Chapter 6: Charity 2

6.0 Charity Efficiency & Accountability

6.1. Charities Bill 2004

A Draft Charities Bill was introduced into the House of Lords on 20 December 2004, but it did not receive Royal Assent before the general election on 5th May 2005. Amongst other things, it sets out a new statutory definition of charity. The Charities Bill is available from the United Kingdom Parliament Website

(http://www.publications.parliament.uk/pa/ld200405/ldbills/015/2005015.pdf ) together with Explanatory Notes to the Bill

(http://www.publications.parliament.uk/pa/ld200405/ldbills/015/en/05015x--.htm )

The home office web site notes that "The Government had proposed that the Bill be dealt with during "wash-up" - the period between the election being called on 5th April and Parliament being dissolved on 11th April - but all-party agreement to that proposal was not secured. It will be for the incoming Government after the election to decide whether or not to re-introduce the Charities Bill. The fact that it has been through a major public consultation, earned the support of virtually the entire charitable sector, and has been through pre-legislative scrutiny and, most recently, over 30 hours of detailed consideration in Grand Committee in the House of Lords will be something for the incoming Government to take into account when considering whether or not it wants to do so". (http://www.homeoffice.gov.uk/comrace/active/charitylaw/index.html)

The key features of the Bill, as they relate to the definition of charity, are set out below:

Charities Bill 2004
Part I

1 Meaning of "charity"

2 Meaning of "charitable purpose"

3 The "public benefit" test

4 Guidance as to operation of public benefit requirement

5 Special provisions about recreational charities, sports clubs etc.


6.2. Charity Commission

The Charity Commission, first established in 1853, is a supervisory agency appointed to oversee the proper administration and enforcement of charities.

Formally it is the Attorney General who enforces charitable trusts in the name of the Crown but in practice charities (including charitable trusts) are regulated and supervised by the Charity Commission.

The powers and responsibilities of the Charity Commissioners are now to be found primarily in the Charities Act 1993, a consolidating measure (the consolidated legislation being principally the Charities Act 1960 and Part I of the Charities Act 1992)

On the next two pages we review in outline the structure and functions of the Commission.

Any assessment of how effectively the Commission performs its several functions must take account of the resources made available to it. Historically the Commission has been under-resourced (see Owen English Philanthropy 1660–1960 (1965) ch 11 on early periods). Indeed in the 1980s the Commission was affected by cash limits and reductions in staff numbers — down from 360 in 1976 to 329 by 1985 (NAO (1986–87) App 3) — whereas the volume of work continued to increase. The criticisms of the Commission’s effectiveness that emerged at that time prompted an increase in staffing levels to the extent that the numbers more than doubled from 346 in 1988 to a peak of 706 in 1993, falling back to 596 in 1998. (National Audit Office Regulation and Support of Charities (1997–98, HC no 2) para 1.7; Annual Report 1997, App C). The Commission now operates with an annual budget of around £21.5m.

It is particularly notable that the investigation section quadrupled in size between 1988 and 1993. This infusion of resources and the manner of staff deployment has implications for the Commission which extend beyond matters of efficiency into the realm of function. They would seem to indicate a shift towards a more interventionist and regulatory role.


6.3. Cy Pres

Where a private trust fails — or ‘lapses’ — the equitable ownership in the property held by trustees is returned to or ‘results back’ to the settlor or to the residuary estate if the settlor is deceased.

But if fulfilment of a charitable gift or bequest fails so that under normal trusts law principles a lapse would occur, the cy-près doctrine may, but not necessarily will, ‘rescue’ the property for charity.

That is to say, in some instances the High Court (Chancery Division) or the Charity Commissioners may establish a cy-près scheme whereby the originally stipulated purposes which have ‘failed’ are replaced by new purposes which are charitable in law and similar to those originally stipulated.

We have seen in the two previous pages that where there is a 'failure' of a charitable gift it may be possible for the property to be applied cy-près by means of a scheme settled by the courts or the Charity Commissioners.

A key question in this area that we have not yet addressed is what constitutes 'failure'.

We look at this topic in some detail in the next two parts of this section of the workbook but first some appreciation of recent statutory developments in the definition of 'failure' is necessary. On the next page we therefore briefly introduce the pre-1960 common law position and compare it with the post-1960 statutory definition of failure.

Initial Failure & Rescue

The substantive law governing the rescue function has three key principles. The first is self-evident - some charitable purpose or institution must be designated as the object of the gift. Next there must be a failure of that gift. Thirdly, to reiterate the point, in cases of initial failure a general charitable intention must be present. Over the next three pages we concentrate on the issue of 'initial failure', the existence of some charitable object being assumed to be present. The matter of 'general charitable intention' is considered separately in subsequent pages.

At the outset of our study of initial failure and cy-près we would emphasise two general points:

(1) Whilst it is the case that the relevant principles are tolerably clear their application largely involves matters of fact. Consequently there is considerable scope for the exercise of discretion and the outcome of individual cases needs to be treated with caution, at least as regards their value as precedents.

(2) If there is no 'failure' there is no need to consider the matter further - there is no role for cy-près. The property is applied as directed by the donor.

This last point may seem very obvious but as we shall see on the next page detecting whether a situation is one of failure is not always straightforward. There can be circumstances where what appears to be a total failure of a charitable bequest may be held not to be a failure at all.

In her will dated 1st May 1990 Ermintrude bequeathed £20,000 each to the four charitable institutions named in the examples below. Ermintrude dies on 1 January 2000.

Advise her executors as to whether there is a failure of any of the bequests.

Before attempting the questions you may find it helpful to read the summaries of the following cases: Re Vernons Will Trusts, Re Fingers Will Trusts and Re Spence's Will Trusts

(1) The Coventry Dogs Home an unincorporated body which closed in 1991.

o û Failure ü No Failure Maybe

(2) Coventry Home for the Elderly Ltd, an incorporated charity which ceased to exist in 1996.

o ü Failure No Failure Maybe

(3) Coventry Home for the Blind Limited, an incorporated charity which ceases to exist after the will takes effect but before the bequest is paid.

o û Failure ü No Failure Maybe

(4) Coventry Animal Refuge. No such body has ever existed.

o ü Failure No Failure Maybe


Answer (1): No Failure

If we follow the dicta of Buckley J in Re Vernon's Will Trusts [1972] Ch 300n then it would be possible to construe this bequest as being one for the purposes of the unincorporated body. If so then there is no failure and the bequest could be carried into effect by one of the means identified in Re Vernon. Support for this conclusion could be obtained from Re Finger's Will Trusts [1972] Ch 286 and Re Koeppler Will Trusts [1985] 3 WLR 765.

