Grand Committee Report of 16 March 2005

Official Report of the Grand Committee on the Charities Bill [H.L.]
(Seventh Day)
Wednesday, 16 March 2005.
The Committee met at half past three of the clock.
[The Deputy Chairman of Committees (Baroness Gould of Potternewton) in the Chair.]
Schedule 6 [Charitable incorporated organisations]:
Lord Hodgson of Astley Abbottsmoved Amendment No. 149:
Page 88, line 20, at end insert—
"( ) A CIO will not he subject to provisions of company law."
The noble Lord said: The amendment seeks to add a new subsection (7) to new Clause 69A in Schedule 6. I shall be brief, as this amendment was tabled before the draft charitable incorporated organisation regulations were issued by the Home Office. These draft regulations make it clear that provisions of company law will apply to CIOs, which is exactly the opposite of what we propose in the amendment. It is interesting to note that in the interpretation section of the draft SI there are references to only three Acts—the Companies Acts 1985 and 1993 and the Insolvency Act 1986. There is a view in the charitable sector that the opportunity for a really innovative approach has been missed. Indeed. some of the amendments that have been tabled by the noble Lord, Lord Phillips of Sudbury, followed this line.
The concept of a CIO gave us an opportunity to think de novo about how best to structure it for its specific charitable purpose. If one accepts that view, then falling back on a company law framework represents an opportunity missed. Our amendment was tabled to try to encourage the Government to think more creatively about the structuring of CIOs. I fear that our encouragement will not be enough, but perhaps the Minister will surprise me. I beg to move.
Lord Bassam of Brighton: The noble Lord, Lord Hodgson of Astley Abbotts, has correctly spotted that there is no language that gives effect to the fact that CIOs should not be subject to the provisions of company law. That is because under Section 718 of the Companies Act 1985, the provisions of that Act do not apply to,
"any body not formed for the purpose of carrying on a business which has for its object the acquisition of gain by the body or its individual members".
The CIO is an example of such a body. so the provisions of the Companies Act do not apply to it. Having heard what the noble Lord said, I am not sure
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how helpful he will feel this is, but we cannot do much more than we have done and I hope that the noble Lord understands that.
Lord Hodgson of Astley Abbotts: It is rather as I anticipated, particularly given the way in which the SI is drafted. We are disappointed that we have not thought round this in the way in which I think the CICs were slightly more creatively constructed. In the circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbottsmoved Amendment No. 150:
Page 88, line 20, at end insert—
"( ) The liability of directors and members of a CI0 to any third party shall be limited to the assets of that CIO."
The noble Lord said: Amendment No. 150 is in the same part of Schedule 6. It adds another provision to proposed new Section 69A, which concerns the nature and constitution of charitable incorporated organisations. The amendment inserts a new subsection (8) to new Section 69A.
As the Bill is currently drafted, it is not clear whether the CIO is to be a limited liability vehicle. If it is riot, then the directors—the charity trustees—will he personally liable for their CIO's debts. In circumstances where the value of the CIO's debts is greater than the value of its assets, this could result in the directors meeting the shortfall out of their own pockets. This is the position currently facing trustees of charitable trusts and is undoubtedly the main reason why the charitable trust is unpopular with charities whose activities involve exposure to liability. Such charities are invariably established as companies limited by guarantee, a format that benefits from limited liability.
If the directors arid members of CIOs will not benefit from limited liability, the new CIO format is likely to be unpopular. For this reason, it is important for the Bill to make it clear that the liability of CIO directors and members is limited. This is what the amendment seeks to achieve. I beg to move.
Lord Bassam of Brighton: As the noble Lord explained, the purpose of the amendment is to limit the liability of the directors and members of a CIO to any third party to the assets of the CIO. The presupposition behind that is that the charity trustees and members of the CIO are personally liable for its debts.
That would be the position of charity trustees in the case of unincorporated charities. However, a CIO is incorporated and its members will not be personally liable for its debts except to the extent, if at all, that they have undertaken a guarantee.
The charity trustees will enter into engagements on behalf of the CIO as its agents and will be protected from personal liability through the ordinary processes of the law of agency, subject to any statutory modification. Notwithstanding the protection conferred by the law of agency, where the charity trustees are personally liable—

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for example, where they have been guilty of wrongful trading—a limitation of their liability in the terms proposed would, in the Government's view, be quite inappropriate.
I hope the noble Lord is reassured by those words. They are certainly intended to reassure him.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister. As I understand what he said, we have here a situation where they would have limited liability so long as they were not trading while insolvent and incurring debts which could not fall due. I see the Minister nodding when I say that and I am grateful for that reassurance. It meets the point made in the amendment and I beg leave to withdraw it.
Amendment, by leave, withdrawn.
Lord Bassam of Brighton Lord Bassam of Brighton moved Amendment No. 150A:
Page 89, line 33, leave out from beginning to ", with" in line 34 and insert—
"(a) "sefydliad elusennol corfforedig", or
(b) "SEC""
The noble Lord said: This is probably one of the most difficult amendments I have ever had to move. I shall try, but do not laugh. My background note states:
"The correct pronunciation of the Welsh phrases in the speaking note is as follows:
"sev-ud-lee-ad corf-or-ed-ig el-us-sen-ol".
We have discovered that there is a problem with the Bill's Welsh translation of "charitable incorporated organisation"—or, more precisely, with its abbreviation—and we have had to reorder the abbreviation. This is basically the reason for the amendment.
There is confusion because the abbreviation "SEC" is already in use for the European Co-operative Society in EC Regulation 1435/2003. We have discussed the matter with the Welsh Assembly and I now have to move this tricky amendment. All the amendment seeks to do is to re-arrange the word order of the Welsh equivalent of "charitable incorporated organisation" to read, as I have put it, "sefydliad elusennol corfforedig"—I think that is it. This gives the abbreviation "SEC" instead of "SCE" and thus gets round the problem. I beg to move.
Lord Phillips of Sudbury: I think the least the Minister can do is to offer a formal apology to the Welsh nation.
This is a serious question: am I right in thinking that a CIO registered in Wales but doing most of its business in England can get away with one of these alternatives on its notepaper? If it can, it will make no sense to anybody this side of the border, and the whole point of this is public protection.
Lord Shutt of Greetland: While the noble Lord is gathering himself to answer, I have a further point about these initials. We are used to charities becoming limited companies and then getting an exemption so
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that "Ltd" is not put after their name. Under the Bill, can these magic letters CIO or SEC be deleted? Some well known names which cannot put "Ltd" after their name may think that it is worthwhile converting to this new form, and will not be particularly keen on putting these initials after their name. Perhaps that point should be covered while we are talking about initials.
Lord Bassam of Brighton: I do not know the answer to the latter question: I will find out and communicate with Members of the Committee. The answer to the question of the noble Lord, Lord Phillips, is that this abbreviation can be used in this way only in Welsh language documentation.
Lord Phillips of Sudbury: I should like to be perfectly clear about that. Is the noble Lord saying that if one of these CIOs, registered in Cardiff but operating principally in England, sends out letters, it will not be able to carry one of these two alternatives in so far as the letter is in English? That appears to be what he said.
Lord Bassam of Brighton: It would be describing itself as a CIO.
Lord Phillips of Sudbury: With respect, that is my question. It would be describing itself as an SEC.
Lord Bassam of Brighton: If it was conducting the correspondence in Welsh, in a Welsh language document, it would use the form proposed in the amendment. If it were doing it in English, I understand that it would use the English formulation.
Lord Phillips of Sudbury: I think we might have uncovered an inadvertent glitch, because I do not think it will be practical for a Welsh SEC that has business over the border—and many of them will—to have two sets of notepaper.
Lord Bassam of Brighton: If it is conducting business in English, it will write it in the English formulation. My guess is that it will probably have a dual-language letterhead which makes it clear that there is a difference. I think that the noble Lord is seeing a difficulty that is not there.
Lord Phillips of Sudbury: With respect, it may sound pettifogging but these are important issues of public understanding. I perfectly understand if the letterhead is in both Welsh and English—then we can all be satisfied. But it is helpful to clarify, for practical purposes, whether a Welsh SEC/CIO operating in England, has to have both sets of initials on its notepaper unless it is confined to Wales. From what the noble Lord has said—and he may want to write to me about it—it seems that if the organisation corresponds, in English, with England or Scotland, it has to use the non-Welsh abbreviation or full name or have both on its notepaper. These small matters are of great practical importance and we need to sort them out.
3.45 p.m.
Lord Bassam of Brighton: I believe that we are clear about how it will work, but we shall have another conversation with the Welsh Assembly and ensure that we have not unintentionally created a difficulty. The noble Lord knows that most documents originating from Welsh organisations in any event have a dual-language letterhead. Sometimes I have received letters in both languages; I do not know why, but 1 have. People are very sensible and practical about the way in which they deal with that.
Lord Hodgson of Astley Abbotts: As someone who spends quite a lot of his time in the border counties, I can say that all our documents for things that operate on a trans-border basis come in dual format, including bus and train timetables. The headings of companies have the Welsh formulation alongside the English one, and you pick the Welsh or the English depending on whether you happen to be Welsh or English speaking.
Lord Phillips of Sudbury: I am most grateful for the assistance of the noble Lord, Lord Hodgson, but he is not quite with me on this. I am not talking about border counties where some people speak Welsh and some English and as a matter of practicality both are used. I am talking about when a Welsh-registered CIO might have an office in Birmingham, for example, and have no need for Welsh. Is that office in Birmingham going to be able to rely on the get-much-worse entity, SEC? I hope not, because that will not mean a thing to the average Brummie.
Lord Brooke of Sutton Mandeville: There are many Phillipses in Wales, and I cannot tell whether the noble Lord, Lord Phillips, is part Welsh or not. However, there was a famous inquest after an accident in a public swimming pool in Wales, when the attendant was asked by the Coroner why he had made no attempt to save the dying man. The attendant said, "I can't swim", and the Coroner said, "I can't believe it. Weren't you asked about that when you were interviewed for the job?" "No," the man said, "the only question I was asked was whether I was bilingual".
The Minister has to be right. On the basis of my experience, I can say that the documents that reach us from Wales are almost invariably in both languages.
On Question, amendment agreed to.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 151:
Page 91, line 25, at end insert—
"(c) a Charitable Unincorporated Association,
(d) a charitable trust."
The noble Lord said: This amendment is designed to allow any charitable unincorporated association and charitable trust to have the right of conversion into a CIO, in the same way as a company limited by guarantee and an industrial and provident society. I ask the indulgence of the Committee, but capital
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letters should not be used in relation to a charitable unincorporated association, as they are in the text of the amendment. I beg to move.
Lord Bassam of Brighton: The property of charitable unincorporated associations and trusts is held on a trust, and their liabilities are legally those of the trustees, since a charitable unincorporated association or trust has no legal personality. Normally the charity trustees of such a charity are entitled to indemnify themselves out of the property of the charity, in relation to the liabilities which they have incurred on its behalf.
The property of a statutory charitable corporation, which will include a CIO, is not held on a trust. The property is owned beneficially by the corporation, but its capacity to deal with that property is regulated by the charity's constitution, and by the legal framework which applies to corporations constituted in that way. Any liabilities are directly those of the corporation. The charity trustees are the corporation's agents, and their relationship with it, and with the people with whom the corporation deals, is governed by the law of agency. The charity trustees will not normally be responsible for the corporation's liabilities.
The main purpose of the CIO provisions in the Bill is to enable one or more persons to form a new type of corporate charity. The benefits of using an incorporation regime which is specifically designed for charities have been extensively rehearsed in preparing for this. The proposed regime can readily accommodate the conversion of charities which are currently set up as companies or industrial and provident societies. That is because these bodies are, as CIOs will be, formed as statutory corporations. They hold their assets and are subject to liabilities, in the same way as a CIO will do or be. Conversion will not interrupt the body's legal personality; it will simply become registered under a different statutory regime.
The assets of the body will continue to be held on the same basis, and its liabilities will continue to be enforceable in the same way as was the case before conversion. The position of those dealing with the body will not be affected by its conversion to a CIO. But this would not be the case on the conversion of a charitable unincorporated association or trust into a CIO. The effect of conversion would be to alter the basis on which the property of such a charity was held and to alter the basis on which its liabilities were enforceable. That could adversely affect the position of those already dealing with a charity and could undermine confidence among its supporters. If charitable trusts and unincorporated associations wish to reconstitute as CIOs, it is appropriate that they should first terminate their present existence and transfer their undertakings to a newly formed CIO.
The proposed new Section 69M of the Charities Act 1993 is designed to facilitate that process. I hope that the noble Lord is enlightened by that explanation and feels able to withdraw his amendment.
Lord Phillips of Sudbury: I am grateful to the noble Lord for his academically impeccable answer, but it did

