Trusts (Capital and Income) Bill [HL]

Lord Phillips of Sudbury Excerpts

Wednesday 25th April 2012 Grand Committee

[Lord Phillips of Sudbury]

My Lords, I endorse the commendation of my noble friend Lord Henley for the work of the Law Commission. It is one of the unsung heroes of the forest of the law and, within it, it is a true forester.

It is particularly warming to know that the report upon which this Bill is based is but three years’ old, which, in terms of this kind of legal reformation, is but a twinkling of an eye. Indeed, the Minister said that the reform vis-à-vis the fruits of demergers was partly in the Bill to rectify the fact that as the law presently stands only indirect mergers are, so to speak, saved, and now direct mergers will be in the more flexible regime.

It is perhaps amusing to remind the Committee that the ruling to which the Minister referred which enabled indirect mergers to result in the apportionments that the court decided was given in the case of Bouch and Sproule, which was no less than 125 years ago. So spreading the benignity of Bouch and Sproule has taken rather than longer than some of us would have wished.

I also cannot resist a nostalgic view of this debate. The Minister talked of his time at the Bar. My earliest days in the law were spent studying trust accounts in 1958. The very cases to which he referred—Howe v Earl of Dartmouth, Allhusen v Whittell and Re the Earl of Chesterfield’s Trusts—are names that adorn the wall of my lavatory. Incidentally, I think Howe was a predecessor of our dear friend, the noble Earl, Lord Howe. They are some of the most complex, arcane, time-wasting and lawyer-infested rules that still apply in our world. Therefore, this is a happy day and I have little to say apart from expressing happiness, except for two points.

The first relates to the drafting of Clause 3. As the Minister clearly described, this provision gives trustees the power to compensate income beneficiaries when there is a direct demerger. I am well briefed on this point by the Law Society, which has a committee to look at such things that is comprised of horny-handed practitioners. They and I feel that subsections (1), (2) and (3) could be more clearly drafted. The particular point that exercises us is that exactly what the trustees are empowered to do is not as clear as it could be. That is, what is the nature and extent of their discretion? Is it an absolute or a qualified discretion? The language of the three subsections states, for example, “the trustees are satisfied”, “the trustees may” and “the trustees consider”.

It is perhaps unfair to ask the Minister to comment on these matters instantly, but after today I hope we will at least consider the potential improvement of three quite difficult subsections. We do not want to put trustees—who, let us not forget, are nearly all volunteer trustees—into a position whereby some aggressive beneficiary or potential beneficiary could try to sue them over the way in which they have exercised the power given to them by this clause.

My second point concerns the Charity Commission, which is extremely useful. At present, for many charities that have permanent endowment—which more have than some realise—it is a real palaver to apply to the commission for an order, and for that order to be considered, made and executed. A great deal of time, effort and expense is wasted because of that state of affairs. It is therefore extremely beneficial and has no down side at all that the Bill will allow the commission—if it so wishes, as I am sure it will—to make regulations that will enable all charities in the future to make provision vis-à-vis endowed property, without applying formally for an order from the commission.

With those few remarks, I thank the Government and all those involved for bringing forward an arcane but none the less very important and practical set of proposals that will make more of a difference than many realise.

--- Later in debate ---

[Lord Beecham]

My Lords, I join other noble Lords in congratulating the Minister on the clarity of his exposition of this intrinsically complex area, and in congratulating the Law Commission on producing the report. As the Minister reminded us, the process began eight years ago, so it has not quite reached the proportions of Jarndyce v Jarndyce. The commission has certainly done a thorough job.

My acquaintance with the rules of apportionment began with my law degree and effectively ended with the solicitor’s final examinations to which the noble Lord, Lord Phillips, referred, save that I learnt to take the precaution of ensuring that the rules were excluded from any will I subsequently drafted. Of course, that will now no longer be necessary. It will be a case of opting in rather than opting out, for which the commission and the Government should certainly take credit.

