OG39 A2 - APPOINTMENT AND REMOVAL, AND WHEN APPOINTMENT IS NOT APPROPRIATE

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OPERATIONAL GUIDANCE

CUSTODIAN TRUSTEES

APPOINTMENT AND REMOVAL, AND WHEN APPOINTMENT IS NOT APPROPRIATE

OG 39 A2 – 21 February 2006

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Contents

1. Appointment of a custodian trustee
2. Advantages and disadvantages of custodian trustees
3. When is a custodian trustee not appropriate?
4. Only one custodian trustee per charity
5. Vesting of trust property in a custodian trustee
6. Local authorities as custodian trustees
7. Removal of a custodian trustee
8. Levels of authority
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. Appointment of a custodian trustee
	The powers to appoint a custodian trustee are contained in s.4(1) of the Public Trustee Act 1906, and appointments can be made in one of the following ways. No particular form of words is required to appoint a custodian trustee, but there must be evidence of a clear intention to do so.
	The Trustee Act 2000 gives charities default power to appoint custodians (as distinct from a custodian trustee) or nominees as the case may be, subject to the charity following any general guidance we may give (see OG 86 B4 section 4.2).

	1.1 By the testator, the settlor or the creator of any trust 1.2 By the person(s) having the power to appoint new trustees 1.3 Power of amendment 1.4 By an Order of the Court 1.5 By an Order or Scheme of the Commission

	1.1 By the testator/testatrix, the settlor or the creator of any trust
	If it is the intention at the outset that a charity shall have a custodian trustee, it will usually be provided for in the governing document by which the charity is established.
	If this is not the case, and the trustees subsequently decide that it would be an advantage to appoint a custodian trustee, then the appointment can be made by the settlor or the promoters of the charity, if they are still alive and are prepared to make the appointment. If they are not, then one of the methods set out below must be used.

	1.2 By the person(s) having the power to appoint new trustees
	The person(s) with the power to appoint new trustees of the charity may appoint a custodian trustee if they feel one is required, either:
	through a power in the governing document of the charity; or
	by relying on s.4(1) of the Public Trustee Act 1906, which refers to the person having power to appoint new trustees.
	It is not essential that the person(s) with the power to appoint new trustees execute a deed to appoint a custodian trustee, but if the appointment is made by deed it can save the trouble of having a separate document to transfer the trust property to the custodian trustee.

	1.3 Power of amendment
	If there is no power to appoint a custodian trustee in the charity’s governing document, and the provisions in the Public Trustee Act cannot be used, the power of amendment may be used (if there is one, and it allows it), to give an appropriate person or persons a power to appoint new trustees, which would give that person(s) the power to appoint a custodian trustee. All that we require in this regard is to be notified and to receive copies of the usual documents appropriate for confirming such an amendment:
	in the case of a charity governed by a trust deed, an executed deed of variation; or
	in the case of an unincorporated association, a copy of the amended constitution and a certified copy of the minutes of the meeting at which the change was agreed; or
	in the case of a charity when a Scheme confers the power of amendment a certified copy of the resolution when it is passed (see OG 1 B1 section 5).

	1.4 By an Order of the Court
	If other means of appointing are unavailable or impractical, the Court may order the appointment of a new custodian trustee on the application of any person who is eligible to apply to the Court for the appointment of a new trustee.

	1.5 By an Order or Scheme of the Commission
	Although the Court has the power of appointment, only in the most exceptional cases is it likely to exercise it. As we have the same powers conferred upon us by s.16(1) of the 1993 Act, we would generally expect an application to be made to us in the first instance. Even so, in most cases it is not necessary for us to exercise our powers if the appointment of a custodian trustee can be made by the persons described in 1.1 or 1.2 above.
	If the charity trustees wish to appoint a custodian trustee, but do not have the power to do so (or a power of amendment to confer a suitable power), we would consider using our Order making powers under the 1993 Act to assist.
	In such cases the trustees will have to:
	give good reasons why one should be appointed; and
	confirm that the corporation proposed as custodian trustee is eligible to be one,
	before we would make the necessary Order.
	It will not normally be necessary to make the appointment by Scheme. The exception would be where the governing document specifies a particular corporate body to be the custodian trustee and the managing trustees wish to change this. Even in these circumstances the managing trustees may have a suitable power of amendment which could be used.
	A body corporate must be a trust corporation entitled to act as custodian trustee before we can appoint it as such (see OG 39 A1).

