Legacies to merged or defunct charities **
The author considers section 311 of the Charities Act 2011 (formerly s. 75F of the Charities Act 1993) and two standard will precedents in the light of the recent cases:
Re Longman (deceased); Berry & Archer v IBS-STL (UK) et al  EWHC 666 (Ch); and Phillips v RSPB et al  EWHC 618 (Ch)
The merger of charities is currently the subject of some interest. The public apparently consider that there are too many charities. There is some academic support for an increase in charity mergers to save costs, improve effectiveness and reduce competition for funds. The Charities Act 2006 included several technical changes to facilitate mergers. The last Labour Government established initiatives such as the Modernisation Fund directly to support charity mergers. Surveys record in 2011 & 2010 that between 20% and 39% of charities were considering mergers as a result of the present financial squeeze. Between 5% and 7% of charities had done so or were doing so. Extrapolating the data to all registered charities would mean at least 8,000 charities have merged since 2009 or are in the process of merging.
Charities that choose to merge have historically been advised to preserve the existence of the former charities as “shells” in order to receive legacies given expressly to those charities. This caused complaints that the retention of the shell was rather clumsy and gave the merger an unfinished feel. It must also increase the burden of administration on the merged charity, as well as causing the Charity Commission to retain an unknown number of redundant charities on the register.
Section 75F of the Charities Act 1993
Section 44 of the Charities Act 2006 was intended to remove the need for merged charities to retain the former charities as “shells” on the charities register. It amended the Charities Act 1993 to add sections 75C to 75F and came into force on 27 November 2007. Section 75C provided that the Charity Commission would establish and maintain a register of charity mergers. Section 75F applies where such a merger has been registered. Subsection (2) provides that “Any gift which— (a) is expressed as a gift to the transferor, and (b) takes effect on or after the date of registration of the merger, takes effect as a gift to the transferee, unless it is an excluded gift.” Excluded gifts are those to charities with permanent endowments that cannot be merged, where the will provides that the gift should be held subject to the same trust as a permanent endowment.
The Law Society in June 2009 identified a number of problems with the new sections. First, there was a risk that a gift would fail if the donor died between the transfer of the last asset (required before a merger can be registered) and actual registration. A trust charity ceases to exist when it has no property. Secondly, the new provisions failed to address the situation where a will specifically names an alternative charity as the recipient of the legacy if the first-named charity has ceased to exist. The Charity Law Working Party considered that the wording in s. 75F was not sufficiently strong to override conditions in a testator’s will that require a charity to exist at or beyond the testator’s death. They provided two examples of conditions that attach to a charitable legacy that would result in the merged charity failing to obtain a legacy pursuant to s. 75F: “no person or organization shall take … unless he, she or it survives me by at least 28 days.”; and “… to the following charities as shall be in existence at the date of my death.”
The Working Party reported that, until tighter rules were introduced, many are advising merging charities to continue to retain shells of their old organisations to ensure legacies were protected. There is some evidence that this is indeed what has happened. By s. 75C(4) mergers may only be registered with the Charity Commission when one or both cease to exist. The number of mergers so registered has fallen from 110 in 2009, to 105 in 2010 and just 80 in 2011. This contrasts significantly with the number of surveyed charities reporting to have merged. The conclusion can be drawn that charities are indeed merging but not registering as merged because they have retained their former charities as “shells”. If this is correct, the purpose of s. 44 of the Charities Act 2006 has failed.
This failure appears to be acknowledged by the Review of the Charities Act 2006, published in July 2012. However, the two recommendations contained in the Review suggest that the reason for the failure may not have been fully understood. In extended form the recommendations are:
“10.4 It would seem sensible to modify the merger provisions in order to provide that all bequests shall be treated as a gift to the new, merged or incorporated charity where the original organisation is linked to the new one through the register of mergers. This should include sensible safeguards around the relevance of the new charity’s objects to ensure that the intentions of the testator are respectfully considered. It will remain possible for those drafting wills to expressly prevent this from happening, should the testator desire.”
“10.5 However, this is something of an inelegant solution, and still involves an element of overriding the testator’s stated intentions (albeit that the testator may often have accidentally misstated them!). In the longer term, then, it would also be helpful for the legal profession to identify a standard form of wording for a charitable bequest that addresses this issue and can then be used by will drafters and members of the public without the need for detailed legal knowledge.”