This afternoon I find myself visited by a slight sense of déjà vu. Many years ago I found myself acting in a divorce case and waiting for my case to be called on behalf of my petitioning client. I sat next to the counsel in the preceding case, a delightful if somewhat eccentric individual. For the avoidance of doubt, it was not the Minister on that occasion. At one point counsel turned to me and said, “Mr Beecham, where is the petition?”. I had to reply, “I am not instructing you”, to which he replied, “I know, I know, but where is the petition?”. Around three weeks ago, my noble friend Lord Bach said to me, “You are to be in charge of this Bill”. It was a visitation that was quite unlooked for. Nevertheless, I am here today to represent the Opposition on this matter and to welcome the simplification that the Bill embodies, in relation to both the rules of apportionment and, in particular, the position in respect of charities and the question of total return. I declare an interest as a trustee of the Trusthouse Charitable Foundation, which already operates a total return policy.

The noble Lord, Lord Phillips, referred to the Law Society briefing, for which I am very grateful. The Law Society is a body to which President Kennedy’s memorable injunction is often thought by solicitors to apply: “Ask not what the Law Society can do for you, but what you can do for the Law Society”. On this occasion, the Law Society has done us all a service in a briefing that contains the recommendations that the noble Lord, Lord Phillips, referred to in respect of Clause 3, where it suggests a new subsection and some clarification. I hope that can be shared with the Minister following this Second Reading, if he has not yet seen those proposals. They seem to make sense in exactly the way that the noble Lord, Lord Phillips described.

Other of your Lordships have made points particularly in relation to the position of charities and, in the case of the noble Lord, Lord Hodgson, in respect of cathedrals. Those matters seem to be worth pursuing. I had the same question in my mind as the noble Lord, Lord Higgins, about whether it is necessary to include a reference to existing trusts in the Bill. That is a matter that I am not qualified to make a judgment about, but it might usefully be considered, because if it is not currently possible for existing trusts to modify the rules then it would seem that they ought to be given that opportunity. They would not have to take it but it might be relevant. That is perhaps, again, a matter that we could return to in Committee.

In principle, and so far as the thrust of this short Bill is concerned, we are completely at one with the Government and look forward to concluding this matter rapidly for the benefit of trustees, beneficiaries and charities.

[Lord Phillips of Sudbury]

My Lords, I should have declared an interest earlier, which I need to do now. I am the founder of, and am still a consultant to, a firm of charity lawyers, Bates Wells & Braithwaite. I should have said that and apologise for not so doing. I will not enumerate the charities of which I am a trustee.

[Lord Henley]

The Committee will be grateful to the noble Lord for that declaration of interest.

I start by congratulating the noble Lord, Lord Beecham, on being the first speaker in this debate to mention Dickens, in this bicentenary of his death. I was wondering how long it would be before Jarndyce v Jarndyce appeared, and assure him that I was about to mention it. Although the noble Lord says that this has been only eight years in gestation, as my noble friend Lord Phillips put it, if we go back to a case that I was not familiar with but which is no doubt up on the wall in the noble Lord’s lavatory, Bouch v Sproule, that was some 125 years—so it has been going on for a considerable amount of time.

I hope to deal with some of the points that have been raised, but give an assurance to the House that this is the beginning of proceedings. We have rather a good form of procedure before us for these Law Commission Bills, which will allow this Bill to be properly scrutinised later on in Committee. Another place will also scrutinise the Bill properly—as it always does—in due course. I am sure we do it slightly better, but another place will have its role to play. I can give that assurance to my noble friend Lord Higgins—this is not some odd procedure whereby the Bill comes only to this House. It will go to another place in due course.

The first point that came up was raised by my noble friend Lord Phillips about Clause 3 and the discretion that is available to the trustees. What qualification was there for that discretion and might there be some alarm among trustees about whether they could be liable for how they exercise it?

I say to my noble friend that the Bill has so far been very carefully constructed. It has been looked at by many people of much greater erudition than me and, possibly, of even greater erudition than my noble friend. They have taken these points into consideration but the great advantage of this procedure is that we can look again as the Bill goes through the House. It is certainly something to which my noble friend might want to come back in Committee when we get to that stage, at which point our mutual noble friend Lord McNally will be dealing with the Bill for the Government. It will be a matter for that Committee.