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not quite go to the point of my amendment. At the end of his response, he was right to say that an unincorporated association, which is a charity or a charitable trust, can any day of the week set up a charitable company—for example, a CIO—and convert into it. The point was that, if it is a membership organisation, members might not be in favour of that. That is why in Amendment No. 152, which is in this group, I have provided that there could not be a resolution to convert into a CIO unless it was passed by three-quarters of the members of the association who were present and voting at a meeting.
I put down this amendment because the Government want to make as much of the CIO as possible and want this to be a vibrant format for charities in the future. On listening to the Minister's reply, I do not think that I detected any significant policy reason for why an unincorporated association or a charitable trust should not have the power to convert straight into a CIO without the business of winding up and transferring of assets.
I do not want to labour that point now. I would be grateful if the Minister would consider the matter further. If I am right and there is no good policy reason, why not facilitate conversion of the charitable trust, for example, in the way that the other two types of charity are facilitated by this clause for the benefit of all concerned? I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 152 and 153 not moved.]
[Amendment No. 154 had been withdrawn from the Marshalled List.]
Lord Bassam of Brighton Lord Bassam of Brighton moved Amendment No. 154A:
Page 97, line 25, after first "CIOs," insert "the conversion of charitable companies and registered societies into CIOs, the amalgamation of CIOs,"
The noble Lord said: Amendment No. 154A stands in the name of my noble friend Lady Scotland of Asthal. New Section 690 gives my right honourable friend the Secretary of State power to make further provision for CIOs by regulation. The regulation-making power, as drafted, does not expressly cover the making of regulations on the conversion or amalgamation of CIOs.
We think that it is likely that we will need to deal in regulations with the more detailed provisions concerning conversions or amalgamations. For example, we may want to provide in regulations for the Charity Commission to consult the registrar of companies or the Financial Services Authority prior to deciding an application for conversion. We certainly do not want to get into the position, once the CIO provisions are in force, where a particular conversion or amalgamation throws up some practical difficulty or issue that we had not thought about before and that the legislation fails to address or cannot resolve.
Some Members of the Committee might point out correctly that the regulation-making power in new Section 690(1) allows my right honourable friend to make provision "in relation to CIOs generally". That wording is probably wide enough to cover issues
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relating to conversions and amalgamations. However, since we anticipate a need for regulations to deal with those topics, we think that it is preferable, in the interests of clarity and transparency, to have an express provision. In fact, that might help to deal with some of the issues which in particular the noble Lord, Lord Phillips, raised or was looking towards in his previous amendment. I beg to move.
On Question, amendment agreed to.
Schedule 6, as amended, agreed to.
Clause 34 [Remuneration of trustees etc. providing services to charity]:
Lord Phillips of Sudburymoved Amendment No. 155:
Page 31, line 12, at end insert ", taking into consideration the other terms of the relevant contract"
The noble Lord said: Clause 34 deals with remuneration of trustees providing services to charity. The scheme there is that the trustee, or someone connected with the trustee, may be able to provide services to the charity and to be remunerated, provided that conditions A to D, set out in the clause, are satisfied. My amendment would amend condition B, which states:
"before entering into that agreement, the charity trustees decided that they were satisfied that it would be in the best interests of the charity for the services to be provided by the relevant person … for the amount or maximum amount of remuneration set out in the agreement".
I want to be certain that condition B will not be construed in a way that prevents the charity trustees taking into account not just the amount of remuneration in the agreement concerned for the services to be rendered but, as I put it in the amendment,
"other terms of the relevant contract".
For example, a charity may need something to be done extremely quickly—let us say some painting. One of the trustees happened to be a painter, the charity did a quick search of what was available in the locality and, as often happens, tradesmen were tied up in work and the charity could not get anyone to do it; but the trustee said, "I do not mind. I will fit this in and do it by the necessary time". If the trustees had to construe condition B as preventing them from giving that factor due consideration, because it might mean that it was going to be a bit more expensive than someone who could do it three months later, condition B needs amending along the lines of my amendment. I commend it to the Committee and I beg to move.
Lord Best: We were all clear in the Joint Committee that remuneration of trustees was a delicate matter on which we did not want any fundamental change to the current position, which makes it pretty difficult, because it requires the Charity Commission's consent before trustees are remunerated. We commissioned a piece of research considering the position in America, where trustees receive payment for their services as trustees. The conclusion that I drew was that it would be extremely unwise to import the American opportunities for payment to trustees here.

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My hesitation about the amendment proposed by the noble Lord, Lord Phillips, is that making it relatively easy for remuneration for services rendered to trustees can come quite close to remunerating those trustees themselves. Although I entirely sympathise with the problem of finding a painter or decorator at short notice, rather more troublesome would be, at short notice, commissioning one of your colleagues for a few thousand pounds to undertake a consultancy considering X or Y on behalf of the other trustees. I want to be certain that we avoid the slippery slope to it being a rather profitable exercise to be a trustee.
Lord Phillips of Sudbury: I would entirely agree with the noble Lord, Lord Best, if I thought that that was what my amendment was opening things up to. But in the circumstance he mentions, it would not allow the trustee to do it unless there was a genuine and bona fide urgency about it. I think it would require bad faith for anyone to use the allowance for which I am asking in that way.
4 p.m.
Lord Bassam of Brighton: I come to this from a starting point similar to that of the noble Lord, Lord Best; that is, that we need to tread carefully and that this is a sensitive issue. On the other hand, we take the view that the clause provides a useful power for trustees to be paid for particular services provided to the charity, subject to the conditions designed to ensure that it is proportionate, protects against conflicts of interest and is in the best interests of the charity.
We are trying to preserve the essence of the voluntary principle of trusteeship, so the Bill will not allow payment for carrying out the duties of trusteeship, nor will it allow a charity's paid employees to be trustees at the same time. I think that that is a very sensible provision.
It may often be the case that a trustee can provide a service which is outside the duties of trusteeship on much more favourable terms than the charity could obtain elsewhere. The noble Lord, Lord Best, used the example of a painter. It could be a painter, decorator or roofer—but someone providing a basic, practical, no-nonsense service—who may be able to provide a repair or make a minor improvement perhaps at a less than market rate. In that situation, the trustees would have to manage the inherent conflict of interest properly and the transaction would have to be conducted openly and reported as required.
A set of four conditions must be met to enable remuneration of a trustee or person connected to a trustee. One of the conditions required for remuneration of a trustee to be allowed under this provision is that charity trustees are satisfied that it would be in the best interests of the charity for the services to be provided by the relevant person for the amount set out in the agreement. In reaching their decision, the trustees would have to consider the details of the agreement, including any other relevant contract terms. If there were other contract terms that were relevant to the decision but which the charity trustees ignored, how could they be
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said to have satisfied themselves that it would be in the best interests of the charity to proceed? That is the key question.
I agree with the intention behind the amendment of the noble Lord, Lord Phillips, but ultimately I would argue that consideration of other relevant factors is already implicit in the condition as drafted. The charity trustees must satisfy themselves that it is in the best interests of the charity to remunerate the relevant person as set out in the agreement. I think that there is sufficient flexibility and sufficient protection.
We are dealing with a very practical situation. I do not think that we are trying to undermine the principles of the legislation as it has operated to date. However, we are mindful of going too far in rewarding those who are trustees and able to provide a service.
Lord Phillips of Sudbury: I am grateful to the Minister. I should like to be certain that I understand his reply. Was he saying.—I think he was—that my amendment is unnecessary in the circumstances I have described?
Lord Bassam of Brighton: Yes, I am saying exactly that.
Lord Phillips of Sudbury: Then I am happy and grateful. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 156:
Page 32, line 2, after "trustee" insert ", whether or not the charity is incorporated,"
The noble Lord said: This amendment, like the previous one, is concerned with Clause 34, which is about the remuneration of trustees. At the top of page 32 the Bill mentions the Trustee Act 2000, obliging charity trustees to adhere to the duty of care set out in that Act when making a decision on whether it will be in the best interests of the charity to remunerate a trustee.
The Trustee Act 2000 applies to all trusts in England and Wales, including charitable trusts and their trustees. It does not, however, apply to companies and their directors and so does not apply to trustees of incorporated charities. The duty of care in Section 1(1) of the Trustee Act 2000 obliges trustees to,
"exercise such care and skill as is reasonable in the circumstances, having regard in particular:
a) to any special knowledge or experience that he has or holds himself out as having, and
b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person".
There can be little doubt that the draftsman of proposed new section 73B(3) intended that duty of care to apply to all charity trustees regardless of how the charity involved is constituted, and not just to the

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trustees of incorporated charities. Adding the words suggested by this amendment will remove any uncertainty on that point. I beg to move.
Lord Bassam of Brighton: Subsections (2) and (3) of new section 73B, inserted into the 1993 Act by Clause 34, provides safeguards to prevent the misuse of the power to remunerate trustees for the provision of services to a charity contained in new section 73A. They are that the charity trustees must meet, first, the duty to have regard to Charity Commission guidance; and, secondly, the requirement to act in accordance with the duty of care in Section 1(1) of the Trustee Act 2000.
In the Bill as drafted, the requirement to act in accordance with the duty of care in the Trustee Act 2000 would apply to all charity trustees, whether or not the charity was incorporated. The proposed amendment would not alter the effect of the clause. I accept that the Trustee Act 2000 does not normally apply to charitable companies except when they are themselves trustees. However, I cannot see anything in the provision as drafted to suggest that it should not apply to trustees of charities of a particular legal form. Therefore, I do not intend to accept the amendment.
The Government have agreed to produce a plain English guide to the legislation once enacted, which will be directed at charities rather than at their professional advisers. I am happy to give an undertaking that in explaining this provision we will clarify that the requirement to act in accordance with the duty of care applies to incorporated as well as unincorporated charities.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister for that. I take it from his response that he believes, rather as in the case of the previous amendment proposed by the noble Lord, Lord Phillips, that this is superfluous and that the case is already covered completely.
Lord Bassam of Brighton: Yes.
Lord Hodgson of Astley Abbotts: I am grateful to him for that reassurance. We look forward to the plain English guide, which will be even more valuable. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 157:
Page 32, line 22, at end insert—
"( ) any business partner:"
The noble Lord said: The plain English guide has come too late for our labours.
The amendment makes clear my strong prejudice, shared by the noble Lord, Lord Best, vis-à-vis the remuneration provisions. It is a probing amendment. As far as I can see a connected person as defined in Clause 34(6) would not include a business partner. I believe that it should. It might include a business partner if the trustee involved and the business partner
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who was to be remunerated controlled a firm, but I cannot even see that. Certainly one should not allow a person connected as closely, commercially and financially, as someone who is a partner. I use the word in its technical sense, meaning a partner under the partnership Act, and in its broader sense. Such a person should surely be brought within the control circle of the allowance vis-à-vis remuneration. On that basis, I beg to move.
Lord Bassam of Brighton: The noble Lord has made a useful point. We understand that there are some helpful precedents in other legislation. Apparently, the company law definition of a person who is connected with a director includes a business partner. The reference for that is Section 346(2)(d) of the Companies Act 1985. A similar connection can be found also in Section 839 of the Income and Corporation Taxes Act 1988.
I do not want to go overboard in committing to considering an amendment on this issue but, if the noble Lord will allow us to take the matter away, we will give it further thought and may well come back with an amendment to meet the point.
In considering this issue, we have discovered another potential gap in the provision defining a connected person for the purposes of remuneration of trustees for providing services. The definition is contained in subsection (6) of proposed new Section 73B. As drafted, it does not appear to cover a corporate body in which the trustee has a substantial interest, while it would cover a corporate body in which a connected person had a substantial interest. We intend to bring forward an amendment at Report stage to correct that anomaly.
The noble Lord may well have moved a modest probing amendment but he has been extremely helpful. We are grateful to him.
Lord Phillips of Sudbury: I am grateful to the Minister, as long as he promises to go overboard. If he does not, I will. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 34 agreed to.
Clause 35 [Disqualification of trustee receiving remuneration by virtue of section 34]:
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 158:
Page 33, line 18, at end insert—
"( ) In requiring reimbursement under this subsection, the Commission may take account of change in monetary values over the period or periods concerned."
The noble Lord said: I hope that this is a self-explanatory amendment. It seeks to amend Clause 35, which deals with the disqualification of trustees receiving remuneration. I am of the view that where the commission makes an order, in effect, requiring a disqualified trustee to compensate, it should be allowed to take account of change in monetary values over the period or periods concerned.
Again, this is me being school-marmish. It strikes me that it would not be a satisfactory arrangement if the most that the commission can require is the

