8: More technical issues in charity law – Law Commission supplementary consultation
Streamlined procedures for changing charitable purposes and acquiring trust corporation status
On 1 September, the Law Commission issued a supplementary consultation in its current charity law project.
The new consultation is welcome, as it raises important questions relating to:
- the process and test which should apply when unincorporated (and corporate) charities seek to amend their charitable purposes; and
- the means by which corporate charities may obtain trust corporation status.
While the subject-matter is technical, the practical ramifications have a wide reach and should be relevant to many charities.
The consultation is supplementary to the Law Commission’s major consultation of 2015, Technical Issues in Charity Law (the 2015 consultation), which raised almost 100 questions over a range of areas of charity law. The questions posed now have come out of the responses to that consultation. They raise new points (or in some cases offer a different view from that proposed in the 2015 consultation), hence the decision to offer them for wider consultation.
The current position
At present, very different regimes apply for charities seeking to amend their purposes, depending upon whether they are unincorporated or companies/CIOs. (Different processes apply for other legal forms, such as charities established by Royal Charter, which were considered separately in the 2015 consultation).
In essence, the regime for most unincorporated charities is (absent an express power in the constitution) more limited in scope, more complex and, arguably, applies a more restrictive test.
- The process depends upon a statutory “cy-près occasion” arising and, if an occasion has arisen, requires a cy-près scheme from the Charity Commission.
- The test applied by the Charity Commission when determining whether to grant the scheme is set out in statute, requiring regard to what the Law Commission refers to as the section 67 “similarity considerations”. These are aimed at balancing the wishes of the original donors against the need for the charity to be effective over time. For example, they include the desirability of securing that the charity’s property is applied for charitable purposes which are “close” to the original purposes.
The process for charitable companies and CIOs is more open and straightforward.
- Charitable companies and CIOs have power to amend their purposes by members’ resolution, subject to obtaining the prior written consent of the Charity Commission.
- There is no requirement for any particular circumstances to have arisen. No scheme is required and there are no statutory considerations for the Charity Commission in determining whether or not to give consent.
- The Charity Commission has developed a policy for consent decisions, based on whether the proposed amendment is rational and whether the proposed new purposes undermine the existing purposes; there is no express requirement that the new purposes be “close” to the existing purposes.
The 2015 consultation had offered the view that it was not appropriate to try to align the powers to amend purposes as between unincorporated charities and charitable companies/CIOs. However, the majority of consultees suggested instead that the powers of amendment should be aligned so far as possible.
The Law Commission has taken this on board and offers proposals in the supplementary consultation as to how this might be done.
A new, improved approach?
The new proposals are, in essence, that:
- Trustees of an unincorporated charity should have a power to change the charity’s purposes, with the consent of the Charity Commission.
- Unlike now, there would be no need for a “cy-près occasion” or a scheme (although it is proposed that the cy-près regime be retained as there may still be occasions where it may be used, and useful).
- In determining whether to give consent:
- the Charity Commission must still have regard to the similarity considerations (possibly with some modernisation of the wording); and
- that test would apply both for unincorporated charities and for charitable companies and CIOs.
- The consultation notes that extending the similarity considerations to charitable companies and CIOs might be seen as increased regulation, although it questions whether the proposal would make a difference in practice.
The proposed approach is a very positive development.
Unincorporated charities and the Charity Commission would be put in a better position to act where it is in the best interests of the charity to amend its purposes, while still paying due respect to the original wishes of the donors.
The closer alignment of the processes for amending the purposes of unincorporated charities, charitable companies and CIOs should make those processes easier to understand and to apply.
It also makes sense to align the test for Charity Commission consent for a change of purposes whatever the charity’s legal form. There may be some debate as to whether the test should be the similarity considerations, as proposed, or the (apparently) wider test currently applied for companies and CIOs. However, that may be a debate of semantics – one of the reasons for the consultation is to draw out whether there would be circumstances where there would be a difference in practice between the two tests.
Trust corporation status
The other aspect of the Law Commission’s supplementary consultation has a very technical subject matter – the special type of corporate trustee known as a “trust corporation” – but it has practical ramifications for many charities in some relatively common situations.
- For example, where an unincorporated charity incorporates, transferring its assets to a new corporate charity, if there is land held as permanent endowment or on special trust in the unincorporated charity, the new corporate charity will want trust corporation status in order to deal properly with the land. (There are other ways to deal with the situation, such as appointing an additional trustee, but it is generally preferable to have the trust corporation status).
- Similarly, if a corporate charity wishes to apply for a grant of probate, it needs to be a trust corporation. (Again, there are other ways around it if the charity does not have such status).
The means to obtain trust corporation status at present are limited and cumbersome. In addition, in some of those cases, it is unclear how far the trust corporation status extends.
Again, the Law Commission has listened to and considered the consultation responses and come to the initial view that there is no reason for the availability of trust corporation status to be limited in this way.
The consultation proposes allowing any charitable company or CIO the power to acquire trust corporation status by resolution of the charity trustees. It also asks whether the status should be available more widely and/or automatically.
This proposal, too, is very welcome. It would, on the face of it, make matters considerably easier, and cheaper, for charitable companies and CIOs to operate effectively in situations where trust corporation status is needed.
The proposal is relatively cautious in its scope – the immediate question would seem to be whether it could not also apply to other corporate charities. Again, that is likely to be a point for responses to the consultation to draw out.
31 October deadline and looking further ahead
The deadline for responses is 31 October and it is hoped that charities and advisers will respond in order to inform the Law Commission’s final recommendations.
While we do not yet know what the Law Commission’s recommendations may be, the open approach demonstrated in the supplementary consultation paper gives rise to hope that those recommendations, and the draft Bill which will accompany them, could yield some genuine, and much wanted, charity law reform.
1 September 2016