Dealing with charities

Dealing with charities Key points for businesses Moira Protani and Neasa Coen of Berwin Leighton Paisner LLP outline some of the issues to be considered by companies when dealing with charities. Illustration: Getty Images In the current climate of corporate social responsibility and growing awareness of ethical business and consumer practices, companies are increasingly finding themselves dealing with charitable undertakings, whether this is simply through making donations, entering into joint projects with charities, or even setting up their own charitable arms. This article: Covers a number of issues which businesses should consider when dealing with charitable trusts. Outlines the advantages of having an incorporated body as a trustee rather than individual trustees and the practical steps required to achieve such status. Highlights some of the issues surrounding corporate donations to charity. BACKGROUND A charity is an entity established for wholly charitable purposes for the benefit of the public. Purposes which are charitable are currently: The relief of poverty. The advancement of education. The advancement of religion. Any other purpose beneficial to the community (for example, the protection of the environment, the protection of animals or the saving of lives) (Preamble, Charitable Uses Act 1601, and Commissioners for Special Purposes of the Income Tax v Pemsel [1891] AC 531). For the first three of these categories of charitable purpose there is a presumption of public benefit (although this is rebuttable). For the fourth category, public benefit must be demonstrated. The Charities Act 2006 (2006 Act) will, when brought into force, codify charitable purposes and set out 13 express charitable purposes (see box Charities Act 1

2006: key provisions and Focus The Charities Act 2006: a helping hand for charities, www.practicallaw.com/ 8-206-5024). The presumption of public benefit will be removed and all charities will have to demonstrate that they provide public benefit (section 3, 2006 Act). The provisions of the 2006 Act in relation to public benefit and charitable purposes are expected to come into force in 2008. Form A charity can be constituted in a number of different ways. For example, it may take an incorporated form such as a company limited by guarantee or a statutory corporation, or an unincorporated form such as a trust or an unincorporated association. A charity may also be created by an Act of Parliament or Royal Charter, or an existing charity may be granted a Royal Charter of incorporation. (For background, see feature article Charity law: doing business with charities, www.practicallaw.com/ 0-102-5429.) There are other forms which a charity may take: for example, a body registered under the Industrial and Provident Societies Act 1965 or certain educational establishments (for example, grant-maintained schools) which are regulated by statute (see feature Unincorporated associations: getting to grips with the basics, www.practicallaw.com/3-356- 4962). In addition, the 2006 Act has introduced a new corporate body for charities, the charitable incorporated organisation (CIO) (see box Charities Act 2006: key provisions ). Trustees Charity trustees are those persons responsible for the management and administration of a charity, regardless of the form a charity takes. In a charity s governing document they may be called by another title, for example, directors (in the case of a charity which is set up as a company) or committee members (in the case of a charity taking the form of an unincorporated association). In the case of a charity established as a trust, the trustees will be the charity trustees. It is possible for a company to act as a trustee of a charitable trust. Charities Act 2006: key provisions The Charities Act 2006 (2006 Act) received Royal Assent on 8 November 2006 and will be implemented over a two-year period. The 2006 Act has codified charitable purposes and sets out the following 13 heads of charity: The prevention or relief of poverty. The advancement of education. The advancement of religion. The advancement of health or the saving of lives. The advancement of citizenship or community development. The advancement of the arts, culture, heritage or science. The advancement of amateur sport. The advancement of human rights, conflict resolution or reconciliation, or the promotion of religious or racial harmony or equality and diversity. The advancement of environmental protection or improvement. The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage. The advancement of animal welfare. The promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services. Any other purposes recognised as charitable under existing law. Any purposes that may reasonably be regarded as analogous to, or within the spirit of, any of the above, and purposes analogous to those latter purposes (section 2). In addition, the 2006 Act amends the Charities Act 1993 (1993 Act) to introduce a new form which charities can adopt, the charitable incorporated organisation (CIO). A CIO is a body corporate with a constitution (sections 69A(2) and 69A(3), 1993 Act, inserted by Schedule 7, Part 1, 2006 Act). It will have a membership (section 69A(4), 1993 Act, inserted by Schedule 7, Part 1, 2006 Act) and its governing document must be in a form specified by regulations to be made by the Charity Commission or as near to that form as the circumstances permit (section 69B(5), 1993 Act, inserted by Schedule 7, Part 1, 2006 Act). A model governing document to be produced by the Charity Commission may be adopted. Charitable companies and registered industrial and provident societies may convert to CIO form, two or more CIOs may amalgamate with each other, and a CIO may transfer its property to another CIO (section 34 and Schedule 7, 2006 Act). Charity trustees have a number of duties, including a duty to protect the charity s property, to comply with the provisions of the charity s governing document, and to act in the charity s best interests. The scope of the duties varies depending on the way in which the charity is constituted, and directors of a charita- 2

