Update: charities

The Charity Commission has begun a new practice of publishing regulatory case reports. These are different from the reports published by the Commission at the end of a formal inquiry under section 8 of the Charities Act 1993. The commission explains on its website that it will only publish a regulatory case report on the conclusion of non-inquiry cases where they decide that there is sufficient merit to do so '“ broadly speaking where there is public interest in the outcome of an assessment case, as was the case with the Prince's Trust.

The Prince's Trust Trading Limited, the trading subsidiary of the Prince's Trust, entered into a joint fundraising venture with Women2Win '“ an organisation which supports the Conservative Party. The subsidiary collected the proceeds of the venture and paid an agreed share to Women2Win. The Charity Commission concluded that the charity had directly, or indirectly, offered an opportunity to fundraise to a political party. Its guidance update, 'Charities and Political Donations', also says that it is not permissible for a charitable trading subsidiary to make donations to political parties.

This would seem to be an application of commission policy rather than the law. While it is true to say that charity law restrictions on party political donations and the support of a political party apply to a charity, arguably they do not apply to a non-charitable company even if it is wholly owned by a charity. The Commission does not share this view but its reasoning is difficult to reconcile with the law.

Charities establish subsidiary companies so that non-charitable trading activities can be carried out which a charity is not permitted to do as a matter of charity law, in a tax-effective way and which will protect charitable funds from any unnecessary risk. The subsidiary can conduct its activities without having regard to the legal restrictions imposed on the trustees of the charity in relation to non-charitable trading activity. If its activities involve collaboration with a third party, whether that third party is politically motivated or not, the company need only consider its own best commercial interests. A charity is required to conduct its relationship with its subsidiary at arms' length and should not, on general principles, interfere with the management of the subsidiary company which is reserved to the directors of the company.

This is not to say that a charity should not protect its good name and reputation. Where it has a non-charitable subsidiary company established to carry out fundraising activities, the charity trustees should ensure that the use of its name by the subsidiary is restricted in a written agreement to prevent the subsidiary from bringing the charity into disrepute.

Alternatively Part II of the Charities Act 1992 may be applicable. This would enable a charity to prevent its name being used by third parties if it was perceived that this would harm the charity's reputation. The legislation enables a charity to obtain an injunction to stop the fundraising event. However, the legislation does not apply to a charity's wholly owned subsidiary company.

Somali Progressive Association

The commission opened an inquiry under section 8 of the Charities Act 1993 into a charity called Somali Progressive Association and published a report of its findings on 21 August 2009.

The charity's objects were directed towards benefit for the Somali community, including education, recreational facilities and relief of those in need through the provision of advice on welfare and benefit rights and housing. The focus of the charity's activities is a 'drop in' centre. It came to the attention of the commission that the chair of trustees had been declared an undischarged bankrupt. This is a ground for automatic disqualification as a charity trustee under section 72(1)(b) of the Charities Act 1993.

The Commission used its powers under section 9 of the Act to obtain the charity's bank records and established that the chair was a signatory to the bank account and that large financial transfers were being made to a bank account which belonged to the charity, although it was not in the name of the charity. The chair resigned before the inquiry was opened. The commission issued temporary orders under section 18(1)(iv) of the Act to prevent the charity from accessing funds in the bank account without the approval of the commission.

During the course of the inquiry, the commission found, among other things, that:

• The director, who was an authorised signatory on the bank account, signed most cheques, including his own salary cheque. However, the commission was satisfied that this was subject to proper oversight by the charity's finance committee.
• In breach of the provisions of the governing document, only one person was signing cheques.
• Volunteers were reimbursed in cash but there was a lack of formal documentary evidence of expenses incurred.
• Trustees were paid a fixed sum in the form of allowances for expenses they incurred. This was more akin to remuneration of trustees than actual reimbursement for expenses.
• The trustees had failed to comply with filing requirements with respect to statutory accounts and annual returns but these were supplied during the course of the inquiry.

