Index: Region ; Belgium ;  Italy ;  United Kingdom

WESTERN EUROPE REGIONAL REPORT

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BELGIUM

A New Form of Foundation Soon to be Introduced in Belgium?
Bart A. Servaes

 1.      New bill.  In November of last year the Belgian government submitted a draft bill to the Federal Parliament in order to amend the Law of June 27, 1921 regarding nonprofit associations and public benefit foundations (see Ordinary Session of the Chamber, 1854 - 98/99, Nos 1 to 9).  Because of the intervening general elections for a new Federal Parliament (June 13, 1999), the bill did not pass through both houses of the Parliament in a timely manner.  It is generally expected, however, that the bill will be approved shortly after the formation of the new government and enter into effect before the end of this year.

 2.      Nonprofit associations.  With regard to nonprofit associations, the main intention of this bill is threefold: (i) to increase the transparency, from an accounting point of view, of the nonprofit associations, (ii) to strengthen the control over such associations by the courts, their members and their creditors, and (iii) to adapt the Law of 1921 to the requirements of the modern society in which the associations must operate (e.g. the possibility to engage in commercial activities; removal of nationality requirements for their members, et cetera). 

 3.      Foundations.  The new bill also intends to reform the Belgian legal framework for foundations.  The parliament seems to respond therewith, at least partially, to a number of criticisms that have recently been made in the legal doctrine with regard to the regulatory regime for foundations in Belgium.  The main reproach in this regard was the limited number of purposes for which, under the current system, a foundation can be created.  According to some authors, this not only prevented the efficient structuring of a variety of initiatives aimed at the enhancement of the general well-being, but also caused an outflow of capital from Belgium to other jurisdictions where more flexible legal regimes for foundations exist (see Banmeyer, I. & Talbot, C., “Les fondations: état présent et idées de réforme”, Ann.dr.Louvain, 1998, 25-77).  In addition, from a corporate perspective, one had been searching for an appropriate vehicle for the certification of securities of Belgian limited liability companies, a possibility introduced recently by the law of July 15, 1998 (this is a technique comparable to the issuance of depositary receipts under U.S. laws).  More than one Belgian legal writer looked enviously to the North, where the “stichting”, a private foundation under the law of the Netherlands, has been successfully used for the last 10 years for such certification initiatives (see Denef, M. & Hamers, J., “Beginselen van Verenigingsrechtelijke Systematiek: binationaal bekeken”, in Beginselen van vennootschapsrecht in binationaal perspectief, Wouters, J. & de Kluiver, H.J. (ed.), 1998, (79) p. 81).  Again, the current legal framework in Belgium prevents the use of foundations for such purposes.

 4.  Private foundations.  The bill introduces a new form of foundations under Belgian law: besides the public benefit foundation, already regulated in chapter II of the law of 1921, it should now become possible for individuals or companies to create private foundations.   The distinction between public benefit foundations and private foundations lies in the purpose for which they are conceived.  A public benefit foundation can only be created for the enhancement of philanthropy, religion, science, art, culture or education.  A private foundation can be used for any purpose, as long as it does not engage in commercial activities nor have as its aim the enrichment of the foundation.  The legislative history lists a number of examples, such as the conservation of a private art collection, the development of a region, the preservation of the private and closed ownership of an enterprise.  Other examples could be the support of a handicapped child after the death of its parents or the creation of a foundation for each new-born in a family to ensure that each of them begins life on an equal footing.  Others might use it for the eternal or temporary support of a favorite football club or political party.

 5.  Creation.  Another major difference between public benefit foundations and private foundations lies in the manner in which they are created.  Public benefit foundations must obtain the approval of the government before they can exist as a legal entity separate from its creator.  For private foundations, the intervention of a notary suffices, and they will obtain legal personality as soon as the required publication formalities have been complied with.

