Legal
Body-building
Increasing numbers of independent schools are becoming incorporated. Mairéad O’Reilly examines the advantages of incorporation as well as some of the key issues that school governors should consider
Incorporation involves the creation of a legal entity separate from the management and members of the organisation involved. The most common and often simplest mode of incorporation for schools is the formation of a company limited by guarantee, registered with the Companies Registry, Companies House. Other corporate forms exist but it is this type of incorporation that is reviewed here.
Advantages of incorporation
1 Limited liability
Incorporation effectively ring-fences the liability for many of the key risks associated with running a school. Managing a school carries with it a host of risks. These include employing staff and entering into contracts with parents and suppliers, as well as potential claims in negligence and possible criminal liability under health and safety legislation. In an unincorporated school, the risk of this liability falls primarily on the governors. They are personally liable but may be able to claim repayment from the school funds of any sum paid, provided the school has sufficient funds to cover it. If the school does not have sufficient funds, however, the governors will remain personally liable for the costs of claims from their own assets.
A claim against an incorporated school will be made against the corporate body, not the governors personally. Similarly, such a claim is made against the assets contained within the corporate body rather than the personal assets of the governors and, if applicable, members. Action under health and safety legislation would be brought against the corporate school. It may still be brought against individual governors, but their consent, connivance or neglect in the offence would need to be proven. Governors would still owe fiduciary obligations to the corporate body and could face a claim by the corporate body if found to be in breach of their duties. They would, however, have the benefit of significant protection against liability from third party claims.
Incorporation also releases governors who have retired from the board from retaining personal liability against third parties with whom the school has had contractual dealings.
2 Reorganisation and execution of documents
The process of incorporation can provide schools with a good opportunity to conduct a constitutional review and, where appropriate, to modernise and update the administrative provisions of their governing documents.
It can also simplify the execution of formal documents as agreements can be executed on behalf of the company only and not by each individual member or governor.
3 Public benefit
It is worth noting, at this time of heightened scrutiny of public benefit delivery, that incorporation provides a fresh opportunity for schools to make specific reference to public benefit in the objects contained in their constitutions. If a school actively operates a policy of providing public benefit, for example by sharing its resources or offering bursaries, it may wish to provide evidence of this commitment in the company’s constitution.
Disadvantages of incorporation
While incorporation offers school governors an invaluable opportunity to restructure the school’s activities and ring-fence the risks and liabilities associated with them, it is important to be aware of the additional responsibilities which come with incorporation.
If it has charitable status, a school must comply with the requirements of the Companies Acts as well as all applicable charity legislation.The most obvious example of this is the obligation to register with both the Companies Registry and the Charity Commission. This and the additional expense involved should be considered before a decision to incorporate is made.
The Charities Act 2006, which received Royal Assent in November 2006, has introduced a new legal entity designed specifically for charities, the Charitable Incorporated Organisation (CIO). This provides the advantages of a corporate structure for charity trustees while avoiding the necessity for dual registration (CIOs will only be required to register with the Charity Commission).
This legislation is not expected to be implemented until early 2008, so forming a company remains the key option for trustees wishing to create a corporate structure. It is yet to be seen how effective and widely used CIOs will become.
Part VII incorporation
It is important to understand the distinction between incorporation of a school as a company limited by guarantee and “Part VII incorporation” under the Charities Act 1993 which confers a form of legal identity on the trustees of a charity as a group. This enables the incorporated body of trustees to act in their corporate name, that is to execute documents, but does not affect the personal liability of trustees or the legal status of the school. For this reason, Part VII incorporation does not offer a viable solution to governors whose chief aim is to limit their own personal liability.
Permanent endowment property
Many schools that are registered charities hold assets such as land, bursary funds and prize funds as permanent endowment, that is capital assets which the charity trustees must retain and cannot spend as part of its income.
Permanent endowment cannot be transferred to a corporate charity to form part of its corporate property. Governors must remember that, where a school is incorporated as a limited company, the permanent endowment must continue to be held on the existing trusts of the unincorporated charity, but may be held by the new corporate charity as trustee.
Incorporation process
If a school does take the decision to incorporate as a limited liability company, some of the key steps involved in the process are as follows:
• formation of a new charitable company – drafting memoranda and articles of association containing the objects which mirror the objects of the existing school;
• registration of the new company with Companies House;
• if the school is a registered charity, making application to the Charity Commission to register the charitable company;
• if the school is a registered charity, simultaneous application to the Commission for a scheme to transfer the assets of the school to the newly incorporated company; and
• drafting a transfer agreement to document the transfer of assets from the school to the newly incorporated company.
Additional considerations
The incorporation of a school creates a new legal entity. It is therefore necessary to consider the contracts which have been entered into on behalf of the school as an unincorporated charity and decide which ones need to be transferred to the new company. This will include any existing contracts between parents and the school. This transfer from the original unincorporated structure to the newly formed company will require notification to all counter-parties to the contracts.
Staff – TUPE considerations
The contracts of all employees working for the school must also be considered. In circumstances where the terms and conditions of employment are to transfer to the new company, but are otherwise to remain unchanged, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (the TUPE regulations) apply. These are designed to protect the rights of employees during a transfer to enable them to enjoy the same terms and conditions, with continuity of employment, as formerly. Each employee whose contract will be transferred to the incorporated school will require a TUPE transfer, switching their contracts to the new corporate entity.
In an increasingly litigious climate, it is prudent for school governors to seek to protect themselves from exposure to contractual and tortious claims by isolating liability for the activities of the school within a corporate body. However, you should always weigh up the advantages of incorporation as a means of risk management against the burden and expense involved in complying with company law regulation.
Mairéad O’Reilly is a solicitor for Bircham Dyson Bell. Mairéad can be contacted on maireado’reilly@bdb-law.co.uk
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