At a time when the Government has spent vast amounts of money on keeping the country going in the wake of the Covid-19 pandemic and as a result, hugely increased the national debt, any funds that the Government can secure without the need for further borrowings are likely to be gratefully received by Rishi Sunak. He will no doubt have breathed a small sigh of relief when the judgment in the case of HM Attorney General v Zedra Financial Services (UK) Ltd was handed down in November 2020.
HM Attorney General v Zedra Financial Services (UK) Ltd
Case overview
The case involved a charity that was created by a very wealthy individual by a deed dated 9th January 1928 in which the individual in question placed £500,000 (which at that time was a vast amount of money). The charitable purpose for which the charity was created was to accumulate income and profits until the date fixed by the trustees as being the date when, either alone or together with other funds then available for the purpose, it was sufficient to discharge the National Debt. Over time, a number of other wealthy individuals donated money to the charity. These additional donations along with the performance of the fund over time resulted in the fund being currently worth around £500 million.
The Claimant, on behalf of the Government, was seeking the release of the funds held in the Charity with a view to reducing (but obviously not extinguishing) the National Debt. The first Defendant is the current Trustee of the Charity, who agreed that the National Fund was a valid charity but disputed that the time had come to release the fund to the Government on the basis that the fund value was nowhere near the level of the National Debt. The other Defendants represented relatives of the donors to the fund, who alleged that the Trust failed and accordingly the fund should pass to the residuary beneficiaries of the original donors.
One of the unusual features of this case, is that the original settlor that created the National Fund was so well connected that he was instrumental in the passing of legislation that directly (but it appears in this case unnecessarily) affected the deed that created the National Fund in the form of Section 9 of the catchily named Superannuation and other Trust Funds (Validation) Act 1927, which confirms as follows:
“(1) Where by any instrument directions are given for any property being held upon trust and the income thereof being wholly accumulated (subject only to payment thereout of any costs, charges and expenses of the trustees and any remuneration to which they may be entitled) for any period to be determined under the provisions of the instrument, and for the property and accumulations being transferred at or before the expiration of that period to the National Debt Commissioners to be applied by them in reduction of the National Debt, then, unless the Treasury within three months after they receive notice of the taking effect of the instrument disclaim the interest of the National Debt Commissioners under the said directions, notwithstanding any Act or rule of law to the contrary, the directions shall be valid and effective and no person shall be entitled to require the transfer of any part of the property, income or accumulations otherwise than in accordance with the provisions of the instrument.
(2) It shall be the duty of the trustees of any such trust as aforesaid to render to the National Debt Commissioners such accounts and information relating to the trust as may reasonably be required by the Commissioners.”
The experts deployed in the case to analyse the level of the National Debt agreed on two things (as set out at paragraph 34 of the judgment):
“(1) At the time of the initial gift to form the National Fund there was (according to ordinary beliefs and knowledge of mankind at the time) a reasonable prospect that it would be practicable to apply the fund representing the initial gift (both on its own and, a fortiori, together with other funds that might subsequently be made available) to discharge the National Debt at some future time;
(2) 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 is “vanishingly small.”
The Second and Third Defendants ran a highly technical argument regarding the Trust failing on the grounds of invalidity based on the drafting of the document itself, no doubt hoping for a very significant windfall as if they had succeeded the funds held in the National Fund would be shared out between the residuary beneficiaries of the donors. The technical argument is summed up succinctly in paragraph 62 of the judgment as:
“She contended that because the trustees will not “stand possessed” of the National Fund until a future event, the trust for the purposes of discharging the National Debt cannot come into existence unless and until that future event occurs.”
The future event referred to above was, in essence, the National Fund being sufficient to discharge the National Debt, a point which the experts agreed would be very, very unlikely to be reached. A similar but slightly different argument was advanced that the Trust fails on the grounds of initial impossibility.
Ruling on the Second and Third Defendants’ arguments, Zacaroli J stated:
“106. Accordingly, I reject the second and third defendants’ submission that because there is now no reasonable prospect of the National Fund ever being sufficient to discharge the National Debt it means that, with hindsight, it has turned out that there was never any reasonable prospect of the National Fund one day discharging the National Debt.
