Scottish transfer of assets regulations 'fundamentally flawed'

19 Mar 2012 News

Proposals by the Scottish government to protect charitable assets at risk through misconduct by a charity's governing body have been slammed by the Institute of Chartered Accountants of Scotland, which says the move could put beneficiaries and creditors at risk.

Proposals by the Scottish government to protect charitable assets at risk through misconduct by a charity's governing body have been slammed by the Institute of Chartered Accountants of Scotland (ICAS), which says the move could put beneficiaries and creditors at risk.

The Scottish government has proposed changes to procedures in relation to the Charities and Trustee Investment Scotland Act 2005, which allows the Office of the Scottish Charity Regulator (OSCR) to apply to the Court of Session for the transfer of assets in the event of a charity misappropriating funds.

The changes would affect the procedure OSCR must follow prior to applying to the Court of Session and would give OSCR the power to reallocate the funds to another charity or charities operating in the same area.

But ICAS has said that the regulations are "fundamentally flawed" and that they "could disadvantage stakeholders including beneficiaries and creditors", and put OSCR at risk of legal action.

Threat of redundancies or insolvency

Christine Scott, assistant director of charities and pensions at ICAS, said: "We support in principle measures aimed at protecting charitable assets. However, removing assets without a comprehensive due diligence exercise could result in an organisation being unable to pay its debts or support its beneficiaries. As a result of financial stress suppliers, donors and financiers may not have the confidence to continue to do business with it.

"We are concerned that repercussions for a transferring organisation could include the triggering of additional liabilities such as pension liabilities and redundancy payments or breaches of bank or loan covenants. The implications of a scheme could even result in insolvency if an organisation can't pay its debts." 

This could also put OSCR itself at risk if an organisation's creditors decided to take legal action as a result, the Institute warned.

The Scottish government says the proposals were recently in a consultation phase and open to public scrutiny. "A number of concerns were raised in the consultation and these will be considered before the regulations are finalised and laid in Parliament. The Scottish government may contact those parties which responded to discuss their response and obtain constructive feedback on how to address any concerns raised," said a spokesman for the Scottish government.

"Fairly simplistic" regulations

ICAS concerns have been echoed within the Scottish legal community. Head of charities at Lindsays Solicitors, Alastair Keatinge told civilsociety.co.uk that the regulations "take a fairly simplistic approach to some potential problematic legal and financial issues. In my view, OSCR should also be able to appoint a judicial factor where this would be more appropriate, ie to safeguard jobs," he said.

He added additional concerns that the regulations would "give significant power to OSCR to propose allocation of charity monies", stating than "clear guidance would have to be given on this". 

Keatinge also said that the matter of jurisdiction, such as where assets of an English charity might be transferred to a Scottish charity, would have to be considered in more depth, and suggested that regulations which would require OSCR to advertise transfer schemes lack merit, advising that contacting relevant stakeholders of the charity to seek their views would be more relevant.

"Whilst I do not share ICAS' view that the regulations are 'fundamentally flawed', an alternative to the regulations is also required," he concluded, "I am not convinced that placing an advert in a newspaper or on a website is efficient to alert organisations or stakeholders to a transfer scheme.

"I also agree with ICAS that the threshold based on annual income is not appropriate and a balance sheet test would be more appropriate."

 

 

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