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09th May 2013

Independent Schools and CIOs: a New Specialist Structure?

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The Charitable Incorporated Organisation, the new legal structure for charities, is now with us. So is it suitable for an independent school? There is one very good reason to consider the merits, although it may not be attractive for some.

There are two essential structures for charities: corporate and non-corporate. The former (eg a company) has the capacity to undertake legal arrangements – employment, property ownership, etc – whilst the latter (eg a trust) must act through its trustees / governors. Consequently, any liability (save for negligence and fraud) for a corporate charity rests within that structure, but for a non-corporate charity liability rests ultimately with its trustees. Non-corporate charities thus present far more risk for trustees. Corporate forms already exist, the guarantee company being the most common, but the CIO was designed as a corporate vehicle especially for the charity sector, which includes charitable schools.

So should a school become a CIO? Non-corporate schools should become corporate for the risk management reason given. The question is whether the CIO is the best corporate structure for them. For schools already established as companies (leaving aside other corporate forms, like royal charter corporations which are unlikely to change from that prestigious form), the question is whether the CIO is a better corporate vehicle than a company.

For non-corporate schools, let us consider two situations. Firstly, a simple breach of contract; secondly, extensive borrowing for capital works for a struggling school. In both situations the governors may be liable for unmet commitments, and these are likely to be far greater in the second example, even if the school is diminished or closed.

The school governors in both cases cannot escape liability by incorporating after the event, but a school which did this would protect its governors from future liability.

What exactly is a CIO then and is it right for a school? A CIO is free from company law, regulation, meetings and terminology: it is not a company at all but a new structure designed for charities. It is however, fully corporate just like a company, which protects its trustees from liability. There is also the advantage, as with any corporate structure, of continuous asset ownership, whereas a trust must transfer and vest property when trustees change. The Charity Commission suggests the CIO will be most suitable for small to medium sized charities which employ staff and / or enter into contracts.

However the chief attraction of CIOs over companies is the avoidance of company law and regulation. The Companies Act alone has an eye-watering 1,300 sections and 16 schedules, and company law cases are reported weekly. Naturally CIOs will not be immune from the inevitable accretions of the law. However at least they will start afresh (except for some principles of company law which may apply by analogy!). Only matters relevant to charities will apply to them: whereas only a fraction of companies are charities, all CIOs will be. Most issues needing law and regulation for CIOs, such as trustees’ duties, relate to all charities. Additionally, separate CIO law will only arise as regards CIOs’ specific structure and powers.

Schools currently operating as companies could also consider CIO status. There will no doubt be reluctance, as a corporate structure is already in place, however there are also some other disadvantages. Although CIOs may grant charges, the Charity Commission will not be keeping a searchable register of charges like Companies House does for companies. CIOs cannot issue debentures, which is one area where a company has more scope. Although many charities do not need to do this, larger and more complex charities including schools sometimes do so; thus the CIO structure may not be right for them. Such schools will have to tolerate being a company in order to continue benefiting from this flexibility.

These specific points notwithstanding, any non-corporate school should critically consider becoming corporate. Non-corporate schools are now relatively few but, in this particularly demanding economy for independent education, each one has an urgent risk management task ahead, whether or not it involves becoming a CIO.

For more information, please contact Chris Knight on 01604 233233 or click here to email Chris.