A charitable model

In September 2009 the Charity Commission published its model articles of association for charitable companies ('the model articles'), titled 'Starting Up '“ Charitable Companies: Model Memorandum and Articles of Association'. These take into account changes in the law arising from the Companies Act 2006, including the sections which took effect on 1 October 2009, and the Charities Act 2006.

Company law recognises that charitable companies are different to commercial companies and makes specific provision for charitable companies in some areas. Directors of charitable companies are charity trustees, defined in section 97(1) of the Charities Act 1993 as 'the persons having the general control and management of the administration of a charity'.

Objects

For a company to be charitable all its objects must be for a charitable purpose as defined by section 2(1) of the Charities Act 2006. As from 1 October 2009 unless a company's articles specifically restrict the objects of the company, the company's objects are unrestricted (section 31 of the Companies Act 2006). In the model articles there is an objects clause (article 4) which states that the objects are specifically restricted to the stated objects. However, for charitable companies which existed prior to 1 October 2009 it is considered by both the Charity Commission and Companies House that a charitable objects clause comprises a specific restriction of the objects of the company. Prior to 1 October 2009 such a clause was contained in the memorandum. As from 1 October 2009 this clause, along with other clauses in the memorandum, other than a wish to form a company and any agreement by the subscribers to be the members, are treated as provisions of the articles (section 28 of the Companies Act 2006).

Conflicts of interest and director benefits

The commission has always taken the view that charity trustees were under a duty to avoid conflicts of interest. Accordingly, having a specific statutory duty for company directors to avoid such a conflict (section 175(1) of the Companies Act 2006) did not appear to us to add anything to the duties of directors who were charity trustees. Section 175(3) of the Companies Act 2006, as modified by section 181(2), permits a conflict of interests arising from an arrangement or transaction with the company to be authorised by the articles. In addition, authorisation of a conflict may be given by the directors where the company's constitution includes provision enabling them to authorise the matter (section 175(5) as modified by section 181(2)).

The model articles include an article (article 44) requiring a director with a possible conflict to withdraw from any discussions in which it is possible that a conflict may arise between the interests of the company and the personal interests of the director.

The model articles published by the Charity Commission provide optional provisions (article 6(4)) authorising certain benefits to directors. These include specific provision with regard to managing any conflicts arising from such benefits. The clause only authorises benefits to directors or connected persons. The term 'connected person' is defined in article 6(5)(b) and (c) in terms similar to the definition in section 73B of the Charities Act 1993 in a limited number of circumstances.

The limited benefits permitted by the model articles are:

(a) Benefits as a beneficiary

A director may receive benefits as a beneficiary of the charity provided that a majority of the directors do not receive such benefits. Many charities wish to involve users of their services in the governance of the charity and this clause permits this.

(b) Payments for services and goods provided in connection with a service

The Charities Act 2006 added to the Charities Act 1993 sections 73A to 73C, which provide a statutory power to a charity to pay a charity trustee for services to the charity (including goods provided in connection with those services), provided certain safeguards are observed. This statutory power does not apply in the event of a prohibition on benefits to charity trustees.

Consequently, the commission considered one of the options in its governing document should be for a prohibition on any benefits to directors of a charitable company. In addition, it considered that where payments to directors were to be made for services, these should be made under the statutory power rather than under the terms of an express power in the model articles. The reasoning for this was that the statutory power provided certain safeguards and protections for the charity which it would not be possible to replicate in an express provision; in particular the provisions with regards disqualified trustees in section 73C of the Charities Act 1993.

(c) Payments for goods provided other than in connection with a service

Prior to the Charities Act 2006, the commission's model memorandum and articles for a charitable company had included an option to pay a director for the supply of services and goods provided certain conditions were met. Following introduction of the statutory power, as set out above, it was considered that the correct approach was to facilitate the use of the statutory power. However, that did not extend to payments for goods provided otherwise than in connection with a service provided to the charity by a director.

As supplying goods in connection with a service provided to the charity and supplying goods not connected to such a service were not qualitatively different, it was considered proportionate to provide such a power subject to safeguards similar to those in the statutory power.