2. Advantages and disadvantages of custodian trustees
	2.1 Advantages 2.2 Disadvantages

	2.1 Advantages
	The advantage of appointing a custodian trustee or the Official Custodian to hold property of a charity is that, because the custodian trustee has a perpetual existence, the title to that property never has to be re-vested in a new trustee. Where the title is held by the charity trustees, every time there is a change of trustee, the title has to be vested in the new trustee jointly with the continuing trustees. It can also be seen from section 3 of OG 39 A1 that custodian trusteeship gives an added measure of security for the trust property.
	Charity trustees may also benefit from the advice and knowledge of an experienced custodian trustee.

	2.2 Disadvantages
	There may be several disadvantages of the charity having a custodian trustee, for example:
	the custodian trustee may charge for its services;
	the role of the custodian trustee may be confused with the role of the managing trustees;
	it may cause difficulties in the charity's investment management.
	The main disadvantage is that many custodian trustees charge for their services. Charity trustees need to look hard at whether appointing a custodian trustee is the most efficient way of dealing with holding the charity’s property or whether another method might not give better value for money.
	Occasionally the role of custodian trustee can be confused with the role of managing trustees, particularly where a local authority is appointed as custodian trustee. (See also section 6.) It is important that every trustee (custodian or managing) has their responsibilities and duties clearly explained to them.
	Difficulties with discretionary investment management arrangements can also arise. It can be helpful to hold shares in the name of a nominee but if a charity has a custodian trustee then it must hold the title of all the charity's property and investments. Under these circumstances it would not be possible for the charity to appoint a separate trustee in the form of a nominee. (For more information on this see OG 86 B4 section 3).

3. When is a custodian trustee not appropriate?
	The decision to appoint a custodian trustee is one for the person(s) with the power of appointing a custodian trustee to make if they have the power to, and there are very few cases where we could object. We can advise, however, as to whether appointing a custodian trustee is appropriate to the particular charity. (See also OG 38 B1 section 3)
	Obviously there is no need for a custodian trustee if the charity has no land or investments for the custodian trustee to hold. Even if the charity does have land or investments, for most smaller charities the same role may be fulfilled equally effectively in another way, for instance by:
	(in the case of land) vesting the property in the Official Custodian; or
	incorporating the trustee body under Part VII of the 1993 Act so that it may hold the property; or
	appointing one or more holding trustees - that is nominees as prescribed in the Trustee Act 2000.
	We recommend that trustees of charities in such a position take professional advice from their own legal advisers as to which is the most suitable option for the particular charity.
	We will not advise trustees on the suitability or otherwise of a particular custodian trustee.
	For the reasons noted in section 5 of OG 39 A1, charitable companies cannot appoint a custodian trustee.

4. Only one custodian trustee per charity
	4.1 Legal reasoning 4.2 Custodian trustees and CREST

	4.1 Legal reasoning
	The powers of a custodian trustee are such that there would be a conflict of duties which could not be resolved if an attempt was made to appoint two separate corporations as custodian trustees of the same trust. In particular, s.4(2)(c) of the Public Trustee Act 1906 states that the custodian trustee shall have custody of all securities and documents of title relating to the trust property of the charity. Clearly it is impossible for two bodies to fulfil this condition. Our view, therefore, is that such an appointment cannot be valid.

