Analysis
The Commonwealth Institute (CIC) (a charitable company limited by guarantee) was placed in members’ voluntary winding-up on 19 July 2007. The CIC had a complex history which dated back to 1887. In the 1950s HM Government (HMG) proposed that the predecessors to the CIC trustees should surrender their lease of their premises in South Kensington (the Kensington building) and move to a new premises at Holland Park. The predecessors of CIC were in receipt of rent and benefited from free utilities (the associated entitlements) under the terms of a sub-lease of the Kensington building. The move to Holland Park meant that these benefits were lost.
In January 2000 a severance agreement and a transfer agreement were put in place between the Secretary of State and the CIC trustees. The intention of these agreements was to, as far as possible but without statutory change, separate the CIC from HMG.
By July 2007 the CIC was solvent and had assets available for distribution, however it was not a profitable organisation, and so it was decided that it should be wound-up. The memorandum of association provided that surplus assets should be transferred to another charity with similar objects. The Commonwealth Education Trust (CET) was constituted as successor trust which complied with the CIC’s memorandum and the CIC’s assets had been transferred to CET in the main. However, there was £8m pending distribution, which were the remaining proceeds from the sale of the Kensington building, which had been sold in 2002 in order to cover liabilities when it had become clear that CIC could not continue its operations. The liquidators made an application under s112 of the Insolvency Act 1986 for directions on the following issues prior to distributing the remaining assets:
- 1) Should the proceeds of sale of the Kensington building be held for CIC absolutely or were they subject to any other interest or special trusts?
- 2) In view of point 1 above, should an order be made in exercise of the court’s cy-près jurisdiction to confirm that the liquidators could pass the proceeds together with any other assets held by them to the trustees of the CET?
- 3) Were the associated entitlements charitable assets and, if so, what steps should the liquidators take to recover and realise them?
- 4) Were the CIC where liable under the terms of the severance agreement to return £594,836 to HMG?;
- 5) Had the title to a collection of art and artefacts, which had passed under a deed of gift in 2003, passed free of restriction? If so, could a declaration be made to this end?
- 6) Should the liquidators take recovery proceedings in connection with the severance arrangements? If not, the liquidators sought a direction from the court that they should distribute the remaining assets.
Held:
- 1) The liquidators were concerned that the predecessor trustees did not have authority under the s39(9)(b) Charities Act 1993 to transfer the Kensington building to the CIC trustees. The court found that this was not the case. They also considered that the necessary procedural steps had not been followed to properly effect this transfer. These procedural defects related to the giving of consent by the board of governors and the exercise of the predecessor trustees’ discretion as well as too few trustees being appointed at the relevant time. The court found that consent had been obtained and that the concerns relating to other defects were unfounded on the evidence. The declaration that the proceeds of sale should be held for CIC absolutely would be made.
- 2) Given the declaration in respect of point 1 above, the exercise of the court’s cy-près jurisdiction was unnecessary.
- 3) Significant written evidence of telephone notes and letters demonstrated that the predecessor trustees were unwilling to surrender the lease on the Kensington building without compensation for the loss of the associated entitlements. However, there was no formal contract to this end. Consideration of further correspondence led the court to determine that the loss of the associated entitlements was to be reflected in the annual funding provided by HMG to CIC (or the predecessor to them). This funding was subject to parliamentary control and therefore it was clear that CIC had no enforceable right to compensation and that the associated entitlements were never ‘assets’ capable of transfer to CIC.
- 4) As to the £594,836, this represented the residue of money paid to the CIC by the Secretary of State under the severance agreement. It was paid in respect of defined building works to the Kensington building. The schedule to this agreement clearly stated that if the ‘aforesaid sum exceeds the amount actually spent on the building works, the excess shall be returned to the Secretary of State’. It was argued that no final certificate of the costs of the works had been issued and therefore that this money could not be said to exceed the ‘amount actually spent’. No accounts had been published either. The court considered these points irrelevant. The monies provided by HMG had clearly exceeded the costs of the works and therefore the £594,836 should be repaid to the Secretary of State.
- 5) Title to the collections vested in the responsible minister. Under the Commonwealth Institute Act 1958 the responsible minister could dispose of objects in the collections which appeared to have ‘become useless’ for the purposes of the relevant organisation. This power did not go far enough, however; by 2003, when the deed of gift was executed, the Commonwealth Act 2002 had come into effect and the limitations on the powers of the responsible minister had ceased to exist. As a result of this change in legislation and due to delivery of the physical custody of the collections having been effected, the title to the collections therefore vested in CIC. CIC could then, under its memorandum of association, dispose of the property and the gift to successor charity was effective. The declaration sought was given.
- 6) As to claims arising out of the circumstances surrounding the severance, the liquidators concluded that it was not appropriate to bring any claims and that they should proceed to a final distribution. The court agreed, finding that no one owed a fiduciary or contractual duty to the CIC and therefore there is no suggestion of a cause of action or of a commission of any tort. The direction sought by the liquidators was given.