Charity Commission applies to English High Court for permission to apply funds to pay a charity's interim manager

In December 2019, the Charity Commission announced its intention to make an application to the High Court in relation to the residual funds held by the insolvent Dove Trust (registered charity number 287401). The application comes following the third and final distribution of the charity's assets to creditors by the Commission-appointed interim manager and seeks the court's permission to apply the remaining funds of around £84,000 towards the interim manager's fees and related costs (in excess of £650,000) after which the Dove Trust will be wound up.

Background

The Dove Trust was established in 1983 for "such charitable purposes as the trustees with the consent of the settlor during his life shall in their discretion from time to time think fit". To carry out its purposes, the trustees established and ran a website called http://www.charitygiving.co.uk/ (the "Website") to facilitate charitable giving by online donations from members of the public for the benefit of other charities or good causes (the "Creditors"), with Gift Aid being claimed by the charity on behalf of donors.

On 25 August 2011, the Charity Commission opened a statutory inquiry in light of the trustees' failure to file accounts (the last accounts filed were for the year ended 5 April 2009) and other serious governance and financial mismanagement concerns, including potential unlawful payments from the charity's restricted funds. The Commission appointed an interim manager (the "Interim Manager") on 6 June 2013 initially to work alongside the trustees although his powers were later extended to act exclusively. Contrary to usual practice whereby interim managers' fees are paid out of charity funds, the Commission decided it  would pay the Interim Manager's fees and expenses at the outset. This was because the charity had no unrestricted funds from which it could pay those fees and expenses.

On investigation, the Interim Manager found a substantial shortfall (of potentially £1 million) between the Dove Trust's restricted funds and donations received but not yet paid to intended Creditors and that as a result of the shortfall, donations intended for one Creditor were being used to fund payments that had earlier become payable to another. The Website was suspended while the Interim Manager sought to reconcile the charity's accounts. In November 2013, The Interim Manager presented his proposals for the distribution of the charity's funds to the Charity Commission.

The Application

The present application is not the first time the Commission has sought an order from the English courts in relation to the Dove Trust. Given the complexity of the charity and trust law issues involved, in December 2013 and after receiving the Interim Manager's proposals, the Commission made an application to the High Court pursuant to section 78 of the Charities Act 2011. This provides that where the Commission has appointed an interim manager, the Commission may apply to the High Court "for such directions in relation to any particular matter arising in connection with the discharge of [the interim manager's] functions". The application asked the court, among other things to: (i) determine the legal basis on which monies paid through the Website were held; (ii) give directions as to how the remaining funds should be allocated between the Creditors and (iii) give such further directions as necessary to resolve a number of consequential issues that arose in connection with the Website and the funds held by the Investment Manager.

In his judgment dated 22 July 2014, Mr Justice Henderson held that:

1. The charity trustees held donations received via the Website on a global sub-trust of the charitable trust on terms that they would, as soon as reasonably practicable, ensure that the funds donated were paid to the charity or good cause nominated by each donor.
2. The trustees owed contractual obligations to each donor to pay a sum equal to the amount of the relevant donation to the donor's nominated charity or good cause within a reasonable period of time. These contracts could also be enforced against the trustees by the nominated charities or good causes pursuant to the Contracts (Rights of Third Parties) Act 1999.
3. The entire fund should be distributed in proportion to the amount they are owed (i.e. using the "pari passu" approach).

The court ordered the Interim Manager to, as soon as practicable, distribute the charity's funds to the Creditors on a pari passu basis. Pursuant to paragraph 2 of the court's order, the Commission had "liberty to apply (if necessary and if so advised) for an order that the costs of and associated with the appointment of the Interim Manager (which shall, for the avoidance of doubt, include the steps taken by the Interim Manager) and/or the costs of and associated with these proceedings shall be paid out of future recoveries made in connection with the Dove Trust". It is under this provision that the Commission now seeks permission to use the charity's residual funds to settle the Interim Manager's fees. Given the exceptional circumstances and that the application could affect a large number of potential Creditors, the Commission has invited representations from those potentially affected by 4pm on 17 January 2020. A witness statement filed by the Charity Commission in support of its application notes that:

1. The usual approach is that interim managers' fees are paid from the charity's current income funds and future income flows. It is only in exceptional circumstances that the Commission may decide that it is in the public interest to appoint an interim manager even where the charity's income may be insufficient to meet the Interim Manager's fees.
2. This was an exceptional case in which the Commission decided to pay the Interim Manager's fees directly as it was in the public interest to recover as much as possible for the Creditors.
3. The Commission considered that the Interim Manager's fees were reasonable and good value for money. The Commission noted the enormous task the Interim Manager faced of dealing with 1,812 Creditors and the fact the Interim Manager achieved better recovery for the Creditors than expected (he recovered 68 pence in the pound as against an initial estimate of 33 pence in the pound, partly because some Creditors did not cash their cheques or could not be traced).

Comment

The Dove Trust illustrates the circumstances in which the Commission may be prepared to take a robust approach and use its own funds to pay for the appointment of interim managers and associated costs. While it now seeks permission to use the charity's funds to help settle some of those costs, given the charity now has a surplus of around £84,000, it seems the Commission may only be able to recover a relatively small portion of its total costs incurred. It should be noted that the Dove Trust had a high public profile and promoting public trust and confidence in the charities sector is one of the Charity Commission's key strategic and statutory objectives. Other measures the Commission took to protect the charity during the course of the inquiry included preventing payments from the charity's accounts without the Commission's prior approval and extending the Interim Manager's powers to act to the exclusion of the charity's trustees.