Pothecary Witham Weld Solicitors

As a charity, do we have to be concerned with the recent changes in company law?

Answer

It depends what is meant by concerned. Worried or disturbed - no, but are there implications and things to think about - yes. In this note reference is only talking about only charitable companies limited by guarantee, not trusts, nor unincorporated associations.

What are the changes - quite a few. The Act runs to exactly 1,300 sections – the longest ever passed by Parliament.

First there is a category over which there is no need for concern – indeed the changes might even help a little to save money.

Examples in this category are:-

• the shortening of periods of notice for meetings,

• the ability to use electronic communications more widely than now (for notices and supplying accounts to members)

both of which are in force since October 2007,

also to come from April 2008 in this category:-

• that a company secretary will no longer be needed, and

documents can be signed off by a single director.

As time passes some charities will surely find the changes helpful and make adjustments to their articles where necessary to allow them to use the provisions.

Secondly, there is the category that might be said to be a bit of nuisance:-

• All companies now have to make sure that the company name, registered office address, registered number and the fact that it is a limited company (usually done now on stationery by saying “Company limited by guarantee no xxxx) is shown on its letters as now, but also on any orders placed for goods or services and on its website – already in force since January of this year.

• Sending all members proxy forms for Annual and Extraordinary General Meetings (in force since October 2007) is another in this category. It’s applicable whether the articles provide for proxies or not. The proxy need not be another member – which can of course have possible implications.

• Then in just over two years’ time (its introduction has recently been deferred to October 2009), we can start getting used to a different form of memorandum and articles – the idea being that the memorandum is to be part of the articles.

• Finally there are the changes about directors – just over a 100 sections on this. Only 7 of these will be mentioned – the 7 statutory duties of directors. 4 of these sections were brought into force in October last year and may bother some director/trustees, though so far the impact has been pretty muted.

1.     a duty to act within the company’s powers (sec 171). Most charitable companies have a catch all at the end of the list of powers in their objects clauses that say they can “do all such other lawful things as are necessary for the achievement of the objects or are incidental or conducive thereto”. Charity Trustees/directors have for some time been reminded by the Commission & other advisors of the importance of acting in the interests of the charity and not acting outside its powers, so there is nothing new here for Charity Trustee/directors.

2.     there is a new duty to promote the success of the company for the benefit of its members as a whole (sec 172). As the members of charitable companies are not supposed to benefit we would have expected to see an exception for charities. But if we go with the spirit of the section, the question arises for charities on how to measure success – not set out.

The Act does set out 6 factors to consider when making decisions contributing to the success of a company:-

o    its long term consequences,

o    the interests of the employees,

o    the impact on suppliers, customers and others,

o    the impact on the community and the environment,

o    the effect on its reputation for high standards of business conduct and the need to act fairly between its members

o    the need to act fairly between its members – irrelevant for charities.

3.     (section 173) a duty to exercise independent judgment. This should not be a problem in charitable companies, as trustees are under such an obligation already.

4.     (section 174) the duty to exercise reasonable care, skill and diligence. This is further defined, in a way that is difficult to explain, but which means that the minimum to be expected of a trustee/director is that he has the skill and knowledge that is reasonably expected of a trustee/director. If a person actually has more than this minimum skill and knowledge, then he cannot get away with making a stupid decision, by saying that even though he was very skilful and knowledgeable, he should be treated as having a lesser amount of knowledge.

These are treated as fiduciary duties to the members and breach gives rise to civil claims for damages, rather than criminal penalties, though who would enforce them in the case of a charity is unclear.

The other three duties are to be brought in at a date to be announced – but are not really worrisome either in the context of charities, as they relate to conflicts of interest (already something charity trustees must avoid), the receipt of benefits from third parties (almost certainly irrelevant for charity trustees) and the requirement to declare interests in proposed transactions (already covered by other Charities Act requirements.)

So – yes - there is quite a bit to think about as part of ongoing governance review processes, but nothing to be disturbed about.