Alternatively it might be possible to argue that the testatrix's intention was that the bequest was dependent entirely on the named organisation being in existence. If, as is the case, it has ceased to exist then the bequest fails. The presumption, though, is in the opposite direction and there would need to be some evidence to counter this in the will as a whole. If we are correct and there is no failure then the bequest will take effect probably by means of the court ordering a scheme of administration - not a cy-pres scheme - to be prepared.


Answer (2): Failure

If we follow the dicta of Buckley J in Re Vernon's Will Trusts [1972] Ch 300n then it would be unlikely for this bequest to be construed as being one for the purposes of the incorporated body. It is more probable that the bequest will be interpreted as being for the named corporate body beneficially (but compare the comments of Goff J in Re Finger's Will Trusts [1972] Ch 286). If so the bequest will clearly fail and the only question would be whether a general charitable intention could be discerned.

Alternatively it might be possible to argue that the testatrix's intention was that the bequest was intended for the purposes of the incorporated charity. The presumption, though, is in the opposite direction and there would need to be clear evidence in the will as a whole to support this interpretation.

Answer (3): No Failure

Following Re Slevin and In Re Arms Ltd in our view the bequest in this case vests in the charity as at the date of death, i.e. the date on which the will takes effect. This therefore seems to be an instance of 'subsequent failure' and the property can be applied cy-pres with no need to establish separately any general charitable intention. Alternatively, depending on the facts, it may be possible to reach a comparable outcome to that in Re Faraker.


Answer (4): Failure

The only question to be decided here is whether there is a general charitable intention so that the property the subject of the bequest can be applied cy-pres.

We think that Re Harwood is slightly misleading on the matter of failure where a bequest is made to a society that has never existed but we recommend that you look at our brief summary of the case.

In Re Harwood [1936] Ch 285 the testatrix in her will made in 1925 made bequests of £200 to the Wisbech Peace Society, Cambridge and £300 to the Peace Society of Belfast. The Wisbech Peace Society had ceased to exist by the date of her death in 1934 and there was no evidence that an organisation called the Peace Society of Belfast had ever existed.

Wisbech Peace Society

Farwell J held that the gift failed and that the property could not be applied cy pres as there was no general charitable intention. The judge explained his reasoning on the latter point as follows:

'...where the testator [sic] selects as the object of his bounty a particular charity and shows in the will itself some care to identify the particular society which he desires to benefit, the difficulty of finding any charitable intent in such case if the named society once existed, but ceased to exist before the death of the testator, is very great'.

(click here if you wish to refer to Re Finger's Will Trusts [1972] Ch 286 where Re Harwood is distinguished but cf Re Spence [1979] Ch 483).

Peace Society of Belfast

Farwell J concluded that the testatrix had no specific organisation in mind, that she wanted to benefit any society formed for the purpose of promoting peace in Belfast, and that this was therefore evidence of a general charitable intention. He somewhat elliptically stated that '...the gift does not fail. It is a good charitable gift and must be applied cy-près'.

Note that this conclusion does appear to be blurring two theoretically distinct steps in the required reasoning: (1) is there a failure? (2) if so, is there a general charitable intention? The outcome would be unaffected; even if the gift did not fail it would still have been necessary to settle a scheme albeit one of administration rather than cy près.

As we have noted previously, if there is an 'initial failure' of a gift to charity then the gift will lapse unless it is possible to identify a 'general' or 'paramount' (the words are synonyms) charitable intention. This restriction on the scope of cy-près derives from late eighteenth and early nineteenth century decisions in which the courts were particularly concerned to protect the expectations of heirs against charitable dispositions.

It is, though, by no means easy to determine in any individual case whether the donor’s or testator’s charitable intention will be labelled ‘genera!’ or ‘particular’. In practice a decision on this issue is often very artificial: ‘To search for such a paramount … charitable … intention is in many cases to follow a will-o’-the-wisp’ (per Vinelott J Re Woodhams [1981] 1 All ER 202 at 210). The court often has to rely on very slight indications in the terms of the gift or bequest itself and any other disposition (e.g. legacies, residuary bequests) with which it is associated in the same document.

On the next page we look more closely at some of the attempts to capture the essence of 'general charitable intention'.

Then on the following page we consider two particularly contentious sets of circumstances concerning the presence or otherwise of a 'general charitable intention'.

Cy-près, Discrimination and 'privileges of charitable status'

Before we leave the topic of 'general charitable intention' consider what in our view constitutes a slightly different use of the concept and the cy-près doctrine. There is some evidence of the courts interpreting 'general charitable intention' in what could be regarded as a liberal fashion to sidestep restrictive discriminatory conditions in bequests.

We have seen previously that in Re Dominion Students’ Hall Trust [1947] Ch 183 the interpretation of 'impossibility' was seemingly broadened to facilitate the removal of a ‘colour bar’ from the constitution of a London hall of residence for Commonwealth and American students. In Re Lysaght and Re Woodhams very specific conditions attaching to bequests were removed under cy-près schemes on the grounds (i) that their retention would cause the bequests to fail and (ii) that they represented inessential elements of the intentions of the respective testators. (Click here to see a summary of Re Lysaght and here for Re Woodhams and for an explicit statement of an anti-discrimination policy rationale in this area you may care to look at a decision of the Ontario Court of Appeal in Re Canada Trust Co and Ontario Human Rights Commission (1990) 69 DLR (4th) 321).

It might be said of Re Lysaght and Re Woodhams that they demonstrate an approach whereby a distinction is drawn ' ...between, on the one hand, cases in which every element in the description of the trust is indispensable to the validity and operation of the disposition and, on the other hand, cases where a further and more general purpose is disclosed as the true and substantial object of the trust, which may therefore be carried into effect at the expense of some part of the particular directions given by the trust instrument' (per Dixon J and Evatt J in Attorney-General for New South Wales v Perpetual trustee Co Ltd (1940) 63 CLR 209 at 225).