 6.   Control.  It is also interesting to point out the difference in how the two kinds of foundations can be controlled.  Indeed, since foundations are usually intended to exist beyond the lifetime of the founder, it is essential that an independent control is exercised upon the managers of the foundation, who will naturally come and go over time and might use the goods for other objectives than for which the foundation was originally conceived. 

 For this reason, public benefit foundations are subject to direct supervision by the government.  The government exercises this control by reviewing the annual accounts of public benefit foundations, which they are legally obligated to prepare and submit to the government.  In addition, the public prosecutor has the power to take any necessary actions before the courts against the administrators of the foundation or against the foundation itself in order to compel compliance.  It has been asserted by some authors that, notwithstanding the limited number of public benefit foundations in Belgium, such form of control can hardly be effective in light of the numerous other public supervision tasks the government must already fulfill. In addition, the authors cite the government’s lack of experience in these matters as another reason for criticism 

 Probably with this critique in mind, the newly proposed private foundations are not put under direct supervision by the government.  Instead, the possibility has been created to delegate supervision of a private foundation to an independent accountant, whose task consists of reviewing the annual accounts prepared by the administrators of the foundation.  In that regard, the accounting and auditing regime created for the non-profit associations will be applied to private foundations.  It remains doubtful, however, whether this is a sufficient and efficient protection against abuses.  Indeed, although the administrators are now obligated to prepare annual accounts, the bill has not described to whom such accounts must be submitted.  Unlike a nonprofit association, a foundation does not have any members.  Moreover, the new law does not contain an explicit obligation to appoint an auditor and it remains therefore up to the founder, and the advising notaire, to be sufficiently prudent and to appoint one in the constituting document.  Finally, the question remains what can the accountant do to protect the interests of the foundation: there is no general meeting of members to which the accountant can report and vis-à-vis whom the administrators must justify themselves.  The only recourse for the auditor is to file a complaint with the public prosecutor or directly with the courts.  Unfortunately, the only option a court seems to have under the bill is to declare the dissolution of the foundation, be it at the request of the public prosecutor or of an interested third party.  This is different from the regime applicable to public benefit foundations, where the courts have been granted the explicit power to remove and replace the administrators in the event that they are using the goods for other purposes than for which the foundation was created or if the administrators turn out to be incompetent. 

 It is unfortunate that in light of the absence of a body such as a general meeting of members and the possibilities for fraud and abuse of the concept of private foundations, the bill drafters have not given more attention to the development of an efficient control (compare for example, with the “stichting” under Dutch law where the supervision of the public authorities is quite important and the courts have been granted broad powers to intervene in the management of a foundation; see W.J. Slagter, Ondernemingsrecht, 1996, §95).

 7.   Liquidation.  Private and public benefit foundations also differ in the way their liquidation is regulated by the new law.  When a public benefit foundation is dissolved, the law requires that the assets will be used as nearly as possible to the purposes for which the public benefit foundation was originally created.  As is the case for nonprofit associations, this explicit requirement does not exist for private foundations.  Nevertheless, with regard to nonprofit associations, it is generally accepted that, notwithstanding the absence of such an explicit requirement in the law, upon liquidation the assets must be used for a purpose that is closely related to the goal for which the nonprofit association was originally incorporated.  This reasoning will probably be equally applicable to private foundations.  Nevertheless, the absence of a written rule in the draft law seems to give the founders a bit more freedom than is the case with public interest foundations. 

 8.   The question has been raised whether a private foundation can be used for the certification of securities of Belgian companies, if indeed upon liquidation the assets of the private foundation can only be destined for a similar purpose.  Indeed, certification requires that the securities owned by the private foundation, and for which the private foundation has issued certificates, must be returned to the owners of the certificates when the foundation ceases to exist (or in certain other situations foreseen by law).  The legislative division of the Administrative Supreme Court gave a negative answer to this question precisely in light of the designation of the assets.  Nevertheless, it has been correctly suggested that nothing prevents the certificated securities from being transferred to another foundation with the same purposes.  Moreover, the law on certification explicitly foresees in an automatic transformation of the certificates into the underlying securities in the event of a liquidation of the issuer of the certificates (see P. BAERT, “Certificering van vennootschapseffecten: bij de noorderburen over het muurtje kijken”, TRV, 1999 (127), p. 141).