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disqualified trustee to reimburse the nominal cash amount that he or she should not have had. If inflation is running at the kind of rates we have seen in our lifetimes, that amount could be very little in the way of putting things right.
Again, this is a probing amendment designed to tease out whether or not this could be accommodated. I appreciate that the precise manner of accomplishing my purpose may not be as simple as the way I have adopted, but I hope that if the Government are not satisfied with this amendment they will produce something on the same lines. I beg to move.
Lord Hodgson of Astley Abbotts: This seems to be a sensible idea even if it may be crawling across the frontiers of human knowledge with a hand lens.
One of the issues, of course, concerns not only the change in monetary values but also the interest on the sum that has been used in the intervening period. If a substantial sum has been wrongly acquired by a trustee and he has had the use of it, an interest rate accrues to that. In many commercial transactions, if someone is found to have misbehaved you would be able to claim not only the value of the money—adjusted in the way suggested by the noble Lord, Lord Phillips—but also the interest on the sum that accrued to the person who wrongly achieved it. The Minister might helpfully address that issue also when he comes to reply.
Lord Bassam of Brighton: I am grateful to both noble Lords for their comments and for the clarity of the explanation of the noble Lord, Lord Phillips.
I certainly understand the point behind the amendment. However, it would not be particularly sensible to complicate the provisions by adding wording which would be relevant, I think the noble Lord will accept, in only a fairly small number of cases. In any event, I expect that the commission will normally be in a position to intervene at a relatively early stage. Indeed, in some cases, it will be able to make an order to prevent a trustee receiving remuneration, as provided in proposed new Section 73C(6), rather than requiring him or her to repay the charity. It is difficult to envisage circumstances in which the commission would intervene after a period of several years, where the changes in the monetary value would obviously have greater significance.
The existing provisions build on that in Section 73(4) of the Charities Act 1993 which similarly requires repayment of remuneration expenses or any other benefit where a trustee has acted while being disqualified. That provision has been in place for some time and has not given rise, so far as we and the commission are aware, of changes in monetary value over time.
The present wording also allows the commission considerable flexibility in determining the monetary value in the case of a benefit in kind. So there is some flexibility there; certainly the commission believes that it has it. I do not think that we need to put anything in the Bill. If we were to do so, we would need quite a complex formulation to achieve what the noble Lord is suggesting. However, he has come up with a proposal that he believes is fit for the purpose, and nice and neat in its simplicity. We would also have to
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consider whether, in the interests of consistency, similar wording might need to be added elsewhere in the legislation, particularly in Section 73(4) of the 1993 Act.
So I understand the point and have some sympathy with it. But having thought about it, checked and consulted, the commission takes the view that it has enough flexibility to deal with the issue in the small number of cases where there might be a problem. So far as the commission is aware, there have not been any problems with that in the past; it has not caused much grief, or any grief at all.
4.15 p.m.
Lord Phillips of Sudbury: That was a highly pragmatic reply, and I understand the reasons for the noble Lord's pragmatism. However, I cannot sign up to the notion that in charity, one should deal with these matters on a lesser and lower basis than in civil law. It is quite clear in general law, if you were seeking compensation in relation to people receiving property improperly, for example, you would be dealing not in monetary values but real values. I am grateful to the noble Lord, Lord Hodgson, for making his point.
I think that I am right in saying that under the Trustee Act 1925 and trustee legislation since then, the power of the courts to award compensation to charities is in real terms, not in monetary terms. I take it that the Minister has been accurately briefed, so I accept that few cases have come up under this provision. I also accept that of course the Charity Commission would act promptly and that it usually does. However, it sticks in my gullet that if a particularly deceitful set of trustees—it might be a small number operating quite a large fund; I can think of three such examples—draws a grotesque amount of remuneration—in the case I am thinking of the excuse was that as it was one of the trustees who put all the money into the fund in the first place, it was really his, sort of—you are left with peanuts if it comes to light five, seven or 10 years later. That is quite unacceptable. And that is quite apart from what the noble Lord, Lord Hodgson, said. I think that that is wrong in principle, and we should not allow things that are wrong in principle to run once we have recognised that that is the case.
I should be grateful if the noble Lord would think again about this. I appreciate that the draftsmen are under some pressure to get things sorted out in the hope that we will push this through before the election is called. However, it need not be a complicated amendment; it could call on normal common law principles of compensation in a better way than I have done in Amendment No. 158. I also see no reason why we should not in the process at least amend Section 73 of the 1993 Act.
I ask the noble Lord to take note of my comments and to have a go at doing something further.
Lord Bassam of Brighton: I certainly hear what the noble Lord says in regard to civil compensation and so on. As I said, I took the point. It is a question of whether it is an issue, a major issue or an issue at all. I will ask

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again, but I will not give a commitment that we will bring forward an amendment. But I will recheck the issue, which I do not see as a major concern.
In any event, I am sure that the Charity Commission would want to adopt a good and sensible practice and would probably want to act in a parallel way with the understanding that the noble Lord gave on civil compensation matters.
Lord Phillips of Sudbury: I am grateful. I do not want to labour this point, but I should like Members of the Committee to consider the fact that this part of the Bill opens up to remuneration a very big swathe of territory that, hitherto, has not been available in terms of paid remuneration. It extends the present provision.
The object of the clause is to open up trustee bodies to the prospect of remuneration under controlled terms. My guess is—it seems common sense and certitude—that there will be more of those cases in the future, unfortunately, than there have been in the past. But I shall leave it at that and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 159 not moved.]
Clause 35 agreed to.
Clause 36 agreed to.
Clause 37 [Power to transfer all property]:
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 160:
Page 34, line 26, leave out "£10,000" and insert "£25,000"
The noble Lord said: In speaking to Amendment No. 160, I shall speak also to Amendment No. 164. These two amendments concern Clause 37, which relates to the power to transfer property of an unincorporated charity, and Clause 38, which relates to the power of an unincorporated charity to replace purposes.
In one sense, this parallels our earlier discussions about minimising the number of thresholds with which trustees have to familiarise themselves. As Members of the Committee will recall, we have argued at earlier meetings of the Committee that a lower limit of £25,000 annual income is the level which strikes the right balance between risk and regulation in respect of registrations. So these comments apply similarly to the levels below which the particular provisions of Clauses 37 and 38 take effect.
But, additionally, that change will, if the Government are prepared to accept it, facilitate mergers among smaller charities, a development that I think most people would consider desirable. It will do that without a huge increase of workload for the Charity Commission having to supervise in detail mergers between what could be tiny charities. As I have said before, a £10,000 annual income would, with present interest rates, be earned on a capital sum of a little more than £250,000.
Perhaps I could give a real-life example in support of those arguments, which has been sent to me by a solicitor, who writes:
"I am writing to you on behalf of a charitable trust for which I act to express my support for the principle of increasing the gross income threshold and to suggest that it should be increased to an even higher level to enable more small charities to take advantage of the broader powers contained in the proposed new sections 74 and 74B.
In this connection, I would particularly like to emphasise the fact that, for the purposes of the 1993 Act, the expression 'gross income' does not mean gross income in the normal sense. Rather. it is treated as including all manner of donations. grants. gifts and legacies as well as the gross receipts from all fundraising activities. This is confirmed at page 3 of the Charity Commission booklet CC64 entitled 'Receipts and Payments Accounts Pack: Explanatory Notes …
My client charity was founded more than 20 years ago for specified charitable purposes concerned with music. The trustees (who include the founder) would now like to broaden its purpose is to include certain wider charitable purposes. Alternatively, they would consider establishing a new charitable trust with wider charitable purposes and transferring the assets of the existing charity across to the new charity. Unfortunately, they are not able to take either of these steps under the terms of the present trust deed or the present section 74 of the 1993 Act. They would however be able to do so under the proposed new sections 74 and 74B, but only if the applicable gross income threshold were to be increased or if 'gross income' meant gross income in the normal sense and did not include all manner of donations and legacies.
In order to address this issue and to ensure that the proposed new section 74B is of benefit to a wider number of charities and not simply to a very small number of very small charities, I would suggest that the gross income threshold in the section should be considerably higher. I would respectfully suggest that a figure of £100,000 would be much more appropriate. I assume that this approach would be much more practical than trying to change the definition of 'gross income', as that term is used in many different sections of the 1993 Act.
I think that such a change would be very much in keeping with the spirit of the Bill which I understand is intended to modernise our rather outdated charities law and generally to help rejuvenate the charities sector by laying down a broader range of charitable purposes and introducing more flexible powers and more effective procedures. I suspect there are many small charities like my client charity which are locked into the straight jacket of an outdated trust deed and would greatly benefit from the opportunity of being able to broaden their charitable purposes or of being able to transfer their assets to a new charity which has suitably broad charitable purposes. In each case, this would enable the assets of the charity to be applied more effectively so as to bring benefits to a wider range of people".
To summarise, the amendment is intended, first, to reduce the number of thresholds and, secondly, to try to ensure that greater use is made of the freedoms proposed under Clauses 37 and 38. Without those changes, we fear that the purpose of those clauses may be stillborn. I beg to move.
Lord Bassam of Brighton: The noble Lord. Lord Hodgson of Astley Abbotts, has given a clear explanation of his amendment. We have already had quite a bit of a debate on the thresholds. As the noble Lord knows, I am certainly sympathetic to the overall objective of simplifying them, although we must be realistic about how they work.
Clause 37 substitutes a new Section 74 in the Charities Act 1993. Currently, Section 74 gives the charity trustees

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of certain unincorporated charities with an annual income of £5,000 or less the power to transfer all the property of the charity to one or more of its other charities. This new section updates that power by extending the annual income level to £10,000, as recommended by the Strategy Unit.
Clause 38 inserts a new Section 74B into the Charities Act 1993 that extends and updates the existing power in Section 94 of that Act. The existing power enables an unincorporated charity that does not hold designated land and has an income of up to £5,000 to modify its own trust by replacing its charitable purposes with other charitable purposes without seeking the permission of the Charity Commission. The clause extends that power by increasing the income limit to £10,000—again, in line with the Strategy Unit recommendation.
The latest figures from the commission show that there are almost 100,000 registered charities with an income of up to £10,000. Those that are unincorporated and do not hold designated land could benefit from that deregulatory measure. So I do not agree with the noble Lord. Lord Hodgson, that that is a stillborn proposition. There will clearly be a large number of potential beneficiary charities. An annual income threshold of £10,000 is also the same as the Charity Commission's monitoring threshold. Charities with either income or expenditure of more than £10,000 must send in their annual accounts and trustees' annual report to the commission with the annual return and trustee update form.
The Government believe that that level of income strikes the appropriate balance between accountability and reducing the regulatory burden on smaller charities. It is the level recommended by the Strategy Unit for those provisions. I can also advise the noble Lord that the impact of these provisions will be assessed as part of the wider assessment of the Bill's impact within five years of it receiving Royal Assent.
This will include consideration of whether it would he appropriate to increase income thresholds in these provisions. Subsection (13) of new Section 74 and subsection (12) of new Section 74B enable the Secretary of State to amend by order the gross income level specified in the provisions. We feel that that provides a sufficient level of flexibility and enables future increases in the income threshold, should it be deemed appropriate. I think that that would enable the type of variation that the noble Lord seeks. It might also enable us, as we have discussed outside the Committee. to re-rationalise the thresholds that operate throughout the legislation—so there is a broader benefit in terms of the review.
4.30 p.m.
Lord Brooke of Sutton Mandeville: Perhaps I may ask the Minister a question which, again, is borne out of ignorance. If you were consolidating two charities in the way that has been described and one of the charities had income from activities, from services, which placed it
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above the 25 per cent limit set by the Revenue and those services would be liable to taxation, would that be a proper purpose for carrying out such a merger?
Lord Bassam of Brighton: The noble Lord said that he was speaking from ignorance. I do not think that he was. His question has perplexed me and has perplexed my advising officials, so we shall have to read his words carefully and try to think of an answer that satisfies him.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister for expressing sympathy with reducing the number of thresholds, but, as the old country saying goes, "fine words butter no parsnips", so we await developments on that front with interest.
Lord Phillips of Sudbury: Can the noble Lord, Lord Hodgson, say that in Welsh?
Lord Bassam of Brighton: You would have to say it the other way round.
Lord Hodgson of Astley Abbotts: The question was raised whether we had set this too low, to allow more charities to take advantage of this simple procedure. I was a little disappointed that the Minister did not address the question of the definition of "gross income", because that, again for simplicity, clarity and comprehensibility for trustees, seems to be different from that which you would normally expect in the non-charitable world outside. That is a pity and that point was made by our correspondent. Can the Minister say anything about the definition of "gross income"?
Lord Bassam of Brighton: That is an issue which I did not cover. Perhaps I shall drop the noble Lord a note.
Lord Hodgson of Astley Abbotts: I thank the Minister for that and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 161:
Page 35, line 5, leave out "charity" and insert "charities"
The noble Lord said: In moving the amendment I shall also speak to Amendment No. 163. Both concern Clause 37 and the power to transfer property. The amendment provides a provision to amend an oversight in the drafting of the Bill, which the Charity Law Association has brought to our attention.
It relates to a situation where a small charity may seek to wind itself up by transferring its capital to another charity. As currently drafted, the clause would preclude a situation where a charity which has two distinct objects, which are to divide its assets and transfer them to two charities, each of which has objects encompassing one of the transferor charity's