Whether or not one finds persuasive this formal explanation for the practical application of the distinction in cases such as Re Lysaght and Re Woodhams, the exercise of the doctrine in this fashion suggests that our perception of cy-près as a privilege of charitable status needs on occasion to be adjusted to incorporate the notion of control over the implementation of the stated wishes of testators.

This is our model flow chart illustrating the relationship between 'failure' and the application of the property cy-près in the context of a gift to a named charity that, if it ever existed, has ceased to do so.



Failure of Charitable Appeals

In one special class of case, principally concerning contributions to public appeal funds where the fund proves insufficient for the designated purpose, statutory provision is made for application of property cy-près, regardless of the particular intention (Charities Act 1993, s 14). Although a resulting trust in favour of a known donor or testator will still arise, the object of the section is to remove the need to undertake extensive inquiries where donors cannot be easily identified or traced, or where contributions have been made, for example, to street collections

Where a charitable appeal has a surplus after fulfilling the stipulated purposes or fails subsequently in some other way, the cy-près doctrine is automatically available, assuming these cases are to be treated as instances of ‘subsequent failure.’ (Click here for comment).

The advantages of charitable status in this context are apparent when compared with the problems that can arise if an over-subscribed public appeal turns out not to be charitable. Where, for instance, no indication is given in the appeal as to the destination of any surplus, the two possibilities are that it should either be returned to the donors or be paid to the Crown as bona vacantia (see In Re Gillingham Bus Disaster Fund [1958] 1 All ER 37).

However, where, for instance, street collections are involved, the inconvenience of being required to trace subscribers is apparent. Consequently, the courts now appear to favour a presumption that donors who put their money into collecting boxes should be regarded as ‘intending to part with their money out and out, absolutely, in all circumstances’ (per Goff J in Re West Sussex Constabulary’s Benevolent Fund Trusts [1970] 1 All ER 544 at 550). Thus, whereas other donations and legacies will be held on resulting trust, unused money from collections is likely to pass as bona vacantia along with unused proceeds of entertainments and raffles, etc. In the two last-named instances the relationship is one of contract — the entertainment will have been enjoyed, the gamble won or lost - and this leaves no scope for a resulting trust.

In an attempt to prevent these difficulties arising with surplus or indeed under-subscribed funds the Attorney-General has prepared guidelines for both charitable and non-charitable appeals (eg recommending that a clear indication as to the destination of any surplus be given in any appeal; click here for further details).


Subsequent Failures & Modernisation

On a previous page in this section of the workbook we described how the definition of failure for the purposes of cy-pres was extended and put into statutory form in the Charities Act 1960, now Charities Act 1993, s 13 (click here if you would like to review the earlier page).

The statutory changes were introduced in response to criticisms that there were many charities that needed modernising to an extent that was beyond the scope of the common law cy-près doctrine. In the next three pages we will look at how the courts and the Charity Commissioners have interpreted and made use of the wider jurisdiction.

Before doing this we would remind you of a basic difference between initial failure and subsequent failure for the purposes of the cy-près doctrine. In cases of subsequent failure - our current concern - it is now generally accepted that once failure is established there is no need to take the further step of searching for a 'general charitable intention' (see e.g. Re Slevin [1891] 2 Ch 236).

There is one preliminary but important point of interpretation to bear in mind when considering schemes to modernise or to alter for any other reason the terms of charitable trusts.

Not all such ‘schemes’ made by the courts or the Charity Commissioners involve the application of property cy-près. A distinction is drawn between ‘schemes’, which involve, for example, merely a change in the administrative machinery of a trust, and cy-près schemes which involve a modification of the charity’s purposes.

The significance of the distinction is that administrative changes need only be ‘expedient’ whereas, notwithstanding liberalisation of the definition of failure, the still quite rigorous requirements of Charities Act 1993, s 13 must be satisfied for a cy-près scheme.

We would like you to consider the issues posed by the facts in three cases and decide whether it is 'unlikely' or 'very likely' that there has been a failure of charitable purposes under Charities Act 1993, s 13 sufficient to enable a cy-près scheme to be made or approved.

Note that section 13 is concerned solely with modifying the purposes of a charity. If, therefore, the existing named purpose is sufficiently flexible to allow an alternative use of the funds or property, then an application to the court or the Charity Commissioners under s 13 is unnecessary. The distinction is clear, its practical application sometimes less so. You may like to keep this in mind when considering the examples.

We would encourage you to review s 13(1)(c),(d) and (e)

You might have noticed that one of the statutory requirement in Charities Act 1993, 13 (1)(d) and (e)(iii) is that in making judgments about failure the courts and the Charity Commissioners are to have regard to 'the spirit of the gift'. In Re Lepton's Charity [1972] ch 276 and in Varsani v Jesani this involved construing documents in the light of the available evidence. In Peggs v Lamb [1994]Ch 172 this process was taken one step further by Morritt J: 'I do not think that the absence of any founding document precludes the existence of any "spirit of the gift." Accordingly such spirit must likewise be inferred' (at 197).

This last comment tends, in our view, to confirm that we are dealing with a somewhat metaphysical construct and that the judicial formulae espoused in the above cases are susceptible to either a liberal or restrictive interpretation.

On the next page we consider briefly some of the implications of the 'spirit of the gift' requirement.

Until now we have assumed that the Charity Commissioners have unhindered jurisdiction to make a scheme as long as the criteria in section 13 are satisfied. Matters are not quite that straightforward. In Peggs v Lamb (1994), for instance, trustees initially took the view on the advice of counsel that no scheme was necessary. This raises the question: where does the responsibility and the power lie to have property applied cy-près? Please read Charities Act 1993, s 13(5) and s 16(4) - (6)

Amalgamation & Co-ordination

On some occasions where property is applied cy-près this can involve the amalgamation of charities (see e.g Re Faraker for an early example). It would though be a mistake to think that every amalgamation involves property being applied cy-près. Whilst there is inevitably some overlap in the respective legal and policy issues, there are sufficient differences to merit the separate although brief consideration given in the next few pages.

We know from the Introduction to Charity Workbook that the charity sector is a very diverse one containing a large number of charities with limited resources and conversely a few charities with very large resources.

