Scottish Court of Session Decisions

The statutory framework

[2] The Charities and Trustee Investment (Scotland) Act 2005 ("the 2005 Act"), which came into force in April 2006, introduced a new regulatory system for charities in Scotland. The petitioner is the holder of the Office of the Scottish Charity Regulator ("OSCR"). In terms of section 1(5) of the 2005 Act OSCR's general functions are: (a) to determine whether bodies are charities; (b) to keep a public register of charities; (c) to encourage, facilitate and monitor compliance by charities with the provisions of the 2005 Act; (d) to identify and investigate apparent misconduct in the administration of charities and to take remedial or protective action in relation to such misconduct; and (e) to give information or advice, or to make proposals, to the Scottish Ministers on matters relating to OSCR's functions.

[3] Section 3 of the 2005 Act requires OSCR to keep a register of charities to be known as the "Scottish Charity Register" ("the Register"). Section 4 makes provision for applications for entry in the Register. Section 5 makes provision for the determination of such applications and, in particular, provides that OSCR may enter an applicant in the Register only if it considers that the applicant meets the charity test. The charity test is defined in terms of section 7(1) in the following terms:

"A body meets the charity test if -

(a) its purposes consist only of one or more of the charitable purposes and

(b) it provides (or, in the case of an applicant, provides or intends to provide) public benefit in Scotland or elsewhere."

The charitable purposes are listed in sub-section (2). The phrase "public benefit" is defined in terms of section 8. Section 8(2), so far as material to the present case, provides:

"In determining whether a body provides or intends to provide public benefit, regard must be had to -

(a) how any -

(i) benefit gained or likely to be gained by members of the body or any other persons (other than as members of the public), and

(ii) disbenefit incurred or likely to be incurred by the public,

in consequence of the body exercising its functions compares with the benefit gained or likely to be gained by the public in that consequence."

In terms of section 13 a body entered in the register which is established under the law of Scotland, or managed or controlled wholly or mainly in or from Scotland, may refer to itself as a "registered Scottish charity".

[4] Chapter 4 of the 2005 Act provides for the supervision of charities. Section 28 provides that OSCR may make enquiries with regard to a charity. Section 30(1) provides as follows:

"Where it appears to OSCR, as a result of enquiries under section 28, that a charity no longer meets the charity test it must -

(a) direct the charity to take, within such period as may be specified in the direction, such steps as OSCR considers necessary for the purposes of meeting the charity test, or

(b) remove the charity from the Register."

Sub-section 3 provides that OSCR must, if a charity fails to comply with a direction under sub-section (1)(a), remove the charity from the Register.

[5] Where as a result of enquiries under section 28 it appears to OSCR that there has been misconduct in the administration of a charity, or it is necessary or desirable to act for the purpose of protecting the property of the charity or securing a proper application of such property for its purposes, certain powers are conferred on OSCR under section 31. In terms of section 106, the interpretation section, "misconduct" is defined as including mismanagement. These powers are provided by sub-sections (4), (6) and (7) of section 31. OSCR may suspend a person concerned in the management or control of the charity; it may give a direction restricting the transactions which may be entered into, or the nature or amount of the payments which may be made, in the administration of the charity without OSCR's consent; and it may direct any relevant financial institution or other person holding property on behalf of a charity or any person concerned in its management or control not to part with the property without OSCR's consent. These powers are subject, in terms of section 32, to a time limit of six months.

[6] Section 34, which is the section under which this petition is raised, provides for the powers of the Court of Session. Sub-section (1) provides that where it appears to the Court of Session that there has been misconduct in the administration of a charity or that it is necessary or desirable to act for the purpose of protecting the property of a charity or securing a proper application of such property for its purposes the court may exercise a number of powers. In terms of section 34(5) these include the following powers: to interdict the charity from such action as the court thinks fit; to appoint a judicial factor to manage the affairs of the charity; to suspend or remove any person concerned in the management or control of the charity; and to order any relevant financial institution or other person holding property on behalf of the charity or body or any person concerned in its management or control not to part with the property without the court's consent.

[7] The powers of the court under section 34 are wider than those of OSCR under section 31. These wider powers include the power of interdict and the appointment of a judicial factor. In addition, any order made by the Court of Session is not subject to the six month time limit.

[8] Section 99 makes transitional provision for the entry in the Register of a body which was previously entitled by virtue of section 1(7) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 ("the 1990 Act") to describe itself as a "Scottish charity". OSCR must enter such a body in the Register. That requirement does not affect OSCR's power to remove a charity from the Register under section 30.