ble company have additional specific statutory duties (for example, duties to declare interests, keep accounting records and file documents at Companies House). Charity trustees may only deal with trust property in furtherance of the objects of the charity and in accordance with their powers, whether under general law (for example, the powers of investment contained in the Trustee Act 2000) or as set out in the charity s governing document. The Official Custodian The Official Custodian for Charities (the Official Custodian) was created by the Charities Act 1960 to hold land on behalf of charities. The Official Custodian is a corporation sole having perpetual succession and using an official seal. In practice, the Official Custodian is a member of the Charity Commission s staff. Land may be vested in the Official Custodian by court order or an order of the Charity Commission on the application of the trustees of an unincorporated charity. Where land is held by the Official Custodian, this will remove the need for the trustees of the charity to follow administrative procedures when there is a change in the composition of the trustee body. The Official Custodian cannot take part in managing land vested in him: this function is reserved to the trustees of the charity. Charitable companies Generally, a charitable company will hold its property outright, that is, as part of its general corporate property, but it is possible for a charitable company to hold property on trust. Trust property such as permanent endowment (that is, where there is a prohibition on spending capital) will, if given to a charitable company, be held by it on trust and cannot be held outright. Where part of a charitable company s property is held on trust and part is held outright, each portion of property will need to be accounted for separately. Property held beneficially will be available to creditors on the charitable company s liquidation, but property held on trust will be ring-fenced (in the case of the charitable company s insolvency) and will not generally be accessible to creditors. In addition, contracts would be entered into in the name of the charitable company itself, as opposed to the names of the individual trustees (see Charitable trusts below). CHARITABLE TRUSTS A charitable trust is an unincorporated body and has no separate legal personality. The trustees enter into contracts in their personal capacity (whereas a charitable company will be able to enter into contracts in its own name). Third parties wishing to supply goods or services or enter into a legally binding relationship with a charitable trust must, therefore, contract with the trustees of the trust in their personal capacity. The trustees are personally jointly and severally liable under contracts to which they are a party and (because there is no separate legal personality) will sue and be sued in their own names by a third party unless, in the context of a particular contractual arrangement, it is agreed that the trustees liability should be limited. It is commonplace to limit liability to the value of the trust s assets available for the purpose of meeting a claim. Land, personal property (that is, chattels) and choses in action (for example, the benefit of contracts or debts payable in the future) should also be held in the names of the trustees, or by nominees or custodians on their behalf (see box The Official Custodian ). Changes to trustees The Trustee Act 1925 (1925 Act) applies to all unincorporated charities, including trusts. It sets out rules for the devolution of trust property where a trustee is appointed or retires from office. The statutory provisions apply in default of any provisions to the contrary in the charity s governing document. Companies dealing with charities will need to ensure they are contracting with the correct trustees at any given point. Appointment. On the appointment of a trustee, anything required to vest the trust property in the new trustees must be done (section 37(1)(d), 1925 Act). This means that stock transfer forms should be executed in the case of shares, and contracts should be assigned or novated in favour of all the proposed trustees, including the newly appointed trustee. Land should also be placed in the names of all the proposed trustees. However, where a trustee is appointed by deed, the deed will operate without the need for a conveyance or assignment to vest trust property in the new trustee and any continuing trustees as joint tenants. For deeds entered into after the commencement of the 1925 Act it is assumed that all the property held on trust will vest in the continuing trustees and there is no need to provide for this expressly in the deed of appointment (section 40(1), 1925 Act and section 9, Law of Property Act 1925 (LPA)). Death. When a trustee dies, the office, as well as the property held in his name for the charity, passes to the surviving