Conversion to Scottish Charitable Incorporated Organisation (SCIO) status has been an option for charities established as trusts and unincorporated associations and for new starts for nearly a year. As is often the case with new products, the advantages of SCIOs as charitable vehicles are frequently discussed, but it is important to be clear that SCIOs have a number of significant disadvantages when compared with other legal forms. So, is there merit in Registered Social Landlords (RSLs) or other charitable housing associations considering conversion to SCIO status?

What are the advantages of conversion to SCIO status?

• SCIO status is available only to charities, so conversion to SCIO status is available only to those housing associations which currently have charitable status. Constitutions are intended to be straightforward and adaptable.
• A SCIO is a body corporate, so the charity trustees of a SCIO are protected by limited liability. This may be attractive to the charity trustees of an unincorporated charitable association or a charitable trust, but, so far as RSLs are concerned, current rules require them to be constituted as either Industrial & Provident Societies or as companies limited by guarantee. So the charity trustees of RSLs already have the protection of limited liability. SCIO status will probably be of little interest to other housing associations which already have limited liability under these forms for the same reason. Conversion to SCIO status may however be of interest to unincorporated housing associations which, although rare, still exist in Scotland.
• In general, SCIOs are subject only to the requirements of charity law, not to the rules governing other forms, such as company law. SCIOs register directly with the Office of the Scottish Charity Regulator (OSCR) to become a charity and answer to OSCR as sole regulator. This simplicity may be attractive to small organisations, but it must be weighed against the disadvantages of SCIO status. If, at some stage in the future RSLs can be established as SCIOs, it remains to be seen whether this can be made to work, as RSLs must currently answer to the Scottish Housing Regulator (SHR).

 What are the disadvantages of conversion to SCIO?

• OSCR should consult with other regulators prior to registration of a SCIO. This would include SHR. In terms of section 58 of the Housing (Scotland) Act 2001 registration as a social landlord is dependant on the organisation being constituted as either an Industrial and Provident Society or a company registered under the Companies Acts. The 2001 Act makes no mention of SCIOs. Once the provisions of sections 24 and 25 of the Housing (Scotland) Act 2010 come into force SHR may decide to permit RSLs to adopt SCIO form under the new registration criteria. These new criteria should come into force later this year. Until then at least, conversion to SCIO status for RSLs is effectively precluded for fear of losing RSL status.
• Conversion to SCIO is a one way street. Once a charity has converted to SCIO status it cannot subsequently convert to another legal form, nor revert to its original form.
• A SCIO cannot amalgamate nor merge with any body that is not a SCIO. This may limit potential merger partners to a very small pool and could result in housing associations with SCIO status being obliged to wind up, transferring any remaining assets to another housing association owing to failure to find a suitable merger partner.
• Members of a SCIO are subject to some of the statutory duties of care of charity trustees as set out in charity law. SCIO members will vote on key decisions such as the appointment and removal of charity trustees and changes to the SCIO constitution. Failure to comply with these duties will be misconduct in the administration of a charity and could result in regulatory action by OSCR against the SCIO and its members. A question arises as to whether the SCIO’s membership will be comfortable with these requirements.
• As with other charities, SCIOs must make reference to their status as SCIOs on a range of documents. However, unlike the other charitable forms it is a criminal offence for a SCIO or anyone acting on its behalf to issue or sign any of the specified documents which do not include the required information, or to authorise such actions.
• There is no provision for a SCIO to register floating charges, which could be a significant disadvantage when compared to the charitable company form.

Summary

The decision about whether to opt for SCIO status must be taken on a case by case basis. Conversion to SCIO status is an irrevocable step and it is therefore vital to ensure that choosing this form will not limit the future development of the housing association, nor its ability to respond to economic, social and market conditions. SCIO status certainly has attractions for small local charities, but is unlikely to be attractive to the majority of housing associations in Scotland, particularly those currently registered under the 2001 Act. It is anticipated that the company limited by guarantee and Industrial & Provident Society forms will remain the preferred models for housing associations in Scotland for the present at least. RSLs and housing associations should certainly take specific legal advice if considering conversion and it would be wise to await SHR’s detailed guidelines which are expected in the Spring of 2012.

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 issues. 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.