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Howard Lederman article ‘The purpose of the filter’ published by Trusts and Estates Law & Tax Journal

Howard Lederman examines Garcha v The Charity Commission [2014], which clarifies when permission to bring charity proceedings under s115 of the Charities Act 2011 will be granted.

Permission to bring Charity proceedings under section 115 of the Charities Act 2011 The purpose of the “filter”

Practitioners will be familiar with the requirement that “charity proceedings” are not commenced or continued unless they have the authority of the Charity Commission.  If consent is refused permission must be sought from a Judge of the Chancery Division under section 115(5) of the 2011 Act1. This article mentions some of the principles governing whether permission may be granted, recently by Norris J in Garcha v The Charity Commission [2014] EWHC 2754.  Permission to appeal his judgment has been granted.

The purpose of this filter in the Charities Act 1993 was said to be to prevent charities from “frittering away money subject to charitable trusts in pursuing litigation relating to internal disputes”2. This purpose is easy to understand. On other occasions the purpose of the filter has been said to be to prevent charities from being harassed by a multiplicity of hopeless challenges3. More difficult questions arise where the costs of the charity proceedings will not fall upon the charity’s funds. This might be because they are financed by a third party such as an insurer or by other funding arrangements. Are there other “policy” considerations the Court is entitled to take into account in deciding whether to grant permission to commence charity proceedings? If so, how are those to be adjudicated upon within the framework of section 115?

The decision in Garcha

The background was a Sikh Temple in West London where a newly elected committee had lawfully taken control of the Charity’s assets and wished to investigate expenditure upon legal costs incurred by a former committee. The new committee sought to commence proceedings for delivery up to obtain legal papers and documents to explain and assess the expenditure upon legal costs and whether those costs were properly incurred. The Charity Commission refused permission for the new elected committee to commence those proceedings. Norris J ultimately held that it was not in the interests of the charity to enable the current committee to investigate the costs incurred by the former committee as it proposed to do because this would amount to pursuing the “previous dispute”.

The decision whether to grant permission has been distilled into a number of principles which Norris J sought to apply in the Garcha case.  These are easy to state. In practice they encounter serious obstacles in some cases.

(1) The court is exercising an original jurisdiction. It is not an appeal against the decision of the commission

The Court is not restricted to a review of the decision of the Charity Commission. Unlike the Charity Tribunal’s jurisdiction in relation to reviewable decisions of the Charity Commission, the Court is not required to apply the principles of judicial review as section 321(4) of the 2011 Act requires.

This has important consequences for how the application for permission is managed:

• Those seeking permission may introduce evidence not available at the time of the Charity Commission’s decision.
• Evidence of events or circumstances post-dating the decision may also be relevant. Strictly it is not necessary for the applicants to show that the Charity Commissioner’s decision was wrong.
• It may be helpful to show that the Charity Commission did not address the relevant issues.

(2) The power to grant leave to take proceedings is conferred in unrestricted terms, though earlier decisions may illuminate its exercise

This principle gives the clue to the nature of the jurisdiction being exercised and its main advantages, as well as areas for concern. In the Garcha decision there was a very large membership of the Charity. Committee elections had been fought upon a manifesto. A new committee had been elected with a mandate to take particular action. The question arises whether in such circumstances this unfettered jurisdiction permits the Court to take a view about the best interests of the Charity which is not shared by the committee as the elected or nominated representatives of the membership. Such a decision may fall within the realm of a “policy” of a Charity or the “discretionary area of judgment” left to the elected decision makers by Charity’s constitution or Scheme. The comparison with the approach of the Courts to decisions of bodies subject to judicial review inevitably comes to mind. Does this part of the test permit the Court to substitute its view about the best interests of the Charity for that of the decision maker? Is the Court likely to ask the question whether the decision to commence or continue proceedings was within the range of reasonable decisions open to the decision maker?

Norris J held that it was for the Court to decide whether the commencement of litigation for delivery up of legal papers held by or on behalf of the former committee amounted to the “least unsatisfactory” way of resolving what he categorised as “the dispute” between rival factions represented by the two committees.

(3)  The weight to be attached to the Charity Commission’s decision

The Court is exercising an original jurisdiction when making a decision whether or not to grant permission for legal proceedings under section 115(5). Inevitably the Charity Commission’s refusal of permission to bring the proceedings will be an important part of the evidence. Norris J. held that the Charity Commission’s decision is entitled to respect because of the expertise brought to bear in making it.

In his decision in an earlier case (Rai) 4 Norris J noted the Charity Commission had developed a structured approach (recorded in Picarda “The Law and Practice Relating to Charities” 4th edition p. 919) identifying the following questions to be considered:-

a) Is the disputed matter properly pleaded?

b) Are there proper parties?

c) Does the proposed action raise issues of substance which should be addressed through the court?

d) Has the matter in dispute been brought in good faith?

e) Are there alternative ways to resolve the issues, and if so, have they been explored?

f) What are the costs of the litigation?

g) What values do the assets involved (financial, reputational or otherwise) have?

h) Would to grant or refuse an order authorising the proceedings interfere in a disproportionate or unjustified way with rights protected by the Human Rights Act 1998?

Norris J noted that the answer to each of those questions is likely to be informed by the Commission’s own experience (which is inevitably greater than that of the Court).This assumes of course that the Charity Commission’s decision is based upon all of the evidence available to the Court, which may not necessarily be the position.

