Cy-près engaged to revive the “spirit” of the long-forgotten “English Method”

Zedra Fiduciary Services (UK) Ltd v H.M. Attorney-General [2023] EWCA Civ 1332

This appeal was brought by Zedra Fiduciary Services (UK) Ltd (Zedra), the current Trustee of the Trust, against H.M. Attorney-General (the Attorney-General) and concerned the appropriate application of funds held on charitable trusts under a cy-près scheme. 

Key takeaways

• The three factors found at Section 67(3) of the Charities Act 2011 are equally important when considering the appropriateness of a proposed cy-près scheme and should not be viewed in isolation from one another.
• Charitable trustees should consider whether the provisions of the Charities Act 2022 may negate the need for them to make an application for a cy-près scheme, in cases where the funds they are handling are worth less than £1,000, and the gift in question meets the new criteria.

Background

In 1927 Mr Gaspard Farrer (the Settlor), a recently retired partner of Barings Brothers & Co Limited (Barings), conceived of establishing a fund which would, over time and with further contributions, pay off the National Debt. At the time, the National Debt (which had existed since 1694) had increased significantly, from £0.6 billion to over £7 billion, as a result of the cost of World War One. It was Government policy, in the years following World War One, to put in place measures to reduce the National Debt. This was called the “English Method” of financing war expenditure, first presented to Parliament by Reginald McKenna, Chancellor of the Exchequer, in June 1915. The belief was that the cost of war should be borne by the current generation, rather than being passed on to future generations. 

The so-called “McKenna rule” committed the government to pay off the National Debt through a series of primary budget surpluses. The Government established a new sinking fund, to which annual contributions would be made for the purpose of retiring the National Debt. Therefore, by a deed of trust dated 9 January 1928 (the Deed) Barings settled an amount of cash and securities initially valued at almost £500,000, (the National Fund) to meet this purpose. Beyond the Settlor’s contributions, a few further contributions were made to the National Fund, with the last of these contributions being made in 1982. 

At the date of the Deed, the National Debt was valued at £7.6 Billion, and by 1928, the National Fund was valued at approximately 0.007% of this amount (£536,384). However, by 31 July 2020, the National Debt had reached the sum of £2,004 Billion, at which time the National Fund was only valued at 0.026% of this amount (£512.2 million).

In 2020, the Attorney-General brought proceedings (the First Hearing) to confirm that the Deed created a valid charitable trust and that the National Fund could and should be immediately applied to the reduction of the National Debt. Zacaroli J found in favour of the Attorney-General, but deferred consideration of whether the court should make a scheme, under its cy-près jurisdiction, and which cy-près scheme would be appropriate, to a later hearing. 

In 2022, the Attorney-General brought further proceedings in this regard (the Second Hearing), at which they and Zedra presented competing schemes. The Attorney-General contended that the National Fund should be applied to reduce the National Debt now, while Zedra argued that the National Fund should be applied for general charitable purposes in the UK. Zacaroli J found in favour of the Attorney-General, that the application of the National Fund in reduction of the National Debt, was the most appropriate course of action.

In the present proceedings (the Appeal), and as explored further below, Zedra brought an appeal against this decision.

Application of the Cy-près Principles in the First and Second Hearings

The doctrine of cy-près was developed by the Court of Chancery in succession to the ecclesiastical courts. It is only applied in very few cases, namely where: 

• the original purposes of the charity failed at the outset;
• the fulfilment of the original purposes of the trust became impossible to fulfil; or,
• the funds of a charity became surplus to its needs.

In such circumstances, the court asserted a power to apply the charitable funds cy-près, i.e., “as close as possible” to the original purposes of the trust.