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objects, but neither has one that covers both. The amendments intend to permit such dual transfers. I beg to move.
Lord Phillips of Sudbury: I rise to speak to Amendment No. 162 in the same group, which makes the same point in a different way.
Lord Bassam of Brighton: Clause 37 modifies and extends the existing provision in Section 74 of the Charities Act 1993. These existing powers currently give small unincorporated charities—those with an income under £5,000 per year and without holding designated land—the power to transfer all their assets to another charity or charities where the purposes are compatible, and subject to certain safeguards. This clause updates that power by extending the annual income level to £10,000, again on the basis of a consensual recommendation from the Strategy Unit.
A transfer must be in the interests of furthering the purposes of the charity transferring the assets, and the purposes of the charity or charities to which the assets are to be transferred must be wide enough to encompass the purposes of the transferor charity. The amendments would extend the scope of this clause so that it would be necessary only for the trustees of the transferor charity to be satisfied that the combined purposes of the transferee charities encompassed the purposes of the transferor charity.
The amendments could lead to a charity's assets being transferred unequally in a way that would not accurately reflect its original purposes. Take the example of a charity whose purposes were the relief of poverty for the people of a particular area. Under the clause as drafted, the trustees of the transferor charity would have to ensure that each charity to which they intended transferring the charity's assets had purposes wide enough to encompass their own charity's purposes. That seems very sensible. If the trustees had to have regard only to the combined purposes of the charities to which the transferor charity intended transferring its assets, they could transfer the majority of its assets to charities which were involved in the relief of poverty but which did not operate in that area, and a minority of its assets to a charity whose purposes matched its own and was actively involved in the relief of poverty in that area. Clearly that would not be an accurate reflection of the transferor charity's purposes.
The aim of the clause as drafted is to ensure, so far as is possible, that the assets that are transferred are used for the purposes for which they were originally intended. Although the amendments are clearly motivated by the intention that a transfer should be in line with the original purposes of a charity, they could inadvertently lead to a situation in which that was not the case, which would be self-defeating. In those circumstances, I am sure that neither the noble Lord, Lord Phillips, nor the noble Lord, Lord Hodgson, would want to press his amendment.
Lord Hodgson of Astley Abbotts: I lasted with the Minister until about two-thirds of the way through his
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remarks, when I thought that he left reality behind—if I may be so rude and impertinent. We are making the assumption that to have a single transfer as envisaged by paragraph (b), we are going to find another charity to which we are transferring our assets that precisely matches what we are doing, as the transferor charity, or we cannot wind it up. It seems just as unlikely that we shall be able to do that as it is that we shall find the problems to which the Minister referred—namely. that there will be shenanigans to find a way in which to push the business of the charity in one direction as opposed to another.
I should have thought that under charity law, the trustees of the winding-up charity would have to have regard to the objects of the charity which they were winding up in disposing of the assets and disposing of them to a new charity. It is unnecessarily restrictive to say that when you wind up you must send all those assets to a charity, as opposed to charities, as that might much more easily reflect the original objectives of the charity, rather than requiring a single transferee on all occasions.
I am disappointed that the Minister has not been able to see the force of that argument. I shall read what he said, but we may want to come back and deal with the matter again.
Lord Phillips of Sudbury: Is the Minister saying point blank that there should be no possibility of the trustees sending their net assets to more than one charity?
Lord Bassam of Brighton: I do not believe that I ruled that out in my remarks; I am sure that I did not, in fact. What we are keen to avoid here is creating a situation in which rogue trustees find a way round by transferring from a charity that they want to close down and putting assets into a number of charities, so that one of those charities gets the majority of the benefit but does not conform with the spirit of the original charity. Inadvertently, in drafting the amendments as the noble Lords have, they have created that possibility. That was what I was trying to describe.
I suggest that noble Lords follow carefully what I have said in Hansard. I believe that their intent is self-defeating in the way that they have framed their amendments.
Lord Phillips of Sudbury: I shall accept that invitation, but on current reckoning I do not see how the Minister gets to that point. However, let us leave the matter and consider it afresh.
Lord Hodgson of Astley Abbotts: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 162 and 163 not moved.]
Lord Bassam of Brighton Lord Bassam of Brighton moved Amendment No. 163A:
Page 36, line 39, leave out from beginning to end of line 8 on page 37 and insert—

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"(3) If under section 74(7) above the Commission directs the charity trustees to give public notice of a resolution, the running of the 60-day period is suspended by virtue of this subsection—

(a) as from the date on which the direction is given to the charity trustees, and

(b) until the end of the period of 42 days beginning with the date on which public notice of the resolution is given by the charity trustees.

(4) If under section 74(8) above the Commission directs the charity trustees to provide any information or explanations, the running of the 60-day period is suspended by virtue of this subsection—

(a) as from the date on which the direction is given to the charity trustees, and

(b) until the date on which the information or explanations is or are provided to the Commission."

The noble Lord said: The amendment was suggested by parliamentary counsel to correct a mistake in the drafting of the Bill. I shall give an explanation, because otherwise the Committee might be puzzled.
The amendment corrects a slip, by replacing existing subsections (3) and (4) with new ones. Noble Lords reading the amendment will be forgiven for not immediately spotting what effect it has, so I shall explain, while apologising in advance for the length of the explanation.
Section 74 of the 1993 Act, as inserted by Clause 37 of the Bill, allows the trustees of some small, unincorporated charities to pass a resolution to transfer all their charity's property to another charity. Before doing that, the trustees must send a copy of their resolution to the Charity Commission. After that, if the commission does nothing within 60 days, the resolution takes effect, and the trustees can then arrange to transfer their property in accordance with their proposals.
If the commission objects to the resolution within 60 days—which it may do either on the grounds that the procedure has not been properly followed or on the merits of what the trustees are proposing—the resolution is effectively cancelled. The trustees may not transfer their property. If the commission believes that the trustees' proposals should be aired in public to give people a chance to comment, it can within 60 days direct the trustees to give public notice of their proposals. If the commission needs more information to make up its mind about the proposals, it can within 60 days require that information from the trustees.
If the commission does either of the last two things, the 60-day clock stops running when the commission directs public notice or when it requires the further information. But, to take an example of the commission deciding to direct public notice and a week later deciding to require further information, the clock has stopped running when the commission directs public notice, and will not start again, under subsection (3) at the bottom of page 36, until 42 days later. So by the time the commission requires further information, in this example the clock has already stopped.
That is where there is a problem with the Bill as drafted, as subsection (4), at the top of page 37, says that the clock "stops running" at the point at which it requires further information. In other words, subsection (4) does
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not allow for the fact that the clock might already have stopped. The same drafting problem arises the other way round, when the commission first requires more information, then directs public notice before the information is received. In a nutshell, the amendment caters for the case in which the commission decides both to direct public notice and to require further information, in either order, and by the time it takes the second action the clock is already stopped as a result of its having taken the first action.
I am sure that that is clear to the Committee. I shall go over it carefully again, if Members of the Committee want me to. It is a technical tidying-up measure that should mean that the scheme operates properly. I beg to move.
On Question, amendment agreed to.
4.45 p.m.
[Amendment No. 164 not moved.]
Clause 37, as amended, agreed to.
Clause 38 agreed to.
Clause 39 [Power to modify powers or procedures]:
Lord Shutt of Greetland Lord Shutt of Greetland moved Amendment No. 165:
Page 38, line 41. at end insert", save that, in the case of a trustee body that traditionally makes its decisions by consensus and without formal voting, a minute of a properly constituted meeting signed by the appropriate person be accepted"
The noble Lord said: First, I again declare my interest as a member of the Society of Friends, popularly known as the Quakers.
This amendment arises because of the concern of the Society of Friends about decision making. There is a suggestion in the clause that a resolution must be passed,
"by a majority of not less than two-thirds of the members entitled to attend and vote … who vote on the resolution".
The concern of the Society of Friends—it may apply to other clauses; I have, I think, spotted one other—which last year celebrated 350 years of existence, is that it has never voted, and does not vote. The society has myriad trusts and various charities both within it and associated with it. The normal practice of the Society of Friends is to arrive at a consensus. I was thinking that we may indeed be operating on Quaker rules in this Committee. We have not voted so far—who knows, we may not vote.
As I said, the society's decision-making is by consensus. If there is disagreement, the meeting is laid aside, there is further prayer and thought, and the friends meet again. Eventually a decision is made. The amendment is about making,
"decisions by consensus without formal voting",
and that,
"a minute of a properly constituted meeting signed by the appropriate person",
should be accepted.
I am not in the habit of making porridge for one: other organisations may well have a similar decision-making system. Provided that these things are done

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properly, as these organisations are accustomed to doing, and as long as the process clearly represents the feeling of the meeting, this amendment should cover the point. I beg to move.
Lord Bassam of Brighton: I should say that I have been a member of one or two Labour Party organisations where I had rather hoped we could reach a consensus without a vote. I rather admire the Quakers in the way in which they work.
I appreciate the noble Lord's point. We think that there is a good argument there. I would like to take it away and give it further consideration. It may well be that we can be helpful on this, and we would quite like to be. Perhaps we should all listen more carefully to how the Quakers conduct themselves. It is a rather excellent organisation.
Lord Shutt of Greetland: I thank the Minister for his welcome comments. Let us hope we can get consensus on the appropriate clause. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 166:
Page 38, line 41, at end insert—
"( ) Where the constitution of the charity concerned allows members to vote by proxy, the requirement in subsection (4) for attendance at the meeting concerned shall be amended accordingly."
The noble Lord said: This amendment relates to Clause 39 and the,
"Power to modify powers or procedures"
of unincorporated charities.
My amendment simply takes into account the fact that some of those bodies—not many, but some—allow voting by proxy. The provision for voting here extends only to members entitled to attend and vote at the meeting who vote on the resolution. So it applies only to unincorporated charities whose constitutions provide only for voting by attendance at the meeting concerned. I think it would be perverse for those charities that have a proxy arrangement not to allow them to exercise it. On that basis, I beg to move.
Lord Bassam of Brighton: I am grateful to the noble Lord for his explanation. The amendment provides for voting by proxy in a membership charity where the charity's constitution provides for proxy voting and a further resolution of the voting members is required in order to modify the powers or procedures of the charity.
We take the view that the amendment is not necessary as it expressly provides for what would already be implied in the provision. As the provision is currently drafted, if the charity's constitution permits attendance and voting by proxy, the requirement of new Section 74C(4) for a further resolution would be
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satisfied by attendance and voting in that way. With that reassurance, I hope that the noble Lord can withdraw his amendment.
Lord Phillips of Sudbury: I must confess that that is not as I read subsection (4). Rather than bore the Committee, I might take this matter up with the Minister or his officials later. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 167:
Page 39, line 5, at end insert "following the resolution"
The noble Lord said: Amendment No. 167 concerns Clause 39, entitled,
"Power to modify powers or procedures".
The amendment inserts a requirement that trusts are taken to have been modified from such date "following the resolution". Those last three words that we seek to add ensure that the power to modify the powers of an unincorporated charity cannot be exercised with retrospective effect. It would surely be undesirable for charity trustees to be able to act ultra vires and then to put matters right retrospectively. That would not provide the required level of certainty for those dealing with the charity. It is therefore a small, technical, but nevertheless important, amendment, which I hope that the Minister will be able to accept. I beg to move.
Lord Phillips of Sudbury: I am sure that a shrewd point has been taken there, albeit one of trustlessness, but trust is sometimes of that order.
Lord Bassam of Brighton: The noble Lord. Lord Hodgson, has made a very sensible proposition. We have given it some thought. It is unlikely that the situation that the noble Lord imagines would happen, but we admit that it could. For that reason, we will take this away and table an amendment that would prevent the circumstances arising that the noble Lord described. I hope, in that situation, that the noble Lord is happy and will withdraw his amendment.
Lord Hodgson of Astley Abbotts: I am more than happy: I am delighted. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 39 agreed to.
Clause 40 [Power to spend capital]:
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 168:
Page 39, line 21, after "that" insert "at least three-quarters of"
The noble Lord said: Endowed property is going out of fashion and has been for many years. None the less, there are quite a few older charities that have endowed property, which, of course, means that the capital of it cannot be spent. There are occasions—I have come across them in practice—where a would-be donor wishes to prevent the capital being utilised in order to ensure the longevity of his or her generosity.
Clause 40 will insert a new Section 75 into the Charities Act 1993. It will allow charity trustees, none the less, in the circumstances prescribed by the clause, to expend capital. My amendment is designed to provide a little more protection than is provided by the charity trustees reaching such a decision by an ordinary majority—the same sort of majority as would be reached on any decision affecting the life of the charity, however insignificant.
By prescribing that at least three-quarters of the charity trustees must be satisfied that the purposes of their trusts can be more effectively carried out if the capital of the fund can be expended, I intend to ensure not only that full deliberation is given but that a special majority of those trustees is behind the proposals. That is akin to the provision under company law where one requires a special resolution to carry out especially important things in the life of a charity. That would not destroy the practicality of the provision, but it would ensure that special consideration was given to it.
Lastly, I would not want to deter those who want to prevent the expenditure of the capital of their fund and those who are contemplating making a substantial gift. Unless you are making a substantial gift, to make a gift in the form of endowed property is wholly counter-productive. I would not want in any way to deter those contemplating making such gifts by the fact that their wish and will can be overridden by the trustees by a simple majority. I beg to move.
Lord Hodgson of Astley Abbotts: I support the amendments. The spending of capital is a serious issue. I understand. in modern financial parlance, that with modern financial instruments the differentiation between capital and income has been blurred. I therefore appreciate that we need some provisions to permit capital to be spent.
But that is not a decision or action to be taken lightly; it is close to selling the family silver. Therefore, introducing a higher requirement, a higher bar that must be cleared, seems sensible. The emergency general meeting level of 75 per cent in the Companies Act seems extremely good. If 25 per cent or more of the trustees oppose such action, there is not the consensus within the charity to permit such a fundamental and irrevocable step to be taken. I very much support the thoughts behind the amendment.
Lord Bassam of Brighton: As we have heard, the amendment would tighten the procedure for trustees to spend capital. The Bill requires a resolution to be passed by the trustees before they can spend any capital and, for most charities, a resolution can be passed by a simple majority. As both noble Lords have made plain, the amendment makes it harder for a resolution to be passed by requiring a three-quarters majority decision rather than a simple majority. In the case of the power of trustees of unincorporated charities to spend small amounts of capital under Clause 40—new Section 75 of the 1993 Act—that is an even harder test or threshold than provided for under the 1993 Act. That Act required only a two-thirds majority before capital could be spent.
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For completeness, perhaps I should add that new sections 75 and 75B contain new powers, so there are no equivalent provisions in the 1993 Act. The purpose of the new provisions in the Bill is to make it easier for trustees to spend capital, not harder, and I shall briefly explain to the Committee some of the background and reasons behind the current policy.
The Strategy Unit found, and we agree, that for some charities permanent endowment is a burden as retention of funds as capital is no longer in the interests of the charity. There are various legal obstacles around which trustees must manoeuvre before they can spend any capital. For example, the charity must have an income of £1,000 or less a year; the trustees must advertise the conversion from permanent to expendable funds; and the Charity Commission must concur with the trustees' resolution to spend the capital. Currently, large charities with small, non-expendable endowment funds are unable to change the endowment into expendable capital in any circumstances.
To give an example, let us suppose that a fictitious large charity for the benefit of the parishes in the City of York has for centuries received various gifts from parishioners in their wills for the upkeep and maintenance of local churches. A small gift given as a permanent endowment in 1800 has been faithfully maintained by the trustees as a permanent endowment ever since. The endowment generates only £50 income. It costs more than £50 to administer the endowment. Under the Bill, if the trustees judged that the capital would be much better used by purchasing a new pew for the local church, then they would be much freer to use the capital in that way.
5 p.m.
There is the safeguard of the need for the commission to concur to trustees' resolutions to spend capital in certain circumstances. These are the circumstances set out in new section 75A(1) and (2) and new section 75B(4). In all cases where these circumstances do not apply, trustees may spend capital without the commission's concurrence.
Trustees are under a duty of care when taking decisions in any circumstances and we believe that it is right to allow them here the discretion to convert permanent endowment into expendable capital. We believe that the provisions in the Bill give sufficient safeguards against the irresponsible expenditure of capital, while allowing trustees the proper room and flexibility to make their own decisions in the interests of the charity. For example, trustees may spend capital without the concurrence of the commission or giving public notice only where the charity's income is £1,000 or less or the market value of the endowment fund is £10,000 or less.
If the amendment were accepted, we would metaphorically be taking two steps forward in enabling trustees to make better use of the charity's funds, and one step backwards in making it harder for them to take this decision. So the amendment is unnecessarily restrictive and would encourage the continuance of self-defeating funds, which would do little to benefit