The pleadings

[9] The ME Foundation ("the charitable company") was a recognised charity under the 1990 Act and on 1 April 2006 was entered in the Scottish Charity Register in terms of the 2005 Act. The objects of the charitable company include, inter alia, the relief of suffering and stress of people suffering from Myalgic Encephalomyelitis ("ME") by providing support to sufferers and disseminating information to sufferers, carers and the general public. It is not in dispute that the directors/charity trustees of the charitable company were Mrs Helen Armstrong, Mr Findlay Armstrong, Mr George Smart and Mrs Agnes Smart. It is common ground that the charitable company derived income mainly from sales at two charity shops to which members of the public donated goods.

[10] OSCR avers that in a number of respects the directors have been guilty of misconduct in the administration of the charitable company. These are set out in detail in the petition and are summarised in Statement of Fact 21 as follows:

"(a) Since inception in 1994 the foundation and the charitable company have recorded a total of incoming resources amounting to £2,595,474 and have incurred total expenditure of £2,215,051; (b) from 1 July 1995, the foundation and the charitable company have remunerated the four respondents as directors/charity trustees a total sum of £338,388, which remuneration at least since 1 July 1997 has been paid contrary to and in breach of the Company's Articles of Association; (c) since inception in 1994 the Foundation and the charitable company had remunerated relatives of the first respondent a total sum of at least £315,000 which, since the coming into force of the 2005 Act has been in breach of that Act; (d) the charitable company has paid, by monthly instalments of £1,666 the total sum of £160,000 to purchase eight plots of land to which it has no title in respect of six plots, and which it is now, on admission by the respondents, unable to sell; (e) the charitable company has paid rental for the shop premises at 8 Inverleith Gardens, Edinburgh, but has had no security of tenure and no leasehold interest in said premises; (f) in respect of four vans, all motor expenses, including the cost of petrol, have been borne in terms of the accounts of the charitable company by the charitable company out of its funds, and there has been no reimbursement to the charitable company in respect of personal usage or personal benefit by the director/charity trustees and other employees who have enjoyed personal benefit from the personal usage of said vehicles; (g) the decision to implement and continue with the project in Oban, to apply the resources of the charitable company in doing so and the manner in which it was done; and (h) the failure to review the expenses being incurred in the operation of shops or the extent to which they contributed to the assets of the charitable company and to reduce the expenditure or cease operation of the shops when taken together cumulatively give rise to circumstances which amount to misconduct by the directors/charity trustees in the administration of the charitable company."

(The purpose of the project in Oban was to develop a village where sufferers from ME could take breaks.)

[11] With one exception the respondents do not accept that there has been any misconduct. They accept that the four directors acted in the capacity of directors and employees of the charitable company. In Answer 15 it is admitted that the first to fourth respondents had breached the terms of the company's Articles of Association in being both members and directors of the company while in the employment of the company. It is averred that they were not knowingly in breach of the terms of the Articles of Association by doing so.

The history of the case

[12] On 10 October 2006 the Lord Ordinary appointed a judicial factor ad interim and made an order requiring the charitable company's bank not to part with any money from the charitable company's account other than on the instructions of the judicial factor ad interim. The petitioner now seeks an order sequestrating the estates and assets of the charitable company and the appointment of a judicial factor, together with the removal of the persons concerned in the management or control of the charitable company.

[13] When the case came before me, Mr Lake, on behalf of OSCR, invited me in terms of the first or second pleas-in-law to rule that certain averments made by the respondents should not be admitted to probation. Mr McIlvride, on behalf of the charitable company and the directors, invited me to allow a further hearing on the petition as a proof before answer on the whole averments and reserving all pleas meantime.

OSCR's submissions
(i) Answer 24

[14] In Statement of Fact 24, OSCR avers that it seeks an order sequestrating the estates and assets of the ME Foundation and the appointment of a judicial factor. Secondly, it seeks the removal of Mrs Helen Armstrong, Mr Finlay Armstrong, Mr George Smart and Mrs Agnes Smart being persons concerned in the management or control of the charitable company from any role in the management or control of it. In answer, the respondents aver that OSCR is under no necessity to seek these orders. After a general denial and quotations from sections 1(9), 28(1), 30, and 31(1), the answer goes on to aver as follows:

"In presenting this petition, and in seeking and obtaining the interim orders granted, the petitioner has not acted proportionately, et separatim has not acted transparently, et separatim has not targeted only cases in which action is needed. As a result of this petition and the actings of the interim judicial factor appointed on the dependence of the petition, the goodwill which previously attached to the company as a charitable body has been destroyed. The allegations made in the petition have [been] published in national newspapers circulating throughout Scotland. The shops operated by the company have been closed. The company's work force has been dispersed. The company's charitable activities have ceased. In the event the petitioner considered that any of the conduct complained amounted to misconduct he ought to have so advised the company and the first to fourth respondents. Had the first to fourth respondents been advised by the petitioner that being both employees, and directors and members of the company, amounted to misconduct they would have ceased to act in all of these capacities. Alternatively, in relation to any of the conduct complained of, the petitioner ought to have given directions in terms of section 30 et separatim section 31(1), (6) and (8) of the 2005 Act in order to bring such conduct to an end. Had he done so, he would have acted proportionately. He would have acted transparently. The present proceedings would have been unnecessary. The charitable benefit previously provided to the public by the company would have been retained."

Mr Lake submitted that the averments in Answer 24 after the words "quoad ultra denied" where they appear in line 2 of the Answer, should be deleted and should not be allowed to proceed to probation. He submitted that the averments in Answer 24 seemed to suggest some failure on the part of OSCR to behave in a proper manner, the effect of which was to disqualify it from making an application to the court under section 34. He submitted that there was no duty on OSCR to advise the respondents, or to use sections 30 or 31 before bringing proceedings under section 34. Mr Lake drew attention to the wording of section 1(9) which required OSCR to have regard to issues of proportionality and transparency. That section did not found the duty suggested by the respondents that the petitioner had a duty to advise or use sections 30 or 31 before bring proceedings under section 34. The respondents appeared to be converting the terms of section 1(9) into a duty dictating which of the provisions in Chapter 4 the petitioner was allowed to use. The statutory scheme comprised, not a hierarchy of provisions, but a number of possible approaches. It was a matter for OSCR's choice which was the most appropriate. Sections 31 and 34 were complimentary and were concerned with questions of misconduct and protection of property. There was nothing in the statute to suggest that the petitioner required to use section 31 first and then, only if that failed, to proceed to use section 34. In this case, the facts indicated that the appointment of a judicial factor was necessary and appropriate. In these circumstances there was no choice and the petitioner required to use section 34. It was for the court to consider whether the factors in section 34 were made out and it was the court's decision which powers to exercise. The petitioner was merely the applicant.

[15] Mr Lake submitted that there was no scope in the test in section 34 for the court to consider what other steps might have been taken by the petitioner. The availability of other powers which might have been taken was not a relevant consideration for the court in considering the whether the test of this conduct and protection of property was met.

(ii) Answer 3

[16] In Statement of Fact 3 OSCR avers that the charitable company is a registered Scottish charity, being a body entered in the Scottish Charity Register and being established under the law of Scotland. It goes on to aver that the charitable company was a recognised charity under the 1990 Act and was subsequently entered in the Scottish Charity Register in terms of the 2005 Act on 1 April 2006. In answer, the respondents, after some limited admissions and a general denial, go on to aver as follows:

"Explained and averred that entering the company in the Register in terms of section 99(1) of the 2005 Act did not affect the petitioner's power to remove the company from the Register under section 30 of the Act. Reference is made to section 99(2). Section 30 provides that where it appears to the petitioner as a result of enquiries that a charity no longer meets the charity test the petitioner must '(a) direct the charity to take .... such steps as [the petitioner] considers necessary for meeting the charity test or (b) remove the charity from the Register'. To determine whether a charity meets "the charity test" in terms of section 7 of the 2005 Act, the petitioner requires to consider inter alia whether the charity provides public benefit in Scotland or elsewhere. In determining whether the charity provides public benefit the petitioner is required, in accordance with section 8(2)(a), to have regard to how any benefit gained or likely to be gained by any member of the charitable body or any other persons (other than as members of the public) in consequence of the body exercising its functions compared with the benefit gained or likely to be gained by the public in that consequence. The petitioner was established by the 2005 Act. Before the 2005 Act came into force on 1 April 2006 a non-statutory predecessor to the petition had been set up. The staff who were to work for the petitioner from 1 April 2006 were recruited to work first for that non-statutory body. From around May 2004 the non-statutory body worked alongside the then Scottish Charities Office. The investigatory staff who were to be transferred to the petitioner on its establishment under the 2005 Act carried out inquiries into existing Scottish charities. Between around April 2004 and March 2006 the company provided those investigators with copies of all documents and further information requested by them. All of the matters now complained of by the petitioner in the present petition were disclosed at that time by the company. Esto the petitioner entered the company in the Register on 1 April 2006, he did not prior to the presentation of this petition direct the company to take any steps he considered necessary for meeting the charity test. He did not remove the company from the register. It is believed and averred he accordingly accepted at that time (i) that the company provided public benefit and (ii) that the benefit gained by the public as a result of the company exercising its functions outweighed any benefit gained or likely to be gained by the first to fourth respondents or any employees of the company."

