Checking the timetable
Catherine Rustomji provides an update on the implementation of the Charities Act 2006...
Since the Charities Act 2006 was enacted, there has been significant coverage of its content. This article reviews the main provisions of the act that are currently in force and identifies what further provisions are still expected. The original timetable set out by the Cabinet Office in December 2006 has been subject to a number of delays, to the extent that not even the revised timetable published in November 2007 could be regarded as entirely accurate.
February 2007
Public benefit consultation. The Charity Commission must carry out public and other consultation as it considers appropriate before issuing any public benefit guidance. The Commission published its draft guidance followed by a three-month period of consultation in the summer of 2006. (See also page 24, Caritas Issue 3, February 2008.) Registration threshold. The threshold for registering new charities with the Commission has now been increased from £1,000 per year to £5,000. Charities below this threshold can still register voluntarily, if they wish to do so, although certain organisations below this revised threshold have had their applications to register refused to be considered by the Commission.
New Charity Commission power.
The Commission has been the power to determine membership of a charity. This can be done on the application of a charity or at any time after a Section 8 Inquiry has been opened (this is an inquiry conducted by the Charity Commission under s 8 Charities Act 1993 as amended by the Charities Act 2006, which can be prompted by concerns relating to a serious risk of significant harm or abuse to the charity, its assets, beneficiaries or reputation).
This new power can often be particularly relevant in relation to Section 8 Inquiries. Perhaps, where a charity has divided into different factions and there is some doubt as to who the current members are. Also, in relation to charitable companies limited by guarantee, if the correct members cannot be identified, this can throw doubt on whether AGMs have been validly held. Furthermore, if trustees are appointed at the AGM, validity of those appointments may also be in question. Restrictions on mortgages of charity land. These provisions have been amended to refer to loans or grants which are secured against a charity's land. Previously, the procedure under s 38 Charities Act 1993 could only be used in relation to secured loans. Where a charity was entering into a secured grant, it was required to obtain an Order from the Commission authorising it to execute the secured grant. As a result of the Act, the revised procedure under s 38 can now also be used in relation to authorising secured grants. Relief from trustees’ and auditors’ liability. The Commission has a new power to relieve charity trustees, charity auditors or independent examiners from liability for breach of trust or breach of duty. This power can be exercised if the Commission considers that, although such a person may well be personally liable for a breach of trust or a breach of duty, he has acted honestly and reasonably and ought fairly to be excused for the breach of trust or breach of duty.
In such a case, the Commission may make an Order relieving him wholly or partly from any such liability. Here, evidence will be key. Full minutes, copies of professional advice and so on are likely to be required in order to provide the Commission with sufficient information to enable it to come to a decision about whether to excuse an individual or not. Trustee indemnity insurance. Previously, if a charity did not already have the power to purchase trustee indemnity insurance in its governing document, it was required to make a case to the Commission requesting consent for this power to be granted to them. Under the Act, charities may now arrange for the purchase of trustee indemnity insurance, out of the funds of the charity, without requiring the Commission’s consent.
November 2007
This was the month that saw a change in the position in relation to mergers. The sector is already seeing an increase in the number of charities merging and this looks likely to continue in the coming years. Register of Mergers. The Act obliges the Commission to keep a Register of Mergers. Every relevant charity merger must be notified to the Commission. A relevant charity merger means:
- a merger of two or more charities in connection with which one of the charities transfers all of its property to the other charity and then ceases to exist; or
- the merger of two or more charities to a new charity and one or all of the merging charities then ceases to exist.
The effect of the Register of Mergers will be particularly useful for charities that transfer their assets to another charity and then wind up the entity that made the transfer. This situation also occurs where an unincorporated charity incorporates as a company limited by guarantee and then transfers all its assets from the unincorporated charity to the new charitable company. Although perhaps not obvious at first sight, this is still considered to be a merger and is eligible for entry onto the Register of Mergers. (See also page 6, Caritas Issue 1, December 2007.)
Previously, in such cases of charities incorporating, any donations or legacies specifically left to the original charity would fail because that charity would no longer exist. Now, the Register of Mergers will allow gifts to the ‘old charity’ to be automatically transferred to the ‘merged charity’. This is much more practical and makes the idea of a merger more appealing. It will also allow for the removal from the Register of Charities of those ‘shell charities’ that were kept in existence primarily for the purpose of receiving any future legacies.
March 2008
The Charity Tribunal. This was established on 27 February 2008 when its president was also appointed. The Tribunal was actually launched on 18 March 2008 with the five legally qualified members of the Tribunal due to be appointed later in the spring. However, because of the length of time parties using the tribunal have to respond to each other, it is likely that all the members should be in place in time for the first case to be heard.
The Tribunal will hear appeals and reviews of certain decisions of the Commission. The intention is for the Tribunal to provide a mechanism for keeping certain decisions of the Commission under review. Previously, appeals were made to the High Court but it is hoped that the Tribunal will provide a less expensive and less time-consuming avenue of appeal.
Having heard a case, the Tribunal will be able to find in favour of a Commission decision, but it will also have various powers that it can exercise if it finds that the Commission has acted unlawfully. For example, it will be able to quash a decision and replace it with its own decision or direct the Commission to take some specific action, such as adding a charity to the Register of Charities.