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those that the charity originally sought to benefit. In some instances, certainly with the example I have given, it could end up costing as much to administer as it provides in benefit.
Lord Phillips of Sudbury: I regret to say that I did not find any of that response persuasive. I am grateful for the agreement of the noble Lord, Lord Hodgson, with the amendments.
Clause 40, which replaces Section 75 of the Charities Act 1993, limits the power to spend capital under the 1993 Act to charities which have a gross income of under £1,000. That will allow the expenditure of unlimited amounts of capital—it could be tens of millions of pounds. To do that on the basis of a bare majority of trustees seems to be wholly unwarranted. The Government have not even replicated the requirement for the agreement of two-thirds of the trustees under existing legislation, which, I emphasise, is for charities with an income of not more than £1,000.
The Minister took no account of my point about the importance to would-be donors of having some security against the quick spending-up of the funds that they want to be there forever. If donors want the capital to be preserved, that is up to them. We must not construct a system that prevents someone who wants to create a large endowment from doing so.
I urge the Minister to read the debate on the amendment. The current proposal does not serve anyone's purpose and we shall certainly return to this matter. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 169:
Page 40, line 5, after "given" insert "more than 100 years ago"
The noble Lord said: If the Minister did not like the fact that the noble Lord, Lord Phillips, was tightening things up, I am about to do a little more thumb-screwing. This group of amendments also relates to Clause 40 and the power to spend capital—and, in particular, to new section 75A on page 40.
The purpose of the amendment is to ensure that where a single donor establishes a charitable trust with a view to expending only its income on its charitable purposes while retaining the capital to produce income for future beneficiaries, it will not be possible for the charity trustees immediately to reverse that decision for the reasons mentioned by the noble Lord, Lord Phillips. The noble Lord quoted from the current legislation, the 1993 Act, and I accept that the provision as currently drawn is so wide that it captures situations that it should not capture.
For example, many independent schools were established as a result of a bequest of one wealthy patron many hundreds of years ago. Where the land and buildings given to establish the school are held as a permanent endowment, the sale proceeds from surplus land cannot be applied in the building of new premises on the charity's existing land. There are many similar instances.
It must be right, therefore, that for very ancient gifts the trustees should have the flexibility to release some of the capital from permanent endowment status so that it can be used to maintain and develop the charity's property. This follows on from the debate that we had a minute ago.
But clearly a balance has to be struck between the wishes of the original donor and the realities of changed circumstances, particularly economic ones. It seems inappropriate for there to be an option for the endowment fund to be freed from the donor's restrictions with respect to expenditure of capital because the charity trustees think it fitting. As I have said today and at previous meetings of the Committee, flexibility and the need to adjust to the effluxion of time is, of course, essential in charity law.
However, that needs to be balanced with the wishes of the donor, without whom no charities would exist. We have chosen 100 years as the point before which trustees should not have this flexibility. This would mean that the original donor, and probably his immediate children, would no longer be alive—so his wishes would not be immediately flouted—and external circumstances will almost certainly have altered dramatically over the period of a century. We accept that it is an artificial date but we argue that it will be an incentive to philanthropy and to the establishment of foundations if the donor knows that there is, at least in the first period, a lock on his assets.
Amendments Nos. 170 and 174 relate to that point. They seek to ensure that where two or more donors give a property, the time from which the 100 years' timeframe is measured is from when the donors contemporaneously give the property. otherwise the 100 years' clock could constantly be restarted as new gifts are given.
This group of amendments seeks to achieve an important balance between protecting the wishes of the donor and maintaining a necessary flexibility to reflect changing times. I beg to move.
Lord Phillips of Sudbury: I am sympathetic to these amendments.
Lord Bassam of Brighton: I have explained the Government's policy in regard to the new powers in the Bill for trustees to expend permanent endowments in certain circumstances. The amendment seeks to preserve the permanency of any endowment which was given less than 100 years ago.
This issue was raised by the Charity Law Association in its evidence to the Joint Committee. It said that the clause as drafted may discourage gifts of capital as there is no prescribed time lapse between the date of the foundation of the charity and the trustees' decision to render capital expendable. The Charity Law Association envisaged a situation where trustees could decide to spend capital the day a charity was founded, which would clearly be undesirable.
However, there are a number of safeguards in the Bill to prevent this situation occurring. Under proposed new Section 75A, the trustees must send a copy of any resolution to spend capital to the Charity Commission

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and may not implement the resolution without the concurrence of the commission. The commission then has a statutory duty, set out in the Bill, to take into account any evidence available to it as to the wishes of the donor or donors. That would guard against the situation the Charity Law Association envisages. The commission must also take into account any changes in the circumstances relating to the charity since the making of the gift or gifts.
If the principle behind the amendment were accepted it would make the new power to spend capital less flexible, not more, which was not the intent behind the provisions. For example, even where a donor of permanent capital agreed with the trustees that the most effective use of the gift a few years after the donation would be for the capital to be spent, under this amendment it would be impossible for that money to be spent and used in the most effective way.
I understand the principle behind the amendment is to stop trustees being able to spend capital gifts which had been given less than 100 years previously, but its actual effect would be to make it easier for trustees to spend capital given less than 100 years ago. That is because Amendments Nos. 169 and 173, which we are now considering, seek to adds gifts given,
"more than 100 years ago"
to the sections which set out the circumstances where the commission's concurrence applies.
It follows that if a gift was given less than 100 years ago it would not fall within the section describing when the commission's concurrence is necessary. Therefore the commission's concurrence would not be necessary and the trustees could spend the gift without the need for concurrence, whether it was more or less than £10,000.
I do not believe that is what the noble Lord is seeking and, for the reasons I have set out, we do not think that the actual or desired effect of the amendment is in the spirit of these new enabling provisions. We believe that the Bill, as drafted, gives the maximum possible flexibility without deterring potential donors to charities. On that basis, I invite the noble Lord to withdraw the amendment.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister. I am partially reassured by the position of the Charity Commission and the fact that its permission has to be sought. It will take into account the donor's wishes and, obviously, the change in the position of the individual charity and I am reassured by that.
I believe that I may have been holed below the waterline by the "less than 100 years" weakness. Clearly that was not the objective. The idea was not that it should remove the Charity Commission from the procedure. The noble Lord, Lord Phillips, and I are both wondering whether this section is drawn too loosely and we are therefore looking at ways of making it slightly tighter.
If I have taken a torpedo below the waterline in that regard, I should like to read what the Minister has said, reflect on it and perhaps come back to the issue. I beg leave to withdraw the amendment.
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[Amendment, by leave, withdrawn.
[Amendments Nos. 170 and 171 not moved.]
Lord Bassam of Brighton Lord Bassam of Brighton moved Amendment No. 171A:
Page 40, line 29, leave out "without the concurrence of the Commission" and insert "except in accordance with the following provisions of this section"
The noble Lord said: In moving Amendment No. 171A, I shall speak also to Amendments Nos. 171B and 174A, which are grouped with it.
The amendments are designed to fill a gap identified at Second Reading by the noble Baroness, Lady Byford. We are very grateful to the noble Baroness because she has drawn our attention to a very helpful point.
The proposed new Section 75A gives the trustees of larger incorporated charities which own unexpendable endowment capital worth more than £10,000 to pass a resolution, on certain conditions, to spend that capital. One of the conditions is that the Charity Commission must concur with the trustees' resolution. The Bill gives the commission three months in which to tell the trustees either that it concurs or that it does not concur with the resolution. The three month period starts either at the point at which the commission directs the trustees to give public notice of their proposals or, if the commission does not exercise its power to direct public notice, at the point at which the commission received a copy of the trustees' resolution.
But, as the noble Baroness, Lady Byford, pointed out, the Bill does not say what happens if the commission fails within the three-month deadline to say whether or not it concurs. In short, the Bill leaves things in limbo because the trustees need the commission's concurrence to proceed with their proposal and yet they do not know whether or not the commission concurs, and there is nothing currently to force the commission to make and communicate its decision.
We do not think that the solution is to provide a sanction on the commission if it fails to meet the deadline. That would penalise the commission but not necessarily help the charity. Instead, we believe that the answer is to allow the charity to go ahead with its spending proposal by default if the commission fails to answer within the three-month deadline. These amendments will achieve that. They will also make identical provision in relation to a resolution made by trustees of a special trust which owns an unexpendable endowment worth more than £10,000. I beg to move.
Lord Phillips of Sudbury: There have been a number of provisions today which depend on notices of various lengths. Here we have got a three-month notice. I wonder whether there is a clause within the Bill dealing with notices. I do not think there is, in which case I presume that one is falling back on the general law relating to notices. If I am right in that supposition, and I think I am, given that the Bill will be relevant to a huge voluntary sector, the vast bulk of which, fortunately, is not made up of lawyers, accountants or other professionals, would it not be helpful to put in a clause making it quite clear just how

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these notices are given and received? It is a real headache understanding quite how notices work in the law. The amendment gives me the opportunity to raise that point with the Minister.
5.15 p.m.
Lord Bassam of Brighton: That is very helpful. Rather than putting such a provision in the Bill—I think that the noble Lord is right and there is a general catch-all—perhaps we should deal with it in guidance. We would like to think about that, and thank the noble Lord very much for raising it.
Lord Phillips of Sudbury: If it is to go in guidance, is there any reason why it should not be in the Bill? Draftsmen may say that if you put it in this Bill you put it in every Bill, but that argument is not relevant to this very particular Bill. However, I do not want to press the point. Guidance is different, and people will not always be able to compare. I can even think of lawyers who, not being familiar with the Bill, would be helped enormously, saving their client a lot in costs, by not having to hunt around in the statutes.
Lord Bassam of Brighton: It may not be a case of either/or; it may be both. Let us park that today and come back to it. I certainly think it should be in guidance.
On Question, amendment agreed to.
Lord Bassam of Brighton Lord Bassam of Brighton moved Amendment No. 171 B:
Page 41, leave out lines 28 to 31 and insert—
"(12) Where—

(a) the charity trustees are notified by the Commission that it concurs with the resolution, or

(b) the period of three months mentioned in subsection (10) above has elapsed without the Commission notifying them that it does not concur with the resolution,"

On Question, amendment agreed to.
[Amendment No. 172 not moved.]
[Amendments Nos. 173 and 174 not moved.]
Lord Bassam of Brighton Lord Bassam of Brighton moved Amendment No. 174A:
Page 42, leave out lines 27 to 31 and insert—
"(5) Where—