This diversity is reflected in the practice and law on amalgamation and co-ordination. On the next page we will briefly summarise some general points on this topic and then go on to look in a little more detail at measures intended to facilitate more effective use of the resources of small charities.

One way of approaching this topic is to ask just how legally autonomous charities are when it comes to deciding whether to coordinate their activities or amalgamate with another charity.

Many modern charities will contain an express power in their constitutions to amalgamate. Where this is not the case then it may be necessary to obtain the assistance of the Charity Commissioners, as under Charities Act 1993, s 16(1)

Even where the charity takes the corporate form, as many modern and large charities do, this does not take them outside the jurisdiction of the Commissioners for all purposes. Thus any change, for instance, in an objects clause will be ineffective unless the prior written consent of the Commissioners is obtained (see Charities Acts 1993, s 64). Moreover even if amalgamation is approved and takes place it may be advisable to leave at least a shell of the old charity in place so that any potential problems of 'initial failure' of legacies that may not become due for many years can be avoided.

Therefore even for large charities charity law imposes some constraints on the way in which a merger or amalgamation occurs.

Further reading:

A-M Piper, The Lawyer 9 June 1998 for a brief overview of the practicalities of amalgamation.

K. Cowin and G. Moore, 'Critical success factors for merger in the UK voluntary sector' (1996) Voluntas vol 7(1), 66-86 for the findings of a study into merger activity between national charities written primarily from a managerial studies perspective.

You may recall that we have previously mentioned the view of the Nathan Committee (1952) that ‘hundreds, perhaps thousands of trusts need revision, and to an extent that goes beyond anything that could be achieved under present cy-près doctrine’ (para 104).

The Committee envisaged two principal methods for achieving this aim, one of which, the modernisation of cy-près, we have already considered.

A second method was to encourage the co-ordination of activities of local charities. This was later supplemented by the provisions of the Charities Act 1985. This statute has in its turn been replaced by Charities Act 1993, ss 74 and 75 which further increase the scope for trustees of small charities to apply trust property in what they perceive as a more appropriate and effective fashion.

The Charities Act 1993, ss 74 and 75 replace the provisions in the Charities Act 1985 and now offer a simplified and widened procedure in an attempt to increase the effectiveness of the jurisdiction. (Click here to see a summary of the s 74 jurisdiction and here for a summary of s 75)).

You may like to test your understanding by tackling the following exercise:

The Earlsdon Watchmakers' Charity is a charity founded in 1909 whose purposes are 'to assist the needy citizens of Earlsdon and their families'. The sole asset of the charity is an endowed fund currently invested in a high income-yield unit trust. In the last financial year the gross income produced by the investment was £1,250. The Annual meeting of the Trustees is attended by 6 of the 9 trustees. Five of those attending agree that, in view of the small income and the fact that Earlsdon is now an affluent suburb, the charity money could be put to better use. Three resolutions (see below) are voted on. The trustees agree that Resolutions B or C are only to be adopted if Resolution A should be invalid.

Which resolutions satisfy the requirements of the Charities Act 1993, ss 74 and 75?


(a) 5 trustees vote to terminate the charity and to pay the endowment to the governors of the local primary school 'to be used for the benefit of the pupils' (1 trustee votes against).

(b) 2 trustees (2 abstaining) vote to transfer the endowment to another local charity for the relief of poverty (2 trustees vote against).

(c) 4 trustees vote to amend the purposes of the trust to read 'for educational purposes for the benefit of the inhabitants of Earlsdon and of the children of such inhabitants' (1 trustee abstains, 1 votes against).


Answer: C

This resolution is intended to exercise the powers given to trustees under Charities Act 1993, s 74. (Click here to see a summary). The jurisdiction given to trustees under s 74 is available as the gross income of the charity does not exceed £5,000 (s 74(1)(a)).

In this case the resolution does comply with the requirement under s 74(3) that any such resolution must have been passed by two thirds of those voting. In this instance 80% of those voting supported the resolution. Note that even with the necessary two thirds majority, the resolution would be ultra vires (' the trustees shall not have the power ...' s 74(4)) unless the trustees had satisfied themselves that the requirements of s 74(a) and (b) had been met. Note in particular that under s 74(4)(a) the existing purposes must have ceased to provide 'a suitable and effective application of the charity's resources'.

The further requirement of s 74(4)(b) may be problematic here. The proposed charitable purposes are much wider than those of the original trust although benefit is still directed towards those residing in the same physical location. (Click here to see an example of the way in which the Commissioners have broadened purposes under a cy-près scheme).

Note that both sections 74 and 75 of the 1993 Act seek to eschew compulsion. The role of the Charity Commissioners is largely restricted to informing and advising trustees about the jurisdiction, although their concurrence in any change is required. Whether the voluntary response has been stronger than under the narrow and more complex 1985 provisions is difficult to establish. (Click here for a summary of the 1985 statute.) The view from the Commission though has certainly been positive. In their 1995 Report, for instance, they assert that 'extensive use' has been made of the new powers by trustees, citing the fact that in that year alone the Commissioners concurred with 1,889 resolutions (Annual Report para 16).

Regulation & Charity Commission

In this section of the Workbook we focus principally on the system of official supervision by which the Charity Commissioners and other government agencies endeavour to ensure that charities act efficiently and honestly.

The changes first introduced in the Charities Act 1992, now mostly consolidated in the Charities Act 1993 and which extend the Commissioners’ powers and increase trustees’ obligations, are likely to affect significantly the process of supervising the activities of charities. The principal agency concerned with maintaining standards of efficiency and honesty remains the Charity Commission, assisted and monitored by the court, although as will be seen the Inland Revenue also has an important supervisory role. A further measure of control is exercisable by public authorities who may demand detailed particulars of management structure, membership resources, financial planning, accounts, proposed activities and so on as a condition of awarding contracts or granting discretionary financial assistance to a charity. It appears, however, that subsequent monitoring and evaluation practices vary widely between and even within government departments (see generally Home Office Efficiency Scrutiny of Government Funding of the Voluntary Sector (1990)).

Note that ‘exempt charities’ are mostly free from the supervisory regime of CA 1993 principally because in theory they are answerable to alternative supervisory agencies e.g. the Registrar of Friendly Societies.

