This article focuses on three specific areas: 'Charity and Trustee Insolvency’, ‘Charity Names’ and ‘The Identity of a Charity’s Trustees’.
Like the Law Commission’s other recommendations, these follow significant consultation within the sector, and aim to address problems which many charities face. While some may not go as far as some consultees desired (such as a power for the Charity Commission to determine who the trustees of a charity are), they are intended to provide a proportionate response that both addresses the issues identified, while preserving the integrity of the surrounding legal framework.
The Government accepted all of the Law Commission’s recommendations in the three areas which are the subject of this article and they are incorporated in the Charities Bill. The Bill was introduced in the House of Lords on 26 May 2021, and has just had its second reading.
- Charity and Trustee Insolvency
The Law Commission’s analysis on insolvency focussed on the ability of creditors to recover property from a charitable trust when a trustee (individual or corporate) goes insolvent.
While the general rule is that the property of a trust of which an insolvent person is trustee is not available to creditors, there are certain situations when creditors can recover property from the trust itself; for example, when a trustee is entitled to an indemnity or to be reimbursed expenses from the charity. In these situations, the outcome of the trustee’s entitlement may be to make charity assets available to the trustee’s creditors.
However, the Law Commission’s analysis found that there is commonly uncertainty over the extent to which trust property is available to creditors in practice. In particular, it is unclear whether creditors can recover property from a trust if it is not part of the general, unrestricted property of the charity. In other words, when it is permanent endowment, held on special trust (i.e. property which is held for a specific, narrow purpose) or a restricted fund. It can also be unclear whether the treatment of trust property differs depending on whether the insolvent trustee is an individual or corporate body.
Law Commission recommendations
The Law Commission concluded that, actually, the existing law (as it relates to the recovery of property from insolvent trustees) does not require reform, but that there are ambiguities in the guidance which would benefit from clarification.
The Law Commission therefore recommended that the Charity Commission update its existing guidance on charity and trustee insolvency (contained in the document ‘CC12 Managing a Charity’s Finances’) to state the following:
- that the law treats permanent endowment, special trust property and restricted funds no differently from other trust property in an insolvency context;
- and that the availability of trust property to creditors (whether permanent endowment, special trust or unrestricted property) is no different whether the trustee is an individual or corporate body.
The Law Commission also recommended that additional guidance be provided on the law relating to the exercise of trustees’ rights of indemnity in an insolvency situation.
Government response and future actionThe Government accepted the recommendations and the Charity Commission has confirmed that it intends to update its guidance under CC12 to reflect the suggested changes.
- Charity Names
The Law Commission’s analysis on charity names focused on the power of the Charity Commission to require a charity to change its name.
At present, the Charity Commission can require a change of name if one of five specific grounds are met. The grounds cover situations in which a name is the same (or too similar) to that of an existing charity, or is likely to mislead the public or is offensive.
The Law Commission found inconsistences in the way the power applies in different circumstances.
For example, the Charity Commission’s power to require a change of name on the basis of it being the same or similar to another charity can only be invoked against registered charities, and within 12 months of a charity being registered. This means that many charities (including unregistered charities or charities which have been registered for more than 12 months) cannot be required to change their name on this basis, even if a clear similarity is present.
The Charity Commission is also unable to rely on its powers to refuse (or delay) the registration of a charity, unless it is applying to be a CIO. This means that an applicant may proceed to enter an inappropriate name on the register, and is only required to change the name once the registration process is complete. Not only does this increase the risk of inappropriate names being entered on the register, but the inability to address the issue as part of the registration process is inefficient from an administrative perspective.
A separate limitation of the Commission’s powers is that they only apply to “formal names”, and not to “working names”. This means that the Charity Commission is unable to prevent charities from using informal working names that it would otherwise have the power to prevent.
Law Commission recommendations
To address these inconsistencies, the Law Commission recommended:
- that the Charity Commission should be permitted to invoke its powers against both registered and unregistered charities;
- that the Charity Commission should be permitted to delay the registration of a charity (or changing a charity’s name), in order to allow for disagreements over names to be resolved earlier; and
- that the Charity Commission’s powers should be extended to cover “working names”, as well as “formal names”.
For further consistency, the Law Commission also recommended that the Commission’s powers be extended to cover “exempt charities” (charities which cannot register with the Charity Commission and are regulated by a separate regulator).
Government response and future actionThe Government accepted the Law Commission’s recommendations and agreed that the changes were a “sensible and proportionate” way of extending the existing legal framework. The recommendations are therefore included in the draft Charities Bill (clauses 25-28) and, once adopted, will amend section 42 of the Charities Act 2011.
- The Identity of a Charity’s Trustees
The Law Commission’s analysis on this area focused on whether the Charity Commission should have greater powers to determine the identity of a charity’s trustees.
At present, the Charity Commission has a power to determine who the members of a charity are, but no corresponding power in respect of charity trustees.
The Charity Commission’s powers are useful in resolving uncertainties over membership and this wider power would be helpful in many situations where the identity of trustees is uncertain.
Law Commission recommendations
The Law Commission considered whether the Charity Commission’s existing powers should be extended to cover trustees, but decided on balance it should not. It considered that the power may not be appropriate in trustee disputes, for example, where trusteeship is often controversial and difficult to ascertain.
However, the Law Commission did propose a more limited power in which the Charity Commission would be able to ratify the appointment or election of a trustee. This would provide charities with additional support in situations where the validity of an appointment or election was uncertain.
The Law Commission therefore recommended:
- that the Charity Commission should be given the power to prospectively ratify the appointment or election of a person to be a trustee;
- that the power should only be exercisable with the consent of the person whose appointment or election is being ratified; and
- a decision to ratify, or not to ratify, an appointment should be subject to challenge by way of judicial review.
Government response and future action
The Government accepted the Law Commission’s recommendations and agreed that the proposed power would help resolve uncertainties around trustee appointments. Among other benefits, this would help reduce administrative difficulties caused when an inaccurate record of trustees is kept.The recommendations have been included in the draft Charities Bill (clause 29) and, once adopted, will introduce a new s184B to the Charities Act 2011