As the first and third sentence of paragraph 10.4 describe the current effect of s. 75F of the 1993 Act, the first recommendation must intend that:
A provision be added to deem the former charity to continue to exist for the purpose of accepting the legacy. This should overcome the problem caused to charities by gifts in wills being made conditional on their continued existence. It could also be drafted in a way that would also overcome the problem caused by the death of a testator between the extinction of the former charity and the formal registration of the merger. It would indeed cause the testator’s stated intention to be overridden but there are three factors to balance on the other side. First, the interference with the testator’s intention must be set against the current burden on merged charities to maintain the former charities as “shells”. Secondly, as suggested, many testators would want the merged charity to benefit. Thirdly, the current fiction of maintaining “shell” charities merely to accept legacies might also not accord with the testator’s intention.
In order for the deeming provision not to apply, the will must expressly exclude the effect of the relevant section. This would preserve the ability of testators that received legal advice to achieve a different result should their chosen charity merge. Home-drafted wills could be less likely to make use of this exception but, on the other hand, the intentions of such testators may be more likely to be fulfilled by the statutory deeming provision.
The second recommendation is more unexpected. There is no shortage of published precedents for clauses that address what should happen if the charity named in the will has never existed, ceased to exist or merged. The precedents often provide for the executors to give the legacy to a charity with similar objects to that originally intended to benefit. In cases of merger, one presumes that the executors normally give the legacy to the merged charity. The legal profession cannot compel the use of appropriate forms of words. The reason that merged charities retain the “shells” of their former selves is to ensure that they receive legacies under wills that omit such provisions. Such wills may be widespread, if recent research is correct that suggests that almost a quarter of wills currently executed are of poor or very poor quality.
Two recent cases in this area address some of the issues discussed.
Re Longman (deceased); Berry & Archer v IBS-STL et al
This was a decision on the construction of s. 75F of the Charities Act 1993 in the face of a gift to a charity conditional on its existence at the date of the testator’s death. It confirmed that the section does not override the wishes of the testator in order to pass the gift to the merged charity.
Elizabeth Longman executed a will on 13 May 2002. After providing for pecuniary legacies and the creation of trust funds for individuals, clause 6 of the will dealt with the residuary estate as follows:
“6.1 I GIVE the residue of my estate … to my TRUSTEES upon trust to divide in equal shares between such of the following charities as shall to the satisfaction of my Trustees be in existence at the date of my death namely:
[6.1.1 to 6.1.5 listed 5 named charities]
6.1.6 INTERNATIONAL BIBLE SOCIETY (UK) …
6.3 IF any charity or charitable organisation which I have named as a beneficiary in this Will is found never to have existed or to have ceased to exist or to have become amalgamated with another organisation or to have changed its name before my death then the gift contained in this Will for such charity or charitable organisation shall be transferred to whatever charitable institution or institutions and if more than one in whatever proportions as my Trustees shall in their absolute discretion think fit and I EXPRESS THE WISH but without imposing any obligation on my Trustees that the gift be given to such charitable institution or institutions whose purpose is as close as possible to those of the charity or charitable organisation named by me in this will.”
The International Bible Society (UK) was at the date of the will an unincorporated registered charity. With effect from 31 May 2007 it transferred the entirety of its assets to IBS-STL (UK) Limited. The merger was registered on 2 January 2008 and the register records that the unincorporated charity ceased to exist on 5 February 2008.
The Testatrix died on 18 April 2008 leaving a substantial estate. The Trustees were satisfied that the International Bible Society (UK) was no longer in existence on the date of death so applied clause 6.3. They considered the wishes expressed by the Testatrix and decided unsurprisingly that IBS-STL (UK) Limited had a purpose as close as possible to the defunct charity. On 16 April 2009 they made an interim distribution to IBS-STL (UK) Limited of some £330,000.
Despite this addition to its funds, IBS-STL (UK) Limited on 18 December 2009 went into administration and on 1 December 2010 entered creditors’ voluntary liquidation. The Trustees wished to avoid paying the balance of the distribution, around £214,000, to the liquidator of IBS-STL (UK) Limited on the grounds that this would frustrate the Testatrix’s intentions. However, they were concerned by advice that they might be compelled to do so by s. 75 of the Act.
