The process for the conversion of a charitable company into a Charitable Incorporated Organisation, due to come into force from 1^st January 2018, potentially causes uncertainty for third party lenders who have taken all assets security over a charitable company, according to a leading corporate lawyer. “The Government’s response to consultation on the new procedure for the conversion of an existing charitable company into a CIO recognises that it might create difficulties where security has been registered over the assets of the charitable company” says Philip Round, a Partner at George Green’s Wolverhampton office. “The response does not, however, offer a definitive solution”.

Mr Round continues “CIOs are a completely new form of charitable vehicle introduced in 2013. They are subject to less onerous reporting and filing requirements than charitable companies. Unlike companies, CIOs are only required to register, and file annual returns, with the Charity Commission, and are not subject to the accounting requirements set out in the Companies Act 2006. Whilst the legislation which introduced CIOs contains a power for the Secretary of State to introduce regulations enabling existing charitable companies to convert into CIOs, such regulations had not been published until recently. It is intended that smaller charitable companies can now apply to convert from 1^st January 2018, with the application dates for larger companies staggered throughout the year. The legal entity will remain the same; the trustees will, however, be required to file new constitutional documents with the Charity Commission.”

According to Mr Round, responses to consultation acknowledge the problems relating to existing security granted by charitable companies. “It has always been recognised that the CIO is unlikely to be a viable proposition for larger charities that wish to borrow money secured by debentures over all of their assets, given that there is no public register of security granted by CIOs other than the register of security over property maintained by the Land Registry. This is unlikely to prove attractive to lenders. The introduction of a procedure for conversion of a charitable company into a CIO does, however, beg the question of what happens to outstanding all assets security registered against charitable companies that wish to convert.”

“Public responses to the consultation suggest that charitable companies should only be permitted to convert if they file a confirmation that all such security has been discharged. The draft regulations do not, however, reflect this. Whilst the Charity Commission is required to consider all interested parties, and has a discretion to refuse to allow conversion, the regulations do not specifically recognise the interests of secured lenders.”

Mr Round concludes, “it is of course unlikely that large charities with significant secured debt will consider converting into a CIO. It is also inconceivable that the Charity Commission would not consider a secured lender’s interests as part of the conversion process. Lenders might, however, consider incorporating into standard facility and security documents specific restrictions against a charitable borrower converting into a CIO.”