In consideration of the expert witness evidence produced at the First Hearing, Zacaroli J found that at the time of the initial gift to form the National Fund, there was a reasonable prospect that it would be practicable to apply the fund representing the initial gift to discharge the National Debt at some future time, but that as at the date of their supplemental joint report (September 2020) the likelihood of the National Fund ever being sufficiently large to discharge the National Debt at a future date was "vanishingly small." The experts also confirmed that “it would not be the “game-changer” in the way that the original benefaction was arguably envisaged.” The National Fund would simply, marginally reduce the extent to which the National Debt increases. Therefore, the fulfilment of the original purposes of the trust had become impossible to fulfil, meaning that Section 62 of the Charities Act 2011 was engaged, which would allow the property to be applied cy-près. In such circumstances, Section 62(1)(a) (ii) provides that, 

“the original purposes of a charitable gift can be altered to allow the property given or part of it to be applied cy-près […] where the original purposes, in whole or in part cannot be carried out, or not according to the directions given and to the spirit of the gift”. 

Further, Section 62(1)(e)(iii) requires that regard is given to the appropriate considerations, when the court applies its jurisdiction to make a scheme altering a charitable trust pursuant to its cy-près jurisdiction. Therefore, at the First Hearing, Zacaroli J considered the three factors at Section 67(3) of the Charities Act 2011, namely:

1. the spirit of the original gift;
2. the desirability of securing that the property is applied for charitable purposes close to the original purposes; and,
3. the need for the relevant charity to have purposes which are suitable and effective considering the current social and economic circumstances.

In the present matter, the Attorney-General’s proposed scheme most closely aligned with Factors One and Two, while Zedra’s proposed scheme most closely aligned with Factor Three.  Though Factor Three is a key factor for consideration, Zacaroli J concluded that it did not outweigh the other Factors, and so found in favour of the Attorney-General’s proposed scheme.

The 2023 Appeal 

The appellate court had an “evaluative judgement” to make of Zacaroli J’s decision, having regard to the three Factors under Section 67(3). This meant that, per Re Sprintroom Ltd^[1], only in the case that there had been “some identifiable flaw” in Zacaroli J’s decision, such as “a gap in logic, a lack of consistency, or a failure to take account of some material factor, which undermines the cogency of the conclusion,” would the Court of Appeal overturn the judgement. 

Regarding the three Factors, the Court of Appeal explained that, while none of them rank hierarchically, nor should they be considered in individual vacuums, it is ultimately a “value judgment for the court” to decide which scheme is the most appropriate, in the circumstances. The Court of Appeal also concluded that it was not for the court to question the wisdom of the original gift, provided that it was made for charitable purposes. 

In consideration of the Factors, the Court of Appeal:

1. agreed with Zacaroli J’s decision about the “spirit of the gift;” that the Attorney-General’s proposed scheme most closely aligned with Factor One;
2. explained that Zedra’s proposed scheme was not close to the original purpose (per Factor Two), and would not necessarily benefit the nation as a whole, or encourage altruism; the primary, original purpose of the National Fund was to discharge the National Debt, but reducing the National Debt was a secondary purpose of the National Fund; and,
3. emphasized that there is a “need,” rather than a desire for the relevant charity to have purposes which are suitable and effective considering the current social and economic circumstances (per Factor Three); the words “suitable” and “effective” cannot be divorced from the original purposes; and,
4. while the effect of the National Fund being applied to reduce the National Debt, would be negligible, (with the National Fund effectively disappearing, except in the form of a book entry), it was never any part of the Settlor’s intention to establish a permanent endowment fund for general charitable purposes. Therefore, it would still be more “effective” to the original purpose of the National Fund, to apply it to reduce the National Debt, than to apply it for general charitable purposes.

Accordingly, the appeal was dismissed. 

The future of the cy-près doctrine

The recent Charities Act 2022 is expected to come into effect in January 2024, and will amend the Charities Act 2011. In part, this amendment will have an impact on the application of the cy-près doctrine moving forward. Charitable Trustees will benefit from a new power in relation to both initial failure and surplus cases. Where funds do not exceed £1,000, and in line with certain other criteria, Charitable Trustees will be able to apply the funds for new purposes, rather than applying to the Charity Commission for a cy-près scheme.  

While the gift in the case considered in this article would not meet this criteria, in view of its scale and the fact that the purpose of the fund did not fail initially, Charitable Trustees should be aware of this update. These changes should make things easier for charities, by streamlining the process for applying certain funds cy-près and allowing for smaller gifts to be made without permission.

 
[1] [2019] EWCA Civ 932