trustees, who are entitled to carry out the trust and exercise all the powers given to the deceased trustee (section 18, 1925 Act). Retirement. Where a trustee who retires by deed declares that he wishes to be discharged from his trust and his co-trustees (or any other person who is empowered to appoint trustees) consent to the discharge, he will be discharged provided that following his retirement there are two trustees or a trust corporation remaining in office (section 39, 1925 Act). Where a trustee retires by deed and obtains a discharge under section 39 of the 1925 Act without a new trustee being appointed, the deed will operate, without the need for a conveyance, transfer or assignment, to vest the trust property in the continuing trustees as joint tenants, save in certain specified circumstances (section 40(2), 1925 Act and section 9, LPA). 3

There are a number of circumstances where the statutory vesting provisions will not apply. These include, for example, where a trustee does not retire by deed or by a memorandum operating as a deed under section 83 of the Charities Act 1993 (1993 Act) (see below), or where a trustee retires but no new trustee is appointed and a discharge is not provided under the 1925 Act. In such circumstances, there will be no automatic vesting of the trust property in the continuing trustees. This is particularly relevant in relation to contracts entered into by trustees. Where a trustee ceases to be a trustee, he remains a contracting party entitled to the benefit of the contract (the right to enforce its terms) and subject to the burden of the contract (compliance with the obligations under the contract). Therefore, a retiring trustee remains liable on the contract as long as he is a party to it and must be a party to any legal proceedings taken by or against the trustees to enforce the contract. Steps, therefore, should be taken to assign or novate contracts where a trustee retires from office. Charities Act 1993. The 1993 Act makes further provision regarding retirement and appointment of charity trustees. Where, under the trusts of a charity, trustees may be appointed or discharged by resolution of a meeting of the charity trustees, members or other persons, a memorandum declaring a trustee to have been so appointed or discharged will be sufficient evidence of that fact if the memorandum is signed either at the meeting by the person presiding or in some other manner directed by the meeting and is attested by two persons present at the meeting. If the memorandum is executed as a deed it will operate to vest the trust property in the continuing trustees (section 83, 1993 Act). INCORPORATION OF TRUSTEES Charities may decide to act through an incorporated body acting as trustee, rather than through a collection of individual trustees. Some charity trustees with trust funds of a high value have chosen not to incorporate on the basis that, having assessed the risks, the likelihood of personal liability may be remote Contracting with an unincorporated charity The contract should be entered into by the individual trustees of the charity and not in the name of the charity. This is because a charitable trust does not have separate legal personality. Checks should be carried out to ensure that the charity trustees have power to enter into the arrangements (for example, in the case of a charitable trust, the powers of the trustees in the trust deed would need to be checked to ensure that they cover the proposed transaction). Ideally, the contract should contain an automatic novation clause, which provides that, following a change in the composition of the trustee body, the contract will be novated automatically following notice by the trustees to the third party. and the charity s assets may be sufficient to satisfy any claims made against the trustees. However, it is fair to say that the benefits of incorporation can be more significant than the risks associated with not being incorporated, and there are a number of situations where being unincorporated could cause operational difficulties, for example: The holding of property and investments by individual trustees is unwieldy and can cause administrative problems when the composition of the trustee body changes, for example, on death or retirement (see Changes to trustees above). Contracts should be assigned or novated. When the trustees are incorporated, they can contract in the name of the incorporated body rather than in person. Although the statutory indemnity in section 31 of the 1925 Act (which entitles a trustee to be reimbursed from trust funds or to pay out of trust funds expenses properly incurred by him when acting on behalf of the trust) is helpful, there is a risk that the value of the assets of the trust fund would be insufficient to indemnify a trustee and a trustee would become personally liable. Incorporation can limit the personal liability of the trustees (see below). There is a possibility of difficulties or delay arising where trustees wish to enforce a contract through the courts against a third party but where the original parties to the contract are no longer trustees and, in particular, where the trustees wish to seek injunctive relief (see box Contracting with an unincorporated charity.) Incorporation of the trustee body can be achieved in one of two ways: Establishing a trust company This approach involves establishing a trust company to act as a trustee of the charity in substitution for individual trustees. The trust company would usually be a private company