The Trustees sought the direction of the court. The Attorney General submitted written representations to the effect that section 75F of the Act did not apply. Counsel argued that: (i) section 75F of the Act applied only when a gift had “taken effect”; (ii) the gift to the International Bible Society (UK) had never taken effect because it was not inexistence at the date of the death of the Testatrix; (iii) therefore section 75F did not apply and the Trustees could apply the balance of the distribution to other charities pursuant to clause 6.3 of the Will. The Trustees were strictly neutral and the company did not appear and was not represented.
David Donaldson, QC, sitting as a Deputy Judge of the Chancery Division, addressed the issue briefly. He concluded at paragraph 9 of his judgment that the Testatrix had not in the terms of section 75F(2)(a) “expressed … a gift to the transferor [viz IBS]”. He explained that “clause 6.1 does not specify the beneficiaries to be all six charities listed in clause 6.1.1 to 6.1.6 but only such of them as are inexistence at the date of the Testatrix’s death. By that time however, IBS had ceased to exist. The Will did not therefore specify IBS as beneficiary nor in consequence, in the parlance of section 75F, express a gift to IBS. Accordingly, there was no gift to be transmuted by the statutory fiat into a gift for the new merged entity.” He therefore found that the Trustees could distribute the remainder pursuant to clause 6.3 as they wished.
This decision is uncontroversial in that it confirmed the opinion expressed by the Law Society and implicit in the Charity Commission’s guidance that section 75F of the Act fails to override gifts condition on the existence of the pre-merged charities. The case nevertheless deserves some comment.
First, the Judge expressed the opinion at paragraph 8 of his judgment that the words “expressed as a gift to the transferor” in section 75F(2)(a) of the Act should be interpreted in the light of the purposes of the section to apply to gifts, as in that case, expressed in the Will to be held on trust for the former charity (a gift for the transferor) equally as those expressed to pass directly to the charity (a gift to the transferor). It is submitted that this obiter dicta construction is sensible and should be followed.
Secondly, the Judge held at paragraph 8 of his judgment that “The obvious purpose of [section 75F of the Act] is to ensure that money (or property) which the benefactor has specified should pass to a charity accompanies it into the entity into which the charity has been merged notwithstanding that the benefaction is not to take effect until a time which postdates the merger.”. By implication the Judge rejected the Trustees submission that section 75F was sufficiently ambiguous for the court to admit ministerial statements as an aid to construction. No doubt this was correct. Nevertheless, the purpose expressed by the appropriate minister in debate was to remove the need for merged charities to retain the former charities as “shells” on the charities register. The wording of the section accordingly fails to achieve the purpose for which it was enacted.
Thirdly, the Judge considered the interaction between clause 6.1 and clause 6.3. This is of interest to Will drafters because clause 6.3 was based on a well-known precedent. He noted that clause 6.3 empowered the Trustees to choose an alternative charity to one listed under clause 6.1 if that charity had changed its name or amalgamated. A Charity that changes its name continues to exist for the purposes of clause 6.1 but the Trustees nevertheless are entitled to direct the gift elsewhere. The reference to amalgamation was relevant where a charity listed under clause 6.1 had merged in a manner that preserved the existence of the charity. It is submitted that this encompasses the situation where a charity has left a “shell” for the purposes of receiving legacies.
Finally, consideration can be given to what other clauses would have saved the gift from being made to an insolvent charity contrary to that which the Trustees considered to be the wishes of the Testatrix. Clause 6 suffered from the fact that, save as otherwise provided, executors must make a gift to an incorporated charity named in the will even if it has entered insolvent liquidation. Had the Testatrix in this case listed IBS-STL (UK) Limited as one of the charities named under clause 6.1, the Trustees would have been obliged to pay the remainder to its liquidator notwithstanding the terms of clause 6.3. Will drafters should consider adding a provision to make the gift conditional not only on the continued existence of a charity but also on condition that a charity being incorporated has not entered insolvency or administration.
Phillips v RSPB et al
This was a case in which a gift failed because the charity ceased to exist after the death of the testator and the court applied the gift the court applied the gift cy-près.
Vera Spear executed a will on 29 August 1997. After making a specific bequest of her pet parrot, the will directed by Clause 6 that the remainder of her estate was left to her trustees:
“to divide the same between [RSPB], [PDSA], Monkey World Limited … and The Owl Sanctuary of Crow Ringwood Hampshire for their respective general purposes in equal shares absolutely.”
