Proposals on ordinary trust status and changing objects
The Law Commission’s consultation on technical issues in charity law ran from March to July 2015. Since then, the commission has analysed the various detailed responses and begun the preparation of a draft Charities Bill, which is currently expected during the first half of next year.
Two issues arose during the consultation on which the Law Commission had not expressly invited the views of consultees, but which were nevertheless addressed in some of the responses. The commission has therefore published a supplementary consultation on these two discrete points, which it intends to consider more fully before making its final recommendations and publishing the Bill.
The topics of the consultation are the means by which charities can achieve trust corporation status, and the process by which they can change their objects. In both cases, the procedures involved vary depending on how a charity is constituted and these latest questions from the Law Commission have identified the existence of sometimes complex processes that would benefit from clarification.
Trust corporation status
The supplementary consultation raises the possibility of trust corporation status becoming more widely available, as well as more easily obtained. Trust corporation status can be beneficial in that it enables sole corporate trustees to give valid receipt for the proceeds of sale arising under a trust of land without having to appoint an additional trustee.
This can be helpful in a situation where, for example, a corporate trustee wishes to take out a grant of probate, or following a merger where the merged corporate charity will hold permanent endowment or property on special trust as sole trustee and needs to be able to deal effectively with the land.
As things stand, trust corporation status can be obtained by one of three means:
- An application to the Lord Chancellor under section 3 of the Law of Property (Amendment) Act 1926.
- Seeking a scheme or order of the Charity Commission.
- In the case of a Charitable Incorporated Organisation (CIO), by making a pre-merger vesting declaration.
These processes can be complicated and time consuming, sometimes presenting a significant barrier to merger. The Law Commission is now proposing, however, that charitable companies and CIOs be given a power to acquire trust corporation status by means of a trustee resolution. Indeed, it goes as far as asking consultees whether they feel that the status should be conferred automatically, without even the need for a resolution.
As the commission’s proposals extend only to charitable companies and CIOs, other corporate charities – such as statutory corporations and Royal Charter bodies – would still need to use existing routes in the event that trust corporation status is required. Should it become available, however, the new power is likely to be seen as a welcome introduction by many.
Changing charitable objects
The Law Commission’s second proposal relates to the tests that apply on an application to amend a charity’s objects, which vary depending on whether the applicant is incorporated or unincorporated. In the latter case, the doctrine of “cy-près” (meaning “as near as possible”) applies and, with a few limited exceptions, the trustees of the charity are required to establish that an “occasion” of cy-près has arisen before they are able to amend the charity’s objects.
These occasions are set out in section 62 of the Charities Act 2011 and arise where, for example, some or all the charity’s original purposes have been fulfilled or can no longer be carried out for some reason.
If an occasion of cy-près has arisen, the Charity Commission has power to amend the applicant charity’s objects by means of a scheme under section 67 of the 2011 Act. The Charity Commission will only exercise the power if it considers such a scheme appropriate, taking into account the purpose for which the charity was originally formed and the desirability of applying its property for similar purposes in the future, but also bearing in mind the need for the charity to continue to be effective in a changing world.
The process that applies to corporate charities is simpler: a change to a charitable company’s objects is regarded as a “regulated alteration” for the purposes of section 198 of the 2011 Act and, as such, any resolution by the company’s members to change the objects clause of the Articles of Association requires the prior written consent of the Charity Commission. A similar requirement applies to CIOs by virtue of section 226 of the same Act.
Charity Commission test
The test applied by the Charity Commission when deciding whether or not to grant consent is based on policy, not statute, centring on whether the proposed amendment is rational, and whether it would undermine the charity’s existing purposes. There is no express equivalent to the doctrine of cy-près.
The Law Commission is now proposing that the two regimes are aligned – although, again, it would appear that statutory corporations and Royal Charter bodies will continue to have to follow different procedures. It suggests that unincorporated charities, charitable companies and CIOs should all be subject to the same statutory test and it proposes the section 67 appropriateness test for this purpose. If adopted, this system would relieve unincorporated charity trustees of the burden of establishing that an occasion of cy-près had arisen, which is likely to be a welcome change.
Some corporate charities may feel, however, that this is an unwelcome development, on the basis that the application of section 67 will constitute an additional regulatory burden, even though it would lead to a more consistent regime overall. It is worth noting, though, that the consultation questions whether broadening the application of the statutory test to corporate charities would make much difference to them in terms of outcome, and this is perhaps unlikely to be the case.
What next?
Combined with the 2015 original, the Law Commission’s supplementary consultation should lead to helpful – and some might say overdue – reform, which would help to cut some of the red tape that currently holds up the implementation of decisions by charities. The consultation closes on 31 October, following which the commission’s final recommendations will be presented to the Government.
