21: When is a charitable gift valid and how to spend £500 million? The National Fund decision

On 26 January 1928, Winston Churchill, then Chancellor of the Exchequer, issued a statement that:

‘… Within the last few days an anonymous donor has set aside the sum of £500,000 to be managed in trust for the nation. The capital is to accumulate … over a long period of years. Ultimately, … it is to be applied to the reduction of the National Debt.’

The fund was known as the National Fund and it grew and accumulated for almost a century until it was worth over £500 million, still a drop in the ocean compared to the National Debt. Last month, the Court had to decide whether the Fund was a valid charitable trust and how it should be applied. The decision came down to well-worn rules of interpretation and is an example of the beneficent approach taken by the Courts to saving charitable gifts.

Background

The Fund’s origins lay in the significant ballooning of the National Debt, from around £0.6 billion to over £7 billion, after heavy government borrowing during the first world war. Government policy at the time was to reduce the National Debt and a sinking fund was established, to which annual contributions would be made. The Fund’s creator, Gaspard Farrer, a recently retired partner at Baring Brothers & Co Ltd, had the idea of settling a fund of £500,000 on his former business to hold as trustee. The idea was that publishing the accounts of the growing Fund each year might encourage ‘other rich men’ to contribute or set up similar funds, so that at some future point such funds together would be sufficient to discharge the National Debt.

With the support of government, which rushed through legislation to overcome legal and practical threats to the Fund’s validity and purpose, the Fund was established by a deed made on 9 January 1928. It did attract further contributions over time, although none since 1982, but, as time went on, it became increasingly apparent that the Fund was never going to be sufficient to discharge the National Debt (now standing at around £2 trillion).

In these circumstances, the Attorney General applied to Court seeking a declaration that the Fund was a valid charitable trust and should be applied to the reduction of the National Debt (a reduction of around 0.026%). The current trustee also maintained that the Fund was a valid charitable trust but disputed the proposed application. Also joined to the application were representatives of descendants of Mr Farrer and of another significant donor to the Fund, to present arguments to dispute the validity of the Fund and contend that it was held on resulting trusts for the donors or their estates.

The principal questions before the Court were to determine the purpose of the Fund and whether the Fund was valid or not. Two bases for invalidity were put forward for the donors’ descendants: that the Fund was invalid because it was subject to a condition precedent which had not occurred and was now incapable of occurring, or because the charitable purpose had failed for impossibility and Mr Farrer had no general or paramount charitable intention. If the Fund was invalid on either basis, the argument was that it would be held on resulting trusts for the descendants.

The Court’s decision

The Court’s judgment was given on 9 November 2020. The Court rejected both grounds of invalidity and found there to be a valid charitable trust.

What was the charitable purpose?

In determining the purpose of the Fund, the debate was whether it was to reduce the National Debt, or to discharge the National Debt. It was common ground that both are valid charitable purposes. However, whichever the Court chose could lead to different results on validity and, ultimately, distribution.

It was agreed that the question of the purpose was to be determined from the wording of the trust deed and that the approach to construction of the trust instrument was the same as for construction of all instruments, where the Court ‘is concerned to find the intention of the party or parties’. The Court does this by:

‘identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party’s intentions’.

In this case, the Court found that the principal purpose of the trust was to benefit 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. It also found there to be a subsidiary purpose to benefit the nation by applying part of the National Fund in reduction of the National Debt if the trustees determined that ‘national exigencies’ required it.

Was the trust valid?

The families contended that the Fund was not a valid charitable trust, first on the basis that it was contingent on the occurrence of a determination by the trustees that the National Fund was sufficient, either alone or with other funds, to discharge the National Debt, something which had not occurred and was now impossible.

The Court rejected this argument. It found that the trust deed effected an immediate and unconditional gift to charity. This was so even though the particular application of the Fund for its primary charitable purpose to discharge the National Debt (as determined by the Court) would not take effect until the Fund was eventually sufficient (alone or with other funds) to do so. The Court considered this conclusion followed logically from the primary purpose; similarly, the secondary purpose imposed a duty on the trustees to consider from time to time whether ‘national exigencies’ required the application of part of the National Fund in reduction of the National Debt, a duty which the Court found was imposed from the outset. Although not determinative, the Court also found support for its conclusion in the language of the deed not being conditional and that there was no gift over, which might have been expected if there was a contingent aspect which could have failed.