 9.   Conclusion.  By making private foundations an option, Belgium will finally join the numerous other jurisdictions in Europe where such institutions have been a reality for many years.  This is a major development which was long overdue.  Only time will tell, however, whether the legislative framework as it exists today is sufficient to give the courts an efficient tool to regulate and control all aspects of such a major new legal institution under Belgian law.

 Vocabulary under local law:

n    Nonprofit association: association sans but lucratif (ASBL) / vereniging zonder winstoogmerk (VZW);

n    Public benefit foundation: fondation d’utilité publique / stichting van openbaar nut;

n    Private foundation: fondation privée / private stichting;

n    Administrative Supreme Court: Conseil d’Etat / Raad van State.

n    Notaire: Notaire / Notaris (Belgian lawyer authorized by the State to execute authentic deeds).

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ITALY

See also in this issue: Operating concessions as a factor in the growth of non-profit
concerns and a tool for reform of the Welfare State

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THE UNITED KINGDOM

ENGLAND

THE REVIEW OF THE REGISTER OF CHARITIES
BY THE CHARITY COMMISSION

Under English charity law there is no statutory definition of charitable purposes.  The present definition of charity can be traced back to the preamble to the Statute of Charitable Uses of 1601 which set out a list of purposes which were then regarded as charitable this included the relief of aged, impotent and poor people, the maintenance of schools of learning and free schools the repair of bridges ports, churches and highways the helpful young tradesmen, the relief or redemption of prisoners.

 Over the years the Courts have added to this list of purposes applying the principle of whether a new purpose came within the spirit of the Preamble.  Then in 1891 in Pemsel’s case Lord MacNaughten classified charitable purposes into four heads – the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community.  Since 1891 the Courts have continued to develop the list of charitable purposes and since the Charities Act 1960 the Charity Commission has played a major part in developing charity law to meet modern social needs using the same principles as the courts.  It is because of this important role of the Commission that in the last few decades there have been comparatively few cases concerning charitable status in the courts.  Examples of new charitable purposes introduced by the Charity Commission have been the promotion of racial harmony, the promotion of the equality of women with men and the provision of conflict resolution and mediation.  As society changes so some purposes must cease to be charitable and an example of removal of charitable status by the Commission was that of rifle and pistol clubs which were originally charitable as being for the defence of the realm but would seem now unlikely to play a part in modern warfare.

 Since the 1960’s there has been considerable debate in England on the definition of charity.  There are always two viewpoints: either that there should be a new statutory definition of charitable purposes or development of the definition through interpretation of the law by the courts and the Charity Commission.  Following the Deakin report on the Future of the Voluntary Sector in 1996 the National Council for Voluntary Organisations set up a Charity Law Reform Advisory Group in 1997 which is currently involved in a consultation on charity law reform, this includes the possibility of the introduction of a statutory definition.  In the meantime, the Charity Commission embarked on a major Review of the Register of Charities.  This was initiated in 1997 by a preliminary consultation and later a full consultation on the Framework document for the Review of the Register.  This set out the background for the review and then went on to set out the characteristics of a charity which would be used to test both charities which were currently on the Register and organisations seeking charitable status.  The reason for the review of the Register was stated to be that the Register had not been reviewed since it was first created over 35 years ago during which period social circumstances and public opinion had changed so that the Commission was to study the Register to find out whether some charities currently on it should possibly be removed and also whether there was scope to develop the boundaries of charitable status.

