ALTERATIONS TO GOVERNING DOCUMENTS:CHARITABLE COMPANIES: THE LEGAL BACKGROUND OG47 A1

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OPERATIONAL GUIDANCE

ALTERATIONS TO GOVERNING DOCUMENTS: CHARITABLE COMPANIES

THE LEGAL BACKGROUND

OG 47 A1 – 12 November 2008

Purpose

This guidance explains the legal requirement for our consent to alterations of the governing documents of charitable companies.

Functional responsibility

For action

Charity Services

For information

All operational staff

Contents

1. The legal background
2. Section 64 consent at a glance
3. Regulated alterations – the law
4. Regulated alterations – policy on giving consent
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. The legal background

Under company law the members of a company, whether charitable or not, can alter its statement of objects and any administrative powers and provisions contained in its memorandum and articles of association. In the case of companies which are not charities alterations can be made which change the character of the company and alter radically the purposes for which its property can be applied. Alterations can also be made which allow the directors to be paid for their services, or to benefit from the company in other ways. In the case of companies which are charities, the freedom to make such radical changes is limited by the requirements of s64 of the Charities Act 1993 to obtain the Commission’s approval to certain types of changes relating to objects, dissolution provisions and trustee remuneration provisions.

2. Section 64 consent at a glance
	2.1 The main requirement for consent 2.2 The meaning of alteration 2.3 Registering the changes 2.4 Removing an express prohibition to pay a trustee

	2.1 The main requirement for consent
	Under section 64(2A) of the Charities Act 1993, as inserted by the 2006 Act, a charitable company needs our written consent before passing resolutions that make any "regulated alterations" to its memorandum or articles of association:
	Regulated alterations are:-
	Any alteration of the objects clause; or
	Any alteration of any provision directing the application of property of the company on its dissolution; or
	any alteration which would provide authorisation for any benefit to be obtained by directors or members of the company or persons connected with them within the meaning of section 73B(5) and (6).
	See OG47 B2 for guidance about some pre-1982 companies that may require our consent to all changes.
	With one exception (see 2.4 below) our consent is not needed for any changes which are not "regulated alterations" – see OG47 B1

	2.2 The meaning of alteration
	When looking at alterations under section 64 of the 1993 Act we consider that the term alteration means both additions (including the insertion of completely new clauses), and deletions of, or alterations to, existing provisions in the memorandum and articles of association.

	2.3 Registering the changes
	Not only do we have an obligation to consider these changes but we are also required to keep an accurate and up-to-date Register, both for ourselves and the public. Similarly, trustees are legally required to inform us of any changes to their Register details. See OG47 C1 about the consent to amendments and subsequent follow-up.

	2.4 Removing an express prohibition to pay a trustee
	An alteration to remove an express prohibition to pay a trustee, thus allowing access to the statutory power in s73 of the 1993 Act to pay a trustee or connected person for goods or services provided to the charity, is not a regulated alteration – see section 3.3 below. However, depending on how the charitable company is constituted the alteration may or may not need our consent – see OG47 B3.

3. Regulated alterations – the law
	3.1 Changing the objects clause – section 64(2A)(a) 3.2 Changing the dissolution provisions – section 64 (2A)(b) 3.3 Trustee benefits – section 64(2A)(c)

	3.1 Changing the objects clause - section 64(2A)(a)
	The memorandum of association of every company must state the objects of the company: usually the objects of a company are set out in a single clause. Modern drafting practice in the case of charitable companies is to exclude from the objects clause any provision which is not strictly speaking an object of the company. In the case of older companies, the objects clause may include not only the objects of the company but also the powers to be used by the company in furthering those objects.
	The amendment of any provision in the objects clause requires our prior written consent under section 64(2A)(a), whether or not it impacts on the charitable purposes. This means that we have to give consent to amendments which, had the amended provisions been outside the objects clause, would not have required consent, because they would have been outside the scope of section 64(2A)(a).
	For the purposes of considering consents under section 64(2A)(a) we should regard any clause containing charitable purposes as an objects clause regardless of its title or position in the memorandum of association, and even where part of the objects are contained in another clause or clauses.
	More detailed guidance on considering such amendments is given at 4.1 below.

	3.2. Changing the dissolution provisions - section 64(2A)(b)
	Any amendment to a provision dealing with the application of a charitable company’s property on dissolution requires our consent.
	Detailed guidance on considering such amendments is given at 4.2 below.

	3.3. Trustee benefits - section 64(2A)(c)
	General position
	Section 64(2A)(c) provides that any alteration to the memorandum and articles of association which would provide authorisation for any benefit to be obtained by directors or members of the company, or persons connected to them within the meaning of section 73B(5) and (6), requires our consent.