107. I therefore reject the contention that the main charitable purpose of the trust effected by the Deed (to discharge the National Debt) was impossible from the outset.
108. In these circumstances it is unnecessary to consider whether the Deed manifests a general charitable intention. Since the point was fully argued, however, and in case the matter goes further, I will deal with that issue on the assumption that the fact that it has now transpired that the National Fund never has been, and never will be, sufficient (whether alone or with other funds) to discharge the National Debt means that the purpose was impossible from the outset…
120. I accept that each of the individual points identified by Mr McDonnell (summarised in paragraph 118 above) is likely to be correct. I agree with Mr Henderson, however, that the submission that these points demonstrate that GF was motivated by the great benefits that would be conferred on Barings, so much so that it makes it impossible to attribute to him a general charitable intention, does not rise above the level of speculation. I consider it, on the basis of the evidence as a whole, to be highly unlikely.
121. In my judgment, for the reasons I have set out above, looking at the terms of the Deed and the extrinsic evidence as a whole (including, but notwithstanding, the documents to which Mr McDonnell took me), GF had a general charitable intention to benefit the nation beyond the specific purpose of discharging the National Debt (or reducing it in the specific circumstances of national exigencies). I do not accept, in the words of Vinelott J, that because it has become impossible to fulfil GF’s primary purpose, his broader intention as disclosed by the Deed and the admissible evidence is thereby frustrated.
(3) The impact of s.9 of the 1927 Act
122. My conclusion that the trust is not invalidated on either of the grounds advanced by the second and third defendants means that it is unnecessary to consider whether, had it otherwise been invalidated, s.9 would have saved it.
Conclusion on the Invalidity Issues
123. For the above reasons, I reject the claim of the second and third defendants that the National Fund is held on resulting trusts for the donors or their estates. No party suggested that there was any difference, in this respect, as between GF (and his estate) and Lord Dalziel or anyone else who subsequently donated to the National Fund (and their estates). In the absence of any evidence or argument to the contrary, I consider that later donations must be treated as having been made on the terms of the trust effected by the Deed.”
Upon reaching the above conclusions, the only issue for the Court to then determine was whether the Court had the power to wind up the charity with a view to the funds held being transferred to the National Debt Commissioners. Zacaroli J found as follows:
“160. For the above reasons, I conclude as follows:
1) The Deed created a valid charitable trust with the principal purpose of benefitting the nation by accumulating a fund that would in time be applied (either alone or with other funds then available) in discharge of the National Debt and the subsidiary purpose of benefitting the nation by applying part of the National Fund in reduction of the National Debt, if the trustees determine that national exigencies required it;
2) The Deed effected an immediate and unconditional gift to charity (such that there was no condition precedent to the coming into existence of the charitable trust);
3) In the following circumstances:
a) the original purposes of the charitable trust cannot be carried out and have ceased to provide a suitable and effective method of using the trust property;
b) this constitutes a case of subsequent (and not initial) failure of the charitable purposes; and
c) GF intended to give the property out-and-out for the specific charitable purposes identified in the Deed; the court has jurisdiction to make a scheme altering the charitable trust pursuant to its cy-près jurisdiction;
4) The court does not have jurisdiction to make a scheme altering the trust under its administrative jurisdiction;
5) The question whether the court should make a scheme, under its cyprès jurisdiction, for the transfer of the National Fund to the National Debt Commissioners for the reduction of the National Debt or for some other, and if so what, charitable purposes will be deferred to a subsequent hearing.”
Comment
It is appreciated that the case of HM Attorney General v Zedra Financial Services is very unusual but the issues surrounding whether a charity’s original charitable purposes no longer being possible can occur and the above case is an in depth analysis of how the Court and indeed individuals that may perceive the prospect of a windfall might approach matters.
How Nelsons can help
Kevin Modiri is a Partner in our expert Charities team.
Should you be affected by any of the matters dealt with in the above case, please feel free to contact Kevin or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.