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The Office of the Third Sector is currently seeking views as part of the consultation exercise on the draft Charities (Pre-consolidation Amendments) Order 2009 (“the draft Amendments Order”) and draft Charities Consolidation Bill (“the draft Bill”), following their publication in September The draft Amendments Order makes changes to the existing legislation prior to consolidation. The consultation ends on 4 December. In what is already an extremely busy time for charity lawyers getting to grips with the impact of the 1 October changes introduced by the Companies Act 2006 and how these will affect charitable companies, the presentation of the draft Bill for consultation fulfils part of the intention to consolidate charity law following the enactment of the Charities Act 2006.

In short, the draft Bill will repeal and replace:

• The Recreational Charities Act 1958;
• The Charities Act 1993; and
• Most of the provisions of the Charities Act 2006

The provisions of the Charities Act 1992 and 2006 which apply to organisations other than charities (such as professional fundraisers) as well as to charities are not included in the draft Bill and remain in separate statutes.

Most people responding to the consultation will probably agree in principle that consolidation is a good thing; bringing together most of the statutory regime relating to charities in England and Wales into a single Act (with the exceptions above). The draft Bill does not seek to change substantively the existing law and is not seeking to introduce far sweeping changes which may have had charities and their lawyers. The Office of the Third Sector states that the aim of the draft Bill is modestly to make the law “simpler, better structured, and more accessible to the lay person”.

On a practical level, the draft Bill achieves this aim by breaking down the longer sections of the existing legislation into more manageable chunks and grouping similar provisions together (such as the provisions relating to the production of charity accounts). In addition, the draft Amendments Order tidies up and modernises the language used in the existing enactments prior to the finalisation of the draft Consolidation Bill. For example, flowery references to the “furnishing of documents” are replaced with references to the “provision of documents”. The aims of the draft Bill are therefore more practical than ground-breaking in nature. The draft Amendments Order does however helpfully attempt to clarify some of the existing law, correct anomalies in existing enactments and repeal out of date provisions. Some of the more significant amendments are worth noting below –

Sections 13 and 14 B Charities Act 1993 – Cy pres

Section 13 sets out the circumstances in which the original purposes of a charitable gift can be altered and applied for purposes as near as possible to those intended by the original donor (known as “cy pres”). Such purposes include when the original purposes of the gift have in whole or in part been fulfilled, can no longer be carried out or have ceased to be either relevant in modern times or charitable at law.

In some circumstances, the purposes of the original gift may already have been modified by scheme or otherwise. Where this is the case, section 13 (3) requires references to the “original purposes” of the gift to be read as referring to the purposes for which the property is for the time being applicable.

When it is possible to alter the original purposes of a charitable gift under section 13, section 14 B sets out the court and the Charity Commission’s power to make schemes to do so:

In making such schemes under section 14B the law requires the court or the Charity Commission to have regard to the “original purposes” for which a gift was given (amongst other things). However, unlike section 13 (3), section 14 B contains no specific provision regarding the interpretation of “original purposes”; a small, but potentially significant anomaly. The draft Amendments Order intends to bridge this gap by inserting this missing provision.

Section 43 Charities Act 1993 – Accounts threshold

The draft Amendments Order clarifies the definition of the “accounts threshold” that is the threshold at which charities must have their annual accounts audited or examined. The accounts threshold was recently raised by statutory instrument from £100,000 to £250,000. However, the definition in section 43 (1) (b) still confusing states that “The accounts threshold means £100,000 or such other sum as is for the time being specified in section 42 (3).” Section 42 (3) now states £250,000, hence the reference to £100,000 is confusing and unhelpful, particularly to a lay person. The amendment removes the reference to £100,000 and refers solely to the sum specified in section 42 (3).

Sections 60 (4) and 82 Charities Act 1993

Section 60 (4) enables incorporated charity trustees to authorise any two or more of their number to execute “documents” to give effect to transactions in which the incorporated body of trustees is a party. Section 82 allows charity trustees who are not incorporated to authorise any two or more of their number to execute “assurances or other deeds or instruments” for the same purpose; not exactly plain language.

The draft Amendments Order removes the unnecessary difference between these two sections and amends section 82 to simply refer to “documents” like section 60 (4). “Documents” has a wider meaning under the Charities Act 1993 than “assurances or other deeds or instruments” and can bring in electronic documents. This widens the scope of section 82 and brings it into line with modern times.