limited by guarantee or by shares. The charity s governing document (for example, the trust deed) would need to be amended to provide for the charity to have a corporate trustee. The trustees of the charity would then retire in favour of the trust company. The main advantages of establishing a trust company are that: It gives trustees of the charity incorporated status and, therefore, limited liability, without the need to make wholescale amendments to the charity s governing document. Each time a director retires from the board of the trust company it is not necessary to assign and novate contracts and transfer assets as they are held in the name of the trust company which has perpetual succession. Trust corporation status may be obtained to enable the trust company to give a good receipt for the sale of real property, which otherwise requires at least two individual trustees. This usually involves an application to the Ministry of Justice. 4

Once the trust company has been established, the trustees will need to transfer the trust s assets to the trust company in consideration for its assumption of any existing liabilities of the trustees. The trust s governing document may need to be amended to authorise the transfer. However, if the trust is permanently endowed, a scheme of the Charity Commission or a deed of retirement and appointment of trustees may be required. The directors of the trust company would, in the same way as any other company, have limited liability in relation to claims by third parties. However, there are situations in which a director may be held personally liable despite the incorporated structure of the company. These are: Where a director assumes personal liability, for example, by giving a personal guarantee. Where legislation contemplates the possibility of directors being personally liable if the legislation is breached (for example, health and safety or environmental legislation). In tort (for example, negligence or nuisance) if a director assumes personal responsibility or if he acts fraudulently. Where a director makes fraudulent or negligent misrepresentations in the course of negotiating a contract between the charity and a third party or does not make it clear that he is contracting on behalf of the charity (and not in his own personal capacity). In the event of the company s insolvency, where a director is found by a liquidator to have entered into transactions at an undervalue, carried out fraudulent or wrongful trading or given preferential treatment to creditors. The main disadvantage of this option is that the procedure itself is time-consuming and it may be necessary to involve the Charity Commission (for example, in relation to amendments to the governing document of the charity or obtaining a scheme). Applying for a certificate of incorporation As an alternative to establishing a trust company, the trustees can apply to the Charity Commission for a certificate of incorporation under Part VII of the 1993 Act (the certificate). The grant of the certificate has the effect of incorporating the trustee body. Real and personal property vests in the incorporated body following the grant of the certificate (section 51, 1993 Act). Contracts entered into after the date of the certificate would be entered into by the incorporated body and not by the individual trustees. Future assets would be acquired in the name of the incorporated body. Following the grant of the certificate, the trust property would be under the control of the trustees for the time being, eliminating the need to transfer property from retiring trustees to continuing and new trustees. If the composition of the trustee body changes, contracts with third parties would not require assignment or novation where the original contracting party is the incorporated body. The incorporated body will be entitled to enforce contracts entered into before the grant of the certificate. However, in order to avoid the possibility of individual trustees being sued, such contracts should be novated in favour of the incorporated body. As the process of novation is time-consuming and cumbersome, however, trustees may decide that they will only novate high value or important contracts. The main advantage of the certificate is that the trustees of the charity continue to administer the charity in accordance with the existing governing document. The Charity Commission has stated that it does not consider that the grant of the certificate gives the trustees limited liability (paragraph 5, CC43 Incorporation of Charity Trustees, www.charitycommission.gov.uk/library/publications/pdfs/cc43text.pdf). There is no legal authority on the point. However, it is our view that where a contract is entered into after the date of grant of the certificate and the party to the contract is the incorporated body rather than the individual trustees, the incorporated body is directly liable on the contract and the individual trustees have no liability. Practical steps Once a certificate has been granted or a trust company established, steps should be taken to ensure that assets and contracts are held in the name of the incorporated body. Although the grant of a certificate provides for the automatic vesting of property in the new body, certain procedures will still be required to ensure that property is transferred to the incorporated body. Where a new charitable company is established to hold the trust property, an asset transfer agreement (and certain further steps) will be required to ensure that property is