Lawyers for the business of media and entertainment

News

Charities Act 2006: An Overview

The Charities Bill, worked on for four years, is now the Charities Act 2006. The Act, which is not yet in force, makes many welcome changes at a technical level, and also includes a number of innovations such as the Charity Tribunal and the Charitable Incorporated Organisation.

The Act also makes it possible for trustees to be paid for services they provide to their charity in certain circumstances, and to take out trustee indemnity insurance.

It also includes many provisions which improve the Commission's ability to police the sector, including a power to enter premises and seize documents, a power to give specific directions for the protection of a charity and to direct the application of charity property. There is also a power to relieve trustees from liability for breach of trust or duty. There are those who might argue that these powers give the Commission wide powers relating to property in respect of which they may be largely unaccountable; but a counter-argument to this is that these powers are counter-balanced by the Commission's new accountability through the Charity Tribunal.

Other useful provisions in the Act include:
• Power to determine membership of charity - Companies Limited by Guarantee (CLGs) (and soon the Charitable Incorporated Organisation (CIO) (below)) have a dual structure of members and director/trustees. It can often happen that a company, because of numbers or neglect, does not keep up with who its members are. The Act gives the Commission the power to determine that matter, a function previously reserved to the Court
• Restrictions on mortgaging - This amends S38 of the Charities Act 1993 which arguably meant that while a mortgage on land to secure a loan can be permitted after obtaining proper advice in accordance with a specified procedure, a mortgage on land for a conditional grant must be cleared through the Commission. The advice procedure will now apply to both loans and grants and also to other proposed obligations
• Power to spend capital – The Act permits unincorporated charities to spend capital if certain financial parameters and other conditions are met. This might be useful for charities established as trusts who find that they cannot effectively carry out their charitable objects because they cannot spend their capital.

Public Benefit Consultation

Perhaps the most contentious provision in the Act is the abolition of the presumption of public benefit. S2(1) of the Act states that for the purposes of the law of England and Wales, a charitable purpose is a purpose which (a) falls within [a list of charitable purposes] and (b) is for the public benefit. S3(2) states that in determining whether [the public benefit requirement] is satisfied in relation to any such purpose, it is not to be presumed that a purpose of a particular description is for the public benefit. Previously charities for the relief of poverty and the advancement of religion and education were presumed to be for the public benefit.

There is currently an ongoing debate about whether the abolition of the presumption actually changes the extent of public benefit necessary in each of the four heads of charity. That aside, the public benefit issue is bolstered by the fact that the new Charity Commission has as one of its statutory objectives a public benefit objective which is to promote awareness and understanding of the operation of the public benefit requirement.

The Commission must issue guidance in pursuance of its public benefit objective. It must also carry out such public and other consultation as it considers appropriate before issuing any guidance. Charity trustees must have regard to any such guidance when exercising any powers or duties to which the guidance is relevant.

It would seem therefore that the Commission will be in a strong position to issue guidance which may mould the public benefit debate going forward. It has issued an indicative consultation schedule which contemplates the launch of a three month consultation in January 2007, with publication of principles of public benefit in June 2007. In September 2007 there will be a pilot assessment of public benefit, producing detailed guidance for specific types of charity, and consultation on that guidance. A formal assessment will commence in April 2008, and in the Summer of 2008 the Commission will report progress to Parliament. It would still potentially be open to Parliament to amend the Act by introducing a statutory public benefit test like the one in S8 of the Charities Trustee Investment (Scotland) Act 2005.

The Payment for Services and Trustee Indemnity Insurance Issues Solved?

S36 of the 2006 Act is a new provision which entitles a trustee of a charity, or a person connected with him or her, to receive remuneration out of the funds of the charity. This does not apply to remuneration for services provided by a person in his capacity as a charity trustee or under a contract of employment. Before the remuneration can be obtained, four conditions must be fulfilled:

• The amount of the remuneration must be set out in an agreement in writing under which the relevant person is to provide the services in question to the charity; and it must not exceed what is reasonable in the circumstances for the provision by that person of the services in question

• Before entering into the agreement, the charity trustees must have decided that they were satisfied that it would be in the best interests of the charity for the services to be provided by the relevant person to the charity for the amount set out in the agreement. For these purposes the duty of care in S1 of the Trustee Act 2000 applies, and the trustees must have regard to any guidance given by the Commission concerning the making of such agreements

• Immediately after the agreement is entered into the total number of trustees to which such an agreement relates must constitute a minority of the trustees

• The trusts of the charity do not contain any express provision that prohibits the relevant person from receiving the remuneration.

S37 disqualifies a charity trustee from acting as such in relation to any decision or other matter connected with the agreement. If a trustee does so act the Commission may make an order requiring the disqualified trustee to reimburse the whole or part of the remuneration received (or the monetary value of a benefit in kind), or not to be paid the whole or part of the remuneration.

This provision should save trustees from seeking to amend their constitutions to permit payment to trustees for services rendered other than in the capacity as a trustee.

Similarly, S39 of the Act permits the trustees of a charity to arrange for the purchase out of the funds of the charity of insurance designed to indemnify the charity against personal liability in respect of any breach of trust or duty committed by them in their capacity as charity trustees; or any negligence, default, breach of duty or trust committed by them in their capacity as directors or officers of the charity or of any body corporate carrying on any activities on behalf of the charity.