Clause 7 provided that:
“if before my death (or after my death but before my Trustees have given effect to the gift) any charitable or other body to which a gift is made by this Will … has changed its name or amalgamated with any other body or transferred all its assets then my Trustees shall give effect to the gift as if it were a gift to the body in its changed name or to the body which results from the amalgamation or the body to which the assets have been transferred.”
Mrs. Spear died on 5 January 2007 leaving a residuary estate of £260,000, with around £65,000 going to each residuary beneficiary. The executors considered that “The Owl Sanctuary” was a reference to the New Forest Owl Sanctuary Limited. The charity had been removed from the list of charities on 17 August 2006 and, according to the Charity Commission, had been struck off the Register of Companies at the same time.
The North Wales Bird Trust, a registered charity, claimed the legacy under clause 7 of the will on the ground that the NWBT was the only charity to have received assets from the NFOS, in particular 17 specified birds. The Trustees were advised that this might not amount to a transfer of “all” the assets of the NWBT and so might not satisfy the terms of clause 7. If so, the gift could be applied cy-près if it showed general charitable intention but otherwise would fail.
The Trustees sought the directions of the court. It emerged shortly before the hearing that the NFOS has been dissolved on 6 February 2007, shortly after the death of the Testatrix. Judge David Cooke, sitting as a deputy Judge of the Chancery Division, found that the NWBT had not received all of the assets of the NFOS so were not entitled to the gift under clause 7. However, he found that the gift suffered from supervening failure and applied it cy-près to NWBT in any event.
This decision depended on its facts and the judge applied the law in a conventional manner. It is nevertheless equally deserving of some comment.
First, although the outcome was satisfactory, this was the result of good fortune not good drafting. The precedent on which Clause 7 was based directs what should happen if a named charities merges or changes its name, but not if it ceases to exist. It was fortunate that the NFOS was struck off after the death of the Testatrix, allowing the court to apply the gift cy-près to the NWBT.
Secondly, the will could also have benefitted from a provision to direct what should happen if one of the named charities, being incorporated, entered administration or insolvency. The judge confirmed that NFOS remained in existence as a charity until it was struck off the Register of Companies and not when it ceased to function. It was fortunate that the complex affairs of the NFOS did not result in the company entering insolvent liquidation. Had it done so, the executors would have been obliged to pay the legacy to the liquidator.
Thirdly, this case highlights the care that must be taken in the drafting of wills. The question of whether NWBT had received “all” of the assets of the NFOS had to be determined by the court, causing the Trustees to incur substantial legal costs. The judge construed the clause to require the transferee to be in a position substantially to take over and carry on the activities of the transferor. The NFOS had ceased to function effectively in 2003 and had since lost all its assets. The process did not fit into the circumstances that Clause 7 was intended to address.
Finally, it is worth speculating what the outcome would have been if the NWBT had decided to register a merger with NFOS between the transfer of the last of its assets in August 2006. The likelihood is that the Trustees would have decided that the NFOS was entitled to the gift. However, it is submitted that they would have applied clause 7 on the grounds of amalgamation rather than section 75F of the Charities Act 1993. The gifts in Clause 6 are conditional on the provisions of Clause 7., this construction would apply the gift as intended by the Testatrix even if the merger was registered after the date of her death, unlike section 75F of the Act.
From the perspective of the will drafter, these cases emphasise the importance of including in a will that gives money to charity provisions that deal with the possibility that the charity merges, becomes insolvent, or ceases to exist. One way to achieve the testator’s intentions is to make the gift conditional on the continued existence of the named charity (and if incorporated is not in administration or being wound up) and in default to give the executors appropriate power to redirect the gift. In the light of recent recommendations, the provisions dealing with possible mergers should also address whether the testator wishes to exclude the effect of section 75 of the Charities Act 1993 or any replacement or amendment.
Executors, in their turn, are reminded that, if the continued existence of a charity is in question, they should check with Companies House whether a company remains on the register, as the information provided by the Charity Commission is not determinative. Otherwise, these cases are examples of how executors should seek the direction of the court in situations where they receive conflicting legal advise as to their duties.
Finally, these case confirm the advice presently given to trustees and officers of charities intending to merge that they should preserve the existence of the former charities in “shell” form if they wish to ensure the best chance of receiving gifts by way of legacy, notwithstanding section 75F of the Charities Act 1993. Whether any amendment or replacement section will have the required effect remains to be seen.