[Lord Phillips of Sudbury]

Can I take it that the Minister will be happy for consultation with his officials to take place on this matter?

[Lord Henley]

Obviously, we are always more than happy for there to be consultation before, during and whenever to deal with these matters. They ought to be looked at and that is how we get the right result in the end on all Bills. It is something that we would more than encourage. I am sure the noble Lord will be in touch with the officials, and that he has already spoken to them, the Charity Commission and the Law Commission at some stage.

I move on to my noble friend Lord Hodgson’s concerns about whether the regulations in Clause 4, particularly the total return investment regulations in new Section 104B, will be too restrictive. Again, this is a matter that we will need to look at in some detail. However, it is a matter that the Charity Commission should be able to get right following consultation. I am certainly confident that it will strive to ensure that the regulations achieve just the right level of trusting the trustees to get things right and protecting charity funds. It is a matter that I hope the House will look at in detail.

I understand my noble friend’s concerns about English cathedrals and that he raised the matter at the Peers’ briefing in March. As a result of ongoing discussions at official level between the Ministry of Justice, the Law Commission, the Charity Commission and the Church Commissioners, they are all looking at the issue. In essence, the Association of English Cathedrals, which represents all the corporate bodies of our 42 cathedrals, has asked that Clause 4 be extended to include the cathedrals in its scope. The association considers that this would benefit the 20 or so cathedrals that have permanent endowment. That would put those English cathedrals on the same footing as the Welsh cathedrals. However, unlike cathedrals in Wales, cathedrals in England are not subject to the general regulation of the Charity Commission. The Government will consider the request from the Association of English Cathedrals carefully, but at present no final decision has been taken.

I cannot remember whether it was on this issue or another that my noble friend speculated as to whether the word “Resist” appeared in my briefing. I can assure him that it does not, although it might appear later as we discuss these matters further. However, this is not really a matter for the Government to resist; it is a matter for all of us to make sure that we get right. Again, I stress that this is not a government Bill; it is a Law Commission Bill, which we are ensuring gets on to the statute book.

My noble friend also asked about social impact and mixed-motive investment. The Government acknowledge that social or mixed-purpose investment is a highly important issue and are grateful to the noble Lord for drawing attention to it, both today and as part of the work of his ongoing review of charity law. The Government’s ambition is that social investment should become a major source of finance for the social sector. To this end, the Cabinet Office’s social investment team is working with other government departments to make this vision a reality. Social or mixed-purpose investment did not, however, form any part of the Law Commission’s work on capital and income in trusts and therefore has not been included in the Bill, by the Law Commission in its report or by the Ministry of Justice in its consultation. Therefore, at this stage we would not want to see anything further added.

I have already dealt with the question from my noble friend Lord Higgins as to whether the Bill will go to the Commons. I can give that assurance. My noble friend also asked whether it will apply only to new trusts, which I think was a question also raised by the noble Lord, Lord Beecham. I can give an assurance that the reform is prospective only. We believe that retrospective interference with existing trusts could frustrate the intention of the person who created the trust, contrary to the general principles of trust law. However, as the noble Lord, Lord Beecham, reminded us, in any drafting of trusts that he has been doing over the last however many years, he has been excluding the rules in Howe v Earl of Dartmouth and others, just as, I imagine, most practitioners have been doing.

My noble friend Lord Higgins also asked about the letter and whether there was going to be any effect on small and medium-sized businesses. We believe that it is unlikely to have a major effect on small and medium-sized enterprises. However, the impact assessment published by the Ministry of Justice states:

“While a reduction in the complexity of the current legal rules may lead to a very marginal reduction in trust related business for small legal firms and trust service suppliers, this is expected to be more than offset by reduced costs for trusts. Small legal firms and trust service suppliers may also benefit from additional business if there is an increase in the number of charities operating total return investment … We do not consider that the Bill is likely to have a disproportionate impact on the operations and performance of small businesses compared to others”.