(a) the charity trustees have passed a resolution under subsection (2) above, and

(b) (in a case where section 75A(5) to (11) above apply in accordance with subsection (4) above) either—

(i) the charity trustees are notified by the Commission that it concurs with the resolution, or

(ii) the period of three months mentioned in section 75A(10) has elapsed without the Commission notifying them that it does not concur with the resolution,"

On Question, amendment agreed to.
Clause 40, as amended, agreed to.
Clause 41 [Merger of charities]:
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 175:
Page 43, line 16, leave out from "others," to end of line 17.
The noble Lord said: In moving Amendment No. 175, I shall speak to Amendment No. 176 as well. This brings us to Clause 41, which deals with mergers. New subsection (4) of new Section 75C on page 43 defines "relevant charity merger" as meaning,
"a merger of two or more charities whereby one of the them ("the transferee") has transferred to it all the property of the other or others, each of which ("a transferor") ceases to exist on or after the transfer of its property to the transferee".
Our amendment seeks to remove the last few lines which require that one or more of the transferors must cease to exist as a result of a charity merger. Amendment No. 175 would remove this necessity in new subsection (4)(a) and Amendment No. 176 would have an identical effect on new subsection (4)(b).
The thinking behind these amendments is that a charity merger does not necessarily result in one or more of the transferors ceasing to exist and this should not, therefore, be a necessary part of the definition of a charity merger. There are many instances where one or more transferors might need to have a residual existence.
Let me give three common examples. The merger could involve the transfer of a separable part of a transferor's operations; secondly, the intention may be for a transferor's legal entity to continue to serve a function in association with the legal entity containing the merged operations; and, thirdly, a transferor sometimes needs to be kept technically in being to ensure that legacies benefiting it do not fail following a merger. Considering these points, we believe that the amendment would be valuable to the new merger regime. I beg to move.
Lord Phillips of Sudbury: With deference to the argument put forward by the noble Lord, Lord Hodgson, it seems to me that to have a "separable" merger—that is, a part-merger—might give rise to considerable confusion. The Government having thought this through, I shall be interested to hear their response—as I have not.
Lord Brooke of Sutton Mandeville: I rise to ask another of my ignorant questions. I recollect that in church porches up and down the land, you periodically see a notice indicating that a consolidation of small charities, which have been in existence for centuries, is being carried out—frequently, as I understand it, at the behest of the Charity Commission. Do rearrangements of that sort, which have obviously the admirable consequence that the number of small charities is reduced, fall under this clause as well?
Lord Bassam of Brighton: I will take advice on that. I think that they probably would, but I take the point. The purpose of the clauses relating to charity mergers is to make things easier for those charities which choose to merge. A major problem which charities

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have encountered in the past is that, after a merger, both charities needed to remain on the Register of Charities in order for them to pick up any future gifts made to them. It has also been time-consuming and difficult to sort out the vesting arrangements. New Sections 75D and 75E streamline the merging process and specifically address those two problems. The amendments tabled on the charity merger provisions touch on some complex legal issues and I hope that Members of the Committee will bear with me while I explain the position of the Government.
The clauses which make the vesting arrangements easier and help future gifts to the old charity go to the new charity—that is, new Sections 75D and 75E—are open for use only in circumstances which are defined as a "relevant charity merger". In order to qualify as a relevant charity merger, the merger must have two characteristics: first, the transferring charity or charities must pass all of their property to another charity and, secondly, the transferring charities must then cease to exist.
As the noble Lord, Lord Hodgson, has explained, these amendments seek to ensure that after a merger the transferor charity or charities may, if it is desirable, continue to exist. The Charity Law Association in its evidence to the Joint Committee suggested that usually after a merger the transferor charity or charities would wind up. However, the CLA stated that occasionally it would be desirable for the transferor to be retained and the two examples it gave were, first, if the transferor is the tenant of property and the lease contains an absolute covenant against assignment; and, secondly, where the transferor charity owns permanent endowment and the transferee is required to hold that property on trust for the transferor.
The Bill as drafted does not stop charities from continuing to exist after a merger. However, it excludes them from the definition of a "relevant charity merger" and therefore from using a new vesting and future gift provision. In general, in the past transferor charities have needed to remain on the register only to collect up future gifts. The Bill addresses that problem in new Section 75E.
If the amendment were to be accepted, the vesting and future gifts provisions would be open to those types of mergers where the transferor charity continued to exist, rather than applying only where the transferor charity ceased to exist. That would mean that a gift left to the transferor charity would automatically pass to the transferee charity. That cannot be right because it would mean that we would be interfering with the rights of the transferor charity—which in this scenario has not ceased to exist—because the gifts given to it by the transferor charity would be automatically passed on to the transferee charity.
I turn now to the first example given by the Charity Law Association in support of these amendments—the example of a non—assignable lease. As presently drafted Section 75D probably would allow the transfer of the legal and beneficial estate in such a lease to be transferred by means of a vesting declaration.
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However, we are considering tabling an amendment later to ensure that covenants cannot be overridden in this way by declaration. This would therefore be an example of a case where the "relevant merger" provisions would not apply. The charities could still merge using the existing general law. For example, the transferor charity could use existing provisions in its governing document relating to the transfer of assets, or use the existing power in Section 74, as amended by the Bill, or apply for an order of the Charity Commission or court.
The Charity Law Association also raises the example of a case where the transferor charity owns a permanent endowment. In its evidence to the Joint Committee, it suggested that this would be another reason for the transferor charity to continue to exist post-merger. I think that that point is misconceived, because if permanent endowment was involved, the transferee would simply become the trustee of the permanent endowment trust, and the transferor could be removed from the register. So it could wind up and would count as a "relevant charity merger", and, as I said, it could then use the vesting and future gifts provisions. This would be the case whether the transferee was a corporate body or not.
I apologise to the Committee for the length of the explanation. No doubt it will wish to consider it at greater leisure, perhaps from Hansard. We are happy to help outside Committee and discuss the matter further if it helps the Committee to understand what we are trying to achieve. However, I suspect that we are heading in the same direction in trying to make the arrangements for transference of charitable benefits as easy and simple as we possibly can.
Lord Hodgson of Astley Abbotts: I think that I will take advantage of the Minister's invitation to read his remarks. It is quite a technical matter. His explanation was very thorough, for which I am extremely grateful, but it contained quite a lot of dense legal verbiage. I am sure that the noble Lord, Lord Phillips, picks it up in an instant, but lesser mortals have to struggle to keep up with the Minister in flow. I shall carefully read the Minister's comments and take advice from people outside who are concerned about this.
Would the answer to my noble friend Lord Brooke on Church charities be that they are currently excepted charities under the Bill and that they are all right for the time being? If so, as excepted charities are to be brought to an end, they will have to register with the Charity Commission in future. That is the issue we debated earlier.
Lord Brooke of Sutton Mandeville: Perhaps my noble friend will allow me. My recollection of such notices as I saw, which were presumably under a scheme of administration or arrangement, were that they might involve small charities within the parish but not necessarily under the purview of the Church.
Lord Hodgson of Astley Abbotts: We have been trying to persuade the Government that we should be trying to find a simpler and easier way to regulate groups of charities, particularly relating to parish churches and

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parishes, than those that the Government currently propose. However, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 176 not moved.]
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 177:
Page 43, line 26, at end insert—
"and shall be accompanied by brief details of arrangements for the discharge of any outstanding liabilities of the charities merging after such transfers"
The noble Lord said: In response to what the Minister was saying on these charity mergers, I should like to thank all those who laboured to produce the new mechanism. It is hugely difficult. I think that, by and large, it has come up with some very useful arrangements that should be very helpful to the sector.
This amendment is probing. My anxiety is that with the current provisions, where two charities will disappear—and I take the Minister's point about the charities ceasing to exist; that is very much at the heart of the mechanism—and with the vesting declaration provisions, which are alarmingly decisive and helpful, I want to be sure that creditors of any of the charities concerned are not left in the lurch or, at least, left not having any idea of where they stand.
My suggestion, which might as well have appeared in subsection (6), or possibly both, is that if charities are taking advantage, as they will, of this new regime, when they give notice, as they must under subsection (3) of new Section 75C, they should also give,
"brief details of arrangements for the discharge of any outstanding liabilities of the charities merging after such transfers".
I beg to move.
5.30 p.m.
Lord Bassam of Brighton: As the noble Lord, Lord Phillips, said, there are some concerns relating to the position of liabilities. The Charity Law Association was concerned that the merger mechanism in the draft Bill explicitly transferred only the assets of the transferor into the transferee and recommended that the Bill should be amended to make it clear that assets and undertakings, subject to liabilities would be vested.
It also envisaged problems with the requirement for the transferor charity to execute the vesting in the new or transferee charity. It suggested that under the Bill, a rogue charity with damaging liabilities could declare that all its assets vest in another charity in order to rid itself of any liability.
The amendment is intended to ensure that the requirement to notify the commission of the arrangements which have been made regarding liabilities will provide some incentive for trustees to take care to make proper arrangements. We do not think that the inclusion of the amendment would be helpful. There are existing legal rules relating to liabilities which will continue to apply. For example, where a merging charity is unincorporated, the charity
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trustees who incurred any liability on behalf of the charity remain liable, until the liability is either discharged or transferred with the consent of the person to whom the liability is owed.
Of course, it would therefore be sensible for trustees to ensure that liabilities are settled or transferred before they part with the charity's property. Where the merging charity is incorporated, according to the law of insolvency, the liability must be settled or transferred before the charity's assets are transferred. We cannot see that it is necessary for the Charity Commission to know all of these details.
For those reasons, we cannot support these amendments.
Lord Phillips of Sudbury: I am very unhappy with that reply. It was impractical and bureaucratic and did not have much relevance to the real world. To say that the insolvency laws provide protection is nigh on useless. They are extremely difficult protections to put into operation, anyway—for example, trading while insolvent, and so on. It would be wholly impractical, particularly in the charity world. The object of my amendment was severely practical, so that creditors would not be left in a limbo land, long before they began to consider what rights they had against an incorporated charity's directors if their various accounts and entitlements had not been properly met or provided for.
My amendment states, "brief details", and therefore does not require lengthy details, but it does require the merging charities to say briefly what arrangements they have made for the discharge of outstanding liabilities. It would be perfectly practical for the Charity Commission to put that in the register—it could be part of the register—and I do not see any reason why, as is provided for in subsection (6)(b), it should not be part of what the commission could require.
I hope that the Minister will think again about this. We are trying to fashion a Bill that is workable, practical, not lawyer-ridden and lawyer-driven. I urge him and his officials to think about this, because, for no other reason than inadvertence, I fear that some charities, in making use of this, will, without malicious intent, cause distress and a waste of time and money for innocent creditors, which could easily be resolved by a mechanism along the lines that I am suggesting.
On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 178:
Page 44. line 7, after "property" insert "and its undertaking. subject to its liabilities,"
The noble Lord said: In moving Amendment No. 178 I shall speak also to Amendment No. 179. They concern pre-merger vesting declarations under proposed new Section 75D, in Clause 41.
As drafted, the merger provisions in Part 2, Chapter 11 of the Bill will transfer only the property of a pre-merger charity. In our view, that is insufficient. In a merger, the post-merger charity will take over the activities of the pre-merger charity and so take on its liabilities as well as its property. If the statutory merger process is to work, it must take these matters into account as well. These amendments would ensure that all factors are taken into account under the merger process.
In part, this is another example of the wrong use of terms which we saw—and as the noble Lord, Lord Phillips, mentioned—in our debate on Amendment No. 142, looking at gross, not net figures. However, since tabling this amendment, it has been pointed out to us that we have not gone quite far enough. Charities will also have "rights"—for example, rights to personal data—which, being an asset of the charity, will form part of the merger process. Accordingly, if the Government were minded to accept this amendment, we would suggest that the phrase should be, "property, rights and undertaking subject to its liabilities". I beg to move.
Lord Bassam of Brighton: We had a little of this discussion when we debated Amendment No. 177. Amendments Nos. 178 and 179 seek to ensure that any vesting declaration made before a merger clearly transfers liabilities as well as assets. The effects of the amendments would be to extend the effect of the new vesting declaration provisions to the liabilities of the transferor charities. However, the provision has been intentionally drafted to help the transfer of the legal title to property only. Except in the case of CIO reconstructions, which come later in the Bill, the Bill contains no provisions overriding the usual legal principle that liabilities can be transferred only with the agreement of the person or people to whom the liabilities are owed. We do not think that the Bill should override the normal legal requirement which ensures that the transfer of liabilities would happen in these sorts of cases.
So we cannot accept the noble Lord's amendment. I hope that that explanation assists the noble Lord and that he will withdraw the amendment.
Lord Hodgson of Astley Abbotts: I am grateful to the Minister. Of course I accept that this is a partial rerun of the discussion on the previous group. May I take it, therefore, that we will have a two-stage merger/premerger vesting declaration equivalent to exchange and completion—that is, there will be a declaration of what we have, all the bits and pieces, the good, the bad and the ugly—and that we are going to net all this out and then bring it all together at the end in a completion phase, and that that is why the word "property" is sufficient? Do I have the concept right?
Lord Bassam of Brighton: After conferring, we have come to the conclusion that the noble Lord's description is apposite. It was nicely put.
Lord Hodgson of Astley Abbotts: It was the brilliance of the Minister's explanation that led me to it.
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If that is the case and we are reducing it all down to a single net figure, having taken into account all the assets and liabilities, I can quite understand it. If that is the legal force of it, then I am content with the Minister's explanation and happy to beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 179 not moved.]
Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts moved Amendment No. 180:
Page 44, line 19, at end insert—
"( ) any land held on leasehold or similar terms which is subject to a restraint on transfer, of the interest held by the transferor charity without the consent of a third party, unless such consent has been obtained before the date on which the transfer would take place; or
( ) any contractual or other obligation undertaken by the transferring charity, or owed to it, which is subject to a guarantee of its performance by a third party unless such consent has been obtained before the date on which the transfer would take place"
The noble Lord said: We are still concerned with Clause 41, but have turned to page 44. New Section 75D contains provisions in subsection (2) for the automatic transfer of property in certain circumstances, but excludes two classes of property from such transfers. We are concerned that it does not include two further categories of property where automatic transfer, which would otherwise apply, could result in damage to the charity.
As the amendment states, those categories are, first, leasehold property that is held by the charity where the lease contains a provision preventing the transfer of the leasehold interest without the consent of a third party—for example, the landlord or a superior landlord—and, secondly, any contractual arrangement, the performance of which is guaranteed by a third party, whether or not the benefit or the burden of the arrangement is owned by the charity.
Our reasoning is as follows. With regard to the first category, we have no doubt that the present position would be effective as a matter of law to transfer the property. However, the effect would be to put the trustees of the transferor charity in breach of their covenants not to assign and to render the lease liable to forfeiture.
In the majority of cases, that would be damaging to the receiving charity, because, at the very least, it would be exposed to uncertainty about possible court proceedings for breach and to doubts about whether it had the benefit of the lease. There could well be unnecessary expense incurred in trying to settle that position.
In the second case, transfer of the obligation to a third party without the consent of the guarantor to the change would render the guarantee void and useless. That could have ramifications in that it could render the contract void if the contract also required there to be a guarantor.

