News & events

02/07/2012 - Mergers and Legacies

A common concern for charities that wish to incorporate is the protection of legacies that may have been left to the unincorporated charity. There are similar concerns when two charities merge. The Register of Charity Mergers introduced by the Charities Act 2006 was intended to resolve the problem but there are some situations in which it may not be effective. Two recent cases illustrate the point.

Mrs Elizabeth Longman died on 18 April 2008, leaving the residue of her estate equally to six charities if they were in existence at the date of her death. One of the six was the International Bible Society (UK). When the Will had been made, the IBS was an unincorporated association but in May 2007 it had incorporated by transferring all its assets to a new charitable company, IBS – STL Ltd.

Mrs Longman's Will had anticipated one or more of the charities merging or ceasing to exist. It provided that in such circumstances her trustees could pay its share of the residue to another charity.

The transfer of the assets of IBS was registered as a merger on 7 January 2008 and the unincorporated association ceased to exist on 5 February 2008. On 16 April 2009, the trustees made an interim distribution of £330,000 to IBS – STL Ltd but, by the time they were ready to make the final distribution of approximately £214,000, IBS – STL Ltd had gone into insolvent liquidation.

Section 75F Charities Act 2007 provides that, where a charity merges and the merger is registered with the Charity Commission, a gift expressed as a gift to the transferor and taking effect on or after the date of registration of the merger, takes effect as a gift to the transferee which, in this case, would be IBS – STL Ltd (in liquidation). The trustees sought the direction of the court as to whether they were obliged to pay the balance of the residue to IBS – STL Ltd or, in practice, to its creditors.

The court held that there had been no gift to the unincorporated association. A Will does not operate until the death of its maker and its provisions have to be applied as at that date. IBS had ceased to exist in February 2008 and so there could have been no gift to it on Mrs Longman's death in April 2008. The trustees had made a valid exercise of their power to make the first distribution to IBS – STL Ltd but were perfectly entitled to exercise their discretion in relation to the residue and not to pay it to the creditors of IBS – STL Ltd.

In Phillips –v– RSPB, the testatrix, Mrs Spear, left the residue of her estate to a number of animal charities, including the New Forest Owl Sanctuary at Ringwood. Mrs Spear made her Will in 1997 but by July 2006, the New Forest Owl Sanctuary had ceased to operate and in August that year it was removed from the register of charities. There was a dispute about the ownership of the birds and other assets of the Sanctuary but it was accepted that many of the birds and some of the assets had come into the ownership of the North Wales Bird Trust. The New Forest Owl Sanctuary was dissolved on 6 February 2007, a few days after Mrs Spear's death.

Mrs Spear's Will provided that, if any of the charities had transferred all its assets, her trustees should give effect to the gift to it as if it were a gift to the body to which the assets had been transferred. The North Wales Bird Trust faced a number of difficulties. It had taken the transfer of some of the assets but by no means all the assets, which meant that the court held that it could not rely upon the provisions in the Will dealing with a transfer of the assets. Furthermore, the New Forest Owl Sanctuary had been a corporate charity and the gift would have been available for use for its general purposes; the normal rule is that a gift to an incorporated charity for its general purposes is to the company itself rather than for its charitable purposes and if the company ceases to exist, the gift fails.

In the present case, however, the New Forest Owl Sanctuary had been dissolved a few days after Mrs Spear's death. It had therefore been in existence at the date of death so that the gift had not failed. It could not, however, be carried through and the court was entitled to make a scheme to apply the gift for the closest possible charitable purpose – which was held to be the North Wales Bird Trust.

The two cases illustrate the continuing difficulty in dealing with legacies following the merger or incorporation of charities. There is no simple solution that will deal with all cases but it is to be hoped that the review of charity law this summer will result in improvements to the register of mergers that will avoid some of the difficulties.

Published by:

Geoff Trobridge (show profile)

Article type:

News (show all News)