SHIFTING PARADIGM OF INVESTMENT BY CHARITIES

• Citation: (2018) 30 SAcLJ 271
• Published date: 01 December 2018
• Date: 01 December 2018

This article argues that charitable identity is dependent primarily on executive provenance. That explains the nature of the public interest in charity law and is the reason that there must be a uniform approach to what application of charity assets to charitable purposes or charitable success means regardless of the legal form of the charity. Further, the article argues that for the sake of charitable success, the focus should generally be on exercise of teleological judgment rather than on exercise of care by charity trustees in investment situations. This means that such charity trustees should be judged in accordance with the business judgment rule in a manner similar to business directors, save that the standard of appraisal should be objective and not subjective and unless the governing instrument of the charity prohibits in effect application of the rule.

I. Introduction

1 There are two ways to think about investment by a charity. In the passive-income sense, which is first, investment is a means of earning income from putting charitable funds in investment instruments such as bonds and equities. This notion will be irrelevant to fund-raising charities maintained wholly by voluntary contributions which are to be expended immediately for charitable purposes. In contrast, charities with productive permanent endowments including mixed charities maintained partly by voluntary contributions and by endowment, and restricted-purposes charities which are only to expend the income from the principal, must invest their endowments or the corpus to generate the necessary investment income.1 The second is an active investment sense in which the notion of investment is strategic. Investment embraces any action that indirectly accomplishes the charitable mission or which strategically does so, such as by deferring accomplishment of a specific mission to a more opportune moment or

where there will be greater effectiveness or impact on public benefit in doing so. This article will argue that the active investment sense is a preferred construction where charity trustees are simply and typically charged to utilise a fund to carry out the purposes for which the charity is organised.2

2 Part II exposes a fundamental argument of the article. It contains a general discussion of the critical role of the Executive in the conceptualisation of charity duties by reference to successfully achieving the purposes for which a charity is organised. This conceptualisation is indifferent to the legal form and organisation of a charity.

3 Zooming in on investment-related duties, part III explores two existing conceptions of the duties of a fiduciary in an investment situation. The first stresses the duty to invest with reasonable care or prudence. The other conception stresses the duty of a disinterested trustee to act in the best interests of the charity (duty of good faith). In business contexts in which the duty is engaged, investment bears a wider meaning of any indirect action or strategic action which accomplishes the fiduciary's purposes.

4 Building on the conclusions reached in part II and the observations in part III, part IV argues that the duty of good faith is a more appropriate rule to govern investment by charity trustees. These conclusions are conspicuously true of charities which do not oblige trustees to generate income from an invested corpus. Part IV also considers more briefly whether the position is and should be different where trustees are obliged to accumulate passive income.

II. Legal form and executive provenance

5 Part II begins by setting out the pertinent background to the issues and arguments of this article. This somewhat lengthy excursus will serve to make two essential points. One is that substance rather than form is imperative when conceptualising charity duties by reference to securing effectually the intended charitable benefits. The second is that executive provenance is indispensable in the way charitable success is to

be defined.3 The clear conclusion is that charity trustees, whatever the legal form of the charity, operate under the same constraints imposed by executive approval of broadly and categorically defined charitable purposes. It will not be forgotten that these constraints are a necessary condition for the existence of a charity. Without an officially approved purpose, there can be no charity.

A. Irrelevance of legal form to charity distribution

6 First, the legal form of association as, or organisation of, a charity, and the divergent manner in which it holds its resources for the sake of its mission do not affect the conceptualisation of charity duties which secure effectual application of charity property to the designated charitable purposes. An incorporated charity4 is as a general rule the owner of its assets.5 However, what is more significant is that an incorporated charity has for its objects the charitable purposes or mission stated in its memorandum and articles.6 While not holding the assets on express charitable trust, the directors are charity trustees where they apply the corporate assets to such purposes as are charitable and are subject to the obligations imposed on charity trustees by the Charities Act.7 Directors of private charitable foundations are similarly treated. Such foundations are more likely than not established as incorporated charities, the directors being put in control of private funds for the purposes of making grants to other charitable organisations. They do not carry out charitable purposes directly but provide funds to those

who do. This distinctive feature, however, makes no difference. The directors of a private foundation are undoubtedly also charity trustees.8

7 A charitable society differs from the charitable corporation in that lacking a separate legal existence, the trustees of the assets of the society as designated custodian trustees will hold them on trust for the society's charitable purposes subject to directions of the executive committee members as charity trustees. The latter are of course subject to the Charities Act.9 In Singapore, the legal form of a charitable incorporated organisation is unavailable. So, there remains only the charitable purpose trust which is the simplest legal form for organising a charity. It goes without saying that the trustees holding property on a charitable trust are charity trustees although not owing duties to individual persons.10

B. Irrelevance of legal form to formation of charity property

8 A second point complements the first point about the irrelevance of form. This is that legal form and organisation of a charity also matters very little to the way charitable gifts and donations which make up the social wealth to be distributed to charity beneficiaries are conceptualised.11 The only thing that matters in the round is the charitable purposes of the gift or donation. Gifts to charitable companies are presumptively construed to be given for their general charitable

purposes, absolutely of course.12 Similarly construed are gifts to charitable societies. A fortiori, they are gifts on charitable purpose trusts.13 Thus, it befalls those who allege that the transfers are for restricted uses or purposes or that only the income derived from the transferred corpus may be used to prove that they are unrestricted and general.14 All transfers alike are construed in a benign manner.15 So, even where the transfers are restricted, charity trustees are permitted to commingle the funds separately transferred for investment purposes.16 They should, of course, keep separate accounts in respect of these funds. There is some complication when gifts are earmarked for named and particular charitable companies or societies which have ceased to exist or otherwise are given under circumstances which call for application of the gifts cy près, if at all. Where the gift cannot be distinguished from the exact identity of the donee, and no other institution can be identified as fulfilling the purposes of the donee,17 or the donee cannot be identified as the donee intended despite changes in its constitution or condition,18 or if an out-and-out intention existed or a general charitable intention cannot be found,19 the gift is held on a resulting trust for the donor. What is significant is that cases where the gift is held on resulting trust are uncommon.

C. Irrelevance of legal form to charitable identity

9 The irrelevance of legal form to both the creation and distribution of charity property, as has been shown, reveal above all a fundamental and underlying irrelevance of legal form in the conceptualisation of charitable identity or what is a charitable purpose. Without exception, the existence of a charity (as Lord Macnaghten observed in Special Commissioners of Income Tax v Pemsel20 (“Pemsel”) depends entirely on what purposes are approved. Never questioned in Singapore, the classification of approved purposes in Pemsel was

recently reaffirmed in the Court of Appeal.21 As a result, there are still only four categories of charitable purposes, namely, relief of poverty, advancement of education, advancement of religion, and purposes beneficial to the community within the spirit and intendment of the preamble to the UK Charitable Uses Act 160122 (“CUA 1601”). The first three apparently were recognised in the inherent jurisdiction of the Court of Chancery while the fourth originated from the 1601 statute.23 Most importantly for our purposes, despite these differences in provenance, all four categories are marked by the same two basic characteristics expressed in the formulation of the fourth category. These are that the purpose must in the abstract and in law be capable of benefitting the public (the spirit and intendment requirement of what the Government considers important)24 and that in the circumstances of any case there is in fact sufficient or demonstrable public benefit (what the court's judge to be...