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If the guarantee was of a lease, for instance, it could have the effects described above. There are also arguments about whether, in circumstances where the obligation guarantee is owed by the charity to a third party, that such a provision could be said to deprive the third party of property rights in the form of the guarantee. It would thus offend the ECHR. We therefore propose in these amendments that there should be two further categories added to the kinds of property excluded from the automatic transfer of property.
We are concerned that the Bill, as drafted, impliedly overrides the interests of third parties—for example, in a case where a leasehold interest is to be transferred from one charity to another. Where a lease includes that consent to an assignment of that lease must be obtained before the transfer is effected, the provisions of the Bill should not override the interest of the third party from whom consent is to be sought.
We accept that many leases contain provisions stating that consent to an assignment is not to be withheld unreasonably and that where such a term is present, the assignment of the lease between the charities should proceed if consent is unreasonably withheld. However, where a lease contains an absolute prohibition on assignment or where agreement can be given or withheld without the test of reasonableness, the Bill should not seek to put charities in a different position to any other party seeking to transfer leasehold property. Therefore, we believe that the proposed amendment is appropriate because it addresses the question of consent. I beg to move>
Lord Phillips of Sudbury: My name is attached to Amendment No. 180, and I concur entirely with what the noble Lord, Lord Hodgson, said in moving it. As I have said before, this is a remarkably powerful piece of machinery to enable transfers of properties without limit as to value to take effect on a declaration entered into by the transferring charity. It is therefore the more incumbent on us as legislators to ensure that in giving that mechanism to charities, one does not infringe on third-party rights. These seem to be two categories of such rights which ought to be specifically protected.
5.45 p.m.
Lord Bassam of Brighton: There is no doubt that this is a complex subject. I congratulate the noble Lord, Lord Hodgson, on the clarity of his explanation; he has undoubtedly raised some very interesting points. Rather than give a lengthy response, we would like to see whether there is any scope for a government amendment which tackles these issues. I am not in a position to say how we will proceed. I thank the noble Lord, Lord Hodgson, for moving the amendment, and the noble Lord, Lord Phillips. We would like to give further consideration to these issues. During that process we can no doubt consult outside the Committee to see what we can do to answer these points.
Lord Hodgson of Astley Abbotts: That is a handsome offer from the Minister, for which I am grateful. This is a highly technical matter. There are concerns about
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this, and I am grateful that the Minister said he would look at it. We await his further advice. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 181:
Page 44, line 34, after "gift" insert "(whether legally effective or not)"
The noble Lord said: This is a probing amendment to try to ensure that the provision will apply to gifts whether legally effective or not. Gifts come in both guises. I need say no more than that, and I beg to move.
Lord Bassam of Brighton: I have to read this brief out by way of response because it contains an example I rather like.
We are trying to make things easier for charities which wish to merge. In the past, trustees have had a problem with gifts left to a charity which has merged. For example, a person may make their will in 1990 and leave a gift in it to a particular charity for cats. Let us imagine a fictitious charity called the Brighton Cats Home, which merges with the Brighton Cats Sanctuary, a similar charity doing similar work—and of a similarly fictitious nature—by transferring all its property to the sanctuary. The donor does not update her will and dies the next year.
Currently, it would be likely that the Brighton Cats Home would have to stay on the register of charities and not wind up in order to collect any future gifts such as the one I have described. Clearly. that would be far from satisfactory because it is, in effect, a partial merger and because there still will be administration costs relating to the Brighton Cats Home, even though its only purpose in existing is to receive future gifts and transfer them on to the Brighton Cats Sanctuary.
The new provisions in the Bill prevent this problem. New Section 75E provides that gifts to the Brighton Cats Home would automatically take effect as gifts to the Brighton Cats Sanctuary if the Brighton Cats Home had wound up as a charity. That is to prevent the very problems I have identified, where gifts are left to charities which no longer exist because they have merged.
I have responded to this amendment on the basis that it is probing, but it is worth mentioning that if we were to accept it, all sorts of legally ineffective gifts made to a charity which had merged would take effect. That would be undesirable. For example, I can envisage all sorts of legal difficulties if a gift of a property which the donor did not own was by this clause apparently made legally effective. It cannot be right that the Bill makes all legally ineffective gifts effective. We only want gifts to charities which have merged to be made legally effective by this provision.
I hope that that explanation provides the assurance that the noble Lord is seeking. I invite him to withdraw his amendment on that basis.
Lord Phillips of Sudbury: The noble Lord could have answered by just saying no. I have had my clarification; indeed, I have had it in abundance with knobs on. All that I will add is that this provision is

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hugely important to practitioners, because it covers such a common occurrence. So I am happy to beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 182:
Page 44, line 42, at end insert—
"75F CHARITY MERGER ENTITLEMENT
(1) Notwithstanding anything, or want of anything, in the constitution of a charity, the trustees of the same have power to merge the charity with another charity or charities having similar objects.
(2) The process granted by subsection (1) shall be subject—

(a) to the provisions of section 75D; and

(b) to any constitutional prohibition of such merger imposed less than 25 years prior to the date of the same."

The noble Lord said: The amendment would insert a new clause following that concerning the effect of registering a charity merger, entitled "Charity merger entitlement". It is designed to help in that common situation where the constitution of the charity allows a merger but where it is not provided for in the Bill. In those circumstances, 1 want the prospect of a charity merger to take advantage of the provisions in new Clauses 75C and 75D—in effect, extending their scope in the manner set out in the amendment.
Lord Bassam of Brighton: The amendment is intended to clarify that existing charities may merge with each other by providing a statutory power to merge, unless the charity's governing documents contain an express prohibition on mergers inserted less than 25 years ago. In practice, this is a power for one or more charities to transfer their property to another charity, because that is how charities merge.
In the Charities Act 1993, there is already a general statutory power for charities to transfer property in some circumstances. That power is in Section 74 of the 1993 Act, which will be updated by Clause 37. The main criteria in the Bill for a charity to use that power is that it must have an income of £10,000 or less and that it is in the interests of furthering the purposes of the charity for the transfer to happen. As I have described, the Charity Commission must then concur to the charity's resolution to transfer the small charity's property to a similar charity or charities.
The amendment would extend the existing power to all charities, no matter what their income. It would do away with the need for commission concurrence and the need for a transfer to take place only where the existing purposes have stopped allowing the charity's assets to be used in the most effective way. That seems too wide. It does not strike the right balance, which we have been seeking to achieve in the Bill, between the efficient and effective use of charitable resources, on the one hand, and protecting the proper interests of donors, on the other.
The Bill's provisions for mergers will already be very helpful to charities wanting to merge, in overcoming current obstacles and in making mergers easier. However, we do not want to swing too far the other
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way and encourage charities to merge when no good case exists for doing so. We think that general law should continue to apply to mergers. I mentioned in speaking to Amendments Nos. 175 and 176 some of the ways in which charities can merge. I mentioned that the transferor charity could use existing provisions in its governing document relating to the transfer of assets; or the existing part in Section 74, as amended by the Bill; or apply for an order of the Charity Commission or court.
I hope that the noble Lord accepts the basic premise that the Bill will make it easier for charities to merge and invite him to consider whether his amendment does not go a step too far. I know that he is keen to ensure that regulations are proportionate to what they are aimed to deal with, and legislation works in the same way. The amendment goes too far and too wide.
Lord Phillips of Sudbury: I am grateful to the Minister and I shall read carefully what he said. I thought that my amendment had struck a balance by stating that, where there was a constitutional prohibition on merger, that should prevail, unless it was more than 25 years old, because old constitutions often contain provisions that are unsuitable to modern circumstances. However. as I said, I shall read what the Minister said and, if necessary, come back. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 183:
Page 44, line 42, at end insert—
"75G PERMANENT ENDOWMENT
Notwithstanding any rule to the contrary, any charitable company or other body corporate shall hold permanent endowments in its own name absolutely and not as a trustee."
The noble Lord said: This is a technical amendment. It states:
"Notwithstanding any rule to the contrary, any charitable company or other body corporate shall hold permanent endowments in its own name absolutely and not as a trustee".
This represents a change in the law. I believe that it will be practical and helpful. It is urged upon the Committee by others beyond this place and I hope that the Government will not find any objection to it. I beg to move.
Lord Bassam of Brighton: As I understand it, the submissions to the Joint Committee of Bates, Wells and Braithwaite—a firm of solicitors not unknown to the noble Lord, Lord Phillips—covered this point. It stated that the current position whereby charitable companies hold permanent endowment as trustee rather than as part of their corporate property creates unnecessary complications. It proposed that the Bill should clarify this complication by making it clear that a charitable company can hold permanent endowment as part of its corporate property rather than as trustee.
However, there is good reason why a charitable company must hold permanent endowment as trustee. A charitable company, like an individual, can hold

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property either beneficially or on trust, and I shall explain for the benefit of the Committee what that means in practice.
Property which is held beneficially by a charitable company is freely available for use or application in furtherance of the objects of the company as set out in its constitution. Under company law, a company can have only one set of objects, and these objects have to be set out in the constitution. Therefore any property of a company which it cannot freely use or apply in furtherance of its objects must be held on a trust which describes the restrictions which apply to the use or application of such property.
Permanent endowment is an example of this; it is property which is subject to direction saying that it has to be invested or actually used for the purposes of the company. Trustees cannot freely apply permanent endowment in furtherance of the objects of the company. It therefore cannot be held beneficially and must be held on a trust.
I am advised that there is another problem with the amendment. It is intended to apply to any corporate body, not only charitable companies. Some corporate charities, such as those incorporated by Royal Charter, hold all their property on a trust. The effect of the amendment would be to remove that property from being held on trust, but it is not clear what obligations would then apply.
The Companies Act 1985 has provisions to make sure that company property is applied properly, even though it is not held on trust. But it is not clear what would be the position in the case of other corporate bodies, such as the charities I have mentioned which are governed by Royal Charter, where the holding of corporate property on trust is the norm, but where the effect of the amendment would mean that the property was not held on trust but was instead held by the company beneficially. The amendment does not deal with these important consequential issues.
I know that that is a very technical response but I am sure that, with his knowledge, the noble Lord will accept that it is a technical issue. I hope that noble Lords—and, indeed, Bates, Wells and Braithwaite—are entirely happy with the explanation. If they are, I am sure the noble Lord, Lord Phillips, will feel able to withdraw the amendment.
Lord Phillips of Sudbury: I thank the Minister for his explanation. I shall study it and, if necessary, I shall return to the issue. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 41 agreed to.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 183ZA:
After Clause 41, insert the following new clause—
"FURTHER AMENDMENTS OF THE 1993 ACT
(1) After section 96(5) of the 1993 Act (construction of references) there is inserted—
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"(6) Any direction of the Commissioners under subsection (5) above shall not operate to constitute a subsidiary undertaking for the purposes of section 42(1)(A) above."
(2) In section 97(1) of the 1993 Act (general interpretation) at the end of the definition of "special trust" insert "and no special trust shall constitute a subsidiary undertaking for the purposes of section 42(1)(A) above"."
The noble Lord said: In the absence of the noble Lord, Lord Dubs, I am prepared on his behalf to formally move Amendment No. 183ZA. I look forward to the Government's response. I beg to move.
6 p.m.
Lord Bassam of Brighton: I am very grateful to the noble Lord, Lord Phillips, for moving the amendment in the thorough, persuasive, articulate and well-argued way in which he has, as is common with his practice in Committee. The amendment is itself thorough, well argued, thoughtful and all the rest, and we are keen to give some fair consideration to it and not to argue against it. I simply give an undertaking that we shall give it fair thought, and I am sure that the noble Lord. Lord Phillips, will happily withdraw the amendment.
Lord Phillips of Sudbury: I have listened very carefully to the long and careful exposition from the Minister in response to the proposed clause. I am sure that the noble Lord, Lord Dubs, will be happy to know that the Government are considering this matter seriously. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Phillips of Sudbury Lord Phillips of Sudbury moved Amendment No. 183A:
Before Clause 42, insert the following new clause—
"TRUSTEES' INDEMNITY INSURANCE
(1) In this section "trustees' indemnity insurance" means a policy of insurance designed to indemnify the trustees cola charity against personal liability of whatever nature incurred by them by virtue of any breach of duty, breach of trust or wrongful trading provided that such insurance shall not extend to the trustees' personal liability for—

(a) fines:

(b) the cost of unsuccessfully defending criminal prosecutions for offences arising out of the fraud or dishonesty or wilful or reckless misconduct of a trustee; or

(c) liabilities to the charity which result from conduct which the trustee knew, or must be assumed to have known. was not in the interests of the charity or which the trustee did not care whether it was in the best interests of the charity or not.