The terms of the insurance must, however, exclude the provision for an indemnity for any person in respect of:

• a fine imposed in criminal proceedings

• a sum payable to a regulatory authority by way of a penalty in respect of non-compliance with any requirement of a regulatory nature

• any liability incurred in defending any criminal proceedings in which he is convicted of an offence arising from any fraud or dishonesty, or wilful or reckless misconduct

• any liability incurred to the charity arising from any conduct which he know or must reasonably be assumed to have known was not in the interests of the charity or in the case of which he did not care whether it was in the best interests of the charity or not.

The trustees may not purchase insurance under this provision unless they decide they are satisfied that it is in the best interests of the charity for them to do so; and the S1 duty of care under the Trustee Act 2000 applies when making such a decision.

Again, this provision should mean that trustees who do not have a power to take out trustee indemnity insurance in their governing document, will not have to petition the Commission to obtain permission to purchase it, provided that the provisions of S39 are complied with.

Two of the most vaunted innovations of the 2006 Act are the Charitable Incorporated Organisation and the Charity Tribunal.

There are arguments that the CIO is not necessary. While it confers limited liability, there is already a limited liability vehicle for charities in the company limited by guarantee; and many of the arguments about the problems with dual regulation between Companies House and the Charity Commission are arguably over-stated. Furthermore, much of the draft regulation around the CIO has been taken from company legislation, further begging the question about whether the CIO is necessary.

On the other hand, the CIO does have very clear duties for its members and trustees set out at Schedule 7 of the 2006 Act, which could offset the uncertainties of the new directors' duties set out in Ss172-178 of the Companies Act 2006.

The Charity Tribunal is a welcome innovation which will help to hold the Commission to account, and which is a much-needed counterweight to the enhanced powers of the Commission conferred by the 2006 Act. Rules are to be laid down by the Lord Chancellor.

One of the criticisms of the Charity Tribunal is that there is no legal aid or its equivalent in respect of bringing an action there, and the Tribunal may only award costs if:

• it considers that any party to proceedings before it has behaved vexatiously, frivolously or unreasonably, or

• it considers that a decision, direction or order of the Commission subject to the proceedings was unreasonable.

As a result, a party bringing an action in the Tribunal must consider the cost implications to themselves of doing so.

A large list of matters appealable to, and reviewable by, the Tribunal is set out at Schedule 4 of the 2006 Act.

Can the Commission Cope?

One major concern in the light of the 2006 Act will be the ability of the Commission properly to regulate the sector in the light of its new functions, duties and powers conferred by the Act. The Commission has five objectives and six general functions set out in S7 of the 2006 Act. It also has to regulate the new CIO and to provide personnel to defend itself against appeals to the Charity Tribunal.

This concern was picked up by the Parliamentary Joint Committee on the Charities Bill when it stated that:

"The evidence we have heard has given us reason to question whether the Charity Commission is properly organised and properly resourced to make it effective in its new tasks. We recommend that professional advice be sought to review the ability of the Charity Commission to meet its new responsibilities under the draft Bill and in particular the quality of the processes, methods and organisation; the calibre of its staff; its resources; and whether the Commission should, like other regulators, be able to determine the number and conditions of its own staff".

The Commission has itself voiced concerns about this. In its 2005 publication Charity Working at the Heart of Society – The Way Forward 2005 - 2008, it stated that:

"How we operate over the next three years will also be influenced by our 2004 spending review settlement of £13 million until 2008. The implication of this is a decline in the real terms value of our funding of approximately 2.5% in each of the next three years".

Consultation on new CC37

A consultation has been undertaken with respect to the Commission's draft, new CC37 on Charities and Public service Delivery, which has been refreshed to take account of the Trafford and Wigan decisions. The draft makes clear that public service delivery by charities is permissible, but that trustees should attempt to ensure full cost recovery where possible, and that they should determine why it is in the best interests of the charity to deliver a service when it cannot do so. New draft CC37 also covers understanding the risks in public service delivery, appropriate legal frameworks, how to ensure that your charity sticks to its mission and guards its independence, and exhorts charities to know their worth.

In this light, the Commission's core advice is "Stick to your mission, guard your independence, know your worth".

Any charity contemplating engaging in the delivery of public services would be well advised to read draft CC37. The closing date for submissions was 5 January 2007.

Viewpoint

The Charities Act 2006, and other initiatives such as the National and Local Compacts, futurebuilders and ChangeUp, and now the new Treasury Interim Report on the Future role of the Third Sector in Social and Economic Regeneration, demonstrate a commitment by Government to the VCS. Despite this, there is considerable room for cynicism.

On one argument the 2006 Act is little more than technical change and window dressing. It does nothing for instance to alleviate some of the more structural problems in the sector such as irrecoverable VAT which is valued at about £460 million annually and which erodes the value of Gift Aid by some 42%.

Again the stimulation of the delivery of public services by charities is – in the light of resistance by funders to embrace full cost recovery and the honouring of the Compact more in the breach – arguably simply a device to get charities to subsidise public service delivery with voluntary income. ChangeUp – currently being restructured to be delivered by CapacityBuilders – could be argued to have delivered relatively little at a heavy pricetag.

Government is indeed striving to pave a way to help the VCS further to establish itself as an important and credible force within our society. More needs to be done however if the sector is to fulfil its true potential. As soon as the back-slapping brouhaha accompanying the passing of the 2006 Act has died down, Government would do well to reflect soberly on how best to achieve the best for and from the sector.

Charities Seminar

We will be holding a Charities Seminar at six pm on 1st February 2006. Topics may include:

• the impact of the Charities Act 2006 – An Overview
• Directors' Duties under the Companies Act 2006

If you would like to attend, then please contact Michelle Long on 0207 667 5129 or email - michelle.long@harbottle.com