transferred to the new charity. Steps to be considered by the charity once a certificate has been granted or a trust company established may include the following: Investments. If investments are held by a custodian, the custody agreement should be assigned to or novated by the incorporated body. Investments held in the names of trustees should be transferred to the incorporated body. Investment management agreements should be assigned to or novated by the incorporated body. Land. Leasehold interests would need to be assigned to the incorporated body. Where a certificate is granted and the trustees hold registered land, an application for amendment of the Register should be made against all titles of which the individual trustees are registered proprietors. Where a certificate is granted and the trustees hold unregistered land, a copy of the certificate should be kept with the title deeds to ensure that the chain of title to the land can be established. Where a trust company is established and the trustees hold registered land, the Land Registry should be supplied with evidence of the change in the composi- 5

tion of the trustee body (a deed or a memorandum complying with section 83 of the 1993 Act) so that the Title Register for the Charity s property can be updated. It would also be possible to effect a transfer of the land from the individual trustees to the trust company. Where a trust company is established and the trustees hold unregistered land, the Deed of Appointment and Retirement of Trustees (or a memorandum complying with section 83 of the 1993 Act) should be kept with the title deeds to ensure that the chain of title to the land can be established. Contracts. Where a certificate is granted, contracts existing before the grant of the certificate should be novated as between the trustees in office before the grant of the certificate, the incorporated body and the third party, to avoid the possibility of the outgoing trustees being liable on the contracts. Similar issues will apply where a trust company is established. DONATIONS Businesses donate to charity for a number of reasons. These include a need, often as part of a wider corporate social responsibility programme, to comply with directors duties under section 172 of the Companies Act 2006 to promote the success of the company (which includes consideration of the impact of the company s operations on the community and the environment) and a wish to contribute to the community in which they operate. In addition, the carrying out of charitable activities can allow employees to get involved. Charitable activities may also represent an effective marketing or profile-raising opportunity for businesses and there are tax benefits for companies in relation to donations to charities (see box Tax relief on charitable donations ). There are a number of ways in which charitable giving may be structured. At its simplest, there is a gift of money or assets without any conditions attached, but companies may, for various reasons, choose one of the following more structured methods of donating: Tax relief on charitable donations In summary, the key tax reliefs available to companies in relation to donations to charity are as follows: A cash payment from a company to a charity is deductible from the company s total profits in computing corporation tax for the period in which the sum was given. The company makes the gross payment directly to the charity and deducts the amount donated when calculating its profits for corporation tax purposes. Payments cannot be made subject to a condition as to repayment. Neither the company nor a connected person can receive a benefit in consequence of making the payment, except in accordance with certain specified limits (sections 338 and 339, Income and Corporation Taxes Act 1988) (ICTA). Relief is available for a company against the salary and other costs of an employee seconded to a charity on a temporary basis. The company should agree the key terms of the secondment (including its duration) with the charity in advance of the secondment (section 86, ICTA). Relief is available for gifts to charity by a trading company of articles manufactured or sold by the company in the course of its trade. When such items are given to charity, they are treated as having been disposed of at nil value for capital allowances purposes (section 83A, ICTA). Relief is available on a gift or sale at less than market value of shares, securities or UK land (qualifying investments) by a company to a charity. The amount of relief which can be claimed is the market value of the net benefit to the charity at the time the company gives or sells the qualifying investment, plus any incidental fees (for example, legal fees), less any disposal proceeds or other benefit which the company or a connected person receives in consequence of the sale or gift of the qualifying investment. Companies deduct the relief as a charge on income for the accounting period in which they make the gift (section 587B, ICTA). If a company sponsors a charitable activity, it can claim relief for sponsorship payments in certain circumstances if these are expenses incurred wholly or mainly for the purposes of its trade (for example, a prominent logo on a charity s promotional material, advertising the company rather than the charity). The relief takes the form of a deduction from trading profits for tax purposes (section 74, ICTA). Grant agreement Instead of donating money with no obligations attached, a business could agree to give money or