The contemporaneous evidence supported this finding – the gift was ‘for the Nation’, language which did not describe a gift which was intended to confer only a contingent benefit.

The second ground argued for the families was that the gift failed for initial impossibility and lack of general charitable intention. To succeed on this ground, the families had to show both elements, as a gift which fails for initial impossibility can still be applied for charitable purposes, by the Court or the Charity Commission making a scheme, where the donor had a general charitable intention.

It was agreed that the time for assessing whether a gift was impossible from the outset was the time that the gift takes effect. As the Court had found that Mr Farrer’s deed effected an immediate and unconditional gift, the date in this case was the deed of the deed, 9 January 1928.

To determine the impossibility or otherwise of the gift at that date, the Court had to ask itself whether there was any reasonable prospect in January 1928 that at some future date the National Fund would be sufficient, alone or with other funds, to discharge the National Debt. Expert evidence presented to the Court made clear that there was such a reasonable prospect at the time. The Court therefore rejected the contention that the main charitable purpose of the trust, to discharge the National Debt, was impossible from the outset.

Having rejected initial impossibility, the Court did not have to consider whether there was a general charitable intention – the families’ argument had failed. However, having heard the arguments and in case of any appeal, the Court also gave its view on this point. Helpfully, the Court rejected an argument that a relevant consideration here should be that the donor and his family were not known as benefactors to charity generally – the Court was clear that a ‘general charitable intention is not to be equated with a disposition towards charitable giving generally’. The test instead is to look at the gift before the Court – in this case set out in the January 1928 deed – and to ask whether a modification to the particular purposes would frustrate the intention of the donor of the gift.

The Court here considered that the reasoning which led it to decide that there was no condition precedent to the gift also supported there being a general charitable intention. In addition, the wording of the gift as being ‘to the Nation’ and the donor’s desire to encourage others to make similar gifts ‘to the Nation’ supported the view that he had a broader intention of benefiting the nation beyond the specific purpose of discharging (or in some circumstances reducing) the National Debt, as identified in the deed.

Winding up the Fund

Having found there to be a valid charitable trust, albeit with a charitable purpose which had become impractical, the next question was the proper distribution of the £500 million plus fund.

The Court determined that it has jurisdiction to make a cy-près scheme under the Charities Act 2011 to alter the charitable purposes. This could be either on the basis that the original purposes ‘cannot be carried out, or not according to the directions given and to the spirit of the gift’ (s62(1)(a)(ii)) or because they have ‘ceased in any other way to provide a suitable and effective method of using the property available by virtue of the gift, regard being had to the appropriate considerations’ (s62(1)(e)(iii) ). The ‘appropriate considerations’ here are the ‘spirit of the gift concerned’, and the ‘social and economic circumstances prevailing at the time of the proposed alteration of the original purposes’.

Although there was a ‘vanishingly small’ possibility of the charitable purpose being achieved, the Court took a pragmatic approach, finding that the possibility was so remote as to equate to no possibility, so that it could be said that the purposes ‘cannot be carried out’. s62(1)(e)(iii) was also engaged because the current economic circumstances mean that ‘adherence to the original main purpose would leave the National Fund in limbo indefinitely, with no benefit accruing to charity at all’.

Once a cy-près occasion has arisen, the Court has a broad discretion to make such scheme as it considers appropriate. The Attorney General sought an order that the Fund be applied now to reduce the National Debt. However, the Court had not yet heard evidence or submissions as to the nature or content of any other possible scheme it might make.  In exercising its discretion, the Court (similarly the Charity Commission when exercising the equivalent discretion) must have regard to:

• the spirit of the original gift;
• the desirability of securing that the property is applied for charitable purposes which are close to the original purposes; and
• the need for the relevant charity to have purposes which are suitable and effective in the light of current social and economic circumstances.

The Court decided that, not having heard evidence or submissions on the point, it was not in a position to compare, in the light of the three factors identified above, the effect of using the National Fund to reduce the National Debt with any other charitable scheme it might make.

The Court has deferred its decision on whether the Fund is to be applied to reduce the National Debt or whether some other charitable scheme is to be made. Danny Kruger, in his September 2020 report, ‘Levelling up our communities: proposals for a new social covenant’, has already called for the Fund to be applied to support civil society, citing the ‘national exigency’ of national recovery from the impact of the pandemic. We will have to wait a little longer to find out how this longstanding gift ‘to the Nation’ will finally be applied.