	Exception – payments for goods and services under s73(A)
	The only exception to this is defined at s 64(2B)(a) which provides that any trustee payment allowed under s73A of the 1993 is not regarded as a benefit : any change to a company’s memorandum and articles of association which permits trustee payments within the limits of s73A is not a regulated alteration and does not therefore need our consent.

	Conditional payment powers
	Section 73 of the 1993 Act creates a statutory power to pay trustees or connected persons for goods and services provided to the charity. A charitable company can use this power without further reference to us, even if its memorandum and articles of association contains a conditional payment power requiring our consent on each occasion that it is used. In other words, the statutory power overrides the condition requiring our consent and the charity can use of the power disregarding the requirement in the governing document for our prior authority where they can meet the conditions of the 1993 Act power. No amendment is necessary in these circumstances to remove the requirement for our consent when using the statutory payment power: if the charity decides to make such an amendment, however, it would not be regarded as a regulated amendment.

	Removal of express prohibitions on trustee payments
	The removal of an express prohibition of trustee or director benefit is, in itself, not a regulated alteration which would normally require our consent even though it may permit the statutory power to be used. The reason for this is that it is the statutory power, not the removal of the prohibition, which authorises the remuneration. Even where it is not a regulated alteration, those trustees who may benefit under the statutory power will not be able to vote on any proposed removal of the express prohibition. Where this means that it is not possible for a sufficient number of people to vote on the proposed removal of the prohibition, the trustees will need to seek an order of the Commission authorising the conflicted trustees to vote – see OG47 B3 for more details. This will be an order under section 26 of the 1993 Act so can only be made by the Commission where we are satisfied that such an order is expedient in the interests of the charity. However, if an express prohibition is to be replaced by a provision which authorises benefits to trustees or directors going beyond those that can be paid under the statutory power to remunerate, then that new provision will be a regulated alteration and will require our consent under section 64.
	See 4.3 below for our policy on considering such amendments, whether or not they exceed the scope of the statutory provision.

4. Regulated alterations – policy on giving consent
	4.1 The objects clause 4.2 Changes affecting application of property on dissolution 4.3 Changes providing authorisation for benefit to directors etc

	The essential aim of section 64 of the 1993 Act as amended is to relax the restrictions on companies amending their memoranda and articles and to limit the number of occasions on which they have to come to us for our consent to do this.
	In general, in considering applications for our consent to regulated alterations we should take a risk based approach, considering whether the proposed changes might affect the charitable status of the company or its reputation or whether the alteration seems likely to give rise to problems at a later date.
	An outline of our approach to each category of regulated alteration is given immediately below, with more detailed discussion of the points to be considered in B2 of this series.

	4.1 The objects clause
	For the purpose of section 64 consents, any clause containing all or part of the charity’s objects is an objects clause.
	The 2006 Act does not specify what changes may be acceptable.
	Essentially we need to be satisfied that, if the change to the objects is material:
	the new wording expresses exclusively charitable purposes; and;.
	the proposed change is not a proposal which no body of reasonable trustees could make. (If you consider the proposal is completely unreasonable, take legal advice) ; and
	the proposed change does not undermine or work against the previous objects of the charity.
	See also OG47 B2 about giving consent to changes.
	Any immaterial change to the objects clause is one which does not affect the meaning of the objects themselves and where the change is purely administrative and would not normally need our consent if it were not in the objects clause. For this sort of change, we should give our consent readily unless it is a change which no body of reasonable trustees could have made.
	New objects being proposed must, of course, be clearly charitable in law.

	4.2 Changes affecting application of property on dissolution
	We may be asked to approve alterations to a dissolution clause that require:
	the property to be passed to a named charity;
	the property to be passed to a charity with the same objects;
	the property to be passed to a charity with similar objects.
	In any of these cases we have to ensure that the proposed amendment is likely to be workable at the time the charity eventually dissolves and that it is not an amendment which no body of reasonable trustees could have made.
	Where the changes to a dissolution clause require the property to be applied for purposes completely different to the charitable purposes of the charity as set out in its objects, we need to be satisfied that the criteria set out in 4.1 are satisfied.
	These scenarios are discussed in more detail in OG47 B2, although this is not an exhaustive list of possibilities. If caseworkers encounter a proposed change which does not fit into any of these categories they should seek legal advice.

	4.3 Changes providing authorisation for benefit to directors etc.
	The third category of "regulated alteration" concerns the extension of provisions which can benefit directors, members, or connected persons personally beyond what is allowed by s73A of the Charities Act 1993. We should ensure that we only give consent where the power will be used in the charity’s interests and where suitable provisions are in place for the management of any potential conflict of interest.

Glossary of Terms used in this Guidance
	1993 Act
	Trustees

Index to further related information