assets to a charity by way of a grant agreement. This would create a contract between the business and the charity, with obligations falling on each party (for example, an obligation on the business to make the gift and an obligation on the charity to use the gift for specified charitable purposes). If the charity breaches a term of the grant agreement, the business may have rights that it can enforce against the charity: for example, the grant agreement could give the business a right to the return of the money, or the business could invoke specified dispute resolution procedures or pursue the matter through the courts. However, if the charity ceases to exist or breaches the terms of the grant agreement by not using the assets for the specified purposes and has insufficient cash to repay the grant to the business, the business may have difficulty recovering monies unless it has secured the performance by the charity of its obligations under the grant agreement. Secu- 6

rity might take the form of a charge over assets of the charity. In such circumstances, the assets secured might be sold to recover any sums owed to the business. Related information Links from www.practicallaw.com and the web This article is at www.practicallaw.com/0-379-0358 A business would be more likely to structure a donation as a grant agreement in the following circumstances: Where large sums of money are at stake. Where the business is funding a project to be carried out by the charity and continued involvement by the business is planned. Topic Charities Practice note Trusts in commercial transactions Previous articles Unincorporated associations: getting to grips with the basics (2007) The Charities Act 2006: a helping hand for charities (2006) Charity law: doing business with charities (2003) www.practicallaw.com/6-200-1622 www.practicallaw.com/4-107-4432 www.practicallaw.com/3-356-4962 www.practicallaw.com/8-206-5024 www.practicallaw.com/0-102-5429 Where the business s name is associated with the charity in relation to a project, so that the business could suffer reputational loss if the funds were not used for the desired purpose. Weblink Charity Commission www.charitycommission.gov.uk For subscription enquiries to PLC web materials please call +44 207 202 1200 Where funds are being given in instalments and the charity is required to spend each instalment in a particular way. Creating a trust Alternatively, the business could give money to the charity on trust. Where a charitable trust is established, the business would give money to the charity (as trustee) with a direction to use the funds only for the charitable purposes set out in the trust deed. The main advantage from the business s perspective of using a trust structure is that the business could retain a level of control over the charitable trust created. For example, the business could have a power to remove the charity as trustee and appoint another trustee, or a power to be consulted over decisions regarding the use of the money placed on trust. It would also be for the business to decide what powers the charity should have in relation to the donated funds. Where funds are held on trust, they must be accounted for by a trustee separately from any other funds which the trustee controls. As a result, any money given by a business to a charity could not be mixed with the charity s general funds or property, save as provided for in the trust deed: this would not be the case if money were given by way of a grant agreement (see Grant agreement above). Any debts of the charity which were not attributable to the business s particular trust could not be met by using the funds donated by the business, even if the charity went into insolvent liquidation. In this way, money given would effectively be ringfenced. The charitable trust may need to register with the Charity Commission as a separate charity if its gross annual income exceeds the current registration threshold of 5,000 (section 9, 2006 Act). Even if it were not registrable, the trust would still be charitable, which would impose legally binding duties on the charity trustees which are enforceable by the courts at the instance of the Attorney General (see Trustees above ). As the charity would have fiduciary obligations in relation to the money over a period of time, a trust structure may, in circumstances where accountability over the funds is required, be a more satisfactory arrangement. Establishing own charity In recent years many businesses have, instead of donating money to existing charities, decided to establish charities themselves. Typically, they take the form of a charitable company limited by guarantee or a charitable trust. When a business establishes and funds a charity, that charity must be allowed to function independently of the business. Ideally, there should be no overlap between the board of the business and that of the charity. However, if there is overlap, conflicts of interests must be managed: for example, the Charity Commission usually requires that there should be a sufficient number of independent trustees to form a quorum. Conflicted trustees must not be involved in negotiations or discussions for both the charity and the business. Alternatively, the negotiation and execution of the arrangements could be delegated to committees, without any overlap between the individuals on each committee. Moira Protani is a partner and head of the charity law group and Neasa Coen is an associate and member of the charity law group at Berwin Leighton Paisner LLP. 7