 The consultation on the draft framework document elicited a large number of responses and following this two final documents were produced in March 1999.  These were the Review of the Register which set out the essential characteristics of a charity and the Hallmarks of a Well Run Charity which set out best practice in charities to inspire public confidence.  These documents make very interesting reading not only for charities in England and Wales but also for other jurisdictions looking at the concept of public benefit organisations.  The Essential Characteristics of a Charity includes the following criteria “that the organisation must have aims directed to the provision of something of clear benefit to others in society, it must not be concerned with benefiting individuals in a way which outweighs any benefit to the public, it must be directed to things that overall are not harmful to human kind, the objects must be certain and lawful and not be pursued to party or other political aims, the organisation must be independent and able to show that any personal professional or commercial advantage is and will continue to be incidental to carrying out its charitable aims and finally it does not impose conditions on access or membership that in practice restricts the availability of facilities in a way that results in the organisation as a whole not benefiting the public”.

 The Hallmarks of a Well Run Charity states inter alia that the charity must be run by a clearly identifiable body of people who take responsibility and are accountable for controlling the charity so that it is economically and effectively run and who act with integrity in the interests of the charity and without regard to their personal interests.  This is a statement of the fiduciary duties of Boards which would be relevant in most not for profit organisations world-wide. 

As part of the Review of the Register the Charity Commission has now embarked on looking at a number of areas where there is potential scope for development of charity law.  The procedure in each case is that a discussion document is produced for consultation and following representations from both intermediary bodies and professional bodies and individual charities a final publication is produced.  The first two discussion papers which came out in 1998 were on Charities for the Relief of Unemployment and the Promotion of Urban and Rural Regeneration, the final document in each case was produced in March this year.  The introduction of the new charitable head of the relief of unemployment was the development of the decision in IRC v Oldham Training Enterprise Council.  In this case the Court decided that the organisation in question was not charitable as the objects included the object to provide support services and advice to new businesses and this could in practice promote the private interest of individuals whether or not there was a wider public benefit.  However the Judge went on to say that the relief of unemployment could itself be within the fourth head of charitable purposes.  Until the development of this new head there have been a large number of registered charities concerned with the plight of the unemployed but these have come either within the relief of poverty or the advancement of education where training is provided or in specific cases within the relief of disability.  In English charity law there are different tests for public benefit under the different heads of charity and under the fourth head public benefit must be proved so that the final publication on the Relief of Unemployment sets out in some detail the criteria which must be met in the case of charities seeking registration under the new head of the Relief of Unemployment to show that there is sufficient public benefit.  The final guidance has drawn on the responses to the consultation document setting out examples of the sort of cases in which charitable activities in the field of the relief of unemployment could come within the stated criteria. 

The criteria which must be satisfied if a charitable organisation is to relieve unemployment are that it must be set up for the primary purpose of relieving unemployment for the public benefit, its activities must be directed to the relief of unemployment generally or to a significant section of the community in a way which can be demonstrated objectively and any benefit to private interests must be strictly incidental to its primary purpose.  As with many charitable purposes it is this balance between public and private benefit which is the crucial test.  The guidance goes on to set out a list of the activities which the Commission will regard as acceptable in the context of the relief of unemployment.  This includes the provision of advice and training to unemployed individuals concerning employment, the provision of practical support to unemployed people by way of accommodation, child care facilities, or assistance with travel, the provision by charities of land and buildings that below market or subsidised rents to businesses starting up, the provision of capital grants for equipment to new businesses and the payment by a grant making charity to an existing commercial business to take on additional staff from among unemployed people.  It is possibly this last case which is the main departure from the previous position where the private benefit must be closely monitored. 