In describing the process of administrative and financial supervision we shall look first at measures relating to the detection of maladministration.

Detection & Prevention

In this section of the Workbook we are looking principally at the way in which the Charity Commission operates to prevent and detect fraud or mismanagement of charity assets.

The principal impact of official supervision is still directed at the activity of a charity as a going concern, but an initial opportunity to exercise a degree of control occurs when a charity is first established or registered.

In describing the process of administrative and financial supervision we shall therefore look first at ways in which the Registration process can be used to try and pre-empt problems arising. We will then move on to consider the obligations on trustees to maintain accounts and to submit them to official scrutiny. This process is a key element in the monitoring arrangements and can alert the Commissioners to the existence of possible problems.

Finally in this section we consider what powers of inquiry and investigation the Commissioners can exercise when put on notice and conclude with a brief survey of what might be seen as the ultimate sanction, removal from the register.

The Charity Commissioners observed in their 1966 Annual Report that ‘we are bound by the decision of the courts to base our decision whether an institution is a charity upon the words used in its constitution or other instrument of government’ (para 34; see also McGovern v A-G [1982] Ch 321 at 346 to the effect that in interpreting charity documents it should not be inferred that trustees will use unlawful means in carrying out their charitable purposes).

This observation appears to negate any suggestion of discretion. In the same 1966 Report, however, the Commissioners demonstrate a readiness to probe into the activities of an organisation and the intention of trustees if faced with draft documents that (para 37) ‘attempt to dress up the purposes of the proposed institution in words which it is hoped will be accepted as charitable even though the purposes, as phrased, are quite remote from the true intentions of the promoters’. (See Youth Training (1982); The Margaret Thatcher Foundation (1991).)

By 1996 this approach is confirmed and arguably broadened into a more general practice whereby consideration of any applicant organisation’s purposes is stated to involve ‘looking at both its objects and its activities’ (para 79). The consequence is that in practice most organisations are likely to comply with ‘invitations’, ‘suggestions’ or ‘strong advice’ from the Commissioners to amend their documentation and procedures, if that is the price to pay for registration (see e.g. The Fairtrade Foundation (1995)).

On the next page we look more closely at some of the specific statutory powers that the Commission can exercise in the registration process.

Under the Charities Act 1993 the Commissioners have been given for the first time certain powers in relation to charity names and charity trustees.

Charity Names

The Commissioners can require a charity to change its name if its proposed title is ‘likely to mislead’ the public as to the purposes or activities of the charity (Charities Act 1993, s 6). A proliferation of organisations with similar names is not only confusing but can undermine the value of one of a charity's important assets - its name. The potential for confusion and subsequent controversy is amply illustrated by British Diabetic Association v Diabetic Society Limited [1995] 4 All ER 812, the culmination of a legal action lasting some four years with costs estimated at £500,000. This is clearly the type of dispute that the new jurisdiction would hope to prevent although the defendant society in the particular case was not a registered charity at the time that the dispute first arose (click here for further details). Note that there are also statutory prohibitions on the use of the words 'charity' or 'charitable' in the names of non-charitable companies or businesses, unless the consent of the Charity Commissioners has first been obtained (see Companies Act 1985, s 26(2); Business Names Act 1985, s 2(1); and Decisions of the Charity Commissioners vol 5, (1997) 4-6).


Trustees

In view of the key role played by trustees in the administration of charity it became accepted that some form of monitoring of trustees should be introduced at the time of registration (see Woodfield Report (1987) para 74; White Paper (1989, Cm 694) paras 5.3 - 5.6)). Consequently a flaw in the pre-1992 law whereby the Commissioners had no authority to debar any person from trusteeship has now been remedied. Under CA 1993, s 72 certain classes of persons are disqualified from being charity trustees. Those disqualified include undischarged bankrupts, any person convicted of an offence involving dishonesty or deception, and any person previously removed from charity trusteeship on grounds of misconduct or mismanagement (s 72(1)). In addition the Commissioners are required (s 72(6)) to maintain a register open to the public of all people removed from trusteeship either by the Commissioners themselves or by the High Court. Finally, anyone acting as a trustee while disqualified under s 72 is committing a criminal offence (s 73).

Submissions of Accounts

A major cause of criticism of the supervisory system historically has been the low level of compliance by trustees with the obligation to submit accounts, exacerbated by the corresponding failure of the Commissioners to monitor and enforce the obligation (see eg NAO (1987) para 1.13–1.17, and Committee of Public Accounts 7th Report (HC Paper (1990–91) no 85 para 3).

These failings ultimately engendered both statutory and administrative responses: Charities Act 1993, Pt VI provided the framework for a revised regulatory regime and the Commissioners increased their investigative division fourfold (with an emphasis on acquiring accountancy expertise; Annual Report 1992 para 79).

The current legal provisions are reviewed and summarised on the next page.



The Table on the previous page does not quite tell the full story about the scope of these monitoring arrangements.

First, exempt charities are not subject to the obligations described above, although they too are required (i) to keep, and retain for at least six years, proper books of accounts; and (ii) to prepare consecutive statements of account relating to a period of not more than 15 months and a balance sheet relating to the end of that period (Charities Act 1993, s 46).

Second, the above provisions, other than s 45 (Annual Report) and s 48 (Annual Return), do not apply to corporate charities. They, however, must submit accounts in accordance with regulations made under Companies Act 1985 Pt VII.

The third but most important reason why the details of the obligations do not tell the whole story is that we do not yet know whether the new framework will have the effect of providing an effective system for monitoring charity activity and for detecting and deterring abuse.

Initial impressions have not been very positive. Both the 1997 NAO Report (click here for a summary) and the Committee of Public Accounts Report in 1998 (click here) were critical of the Commission's efforts to ensure that the accounting and reporting obligations were complied with.

The response of the Commission has been that these criticisms are based on 1996 data, before the new provisions took full effect, and that only from 1998 onwards can a fair judgment be made about the effectiveness of the new framework and the Commission's monitoring efforts.

Inquiry & Investigation

Receipt of accounts and annual reports and returns does not necessarily mean that an effective monitoring process will occur. This will depend on what further legal powers are available to the Commission and also to some extent on how effectively the resources of the Commission are deployed on investigation duties.

On the next page we will examine some of those legal powers.

