Part 1: Purposes, Powers and Governing Documents Section 10: Amendment of powers to release restrictions on spending capital Exercising the power to release restrictions on spending capital where there is outstanding borrowing from permanent endowment
Section 10(2) and (3) make provision for how the power to release permanent endowment restrictions (under sections 281 and 282) operate where the trustees have already borrowed money from a permanent endowment fund and some or all of that borrowing remains outstanding (see further section 12 which creates a power for trustees to borrow from permanent endowment). Two changes are made:
First, section 10(3)(b) amends section 282(1) of the CA 2011, section 10(3)(c) inserts a new section 282(1A) into the CA 2011, and section 10(3)(f) inserts a new definition in section 282(5) of the CA 2011. The effect of those provisions is to ensure that the amount of any outstanding borrowing from permanent endowment is taken into account when determining whether the fund falls above or below the £25,000 threshold and therefore whether Charity Commission consent is required. The value of the fund is to be calculated by including the amount of any outstanding borrowing. Accordingly, if the trustees have borrowed £6,000 from a permanent endowment fund of £30,000, then the fund comprises assets of £24,000 plus the benefit of the obligation to repay the £6,000 borrowing. The "adjusted market value" of the fund (under section 282(5) of the CA 2011) would be £30,000, namely the current fund value of £24,000 plus the outstanding borrowing of £6,000. Since that adjusted market value of the fund is over £25,000, it would be necessary to obtain Charity Commission consent to any release of the permanent endowment restrictions under section 282.
Second, section 10(2)(b) inserts new sections 281(6A)-(6C) into the CA 2011 and section 10(3)(d) inserts new sections 282(3A)-(3B) into the CA 2011. The effect of those provisions is to allow the trustees to use the powers under section 281 and 282 of the CA 2011 in order to release permanent endowment restrictions in respect of outstanding borrowing from the permanent endowment.
In the example above, there is outstanding borrowing of £6,000 from the permanent endowment fund. If the trustees subsequently decide that that sum should be permanently released from the permanent endowment fund, the trustees would not be required artificially first to repay the £6,000 outstanding borrowing and then to pass a resolution under section 282 to release that same £6,000 from the permanent endowment restrictions. Instead, the trustees can pass a resolution under section 282(3A) (or, if the fund does not exceed £25,000, under section 281(6A)), in which case the obligation to repay the outstanding borrowing will be extinguished.
The legal test is the same for both (a) releasing a fund and (b) extinguishing an obligation to repay borrowing to a fund, namely that the trustees are satisfied that the purposes of the fund could be carried out more effectively.
The new subsections are needed because outstanding borrowing has, strictly speaking, already been released (and replaced by an obligation on the trustees to repay the borrowing), so it is the obligation to repay that is being extinguished, rather than the permanent endowment restriction that is being released.
The new subsections will usually apply where the trustees could repay the outstanding borrowing but have made a positive decision that they should not do so (pursuant to the legal test summarised in sub-paragraph (ii) above). There is no express prohibition on the new subsections being available where the trustees are unable to repay the outstanding borrowing, or are facing difficulties doing so. However, where the trustees are unable to pay (and in cases where the borrowing was under the new power in section 284A of the CA 2011, inserted by section 12 of the Act), the trustees would be expected to use the more specific provision under new section 284D requiring the trustees to seek an order from the Charity Commission directing them how to proceed.