Law & Governance: the rules surrounding membership of charitable companies

Daniel Hammond considers membership of charitable companies and asks: when is a member of a charity not a member?

Charitable companies are generally incorporated as companies limited by guarantee, as opposed to by shares, and have exclusively charitable objects. Rather than having a financial investment or equity in the company, the members of such companies agree to guarantee the liabilities of the company up to a fixed sum of, say, £10.

Incorporation, in this way, continues to be an attractive option for all charities but particularly those that employ staff, enter into substantial contracts and generally incur liabilities in an increasingly litigious world.

Confusion often arises as to the composition of a charitable company's membership, for example on the event of a winding up or merger of a charity. It is common to find that charitable companies assume a commonality of directors and members. Whilst this may well be the case it is equally likely to find that there are directors who are not members and vice versa.

Larger charities can create membership classes so that only a proportion of members are actually members for the purposes of company law, with the others being members by contract only. Adopting this approach will sidestep the inevitable administrative burden and associated expense of compliance with company legislation relating to company members. Obviously it would be appropriate to consult with a legal company and/ or charity specialist to obtain the approval of the Charity Commission before making changes to a charitable company's articles of association or membership rules.

Generally, members under the Companies Acts 1985 – 2006 will, amongst other things, have the right to receive the annual accounts of the company; be included on the register of members; vote at general meetings; inspect the company's register of members; and in some circumstances apply to the courts to wind up the company. Commonly members will also be able to appoint directors.

Although a wide-ranging membership might be considered the most attractive option,  this may actually  create difficulty in tracing members at key times in the charitable company's existence. The consequences of not being able to validly approve, at member level, a dissolution, merger or gift of assets of a charitable company could be devastating.  Also, the total number of members with voting rights can be of critical importance if membership rules or articles of association require a percentage of all the members of the company to approve a resolution, or even unanimity. A smaller, core, membership and a larger less privileged body of members will often be appropriate.

Trustee directors will always be well advised to take legal advice when incorporating a charitable company, creating a membership agreement, recruiting new members or as a matter of good housekeeping, in order to simplify day to day administration and to plan for a well ordered corporate future.

Daniel Hammond is a senior solicitor at Yorkshire law firm Andrew Jackson.

Third Sector [2008-07-31]