(d) Interest on money lent at a rate at least two per cent below base rate

This benefit was considered to be so clearly in the interests of the charity as not to require any special procedures to be followed.

(e) Rent for premises let by a director on reasonable terms

The requirements here are that the rent and the other terms of the proposed lease are reasonable and proper and that the director concerned shall withdraw from any meeting at which such a proposal or the rent or other terms are discussed.

(f) Indemnity insurance

Section 73F of the Charities Act 1993 provides a statutory power for charity trustees to arrange for the purchase, out of the funds of the charity, of insurance designed to indemnify the charity trustees against any personal liability in respect of any breach of trust or duty. Once again the approach taken in the model articles was to facilitate the use of the statutory power rather than provide an alternative express power. The statutory power can in any event only be excluded by purchase of such insurance being expressly prohibited and not by a general prohibition on trustee benefit.

(g) Participation in the normal trading and fundraising activities of the charity on the same terms as members of the public

This is another benefit which does not need any special procedure to be followed.

(h) Other benefits authorised by the commission

Where a particular benefit to a director is in the interests of the charity, the commission may authorise it under section 26 of the Charities Act 1993 even if it would not otherwise be within the powers of the charity trustees. By reason of section 26(5A) such an order may authorise an act even though it would otherwise involve the breach of one of the general duties of directors, e.g. the duty to avoid a conflict of interests. Accordingly, a conflict arising from a benefit authorised in this way would not require authorisation by the articles (although the model articles do in fact provide this) nor authorisation by the directors under the procedure set out in the articles.

Authorisation of conflicts by directors

The model articles for a charitable company include a power for the unconflicted directors to authorise a conflict of interests arising from a duty of loyalty owed by a director to a third party provided that the conflict does not involve a direct or indirect benefit of any nature to a director or a connected person (article 45). It was considered that where having a conflicted director in other situations was in the interests of the charity, specific authorisation by the commission under section 26 of the Charities Act 1993 would be appropriate. This was because of the possible benefits to the director involved.

Directors as natural persons

The Companies Act 2006 (section 155) requires companies to have at least one director who is a natural person. The commission's model articles (article 24(1)) require a director to be a natural person aged 16 years or older. Difficulties in governance of charities have arisen with regard to corporate bodies acting as directors alongside other directors who are natural persons. Accordingly, the commission considered that the model articles should provide for all directors to be natural persons. This does not preclude a charitable company applying for registration with a corporate director provided that suitable provision is made to ensure the interaction of individual and corporate responsibility is workable.

AGMs and company secretaries

A private company is no longer required to hold an AGM or to have a company secretary. The model articles make provision for an annual AGM as it was considered good practice for charitable companies to hold one (article 10). The model articles do not require there to be a company secretary and leave this as optional (see articles 2, 38(3) and 47).

Proxy notices

Prior to the Companies Act 2006 the model articles made no provision for proxies as such provisions were not considered appropriate. The right to appoint proxies is now statutory. Accordingly, the model articles (see article 19 and 19A) include the provisions with regards proxies contained in schedule 2 of the Companies (Model Articles) Regulations 2008.

Indemnity

The model articles contain three options (article 56) with regard to indemnifying directors to the extent permitted by sections 232 to 234 of the Companies Act 2006 '“ discretionary, mandatory or limited. There is also an optional indemnity for auditors (article 56A).

Chairperson's casting vote

In accordance with the Companies Act 2006 there is no provision for the chair to have a casting vote in members' meetings. There are different views as to whether a chair should have a casting vote in directors' meeting. The model articles provide an optional article permitting this if so wished (article 38(5)).

Electronic communications

There is an optional article permitting the directors of the charitable company to hold meetings by suitable electronic means agreed by them in which each participant may communicate with all the others (article 38(6)).

Dissolution

The relevant article ensures that the assets of the charitable company can only be applied for charitable purposes and not distributed among the members of the company (article 58).

Fit for purpose

The development of appropriate model articles following the changes in legislation has been a complex and challenging process. The commission hopes the model articles will meet the needs of charities while ensuring there are appropriate safeguards against abuse. We will review these regularly to ensure they are fit for purpose.