As regards deployment of resources it is evident that there has been a significant shift in the approach of the Commission over the last decade. Statistics on the employment of accountants illustrate this; in 1988 the Commission employed no accountants but by 1997 it employed nine. (Click here for further information on the allocation of resources to the Investigation Branch of the Commission).

Read Charities Act 1993, s8, s9 and s 11. In this exercise we provide you with five propositions about the powers available to the Charity Commissioners.

We would like you to place a tick in the appropriate box of any of the propositions that you believe are correct.


1. The Commissioners can undertake an Inquiry only where they have reasonable grounds to suspect misconduct or mismanagement.

2. The Commissioners can require a trustee to provide a copy of any trust document only where an Inquiry has been instituted under s 8.

3. The Commissioners can require any person to provide them with documents in respect of any charity, registered or unregistered.

4. It is a criminal offence to conceal a document liable to be required by the Commission.

5. It is a criminal offence to refuse to provide information to the Commissioners when requested to do so.

Answer: (4)

As you are probably beginning to appreciate the ways in which the Commission has deployed its resources in the monitoring process has been the subject of close analysis and of considerable criticism from e.g the Committee of Public Accounts in parliamentary sessions 1990-91 and 1997-98.

In forming a view on how, in your opinion, the Commission uses the legal powers given to it (and that you explored on the previous page), you may find it helpful to follow through in diagrammatic form the investigation procedures the Commission adopts.

Picture 1 Picture 2



Picture 3

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Picture 1 identifies the source of information for the Commission; Picture 2 shows how allegations are evaluated and Picture 3 how they are investigated.

We have seen that there has been a substantial increase in the allocation of resources by the Commission to its monitoring activities. (Click here to review the data). It is though difficult to determine precisely how far this has produced an improved and fully effective monitoring system. The annual statistics provided by the Commission a decade ago (i.e. before the major statutory and administrative changes) were much less detailed than those now produced. This make accurate comparisons impossible.

Where the Commission identifies what it believes to be a 'cause for concern' there are a range of measures that can be taken to protect charity assets.

We look at these measures in the next section of the workbook (Protection of Property)


Protection of Property

The Commissioners have considerable powers to act for the protection of charity property where maladministration or abuse of charity funds is revealed. Thus CA 1993, s 16(1) gives the Commissioners the same statutory powers as are exercised by the courts for appointing and removing trustees (see generally the Workbook on Trusteeship, especially Section 2: Filling the Office of Trustee) and for vesting or transfer of property, subject to the limitations mentioned in the earlier discussion of cy-près schemes (s 16(4)(5)).

Of greater immediate significance for our purposes, section 18 of the Act also provides far-reaching powers to protect the property of any charity from fraud or mismanagement on the part of those in control of it.

There are though two features to emphasise about this jurisdiction. One is that it does not extend to exempt charities. The second feature is that the most of the powers under s 18, those in s 18(1) and (2), are exercisable only after an inquiry has been instituted under section 8 of the 1993 Act.

On the next page we will examine the extent of the jurisdiction given to the Commissioners under s 18.

In this exercise we provide you with six propositions about the powers available to the Charity Commissioners.

We would like you to place a tick in the appropriate box of any of the propositions that you believe are correct.


1. The Commissioners can only act under s 18 after an Inquiry has shown that there has been both misconduct and mismanagement in the administration of a charity

2. The Commissioners can suspend a trustee for an unlimited period under s 18.

3. The payment of generous salaries to employees can constitute misconduct for the purposes of s 18.

4. The Commissioners cannot remove a trustee from office under s 18 simply because of misconduct by the trustee.

5. The Commissioners can remove a trustee who is unwilling to act without the need for a s 8 inquiry.

6. The Commissioners cannot exercise their powers under s 18 unless written notice has been sent to every trustee.

Answer: 3, 4, 5.

An important distinction is drawn in Charities Act 1993, s 18 between two aspects of the powers available to the Commissioners. The more extensive requirement to be satisfied in s 18(2) — ‘both mismanagement or misconduct and the necessity or desirability of acting to protect property'’ — than in s 18(1) reflects a distinction between respectively ‘permanent and remedial powers’ and ‘temporary and protective powers’ (Charities: A Framework for the Future (1989)). Thus the powers under s 18(1) can be invoked promptly, whereas use of the powers under s 18(2) is subject to notice requirements to those who may be affected (ss 18(12) and 20).

It is this facility given to the Commission to act promptly in the use of its powers, allied to the increased resources applied to monitoring, that the Commission hopes will enable it to achieve its aim of 'giving the public confidence in the integrity of charity' (Annual Report 1997 p 2).

A trite comment is that it remains to be seen whether that hope will be realised. The Commission was the subject of quite strong criticism by the Committee of Public Accounts in 1998 for failing to make full use of its powers and resources.

It is beyond the scope of this Workbook to investigate this issue to any great depth. Moreover, a fuller picture will emerge when the Commission has available the results of its current (1998) exercise to ensure that charities comply with their accounting obligations. You may, however, find it helpful to compare the principal criticisms of the Public Accounts Committee with the latest data from the 1997 Annual Report of the Charity Commissioners.

Charity Proceedings

In this section of the Workbook we have seen that jurisdiction in relation to the administration of charities now largely resides with the Charity Commissioners (see Charities Act 1993, s 16). To lend weight to their enhanced role, the Charities Act 1993, s 32 conferred on the Commissioners a new power to bring of their own motion legal proceedings with regard to charities, subject only to their obtaining the formal agreement of the Attorney-General (click here for more on the reason for the measure).

The need to provide the Commissioners with some 'forensic threat' may have been one reason for the change but note that Picarda The Law and Practice Relating to Charities (2nd edn, 1995) has suggested that a supporting reason ' was to relieve the direct workload on the Attorney-General' (at p 558).

The granting of this power does not completely rule out the possibility of 'charity proceedings' as they are called being brought before the courts by some party other then the Commissioners. Under s 33 locus standi is extended to other individuals. We will look at who comes within the scope of this section over the next two pages.

Charities Act 1993, s 33 provides for the taking of proceedings by persons other than the Charity Commissioners. The class of persons who can qualify under s 33 seems to be widely drawn in subsection (1). (Click here to see s 33(1)). In particular the reference to 'any person interested in the charity' would at first glance appear to be very broad. We will look in some detail on the next page at how this term has been interpreted by the courts.