(2) Subject to subsection (3), a charity may use its resources to purchase trustees' indemnity insurance unless there is an express prohibition in the charity's constitution on the charity affecting such insurance.
(3) The powers in this section shall only be exercisable if, having given the Commission 28 clear days' notice of the proposal so as to exercise them, the Commission does not object in writing."
The noble Lord said: I have endeavoured so far this afternoon to be as brief as possible in an attempt to see this Bill into port, but I must say a few words on this amendment, which stands also in the names of my noble friend Lord Dholakia and the noble Lord, Lord Hodgson of Astley Abbotts.
This is an important proposed new clause. Many constitutions of many charities do not contain an express power enabling the trustees to take out indemnity insurance. In those circumstances, given that insurance of that nature bestows a personal benefit on the trustees involved, they have no power to do so. It is possible to seek the consent of the Charity Commission—and indeed many charities follow that course—so that despite the absence of a power to take out that type of insurance, they can in the circumstances do so. On the whole, and generally speaking, the Charity Commission deals with those requests practically, sensibly and in reasonable time. But that is not always the case.
In practice, as I have observed, there is a variability of response at the commission. If lawyers are used to undertake the course of action, as is often the case, expense is often involved. The amendment would cut out the need to do that, on various bases. First, in modern times, unfortunately, trustees are extremely anxious about their own potential personal liability, in a way that they simply were not when I started practising charity law. It is one of the most distressing aspects of the modern charity world that there is what I would consider an exaggerated sense of vulnerability to liability on the part of trustees.
I always take pleasure in asking groups at a lecture or meeting how many of them have ever had to pay a penny out of their own pockets, and I have never seen a hand put up out of thousands and thousands whom I have asked. None the less, the fear is there. In theory, the trustee today is subject to a great many legal and other requirements and, in theory, he can be personally liable if things go badly wrong. One has to face the fact that whereas trustees' indemnity insurance was probably not even thought of 30 years ago, it is now a lively topic. More and more, groups of trustees seek reassurance that insurance is in place.
The amendment has a sensible structure. First, it says that it will not come to the aid of trustees when there is an express prohibition in the charity's constitution against effecting such insurance. Members of the Committee may say that that is obvious, but at least it is there. Secondly, it says that the power is exercisable only after having given the Charity Commission 28 days' notice of the proposal, which would give the commission the opportunity to object, if that is desired. The commission therefore has the opportunity to review the whole position, as it currently does.
The proposed new clause would provide for the limitations on insurance which the commission invariably requires in any event, in cases that are brought to it, and which are in law necessary. Therefore, for example, we exclude from the coverage of such indemnity insurance fines against trustees and,
"the cost of unsuccessfully defending criminal prosecutions".
Most importantly, it would exclude from insurance coverage liabilities in respect of conduct which the trustee,
"knew, or must be assumed to have known, was not in the interests of the charity or which the trustee did not care whether it was in the best interests of the charity or not".
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We believe that those words cut out all those classes of conduct on the part of trustees which frankly do not warrant or deserve insurance coverage.
On that basis, the amendment has been drawn up and proposed. Unlike many amendments that have been moved, it would have a very wide, practical and positive effect. I beg to move.
Lord Hodgson of Astley Abbotts: My name is down in support of the amendment. The noble Lord, Lord Phillips, has made an admirable case for the proposed new clause. I add only a couple of brief points.
It is a truism that we live in a litigious age. People reach for their lawyers frequently, to the great benefit of the legal profession. If we want quality people to serve as trustees, they are entitled to some protection, so long as they behave themselves. That protection needs to be provided as easily as possible, so the proposal being made here is very sensible.
I part from the noble Lord, Lord Phillips, when he says that people have an exaggerated sense of the risks that they run. All risks are exaggerated until something happens to you, at which point it is a very serious matter involving not only considerable sums of money but very long periods of time during which you are held in a state of suspended animation while the case is heard, comes to court and so on. It is very important to have such protection, although whether it can be found at a reasonable cost is another matter.
Cases such as the ones that we are discussing bring into play one other difficulty, which is that when they come into being they are really a fight between insurance companies. They are very prolonged—they can run for years and years—which will have an impact on the sector, if there is a widespread number of cases and insurance companies get involved. The process is partly a way of tiring out the opposition, so there is no urgency on either side to settle, and things can become very exaggerated indeed. During that time, the poor luckless trustee is left hanging there in the wind, not quite knowing what is going to come out and what the outcome will be. The protection in the amendment is necessary to minimise the mental anguish that these people will suffer in these sorts of cases. I strongly support the proposal of the noble Lord, Lord Phillips.
Baroness McIntosh of Hudnall: I support not necessarily the amendment as drafted, but the spirit in which it was moved. On behalf of those of us who are trustees—which is probalbly everyone in this room, or at least a fair proportion—I should like to say that the issue of the perception of risk is real. There are circumstances, which are probably more frequent now than they used to be, in which the perception is more powerful—for instance, when a relatively small charity undertakes a large capital project. That is the kind of situation with which I am familiar.
For example, when a building has to be extensively rebuilt or refurbished and the charity suddenly has huge liabilities for capital sums, they may come in and out quite quickly, but while they are in play the

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trustees' vulnerability is very considerable. The issue of indemnity and protection from personal liability becomes a matter of extremely sharp focus for trustees in that sort of situation.
I do not presume to know whether this amendment does the job—and I would anticipate that my noble friend the Minister will tell us it does not.
Noble Lords: Oh!
Baroness McIntosh of Hudnall: I simply observe that that occasionally happens. But even if this amendment is not the right answer, an answer to the problem might be a useful thing to have in the Bill.
Lord Brooke of Sutton Mandeville: It might be helpful if I speak for a moment or two while confabulation takes place on the other side of the room. This very morning, a meeting downstairs in one of the dining rooms was addressed by Mr Alastair Ross Goobey, on the subject of corporate governance, at which my noble friends Lord Hodgson and Lady Wilcox were also present. Although he did not specifically use charities as an example, he said something in response to questions which was relevant to an experience through which I have lived.
He said that people are not necessarily put off—and noble Lords will see why I am not alluding to charities—by the fact that the rewards are not significant in helping bodies, but frequently are by the potential danger to your reputation if something happens within the body with which you are in some way professionally involved. I was invited to become the chairman of a charity in the field of architectural conservation after I ceased to have the relevant ministerial responsibilities. because a particularly able person in that field was not prepared to accept the chairmanship due to the general risks associated with becoming a trustee.
I am delighted to say that in due course we persuaded him to become deputy chairman, so, in the end, we solved the problem; but I see how in this area people can be put off from becoming trustees when they would be exceptionally valuable to the institutions concerned. Insurance is one of ways in which they can be persuaded.
Lord Bassam of Brighton: I am grateful to all four contributors to the debate on the amendment. It is couched in highly technical terms. I am not sure, as the noble Baroness, Lady McIntosh of Hudnall, suggested, that it works to its intended purpose, but, nevertheless, I understand what is behind it and I have great sympathy for the objective.
All contributors have put their fingers on the issue—that there is a fear, which is in most instances greater than the actuality, that trustees will end up being personally liable in some way. There is no doubt that that fear has been increasing in recent years.
I heard and take note of what the noble Lord, Lord Hodgson, said, that it is rare indeed for personal liability to be enforced against a charity trustee. I am told that there is no central record of the numbers of
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cases and no requirement, in any event, for every case to be reported to the Charity Commission. The Charity Commission has not been aware of any cases at all within the past year and we should bear in mind that there are some three-quarters of a million people who act as charity trustees, so it must be a low risk. But, as the noble Lord, Lord Hodgson, said, if that happens, it is very painful for those involved.
The law already protects diligent trustees from personal liability and the Bill makes it easier for trustees to take advantage of that protection. Clause 36 gives the Charity Commission a power that the court has at the moment to excuse trustees from personal liability where they have acted honestly and reasonably. Trustees in those circumstances would be able to go to the commission, explain their predicament and the decisions and actions that they took that led to that, and receive—
Lord Phillips of Sudbury: I am sorry to interrupt the noble Lord. I have not done that today or for several days, but I must stop him in his tracks. It is of no use or consolation to the type of trustees that we are talking about to say that there is power on the part of the High Court or the Charity Commission to relieve you from liability. It would then be a laborious process to put together your case to take to the commission, who may then ask you a series of questions. It can go on for months, the costs can be prohibitive and outcome uncertain. So, I want to save the Minister's breath and say that his explanation does not really tackle the root issue.
6.15 p.m.
Lord Bassam of Brighton: There is a silver lining to what I am about to say. The noble Lord, Lord Phillips, is diligent to the end, and I congratulate him on that.
The commission will take very careful account of the process. in the circumstances that I have described. The amendment recognises in paragraphs (a) to (c) of subsection (1) that there are some categories of reliability for which it would be inappropriate for trustees to use charity money to insure themselves. Additionally, that is not something that all trustees understand. Trustee indemnity insurance does not cover trustees' personal liability for their charities' debts. If the trustees of a charitable trust or association enter into a contract and the charity turns out not to have enough resources to meet its obligations. perhaps as my noble friend Lady McIntosh described, the trustees can be personally liable and indemnity insurance will not necessarily help them. Despite all that, many trustees continue to believe that indemnity insurance is desirable or essential for them. I am advised that last year the Charity Commission dealt with more than 1,000 applications from charities for authority to purchase trustee indemnity insurance.
We have sympathy with this matter, not because we believe that insurance has a great intrinsic value in providing the ultimate in insulation against personal financial loss but because of the "peace of mind" factor. People who regard the risk of personal liability as significant could be put off becoming trustees in the first place. In the example given by the noble Lord,

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Lord Brooke, in the end that was not the case, but persuasion and arm-twisting had to take place first. I am personally familiar with that scenario and could draw on several experiences that could give testament to it.
We do not want excessive caution and defensiveness to get in the way and believe that it is essential that people who do have something to contribute can do so freely and are enabled to do so without fear of retribution and without there being a deterrent. So I am very receptive to the spirit of the amendment, and if the noble Lord. Lord Phillips, would allow me, we shall take it away for further consideration, with a view to coming back with something probably not too far removed from what he has drafted himself, with all his expertise. I am grateful to him for pursuing this, as it is an important issue. We want to ensure that comfort at least is given to those who have what is perhaps an excessive dread of becoming involved and subsequently racking up an indemnity.
Lord Phillips of Sudbury: I am most grateful to the noble Lord and appreciate his last remarks, as that will give people more solace than many of us realise. I look forward to seeing the amendment when it is tabled. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Bassam of Brighton: Because we have all been very good and very well behaved, this may be a
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convenient moment for us to conclude our considerations for today. We have made very good progress, and I am grateful to everybody who has been involved in that.
Lord Brooke of Sutton Mandeville: I have been watching the Order Paper in the past couple of days, and it is noticeable that the earlier amendments in the Government's name have a "g" attached to them on the sheet in the conventional way and that the later ones do not. What one has been seeking to test is whether the Government have become so fatigued that they did not feel that it was necessary to put down "g's" for the later amendments. Alternatively, perhaps that gives a pretty good index of the point that they were hoping to reach today. I notice that the next government amendment that we are to debate does not have a "g" attached to it on the Order Paper, or rather in the document in the Printed Paper Office. Therefore, it seems to me that my theory is probably right.
Lord Bassam of Brighton: I spotted an amendment earlier that did not have a "g", and had to concentrate to pick it up. If it is convenient to Members of the Committee, I propose that we adjourn until Monday next at 3.30 p.m.
The Deputy Chairman of Committees (Lord Ampthill): The Committee stands adjourned until Monday next at 3.30 p.m.
The Committee adjourned at twenty minutes past six o'clock.