Charities Act 2006 – Register of charity mergers

The Charities Act 2006 introduced a register of mergers, which was intended to address uncertainty over whether a legacy to a charity which has transferred all of its property to another and ceased to exist can pass to the transferee charity. This applies to “relevant charity mergers” including incorporation situations, where an unincorporated charity transfers its assets to a new charitable company or where one charity takes over another charity’s assets and undertaking.

Prior to the introduction of the register of mergers there were issues with legacies involving merged charities failing because the charity to which the gift was intended no longer existed, having been dissolved post-merger. On many occasions, to solve the problem, charity lawyers advised that the transferor charity should not be dissolved, but should be maintained on the Register of Charities as a “shell charity” capable of receiving any post-transfer/merger legacies and transferring these to the merged charity: a solution to the problem, but one which came with an administrative burden (particularly for charitable companies with annual returns, reports to Companies House etc).

The Register of Mergers was intended to address this problem and enable the merged charity to receive legacies to the transferee charity on or after registration and remove the need to maintain “shell charities” to receive such legacies thus reducing the associated administrative burden.

There has been considerable debate and publicity in the charities sector and amongst charity lawyers as to how effective the Register of Merger provisions really are and in some cases, it is still advisable to maintain the transferor charity as a “shell charity” to receive any legacies post merger or incorporation.

For example, the new provisions may not be effective to enable a merged charity to receive income from legacies to the old pre-merger charity or where a Will names another charity as alternative recipient of the gift if the first charity has ceased to exist.

The draft Amendments Order presents a welcome opportunity to address these issues, but disappointingly it does not do so. It does not change the existing Register of Merger provisions to overcome these problems and does not therefore remove the need in many circumstances to maintain “shell charities” post merger. Apparently the Office of the Third Sector and the Charity Commission intend to tackle this when the impact of the Charities Act 2006 is reviewed in 2011. 2011 is still more than two years away, and the failure of the draft Amendments Order to tackle this issue is an irritation for charities contemplating incorporation or merger and for charity lawyers, particularly in a social and economic climate where charity mergers are on the rise. Maybe not an opportunity all together missed, but unfortunately not an opportunity taken at the ideal moment.

Conclusion

Overall the draft Bill generally achieves the Office of the Third Sector’s “simplification” aim and brings together the various strands of law in the existing Acts into a single piece of legislation. However, some opportunities have slipped by and need to be picked up in the future. It remains to be seen what else will arise out of the consultation on the draft Bill which ends on 4 December.

Gerry Morrison, Head of Charities, Social Enterprise and Education Group, Rollits.

[In a separate box]

Charities Act 2006 implementation

In the midst of the consultation on the draft Amendments Order and the draft Bill the Office of the Third Sector has also recently confirmed that the provisions listed below relating to exempt charities are expected to come into force in December 2009 (subject to Parliamentary approval of the secondary legislation). Charities and their lawyers will continue to be very busy keeping pace with all of the developments into the New Year!

The following charities are already set to lose their exemption under section 11 of the 2006 Act:

(a) the Church Commissioners and institutions administered by them;

(b) the representative body of the Welsh church and property administered by it;

(c) Eton College;

(d) Winchester College;

(e) certain students’ unions.

The draft Charities Act 2006 (Changes in Exempt Charities) Order 2009 (“Section 11 Order”) will also remove the exemption from the following charities in the first tranche:

(a) the colleges and halls in the Universities of Cambridge and Durham;

(b) the halls in the University of Oxford

(c) higher education corporations in Wales;

(d) universities and university colleges in Wales and institutions connected with them which have been designated as exempt charities by Order in Council;

(e) successor companies to higher education corporations which conduct institutions that are eligible to receive funding from the Higher Education Funding Council for Wales;

(f) charitable institutions connected to institutions mentioned in paragraphs (a) to (e) above which were exempt charities;

(g) the Board of Governors of the Museum of London.

The Charities Act 2006 (Principal Regulators of Exempt Charities) Regulations 2009 (“Section 13 Regulations”) prescribe principal regulators for exempt charities and their connected institutions in Schedule 2 to the 1993 Act. These exempt charities will remain exempt. The principal regulators appointed as part of the first tranche are:

(a) Higher Education Funding Council for England (HEFCE) for higher education institutions in England and their connected institutions;

(b) The Secretary of State for Environment, Food and Rural Affairs for the Board of Trustees of the Royal Botanic Gardens, Kew and its connected institutions;

(c) The Secretary of State for Culture, Media and Sport for the Boards of Trustees of museums and galleries and their connected institutions.

Gerry Morrison