In the meantime it is important to appreciate that the Commissioners retain a 'gate-keeping' function in that their authorisation is in most instances required before charity proceedings can be commenced. That said there are some circumstances where charity proceedings may be entertained by the court without the prior authorisation of the Commissioners. Read s 33 and then place a tick against the examples where authorisation is required.

(a) A trustee wishes to appeal to the Court against a decision of the Commissioners to refuse to act of their own motion against a trustee believed to be bankrupt.
(b) A trustee wishes to appeal against a decision of the Commissioners to suspend him from the office of trustee.
(c) A decision by the Attorney-General to institute proceedings against a charity.
(d) A trustee wishes to commence proceedings against other trustees for misconduct in the management of the charity.

Answer: D

A trustee would clearly have locus standi under s 33(1). Section 33(2) makes explicit that unless otherwise provided for in s 33, 'no charity proceedings relating to a charity (other than an exempt charity) shall be entertained or proceeded with in any court unless the taking of the proceedings is authorised by order of the Commissioners'.


Control of Fund Raising

Fund-raising is an important activity for many charities. Fund-raising is also an opportunity for the less-than-scrupulous to exploit the idea of charity for their own advantage. (Click here for details of one such pre-1992 scheme). Concern at the inadequate control exercisable over such fund-raising activities was expressed in the Woodfield Report (Pt 12) and reflected in the government’s 1989 White Paper (Charities: A Framework for the Future ch 10; see also NCVO Malpractice in Fundraising for Charity (1986)). Subsequently the Charities Act 1992 introduced a new regime to control public fund-raising (Pt II) and public charitable collections (Pt III). These measures which broadly aim to protect the interests of charities and donors remain in place, the CA 1993 neither updating nor consolidating them.

Charities Act 1992, Pt II (ss 58–64) These provisions are directed at controlling the activities of ‘professional fund-raisers’ and ‘commercial participators’.

Charities Act 1992 Pt III (ss 65–74) Part III is concerned with public charitable collections, and is largely a rationalisation of existing legislation. The main aim is to harmonise and modernise existing laws regulating street and house-to-house collections.

Over the next four pages we will introduce the quite detailed statutory provisions and accompanying regulations but do not propose to study them in great detail. For a fully-rounded picture of controls on fund raising one would need also to take into account areas of the criminal law (click here for an example).

Further Reading:
o H. Picarda The Law and Practice Relating to Charities (2nd edn, 1995) ch 45.
o P. Luxton, 'Control of Fund Raising for Charitable Institutions - The New Law' (1992-93) 1 CL & PR 147-152 and 233-238.
o J. Hill, 'Enter the Commercial Participator' (1995-96) 3 CL & PR 17-28.

Before we look in a little more detail at the regulatory framework there are two general points to emphasise.

The first point is that written agreements between fund-raisers and charitable institutions and disclosure of information by fund-raisers to donors are central to the process of regulation. Indeed it is unlawful (s 59(1)) for professional fund-raising to take place on behalf of a charity without a written agreement between the fund-raiser and the charity.

The second key element to emphasise about the framework is that additional protections and powers are given to both donors and to charitable institutions, which to some extent are intended to encourage them to operate as the fund-raising watchdogs.

On the next page we use a click on picture page to outline some of the key aspects of the Part II regulatory framework.

We are all familiar with the practice of street collections or house-to-house collections by charities. Prior to 1992 these were regulated by several different statutes, which was said to leave loopholes in the law and create confusion for donors and donees.

Charities Act 1992 Pt III (ss 65–74) is concerned with public charitable collections, charitable again including ‘benevolent or philanthropic purposes’, and is largely a rationalisation of existing legislation. The main aim is to harmonise and modernise existing laws regulating street and house-to-house collections.

The Act provides that no ‘public charitable collection’ (s 65(1)(2)) is to be conducted without either a permit issued by a relevant local authority (s 68), or under an exemption order issued by the Charity Commission (s 72). The Act specifies the circumstances under which a local authority can issue (s 68) or refuse permits (s 69(1)) eg undue inconvenience to members of the public (s 69(1)(a)) or, indeed, withdraw one previously issued (s 78).

As regards an exemption order, this can be issued where the collection is to take place over the whole or ‘throughout a substantial part’ of England and Wales (s 72(1)). One slight quirk, given the overall scope of Part III, is that an exemption order can be issued only for a charity as defined in common law.

Given the need for charities to raise funds it is scarcely surprising that modern marketing techniques, particularly the use of advertising, hold out certain attractions. What may be surprising, however, is that it was not until 4 September 1989 that the restriction on paid-for charity advertising on independent television and radio was lifted. Prior to then charity advertising had either been limited to newspaper and journal outlets or had been permitted use of free appeals ranging from The Week's Good Cause on Sunday morning radio to such large scale general appeals such as BBC Children in Need.

There is now a plethora of codes and regulations that cover charity advertising most of which are designed, in common with those applicable to commercial organisations, to ensure that advertisements by or for charities are legal, decent, honest and truthful (see generally D. Morris, 'The Media and The Message' (1995-96) 3 CL & PR no 3, 157-177; Picarda pp 635 - 644; and specifically the ITC Code and, for general appeals, the Broadcast Appeals Consortium Charter).

It is not our purpose here to investigate the regulatory framework. Instead on the next page we will encourage you focus on some of the possible implications of allowing charities to advertise.


Taxation & Summary

'The Chancellor of the Exchequer is a man whose duties make him more or less of a taxing machine. He is intrusted with a certain amount of misery which it is his duty to distribute as fairly as he can'. Not everyone would agree with this rather jaundiced view of Chancellors expressed by Robert Lowe in the House of Commons in 1870 (11th April). What is striking is that since the time of the introduction of income tax by William Pitt in 1799 almost all these 'taxing machines' have sought in various ways to exempt charities from sharing in the misery. The result is that today a wide range of valuable tax reliefs are available to charities and to donors.

Where there are tax reliefs there are also temptations to exploit their availability. One consequence has been the introduction of specific anti-avoidance measures, such as those in the Finance Act 1986, ss 31 and 33. We are, however, not concerned here to explore the intricacies of such legislation. Our concern is a rather more general one which focuses principally on the monitoring mechanisms and the links between the Charity Commissioners and another regulatory agency, and the last one to be considered in this Workbook, the Commissioners of the Inland Revenue.

