charitable incorporated organisations. The amendment inserts a new subsection (8) to new Section 69A.
As the Bill is currently drafted, it is not clear whether the CIO is to be a limited liability vehicle. If it is not, then the directors—the charity trustees—will be personally liable for their CIO's debts. In circumstances where the value of the CIO's debts is greater than the value of its assets, this could result in the directors meeting the shortfall out of their own pockets. This is the position currently facing trustees of charitable trusts and is undoubtedly the main reason why the charitable trust is unpopular with charities whose activities involve exposure to liability. Such charities are invariably established as companies limited by guarantee, a format that benefits from limited liability.
If the directors and members of CIOs will not benefit from limited liability, the new CIO format is likely to be unpopular. For this reason, it is important for the Bill to make it clear that the liability of CIO directors and members is limited. This is what the amendment seeks to achieve. I beg to move.
Lord Bassam of Brighton: As the noble Lord explained, the purpose of the amendment is to limit the liability of the directors and members of a CIO to any third party to the assets of the CIO. The presupposition behind that is that the charity trustees and members of the CIO are personally liable for its debts.
That would be the position of charity trustees in the case of unincorporated charities. However, a CIO is incorporated and its members will not be personally liable for its debts except to the extent, if at all, that they have undertaken a guarantee.
The charity trustees will enter into engagements on behalf of the CIO as its agents and will be protected from personal liability through the ordinary processes of the law of agency, subject to any statutory modification. Notwithstanding the protection conferred by the law of agency, where the charity trustees are personally liable—
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for example, where they have been guilty of wrongful trading—a limitation of their liability in the terms proposed would, in the Government's view, be quite inappropriate.
I hope the noble Lord is reassured by those words. They are certainly intended to reassure him.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister. As I understand what he said, we have here a situation where they would have limited liability so long as they were not trading while insolvent and incurring debts which could not fall due. I see the Minister nodding when I say that and I am grateful for that reassurance. It meets the point made in the amendment and I beg leave to withdraw it.
Amendment, by leave, withdrawn.
Lord Bassam of Brighton moved Amendment No. 150A:
"(a) "sefydliad elusennol corfforedig", or
(b) "SEC""
The noble Lord said: This is probably one of the most difficult amendments I have ever had to move. I shall try, but do not laugh. My background note states:
We have discovered that there is a problem with the Bill's Welsh translation of "charitable incorporated organisation"—or, more precisely, with its abbreviation—and we have had to reorder the abbreviation. This is basically the reason for the amendment.
There is confusion because the abbreviation "SEC" is already in use for the European Co-operative Society in EC Regulation 1435/2003. We have discussed the matter with the Welsh Assembly and I now have to move this tricky amendment. All the amendment seeks to do is to re-arrange the word order of the Welsh equivalent of "charitable incorporated organisation" to read, as I have put it, "sefydliad elusennol corfforedig"—I think that is it. This gives the abbreviation "SEC" instead of "SCE" and thus gets round the problem. I beg to move.
Lord Phillips of Sudbury: I think the least the Minister can do is to offer a formal apology to the Welsh nation.
This is a serious question: am I right in thinking that a CIO registered in Wales but doing most of its business in England can get away with one of these alternatives on its notepaper? If it can, it will make no sense to anybody this side of the border, and the whole point of this is public protection.
Lord Shutt of Greetland: While the noble Lord is gathering himself to answer, I have a further point about these initials. We are used to charities becoming limited companies and then getting an exemption so
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that "Ltd" is not put after their name. Under the Bill, can these magic letters CIO or SEC be deleted? Some well known names which cannot put "Ltd" after their name may think that it is worthwhile converting to this new form, and will not be particularly keen on putting these initials after their name. Perhaps that point should be covered while we are talking about initials.
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