Amending your rules - Pitfalls for charities

Changing the rules of a charity may seem fairly straightforward and in many cases the process is relatively simple.  However there are a number of pitfalls to look out for when changing your rules, particularly when there are members or beneficiaries who are entitled to vote on rule changes. 

Getting started

Assuming the entity is a charitable trust, generally the starting point is the trustees deciding that certain provisions of the rules need to be changed.  The rules may be old-fashioned, may no longer be applicable or simply may not work in practice in 2016.  Some of the common rule changes we see are amendments due to changes in technology such as with meeting procedure to allow for electronic or telephonic meetings, and notice requirements being by email instead of by post or by fax.  Once the decision has been made to change the rules, the trustees must look at the process in the current rules. 

Check the current rules

Always check your current rules as a starting point.  You must follow the process set out in the then current rules.  This assumes that the current rules are valid.

Follow the process very strictly.  In a recent High Court decision, the trustees learned the hard way about the powers of the court to invalidate rule changes.  In this case the rules were for elections, removal and appointment of trustees, and amendments to a charitable trust deed – the procedures were not followed correctly.  There was animosity between the trustees over the legitimacy of a 2012 trustee election, and a question as to whether the 2010 amendment to the rules was valid.  In 2010, the number of trustees was amended from ten to seven following a postal vote of those eligible to vote.  The early trust deed required a meeting to be held.  The issue for the Court to decide was whether the 2010 amendment could be made by way of a postal vote without holding a meeting, and whether the Court should exercise its discretion to remove the trustees.  The Court declared that:

• The 2010 amendment was of no legal effect as the correct process was not followed;
• The 2012 trustee election was invalid because the process in the 2005 rules was not followed; and
• As a result, the trustees were removed.  The Court, on the basis of a recommendation from the Attorney General’s office, ordered interim and independent trustees to be appointed to arrange new elections.

This case shows the importance of strictly following the procedure in the rules and demonstrates that the High Court has the ability to invalidate historic actions if procedures have not been correctly followed.  The 2010 error led to future actions also being held to be invalid, leaving the organisation in this case in a position where it was unable to operate.

Notice requirements

It is important to ensure that all of those people who are required to be notified of any proposed amendment are correctly notified in accordance with the rules.  Trustees should be alert to those who must be notified of any proposed amendment.  For incorporated societies or charities set up for the benefit of members or iwi groups, it is likely that there is a requirement to notify members or beneficiary groups.

Some rules provide that any changes to rules must be advertised in certain publications.  The trustees should make sure that advertising is carried out in the correct publications and that any required timeframes are met.  Trustees also need to be aware of what is to be included in those notices.  For example, it may be a requirement that the specific proposed rules are included in the notice.

Keep records

Ensure that accurate and detailed minutes are kept which include a record of those people present at any meeting; quorum requirements, including whether the quorum was met; who voted in favour of the rule change and who voted against the rule change.  Where a number of people are voting, record how many people voted in favour of a change and how many people voted against.  A statement as to whether the rule change was passed should also be included.  It is often difficult to prove that a rule change was validly passed if there is no supporting documentation.  Keeping detailed records will assist if any changes are challenged in the future.   

Registering rule changes – the paperwork

Assuming the new rules are validly passed, if your entity is an incorporated charitable trust, an incorporated society and/or a registered charity under the Charities Act 2005, the new rules must then be registered.  An incorporated charitable trust or an incorporated society must notify the Registrar of Charitable Trusts/Incorporated Societies of the rule changes.  A registered charity must notify the Charities Board (previously known as the Charities Commission).  If your organisation falls within both categories, the rule change must be notified with both organisations.

Conclusion

Rules of any organisation should be regularly reviewed to ensure that the rules reflect the current reality of that organisation.  Being aware of the required process and following that process is essential.  If in doubt, seek advice from your lawyer.

If you would like further information please contact Jessica Middleton on 07 958 7436.