The second new area which went out for consultation in 1998 and where the final document was produced in March this year is the Promotion or Urban and Rural Regeneration.  Again this is a new fourth head charitable purpose and charities which have been working in this area in the past have been registered either under the heads of the relief of poverty, the advancement of education, the prevention and protection of health or environmental purposes.  The Commission has now recognised that the promotion of urban and rural generation for public benefit in areas of social and economic deprivation is a charitable purpose in its own right.  Again a number of criteria have to be met to bring an organisation within this new head and to demonstrate the necessary level of public benefit.  These are that the organisation has effective criteria to determine whether or not an area is in need for regeneration, that it will undertake at least three or four listed activities and these activities cover a broad spectrum of regeneration work, the public benefit from its activities outweighs any private benefit and the objects are exclusively charitable.  The new head would thus not be available to a single issue organisation but it must carry out a range of activities which could include the provision of housing for those in need, helping unemployed people find employment, the provision of land and buildings on favourable terms to businesses in order to create training and employment opportunities for unemployed people, the provision maintenance and improvement of roads and accessibility to main transport routes, the provision of recreational facilities, the preservation of buildings in the area which are of historical or architectural importance and the provision of public amenities. 

In 1999 three new discussion documents have been published.  These are on Community Development, the Recreational Charities Act 1958 and, what is possibly the most contentious area, the maintenance of an accurate register of charities which looks at the removal of charities from the Registers. 

The paper on the Promotion of Community Development as a new fourth head is a very interesting one.  This is an area which has been under discussion between the Commission and organisations in the community development world for some years.  The discussion document defines community development as involving the empowerment of communities which are socially and economically disadvantaged or excluded, usually but not necessarily a local community where the measure of success is not in the achievement of aims but in the process.  It also sets out typical activities such as helping people to form community groups, the provision of advice and support to groups on resources, facilities and strategy, helping groups to develop links and enabling groups to become more self sufficient.  To come within the new fourth head of promotion of community development the criteria to be satisfied would be that the community must be socially and economically deprived using objective criteria such as the index of local deprivation or the proposed indicators of social exclusion.  The activities would have to be shown to achieve the object and the extent of private benefit would have to assessed.  A suggested object is “to develop the capacity and skills of                           in such a way that they are better able to identify and help meet their needs and to participate more fully in society”.  The legal basis for the development of this new charitable head is by analogy to the advancement of education in that community development provides opportunity to acquire skills, also by analogy to rehabilitation of various groups which is a charitable purpose dating back to the 1601 statute and the promotion of good citizenship.  The public benefit test will be met as by increasing skills and competencies and self confidence in members of the community public money for communities will be used more effectively and it is in the interest of society that the capacity of socially and economically disadvantaged communities should be developed.  The paper also states that capacity building promotes social cohesion. 

The discussion paper on the Maintenance of an Accurate Register of Charities is a very interesting document which analyses the various cases where an institution on the Register of Charities could be removed and the legal consequences of such removal.  The paper states three different cases where there could be a removal: firstly where there was a mistake in registration that is where the institution was never charitable but was placed on the Register in error possibly because of wrong information or because of an error or because a view of the law has subsequently being changed by case law.  If the institution was never in fact charitable then the assets have never been held for charitable purposes so that they can remain with the institution.  This will obviously raise some issues particularly whether the Inland Revenue or donors who gave to the institution on the mistaken belief that it was a charity may have possible claims.  The second case is where there has been a change of social circumstances so that although the institution when registered was established for what were then exclusively charitable purposes it is now held that those purposes are no longer charitable.  This is of course the most controversial position and likely to be queried by trustees and professional advisers.  Again there are several potential situations: if one of the purposes remains charitable then the trustees will need to apply the funds for that purpose.  If however none of the purposes are considered to be charitable any longer then the consequences will depend on the legal structure of the institution and whether the property is deemed to be held on trust.  This is a complex legal issue arising from English trust law.   In the case of an unincorporated charity that is a trust, an unincorporated association or a body incorporated by royal charter (these structures are still very common in England) the property will always be held on charitable trust.  In the case of a charitable company limited by guarantee it will be a question of fact whether the property is held by the company as part of its corporate property in which case it is not held on trust or whether it is held by the company as trustee.  Where the property is held on trust the trustees will first be given the opportunity to alter the terms of their governing document to declare charitable purposes.   If this is not possible then they may apply for a cy-pres Scheme that is a scheme that directs that the assets should be held on trust for a charity with purposes as near as possible to the existing trusts.

SCOTLAND

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