The Tribunal will be able to award costs in certain circumstances, but it will not be able to award compensation.
There will also be a new procedure called a ‘reference’. This will enable the Commission or the Attorney General to ask the Tribunal to consider wider questions to help to clarify or develop charity law.
New powers for the Charity Commission. The Commission has been given new powers in order to assist and supervise charities. These enable it to:
- suspend or remove trustees from membership of the charity;
- give specific directions for the protection of charity property;
- direct the application of charity property; and to
- give advice and guidance.
This is another example of the Commission being given additional powers and therefore more ‘bite’ as the regulator of charities. Remuneration of trustees. The Act does not create a mechanism to remunerate charity trustees simply for being charity trustees. The provisions relate to remunerating trustees for providing services to the charity, subject to certain requirements. These are:
- the agreement is set out in writing;
- prior to entering into the agreement, the charity trustees have decided that they are satisfied that it would be in the best interests of the charity for those services to be provided by the relevant person; and
- the total number of trustees receiving remuneration in this way constitutes a minority of the total number of trustees of the charity.
Although these new provisions refer to remuneration for services, the definition of services (in this context) includes goods that are supplied in connection with the provision of services – for example a trustee who is a painter- decorator could provide decorating services to the charity and also provide the materials. The provision of goods in any other context would not be authorised in this way.
1 April 2008
Definition of charity and public benefit requirement. The Act introduces the first statutory definition of ‘charity’. In order for an organisation to be a charity, it must be established for one of the charitable purposes set out in the Act and it must also be established for the public benefit.
In many ways, the charitable purposes in the Act seek to list in statute what has already been considered to be charitable by the Commission and the Courts. There is also a ‘catch all’ purpose ensuring that anything that is currently charitable will also be included.
There has been much debate surrounding the issue of what public benefit really is. The Odstock decision is indicative of how the Commission currently interprets the rules (see pages 10 and 11 Caritas Issue 4, March 2008), and the detailed guidance in relation to meeting the requirement currently going through the consultation process with the various sub- sectors is set to intensify this. The Commission has published its draft consultations for charities established to advance religion, for the relief or prevention of poverty, to advance education and fee- charging charities.
There will now be a three-month period of consultations (March to June/July 2008) in order for the Commission to produce finalised supplementary guidance for those sub-sectors on public benefit by the end of 2008. From late March 2009, charity trustees will begin reporting on public benefit as part of their Trustees’ Annual Report. Fundraising statements and commercial participation. Draft guidance has been published by the OTS (and is downloadable from their site) to explain to charities, professional fundraisers and commercial participators involved in fundraising ventures, what changes have been made to the requirements of Part II of the Charities Act 1992 by the Charities Act 2006. These changes relate in particular to ‘solicitation statements’, in other words the statements used when raising funds and some suggested clauses for fundraisers are included in the guidance. The new requirements come into force on 1st April 2008 and the deadline for comments on the guidance to the OTS is 31 May 2008.
For changes in charity accounting, see the governance article on pages 6 to 8.
Summer 2008
Charitable Incorporated Organisation (CIO). The Act introduces the concept of the CIO which is a specifically designed corporate vehicle for use by charities. In its planning stage, there was discussion that there should be two forms of CIO, one where it is appropriate to have trustees and members, and the other where only trustees are required. The Act states that a CIO shall have one or more members and shall also have charity trustees.
One of the advantages of the CIO is that it will be solely regulated by the Charity Commission, as opposed to companies which are regulated by both Companies House and the Commission.
While the concept of the CIO may be of interest to many charities, these provisions are not expected to come into force until the summer of 2008. Even then, the introduction of the CIO requires secondary legislation which is in the process of being drafted. The detail of the structure of the CIO is not yet known, but this will be something to watch with interest. Whether the CIO is as attractive as many charities think it will be, is yet to be seen.
The CIO is not expected to be available for use by charities until late 2008 or early 2009 (at the earliest). For those charities that are currently unincorporated, incorporating as a company limited by guarantee now should still be considered. The Act provides a mechanism to convert from being a company to a CIO at a later date. At least by incorporating in the meantime, the trustees are not continuing to expose themselves to potential personal liability.
The Charities Act 2006 is a significant piece of legislation in terms of the development of charity law and also the regulation of charities. A number of provisions will be welcomed by charities for providing more practical solutions to everyday scenarios – e.g. paying a trustee for providing additional services to the charity. There is now a period of opportunity for interested parties to take part in the Charity Commission’s consultations on the additional public benefit guidance in order to better inform the Charity Commission and assist in producing guidance that is as complete and well-informed as possible.
Further reading - Further information on the progress of implementation is available from the Office of the Third Sector (www.cabinetoffice.gov.uk/third_sector) and the Charity Commission (www.charity-commission.gov.uk).
Author: Catherine Rustomji
Catherine Rustomji is a solicitor in the charities and independent schools team at Dickinson Dees LLP and is also secretary of the Charity Law Association. She advises on all aspects of charity law, in particular, governance and constitutional issues, incorporations and advising charity trustees on their duties and responsibilities. Catherine is also a charity trustee
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