Not just an empty shell

Charities that have merged should be able to rely on the Register of Mergers to protect future gifts made to their predecessors, a mechanism which some authors believe make it unnecessary to maintain 'shell companies' purely to receive such gifts (see for instance 'No more empty shells', Solicitors Journal Charities and Appeals Supplement, Winter 2009). But for many charities it is possible that reliance on the Register of Mergers to protect the receipt of future gifts, in particular the receipt of legacies, would be an expensive mistake.

The Register of Mergers

There are various forms a merger may take, but invariably one charity, the 'transferor', ceases to exist as a result of the merger. There are exceptions, for example where a charity has no power to dissolve and holds permanent endowment property. In such cases, the charity transfers its unrestricted property to its successor but continues to hold the permanent endowment; there is a merger but no charity ceases to exist. However, where the merger leads to the disappearance of a charity, an entry in the Register of Mergers (set up under the Charities Act 2006) should ensure that gifts to a transferor would be donated automatically to its successor charity: the intention behind the gift would be protected. This legislation had a laudable aim, but it has not worked as intended.

A charity may not normally be recorded in the Register of Mergers unless it has been wound up. Once it no longer exists, it may be entered onto the register. Section 75F of the Charities Act 1993 provides that from the date the merger details are entered onto the register, gifts to the transferor take effect as gifts to its successor. This will cover, for example, the situation where a donor sends a donation to the transferor after the merger.

Practical problems

Critically, many charities receive a large portion of their income from legacies. Wills are immensely varied, but many of them contain some variation on this formulation: 'I leave half of the residue to the transferor and the other half of the residue to my beloved daughter provided that if the transferor has ceased to exist at the date of my death, I leave all of the residue to my daughter.'

In this situation, as the transferor no longer exists, the gift will go to the daughter. Had the transferor been maintained as a shell charity, the successor charity would have benefited from the legacy. There are also many forms of testamentary wording that can be envisaged that would create ambiguity, leading potentially to costly legal disputes between the successor charity and the beloved daughter.

Then there are possible problems with gifts to unincorporated charities, which are typically construed as gifts for the purposes of those charities, rather than gifts to the charity itself (this reflects the presumed underlying intention of donors). Therefore unincorporated charities that are considering a merger (and a merger includes the incorporation of a charity) may still consider the Register of Mergers to be a useful tool.

A legacy left to the unincorporated transferor will normally be construed as a gift for its purposes and so the legacy may be paid to its successor. But however consistent the courts are in their construction of such gifts, executors may not always take this approach without legal coercion, whether through ignorance or choice. Maintaining the transferor's existence may be preferable, if only to prevent the executor from perceiving there to be ambiguity as to a legacy's destination.

Name appropriations

A client has recently decided not to use the register for a different reason. When a transferor is wound up, they are removed from the register. There is then no provision to prevent a new charity from being registered with a name similar or identical to the transferor's name. The Charity Commission's power to give directions requiring a charity to change its name under s.6(2)(a) of the Charities Act 1993 would not apply as the original charity no longer exists. And the commission's power under s.6(2)(d) would probably only apply where the new charity's name misleadingly implied that it was connected to the successor charity (rather than its predecessor which no longer exists), which could be difficult to prove.

Insolvency legislation partially protects the names of former companies that have gone into insolvent liquidation, but any transferor should have discharged its liabilities before being entered onto the register and so will not qualify for such protection. This would create confusion as to who is perceived to be the transferor's successor and proper recipient of donations.

It would be difficult to prevent the new charity from being registered. Once the transferor has been removed from the registers at the Charity Commission and at Companies House (if applicable), the successor charity would have to rely on its intellectual property rights, if any, in the transferor's name. This could be an expensive and unsatisfactory strategy.

The client in question had particular reasons for its concern that a charity would be registered with the transferor's name. However, where a transferor has a name which may be the subject of a charity registration application in the future, whether inadvertent or deliberate, this should be considered before use of the register. The risk may be remote, but it is easily avoidable by maintaining a shell charity.

The continuing need for 'shell charities'

Given the numbers of poorly drafted wills, it is likely that legacies to transferors will continue for many years to be uncertain, or to fail. Maintaining a shell charity to receive gifts which would otherwise fail is not onerous. It may be administratively inconvenient but, given the limited effect of the Register of Mergers, it will often be the most appropriate course of action. Where an unincorporated charity is to be merged, the need to retain it as a shell charity is less pressing, but could help to provide certainty as to the destination of a gift.

Finally, the maintenance of a shell charity is an important method of protecting the transferor's name from future misuse.