(4) The merits of the proposed proceedings

There must, of course, be a legally sustainable claim to be advanced in the proceedings for which permission is sought (one that has a real as opposed to a fanciful prospect of success). This point adds little to the balancing exercise in many cases. If the proposed claim has a fanciful prospect of success it would probably be susceptible to an application to strike out or summary judgment in due course.  If the claim is doomed to fail, the permission application is of little significance unless the Charity’s funds, assets or reputation is put at risk.   It does mean that an Applicant will need to ensure that it can demonstrate by evidence at the application that the claim is at least arguable and there are no evidential lacunae.  Norris J accepted the proposed claim to be brought by the new committee on behalf of the charity was legally sustainable in the Garcha case.

(5) Bona fides of the decision maker

The proposed legally sustainable claim must be advanced in good faith. Again this probably adds little to the balancing exercise in many cases. If the decision to make a claim is exercised for improper or ulterior purposes, it is unlikely to be within the terms of the charitable trust and/or the Charity’s constitution. If the Charity is a company, compliance with the duties imposed upon directors and others by the Companies Act 2006 might be relevant under this principle. The bona fides of the applicants was not an issue in the Garcha case.

(6) Use of Charity funds

Norris J held that it is not a sufficient that there is a legally sustainable claim advanced in good faith, as the underlying purpose of the filter is to prevent the resources of the charity being frittered away on internal disputes. Few would quarrel with this as a guideline or factor potentially relevant to the filter exercise to be performed under section 115 of the 2011 Act. Charity funds were not at risk in the Garcha case and appropriate conditions or undertakings could be imposed as a condition of grant of permission. Norris J appeared to accept the principle that appropriate conditions could be imposed or undertakings required as a condition of granting permission under section 115 of the 2011 Act

(7) The “least unsatisfactory course”

Norris J’s view of this principle was the court must ultimately be satisfied that the commencement of the proposed litigation is the “least unsatisfactory” course having regard to the interests of the charity as a whole.  This was a key factor in Norris J’s decision in the Garcha decision.

Norris J thought it was appropriate to give precedence to his view of the best interests of the charity.

In some respects part of this test can be easily assessed. Compliance with pre-action Protocols and offers of alternative dispute resolution are objective hard edged measures of compliance which can be used to see whether litigation is an appropriate use of the Charity’s resources. This was not an issue in the Garcha case. The omission to explore alternatives to Court proceedings is unlikely to be an issue in many cases where the Charity or persons interested have been appropriately advised.

Is the least unsatisfactory course test appropriate?

In some cases the decision makers or those seeking permission to bring charity proceedings will be sophisticated individuals who have been in receipt of independent legal advice where all the other elements of Norris J’s principles have been satisfied. In such cases it may be arguable the Court should ask the question whether the decision to commence charity proceedings was within the range of decisions which a reasonable decision maker could make5.

In other contexts where there is a power in the constitution to commence such proceedings, the Court will not ordinarily interfere in the exercise of a discretion by a charitable trustee when acting bona fide in what is honestly considered to be the best interests of the beneficiaries.

Is the “least unsatisfactory course” test compliant with rights protected by the Human Rights Act 1998?

In some cases, the effect of the Court’s decision not to grant permission to commence proceedings under section 115 of the 2011 Act may be to deny access to a Court to a individuals managing assets for the charity in respect of their civil rights or amount to an interference with rights of property protected by Article 6 and Article 1 of the First Protocol of the European Convention on Human Rights.

  • In these cases the issue will be whether the refusal of permission under section 115 amounts to a proportionate or reasonable means of achieving a legitimate aim.  Even if the section 115 procedure requiring permission satisfies that test the question arises whether the approach taken by the Court on such an application satisfies that test.
  • This issue is likely to require an assessment of whether there is a relationship of proportionality between the Court’s assessment of the interests of the Charity contemplated by the proposed proceedings, and the decision to refuse permission6.  Inevitably this will be a fact specific decision.
  • Where a Charity seeks to investigate the propriety of expenditure and the commencement of proceedings is a necessary step in that investigation, it will rarely be proportionate to refuse permission on the ground that the Court’s view is that such a refusal is the “least unsatisfactory” course.
  • Where the decision to commence proceedings is that of the Charity and governed by a Scheme or other document such as a constitution, it is suggested the approach taken by the Administrative Court to decisions  which are the subject of review, would automatically take into account the Convention Rights of those interested in the Charity such as trustees and members, if there was evidence that some members of the Charity or beneficiaries would be disadvantaged by the decision of Charity Trustees (or others) to commence or continue proceedings. Otherwise the Court should be slow to interfere with a decision to commence proceedings which was within the range of decisions which could be reached by such a person nominated by the Charity’s governing instrument. If this is not the test, there is the danger that the least unsatisfactory course test may result in a decision which is not proportionate to the aim of filtering out hopeless claims or protecting the Charity’s funds.

The views expressed in this article are those of the author. They are not necessarily shared by his instructing solicitors or clients.

Howard Lederman
Barrister

Howard Lederman was Counsel for the Applicant in Garcha v The Charity Commission [2014] EWHC 2754.
All rights reserved.

Footnotes:

i. Charity “proceedings may nevertheless be entertained or proceeded with if, after the order had been applied for and refused, leave to take the proceedings was obtained from one of the judges of the High Court attached to the Chancery Division”
ii. Muman v Nagasena [2000] 1 WLR 299
iii. Scott v National Trust [1998] 2 All ER 705 at 713; Hampton Fuel Allotment Charity [1989]1 Ch 484 at 494A-B.
iv. Rai  and others v  Charity Commission [2012] EWHC 1111
v. Boddington v British Transport [1999] 2 AC 143 at 175
vi. Ashingdane v United Kingdom (1985) 7 EHRR 528 , para 57 and Seal v Chief Constable of South Wales Police [2007] 1 W.L.R. 1910 at para [20]

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02.07.2015