The commission found that transactions on the bank account were genuine and provided advice on the law and good governance practices.

The commission concluded that:

• the chair had acted as a trustee while disqualified, may have committed a criminal offence and that the charity's reputation had been damaged;
• the trustees had not taken sufficient steps to ensure that the charity's money was not put at risk;
• the trustees had failed in their duties to ensure that there were robust procedures in place for vetting land appointing trustees;
• financial controls were inadequate; and
• there had been a breach of the constitution by the trustees in receiving fixed payments for expenses.

The trustees were required to address the governance procedures and to consider taking action to recover funds obtained by the chair. The commission indicated that it may consider using its powers under section 73 of the Act if the trustees failed to take such steps.

Charity legacies

The cases of Ritchie, Ritchie and Others v National Osteoporosis Society and Others [2009] EW HC 709 (Ch) and Perrins v Holland and Others [2009] EWHC 1945 (Ch) are just two of a number of testamentary capacity cases which have been heard in the past six months. Challenges based on testamentary capacity are becoming ever more common, and this increase is likely to continue as the population ages.

Mrs Ritchie died in 2006 having made a will in 1998 leaving her substantial estate (£2.5m) to the National Osteoporosis Society, with the exception of a £5,000 legacy to her local church. She left nothing to her four children. The will was professionally drawn by Mrs Ritchie's solicitor.

Mrs Ritchie understood that her children would receive nothing from her estate and seemed to know what she was doing. She told her solicitor that her children were well provided for, that they did nothing to help her and that there had been a history of violence towards her.

Mrs Ritchie's children brought a claim against the will on the grounds of lack of capacity. They claimed that she was suffering from a disorder of the mind which had poisoned her affections against them and these delusions had caused her to disinherit them.

The case turned on two points: firstly whether the statements made by Mrs Ritchie about her children were true and secondly, if they were not true, whether she believed them or not. The judge held that the allegations made by Mrs Ritchie were not true. He also held that the medical evidence suggested that Mrs Ritchie was suffering from paranoia and believed the allegations to be true. As there was no rational reason why Mrs Ritchie would have disinherited her children, it followed that the delusions caused Mrs Ritchie to disinherit her children and that the will was therefore invalid for lack of capacity.

Perrins v Holland was also a case in which the deceased failed to make provision for his child, in this case his son. The testator was suffering from Multiple Sclerosis. He gave instructions for his will in April 2000 but did not execute it until October 2001. The testator had communication problems although he could still be understood. His cognitive functions had, however, deteriorated between the time he gave instructions and the time he executed the will. The testator's will left everything to Anne Dooney, his co-habitee. It excluded his son David. The main asset of the estate was a bungalow which the testator shared with Anne Dooney.

David brought a claim against the validity of the will on the grounds of lack of capacity. One of his arguments was that the will was not rational on its face, as it excluded him and that there was no rational reason why he should have been excluded.

The judge held that the testator had capacity when he gave instructions for the will as he met the criteria set down in the Banks v Goodfellow test (Banks v Goodfellow [1870] LR 5 QB 549). He lacked capacity by the time he executed the will. Following Parker v Felgate [1883] 8 PD 171, however, the will was held to be valid.

In this case, the judge also held that the will was rational on its face, even though it failed to provide for the testator's son. The son received the testator's pension of £160 per month until he reached the age of 21 which was the only other significant asset in the testator's estate. The testator's property was also Anne Dooney's home and the judge therefore felt that it was reasonable for the testator to have left it to her.

Since the decision in Sharp v Adam [2006] EWCA Civ 449 there have been a number of challenges to wills by testators' children claiming that a will is not rational on its face because it excludes them. The decision in Ritchie suggests that judges are sympathetic to these types of claims although the decision in Perrins v Holland suggests that they are prepared to find a rational explanation for a will even when it excludes the testator's children. The Ritchie case also shows the importance of (untrue) allegations made by the testator about their children. Charities who find themselves defending such a claim will need to tread carefully.