[17] In relation to Answer 3, Mr Lake submitted that the averments in the passage quoted above should be deleted and should not be allowed to proceed to probation. He submitted that the test under section 34 was quite distinct from the charity test under section 30. OSCR did not seek to put in issue the question of public benefit and the balance of public benefit and benefit to the directors. OSCR's averments in relation to remuneration were in the context of misconduct. OSCR was not suggesting that the charitable company's purpose did not include public benefit. Nor was the petitioner in Statement of Fact 14 putting in issue the public benefit test in relation to the revenues of the shops being negligible when being compared to the expenses incurred. Compliance with the charity test was not being put in issue. What was being put in issue was the question of misconduct. Mr Lake submitted that there was no proper foundation for the inference which the respondents averred. The respondents were suggesting that because those steps had been taken under section 30, the charity test was met and the assumption made that one benefit outweighed the other. There was no requirement under section 8 for one benefit to outweigh the other.

The respondents' submissions

[19] Mr McIlvride indicated that he was not suggesting that the failure of the petitioner to take any steps under section 30 amounted to a defence or constituted a breach of duty on the part of the petitioner. All he was saying was that what the respondents offered to prove was relevant to the issue which the court would ultimately require to consider and in particular what orders, if any, should be made.

[20] Under reference to section 31(6), Mr McIlvride submitted that if there had been payments made by the charitable company to relatives of the directors which ought not to have been made, it would have been open to the petitioner to make a direction indicating that such payments could no longer be made. If, in the end of the day, that were the only example of misconduct which was proved, it would be open to the court, in exercising its discretion whether to make a particular order, to take account of the fact that OSCR had such power to direct, but had declined to use it. Mr McIlvride accepted there was no hierarchy of remedies.

[21] Under reference to Answer 24, Mr McIlvride submitted that in exercising its discretion the court would take into account the question of proportionality in the orders sought. The court would be entitled to take into account whether or not other remedies had previously been resorted to. The court would be entitled to consider whether it might have been more proportionate for the petitioner to make directions or remove the charity from the Register rather than, as a first step, come to the court seeking sequestration. Depending on what misconduct was found, the court might take the view that a much more appropriate course would have been that the petitioner could have dealt with the matter by direction or removal. These were factors of which, at this stage, it could not be said that they would require to be excluded from the court's consideration.

Discussion

[22] I have set out the submissions of the parties in some detail because, in my opinion, in the end of the day, the competing submissions before me came to be at cross-purposes. I can well understand why Mr Lake interpreted the averments in Answer 24 as suggesting that the petitioner was somehow disqualified from making an application to the court under section 34 because it had failed to take steps under the earlier sections. The same applies to the submissions advanced by Mr Lake in relation to Answer 3.

[23] In the event, Mr McIlvride accepted that the sections were complimentary and not part of a hierarchy of options. Essentially, Mr McIlvride's position was that under section 34, once the misconduct test was met, the court had a discretion whether to make the orders sought. His submission was that the failure of OSCR to opt for some of the less draconian options, and its failure to remove the charitable company from the Register after it had been the subject of automatic entry into the Register, for a period of time, were matters which the court could take into account in deciding whether to exercise its discretion to make the orders sought. That position had the effect of leaving Mr Lake's arguments beside the point. That was not the position which Mr Lake thought he was meeting. It seems to me that the short answer to Mr McIlvride's position as to the effect of the averments in Answers 24 and 3 is that on any sensible reading these averments simply do not say what Mr McIlvride wants them to mean. I am inclined to the view that, had they been capable of bearing the meaning for which Mr McIlvride contended, it would be likely that an inquiry in the form of a proof before answer would be necessary in relation to such averments. It would be difficult to say that such averments in proper form directed towards the issue of the exercise of discretion by the court, in the event that the misconduct test was met, would be so irrelevant as to be required to be excluded from probation at this stage.