Over the next two pages we will look at how far the agencies are able to collaborate and how effective the monitoring is by the Inland Revenue. As we shall see, it too, like the Charity Commission, has come under the scrutiny of the National Audit Office.

Collaboration, or at least exchange of information held by regulatory bodies, can be seen as an important facet of an effective system of monitoring. On this page the questions that we ask are directed towards establishing how far statute law provides for collaboration and whether the Inland Revenue has any discretion over allowing tax reliefs to registered charities.

Before attempting the questions on this page you should read ICTA 1988, s 505, Charities Act 1993, s 4, Charities Act 1993, s 10 (1) and (2), and Charities Act 1993, s 10(4).

Which of the following propositions are correct? Place a tick in the appropriate boxes of those where you think that the proposition is correct.

Note that in the statements 'IR' and 'Commissioners' stands respectively for the 'Inland Revenue' and the 'Charity Commissioners'.


(a) Upon request from the IR the Commissioners must disclose any information they possess about any matters relating to a registered charity.

(b) The IR may disclose any information they possess about any charity to the Commissioners upon request.

(c) The IR cannot refuse to recognise as charitable an institution that is entered by the Commissioners on the Register of charities.

(d) The IR must allow the relevant tax reliefs to any registered charity that claims such relief (eg refund of income tax paid on covenanted income).


Answer: C

Under Charities Act 1993, s 4 an institution entered on the Register is presumed 'for all purposes' to be a charity and this is binding on the Inland revenue. The converse is, of course, not the case. There is no presumption, conclusive or otherwise, that an institution that is not registered, or even whose application for registration has been turned down, is not a charity.

On the previous page we focused on the extent to which the Inland Revenue cooperated with the Charity Commissioners in their respective monitoring activities. In 1997-98, for instance, there were 66 specific referrals of cases to the Commissioners by FICO (The Financial Intermediaries and Claims Office), the section of the Inland Revenue who administer the exemptions enjoyed by charities. Despite this evidence the Committee of Public Accounts in a 1998 Report specifically recommended that greater efforts should be made by both organisations to work together 'to detect non-compliance' (click here for details).

The general view of FICO's work expressed by the Committee was that whilst in 1996-97 some £6m in tax revenues had been recovered by the compliance activities of FICO those activities lacked sufficient focus (click here for details). It appears from the Report that FICO is in the process of adopting a more targeted strategy based on a system of risk assessment (click here for more detail). In this respect the response of the Inland Revenue is similar to that of the Charity Commissioners to that same Committee (click here for a summary of the Committee's criticisms). That response seems to be that 'we are working hard at improving our monitoring systems and you should judge us when they are in place and fully operative'. This looks like a topic where our response has to be 'watch this space for further developments'.

It is evident that the Committee of Public Accounts is very likely to wish to return to these matters of monitoring and compliance as regards both the Charity Commissioners and the Inland Revenue.

We have seen that the courts and the Charity Commissioners are equipped with a seemingly powerful battery of supervisory rules, principally under the 1992 and 1993 Charities Acts. However, as with any other supervisory body or agency the effectiveness of the supervision exercised by the Commissioners cannot be assessed by considering merely the rules under which it operates. Account must also be taken of their approach: do they achieve an appropriate balance between their supportive role and their supervisory and monitoring functions?

On the next (and last) page of this section we attempt to summarise the main points of the debate as to whether Charity law and the Charity Commissioners have managed to strike the appropriate regulatory balance.

Overview

In the introduction to this workbook we stated that it is principally concerned with the regulation of charities from the standpoints of effectiveness of purposes, efficiency of management and administration and accountability of the trustees.

In this overview we intend to focus on the the issues of efficiency and accountability.

First, however, a brief comment about 'effectiveness of purposes' is called for. You might like to consider how far the assessment of effectiveness, evaluated in this Workbook primarily in the context of the operation of the cy près doctrine, should take account of a qualitative dimension to charitable activity. (Click here for comment).

As regards 'efficiency' and 'accountability' we have tended, in this Workbook, to place the Charity Commission at the fulcrum of regulation. Arguably, however, the central figures are the trustees. Indeed the Commissioners themselves have frequently emphasised this dimension to the regulatory framework. (Click here for comment).

As we have examined in some detail the part that the Commissioners play in seeking 'to give the public confidence in the integrity of charity' (Annual Report 1997, para 11) we focus in this Overview on the position of trustees and their accountability.

On the next page we show in diagrammatic form the numerous strands of accountability that can affect trustees. It is important to bear in mind that it is only the largest charities that are likely to be faced with the multiple dimensions of accountability illustrated in the diagram.

It would require another workbook to explore fully all the dimensions of accountability portrayed in the Diagram on the previous page. And, of course, there is another workbook (Trusteeship) to which reference can be made if you want to read a more comprehensive account of the law on trusteeship.

Here, however, we concentrate on a key issue which is emerging as a specific focus of debate in the context of charity i.e. whether the current legal framework concerning charity trustees' duties, powers and liabilities is appropriate for the increasing commercial and managerialist responsibilities that many charity trustees are facing. (Click here for a perceptive summary by the National Council of Voluntary Organisation (NCVO) of the responsibilities of charity trustees)

Consider on the one hand, for instance, the fact that a declared aim of the legislative framework contained in the 1992 and 1993 Charities Acts is to place more responsibility for managing a charity’s affairs squarely on the shoulders of trustees. On the other hand it is reported (i) that two-thirds of trustees are unaware that they are trustees (ie because their formal title does not include the word ‘trustee’); and (ii) that half to two-thirds are unaware of the nature of their responsibilities (see generally NCVO On Trust (1992)).

Given these circumstances has the time come to allow either the appointment of corporate trustees or the remuneration of individual trustees or for trustees to be insured against any possible liability?

We introduce you to the debates on some of these issues on the next page. There is one further accountability issue that we also introduce on the next page.

Vesting authority and responsibility in trustees may conflict with a demand for democratic accountability that is increasingly being voiced in some charitable circles. How far can and should the legal framework seek to facilitate involvement of and possibly even control by the users of some charitable services?