CHARITY LAW ASSOCIATION REPORT OF THE WORKING PARTY ON THE COMPANY LAW REFORM BILL [HL]

Introduction

The Charity Law Association has 725 members, principally, solicitors and barristers and also accountants and other non-professional members. The members of this working party are as follows:

Malcolm Lynch, Partner, Wrigleys, Executive Committee member of the CLA
Robert Porter, Senior Associate, Harbottle & Lewis
Geoff Trobridge, Partner, Ashfords
Abbie Rumbold, Solicitor, Bates Wells & Braithwaite
Cecile Gillard, Jordans Limited
Gareth Morgan, Sheffield Hallam University
James Dutton, Solicitor, Charity Commission

General

The Charity Law Association has responded to the consultations on Company Law Reform during 2005 with Francesca Quint submitting her final comments on certain draft clauses in 2005. It is appreciated that a substantial part of the Bill has already been discussed in committee in the House of Lords but we believe that it would be useful to refer to some of the debate which has occurred and to make a small number of points which we believe the Government should address.

Part 8 – Members of a company
Chapter 3

The Charities Bill proposes to introduce a power for the Charity Commission to determine membership of a charity on the application of the charity or at any time after the institution of an enquiry under Section 8 of the Charities Act 1993.

In social enterprises and not for profit companies established as companies limited by a guarantee and having no share capital, problems commonly occur concerning who the members of a company are. It is suggested that clause 112 is amended so as to give the Registrar of Companies the power to determine membership of a company limited by guarantee and having no share capital.

Clause 116 of the Company Law Reform Bill permits the register of members of a company to be open to the inspection of any member of the company without charge and of any other person on payment of such fee as may be prescribed (Clause 116(1)).

Whilst a member or person who thinks they may be a member of a company limited by guarantee may use the provisions under Clause 116 to see the company’s register of members and refusal by the company and relevant officer of the company is an offence, CLA believes it would be more appropriate for not for profit companies to have the Registrar of Companies determine membership of companies limited by guarantee and not having a share capital, than to apply the default provisions under Clause 116(3) to 116(8). It is suggested that Clause 116(3) to 116(8) applies only to companies other than companies limited by guarantee and not having a share capital and that an additional power to determine membership of a company limited by guarantee and not having a share capital is given to the Registrar as follows:

"The Registrar may:–

(a) on the application of a company limited by guarantee and not having a share capital, or

(b) on the application of any member of a company limited by guarantee and not having a share capital; or

(c) on the application of any person whom the company limited by guarantee and not having a share capital denies being a member of such a company;

determine who are the members of the company."

"The Registrar’s power under sub-section (1) may also be exercised by a person appointed by the Registrar for the purpose."

Part 8

Chapter 3 – prohibition on subsidiary being a member of its holding company – clause 127 and clause 129

We believe that these sections do not cover a situation where a holding company is the settlor and sole member of a charitable company and the charitable company holds shares in the holding company. This can occur if individual shareholders of the holding company make gifts to a charitable trust established in this manner. If the subsidiary company is the corporate trustee of a trust then clause 129(1)(b) will permit the subsidiary company to hold shares in its holding company. A charitable company may hold shares as a trustee on particular trusts but it is more likely to be holding them as part of the trust fund of the charitable company. A holding of shares by the charitable company in its parent holding company as part of its trust fund would not be permitted under Section 23 Companies Act 1985, since the charitable company in those circumstances is not acting as a trustee. It is suggested that the following new clause be inserted after clause 136:-

"Application of provisions if the company is a charity.

The prohibition in section 127 (prohibition on subsidiary being a member of its holding company) does not apply where the subsidiary is a company limited by guarantee and having no share capital and is a charity."

Part 15
Chapter 5 – Director’s Report

There is inconsistency in what is required in a director’s report under the Companies Act and what is required under the Statement of Recommended Practice for Charities. The drafting of Chapter 5 takes no account of charitable companies so that you have anomalies such as Clause 389(3) which require charitable companies (except those subject to the Small Companies Regime) to state the amount (if any) directors recommend should be paid by way of dividend. Clearly, this is not applicable to a charitable company nor is it generally applicable to a company limited by guarantee and having no share capital.

It is suggested that Clause 389(4) is, therefore, amended so that it could permit an alignment between charities statement of recommended practice and the director’s report for a charitable company. This might be done by amending Clause 389(4) so that it stated, "The Secretary of State may make provision by regulations as to matters which may be omitted from the director’s report of a charitable company and as to other matters that must be disclosed in a director’s report of any company".

Part 15 – Chapter 8

The independent examination regime under s.43 of the Charities Act 1993 is now well proven, and is specifically applicable to entities which are charities. In contrast, the reporting accountant regime, which was never designed for charities, fails to consider many issues which are crucial in charity accounts; and as such it offers little effective assurance to donors and funders who are the principle users of the accounts of charitable companies.

We have had the benefit of reading Lord Hodgson’s proposed amendments to this Chapter and Schedule 9 relating to the accounts of a charitable company below the audit threshold reported in Hansard for 7th March 2006. The Charity Law Association had made comments regarding thresholds for accounts in its submission in September 2005. We wish to support these amendments which we believe will be an important deregulatory measure. We believe the amendments will not prevent those charities which seek to continue with a full audit making that choice and will permit smaller charities to maintain safeguards by having an independent examination. It is understood that the Government will consider the amendments proposed by Lord Hodgson in more detail and this is welcomed by the Charity Law Association. If we may assist in the examination of this matter further, we would be happy to do so.

Part 26 – Clause 677

This Clause permits the Registrar of Companies to alter the form of company numbers and issue an existing company with a new number. The Charity Law Association is concerned with the effect which the proposed change of registered number may have on a charity’s legacies where the company number of the registered charity has been specified in a legacy and it is subsequently altered under this section. We believe there should be an additional clause to Clause 677 which should state, “A change of a company’s registered number pursuant to Clause 677(4) shall have no effect on the legal status of the company and, in the case of a company which is a charity, any gift which refers to the company by its registered number prior to the date on which the company is notified by the Registrar of the change will take effect as if the gift was made to the company with a registered number effected by notice by the Registrar of the change”.

Part 26 – Clause 720

It is not unknown in not for profit membership organisations established as companies limited by guarantee and not having a share capital for vexatious members or ex-members to engage in frivolous actions against the company. For companies limited by guarantee and not having a share capital it would be more appropriate for an enforcement of companies filing obligations to be a duty of the Registrar of Companies.

In the case of frivolous or vexatious complaints under Clause 724 a court should be able to provide that all or a proportion of all costs should be borne by the applicant.

23rd March 2006

Malcolm Lynch
Partner
Wrigleys Solicitors
Chairman
Charity Law Association
Working Part on the Company Law Reform Bill