** ‘a version of this article was published in the Private Client Yearbook 2013’
 Footnote 1 to the Charity Commission Research Report RS4 (April 2003) records this response to a 1999 survey of public attitudes the Charity Commission.
 “Merging Interests”, Bill Mather (2000) published by the Baring Foundation
 “Managing charities in the new normal –a perfect storm?” the fifth “Managing in a downturn” report by CFG, Institute of Fundraising & PwC published on 16 April 2012 recorded that 20% of charities surveyed had considered a merger in the past 12 months, up from 12% recorded in March 2011. 5% had in fact merged. In the report “Learning from mergers” by M. Gabriel, published by Birmingham Capacitybuilders in 2010, 39% of respondents had considered a merger in the past 2 years. 7% had done so or were doing so.
 “Legal Issues in Charity Mergers”, (2001) by Debra Morris, published by the Charity Law Unit of the University of Liverpool, pp. 14-15.
 See the statements of Lord Bassam of Brighton, then a minister in the Attorney General’s Office, in the debate on 16 March 2005, Hansard HL Deb, Vol 670 c546-547.
 The Charities Act 2006 (Commencement No. 2, Transitional Provisions and Savings) Order 2007, SI 2007 No. 3286 (C. 135).
 Charity Law Bulletin No. 1, published by the Wills & Equity Committee, Charity Law Working Party, June 2009.
 A similar form of words is used in “Brighthouse’s Precedents of Wills”, 14th Ed (2007) numbers 117 & 117b.
 Interview by Tania Mason with Ian Oakley-Smith of PwC published on 16 December 2011 by www.civilsociety.co.uk
 The Charity Commission itself advises merging charities to take advice whether to keep “shells” of their former existence if they may receive significant legacy income: “Operational Guidance. Register of Charity Mergers: sections 305-314 of the Charities Act 2011. Technical Background.” Document OG 60 A1 (14 March 2012) on the Charity Commision website.
 “Trusted and Independent: giving charity back to charities.” Review of the Charities Act 2006. HMSO July 2012. Paragraphs 10.2 & 10.3
 “Practical Will Precedents” by Hallam, Bruce-Smith, Paul, Clark & Underwood, Sweet & Maxwell (looseleaf) have included appropriate clauses since at least Release 22 in August 2009.
 “Understanding the consumer experience of will writing.” By IFF Research commissioned by LSB, LSCP, OFT & SRA, published 14 July 2011 at table 8.3.
 In the matter of the estate of Elizabeth Longman, Deceased sub nom (1) Simon Anthony Berry (2) Paul Archer (as executors of the estate of Elizabeth Longman) v IBS-STL (UK) Limited (in liquidation) (2) HM’s Attorney General  EWHC 666 (Ch)
 Such statements are admissible as an aid to construction when (a) the section is ambiguous; (b) the material relied upon consists of one or more statements by a Minister; and (c) the statements relied upon are clear: Pepper (Inspector of Taxes) v Hart  AC 593, HL, per Lord Brown Wilkinson at 640B.
 See note 5 above.
 “The Encyclopedia of Forms and Precedents”, 5th Edition, 2001 Reissue, Vol 6(2), Form 90. A similar precedent is found in “Parker’s Modern Wills Precedents” 7th Ed, by Michael Waterworth, at Form 8.16.
 Re: ARMS (Multiple Sclerosis Research) Limited  1 WLR 877 per Neuberger J
 The suggested form of words in “Practical Will Precedents” op. cit., at Precedents F5t1 & F5t4 applies only where the charity is subject to a [compulsory] winding-up order, such as happened in Re ARMS (supra). It would not have applied in Re Longman, where the charity went first into administration and then entered creditors’ voluntary liquidation. This form of insolvent liquidation does not require the court to make a winding-up order.
 Phillips v (1) Royal Society for the Protection of Birds (2) Peoples Dispensary for Sick Animals (3) North Wales Bird Trust (4) Susan Mary Small (5) HM’s Attorney General  EWHC 618 (Ch)
 It appears in “A Practitioner’s Guide to Wills” 3rd Ed, (2010) as Precedent 5Y.
 Applying Re ARMS (supra) and Re Slevin  2 Ch 236.
 Paragraphs 11 and 12.
 Alternatively insolvent liquidation. There may be occasion that a charity enters solvent liquidation as a form of restructuring.