A practical but slightly cumbersome hangover where charities have merged is the need to retain the shell of the transferor charity, rather than winding it up following completion. Typically this is to avoid the risk of failed legacies. Despite statutory provisions (and the introduction of a register of charity mergers) that were intended to prevent such a failure, there are still shortcomings. The Law Commission's recent report on technical issues in charity law has confirmed that there may still be reasons why retaining a shell charity is beneficial.

Failed Legacies

Amongst a very wide range of other issues, the Law Commission considered the specific difficulty that arises in relation to charity mergers. This is that a legacy to the transferor charity may fail after the merger, even if the transaction is recorded in the register of charity mergers. This risk arises because the legislation does not expressly encompass bequests that have been made to charities that have ceased to exist at the date of the testator's death, even if the reason that they have ceased to exist is because of a merger.

The report recommends a change to those provisions that would help to avoid the risk of failure of a legacy in these circumstances. If enacted, the provisions would have the effect that a legacy would take effect as being for the transferee in a merger, even if the original charity (the transferor) has ceased to exist post-merger.

The report also recommends that the amendment should have retrospective effect. This is in the sense that it should capture any bequests arising after the commencement date of the new legislation, whether the Will (under which the bequest is made) was drafted before or after the commencement date.

This is clearly all very welcome, in terms of proposals for dealing with this specific difficulty.

Other benefits of shell charities

The report goes on to highlight some other reasons why a transferor in a charity merger might want to keep a shell charity. The main reasons are:

  • Difficulties transferring a bank account from one entity to another – some banks (though not many) will treat an account as belonging to the transferee on a merger but unless the bank does so, all donations and standing orders will continue to be received into the transferor's account.
  • To keep an existing charity registration number – particularly where there is a strong charity brand and identity that should be maintained for some transition period after completion.
  • A lack of awareness of the register of charity mergers – which may lead executors of a Will to assume that a bequest fails because the transferor charity has ceased to exist. Here, the Law Commission recommends that the Charity Commission introduce a mechanism for highlighting, on the register entry for the transferor charity, some indication that it has been merged with another charity. Until the Charity Commission introduce the kind of mechanism that has been recommended, the register entry for the transferor charity would simply say that it has ceased to exist, if no shell charity is retained in the meantime.

Deciding whether to retain a shell charity 

Trustees will need to consider the risks of winding up the transferor charity post-merger. This decision must take into account the practical difficulties with maintaining a shell charity, such as the continuing administrative requirements for an organisation with no assets, both under charity law and, where applicable, company law.

The Law Commission has prepared a draft Bill to reflect its recommendations and enactment of the Bill would address the risk of failed legacies. For charities with significant legacy income we would certainly recommend a shell charity be retained following any merger as a short term measure, until it becomes clearer whether or not (and when) the Law Commission's proposals are likely to come into force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.