Governance of charitable trusts – and how the new Trusts Act 2019 might impact

by Sue Barker
6 December 2019

There appears to be a trend in New Zealand at the moment for incorporated societies to restructure as charitable trusts: many incorporated societies appear to be struggling to find sufficient members, and/or to attract those members they do have to attend general meetings. Yet, despite this, many are finding newsletter readership and social media presence growing, with more people offering their time and money to help their organisation, without necessarily seeking formal “membership”. These factors, coupled perhaps with a focus on structure precipitated by the proposed new Incorporated Societies Bill (expected to be introduced into Parliament this year),[1] appear to be making the more “nimble”, autocratic charitable trust structure seem more attractive to some charities.

Choice of structure is, of course, a decision for an individual charity to make, guided by its rules, particularly its charitable purposes, and the applicable law. However, in making made the decision to restructure as a charitable trust, it is important to bear in mind that governance of a charitable trust is different to governance of an incorporated society. Of course, there are areas of overlap, but there are also some key differences.

Amending the trust deed

One of these differences relates to the ability to amend the charity’s constituting document. Fundamentally, an incorporated society constitution might loosely be thought of as a type of contract between its members and the society (see for example clause 26 of the Exposure Draft Incorporated Societies Bill).[2] It therefore seems reasonable for the “contracting parties” to review the terms of their “contract” from time to time, and it is common for incorporated societies to include, as a standing agenda item at each annual general meeting, suggested amendments to their constitution.

By contrast, the general rule with respect to charitable trusts is that, once established, the trust deed cannot be varied. The concept of a trust appears to have begun in 13th century England, when people left their property to be held by a trusted friend or relative for the benefit of their family while they went away to fight in the Crusades.[3] In other words, a trust is a legal relationship, rather than a legal “entity”, and the fundamental principle is that “settlor autonomy”, as expressed in the trust deed, should be maintained. This means that, even where a trust deed contains a clause allowing the trust deed to be amended, as most modern charitable trust deeds do, trustees cannot use this “variation power” to remove a specific restriction to which they were subject from the very foundation of the trust.[4] It is also risky to use a power of variation to change the fundamental provisions, or the “substratum”, of the trust.[5] The substratum would likely include the charitable purposes of the trust.

Duties of trustees

Another area of difference relates to the duties of trustees. The Trusts Act 2019 aligns with developments in a number of other areas of New Zealand law by setting out the duties of trustees in statute, “to provide guidance to individual trustees who need to understand, without reference to large tomes or compendia of cases, what their basic obligations as trustees are”.[6] Although there is overlap between the duties of directors in sections 131-138 of the Companies Act 1993, the duties of officers of incorporated societies in clauses 48-55 of the Exposure Draft Incorporated Societies Bill, and the duties of trustees, the duties do not align entirely, and all trustees of charitable trusts should be familiar with the 5 mandatory duties and the 10 default duties set out in sections 21 to 38 of the Trusts Act 2019.

Delegation power

Another area to be aware of relates to the power to delegate. In principle, trustees have a duty to act personally, and for that reason, the powers to delegate set out in sections 67-72 of the Trusts Act 2019 are tightly constrained. For example, section 67(3) makes it clear that a trustee may appoint an agent in respect of “administrative functions” only; the provision does not permit the delegation of “trustee functions”, or fundamental decision-making powers, such as the determination of distributions. Under section 68, the trustee must also keep the arrangement under review and consider whether the trustee should exercise any power to intervene.

It is possible for a trustee to appoint a delegate to take their place fully, to exercise all of the trustee’s duties, powers and discretion, but section 70 makes it clear that this may occur only in limited temporary circumstances, such as absence from New Zealand, or temporary lack of capacity to perform the functions of a trustee. Such a delegation may also only be done by power of attorney (section 70(1)), and the safeguards set out in sections 70 to 72 provide a good indicator of when delegation is appropriate and when it might be better to resign.[7] In addition, if a trustee does not wish a delegate to exercise the trustee’s power to resign, the instrument of delegation would need to make this clear (section 70(6)).[8]

Section 67 may not provide sufficient power to appoint an investment manager to make all investment decisions regarding the investment of the trust fund. Similarly, section 70 would not allow delegation to an investment manager on an ongoing basis. If it is considered desirable to have the ability to appoint an investment manager, it would appear to be necessary for the trust deed to provide for this specifically.[9]

Conclusion

For a fuller discussion regarding the governance of charitable trusts, please see the CCH webinar which, at the time of writing, can be accessed on demand here: https://www.cchlearning.co.nz/events/2197-governance-of-charitable-trusts-2019-19-november-2019-on-demand/. Alternatively, please contact the writer at www.charitieslaw.co.

 

About the writer:

Sue Barker is the director of Sue Barker Charities Law, a boutique law firm, based in Wellington, specialising in charities law and public tax law. Since its founding in 2012, the firm has won a number of awards, including Boutique Law Firm of the Year at the New Zealand Law Awards. Sue is a director of the Charity Law Association of Australia and New Zealand, and a member of the Core Reference Group for the review of the Charities Act. Sue is also a co-author of the text, The Law and Practice of Charities in New Zealand (LexisNexis, 2013), and a contributor to Regulating Charities: the Inside Story (Routledge, 2017). In 2016, Sue was made an Honorary National Life Member of the National Council of Women of New Zealand Incorporated for her work assisting the Council with charities law issues. In 2019, Sue was awarded the New Zealand Law Foundation International Research Fellowship Te Karahipi Rangahau ā Taiao, New Zealand’s premier legal research award, to undertake research into the question “What does a world-leading framework of charities law look like?”, with a report due by March 2021.

[1] Although at the time of writing, there are only 6 Parliamentary sitting days remaining in 2019.

[2] https://www.mbie.govt.nz/assets/f35620d448/incorporated-societies-bill-draft-for-consultation.pdf, last accessed 6 December 2019.

[3] With apologies for the reference to an unpleasant time in history, see Law Commission Review of trust law in New Zealand: introductory issues paper, November 2010, paragraph 2.4: https://www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC%20IP19.pdf, last accessed 6 December 2019.

[4] See New Zealand Law Commission Review of the law of trusts: a trusts act for New Zealand, NZLC R130, August 2013 (“R130”) paragraphs 10.1 and 10.28.

[5] Varying trust deeds, G Kelly and K Lawrence, paper presented to the NZLS CLE Ltd Trust Conference – Trusts on Trial, June 2017.

[6] R130, paragraph 11.

[7] Law Commission Issues Paper 31 Review of the Law of Trusts – Preferred Approach, 13 November 2012 (“IP 31”) paragraph 4.39.

[8] IP 31, page 86; Law Commission Issues Paper 26 The Duties, Office and Powers of a Trustee: Review of the Law of Trusts – fourth Issues Paper, 30 June 2011 (“IP 4”), paragraph 5.13.

[9] IP 4, paragraph 5.34.

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