	4.2 Custodian trustees and CREST
	CREST is a paperless electronic system for the transfer and recording of ownership of shares, which began operating in July 1996. Normally a charity wishing to use CREST will appoint a system-participant (eg a bank) as a nominee who will hold title to the shares. Charities which already have a custodian trustee are, in our view, not able to do this, as the title to the shares could not be vested in the nominee without cutting across the custodian's statutory responsibility to hold the title to all trust property. (For more detail about nominees under the Trustee Act 2000, see OG 86 B4).
	The way around this is for the custodian trustee itself to become a sponsored member, operating through a system-participant. Some custodian trustees (eg bank trust companies) may be large enough for them to consider being system-participants in their own right, but for most this is unlikely.
	However, some medium sized and smaller charities may not be able to afford the expense of being either a system participant or a sponsored member, especially if their investment holdings are small. Incurring such expense merely to hold shares in CREST may not be in the best interests of the charity. In these cases, charities may prefer to hold their shares in a paper based system of share transactions. This will be viable whilst both the paper based system and the original company are still in existence.
	Problems may arise when the original holdings are acquired by another company which uses the CREST system exclusively, and the charity’s custodian trustee is unable or unwilling to become a sponsored member or a system participant. In this case, the shares would need to be held by a nominee of the charity who was also a CREST system participant.
	As indicated above, the holding of shares in CREST in this way is incompatible with the provisions of the Public Trustee Act 1906, but the courts are likely to take a pragmatic view of such arrangements and case law suggests that the courts would not force the trustees to dispose of the shares, particularly if the situation had not been brought about by the actions of the trustees (eg the takeover of the original company).
	Case workers should refer all such cases to Legal Division for advice.

5. Vesting of trust property in a custodian trustee
	Once a custodian trustee has been appointed, then in accordance with s.4(2)(a) of the Public Trustee Act 1906, the trust property must be vested in the custodian trustee as if it were the sole trustee, and we may make vesting Orders for that purpose where necessary.

6. Local authorities as custodian trustees
	Local charities such as village halls or community associations may wish to appoint the local authority as a custodian trustee. This has the distinct advantage of not having to execute a deed every time a holding trustee changes, as the local authority has perpetual succession.
	It also avoids most of the potential pitfalls associated with appointing the local authority as managing trustee of the charity (see OG 38, Corporate Trustees and also OG 56, Local authorities and trustees), as the members of the management committee of the hall or association remain charity trustees and retain control of the charity. The custodian trustee can only act on the lawful instruction of the charity trustees.
	Even then, there have in the past been problems with local authorities misunderstanding their role as custodian trustees, so our general policy is strongly to suggest that the land be vested in the Official Custodian instead. There are, however, circumstances where it is more advantageous to the charity to appoint the local authority.
	If, therefore, a local charity which holds an interest in land, or is in the process of acquiring it, wishes to appoint the local authority as custodian trustee we should not object. We should be prepared to make an Order to appoint, if that is required, provided that the charity trustees can make a reasonable case for the appointment.
	For more detail on this see OG 56 B1 section 5.

7. Removal of a custodian trustee
	The powers and duties set out in s. 4(2) of the Public Trustee Act 1906 do not include provision for the resignation of a custodian trustee.
	S.4(2)(i) provides that the custodian trusteeship can be terminated by an Order of the Court, on the application of either:
	the custodian trustee;
	any of the managing trustees; or
	any of the beneficiaries;
	It is unlikely, however, that it would be necessary for the Court to make the Order, because we have the necessary powers under s. 16(1) of the 1993 Act. It is preferable for the applicant(s) to come to us rather than for the charity to incur the expense of an application to the Court; there is no other way in which a custodian trusteeship may be ended.
	In the event of a custodian trustee being removed without its consent, the Order would be made upon the application of the managing trustees of the charity. It would include suitable provisions for vesting trust property either in one or more of the managing trustees or, as would be more likely, in another trust corporation (which might be appointed either as a replacement custodian trustee or alternatively as a nominee or custodian under the provisions of the Trustee Act 2000).
	In these cases, we must give the custodian trustee one month’s notice of the proposal to remove it (section 20(3) of the Charities Act 1993).
	Such cases are likely to be rare, but may occur if the charity trustees feel that retaining that particular custodian trustee is not in the best interests of the charity (eg on grounds of cost or maintaining efficient administration).

8. Levels of authority
	PB3s who have been appointed Assistant Commissioners may make Orders appointing suitable corporations as custodian trustees.
	Where a Scheme is required to amend the charity’s governing document in order to appoint a custodian trustee, the Scheme may be made by a PB4 who has been appointed an Assistant Commissioner. It may also in suitable cases be approved in principle by the PB5 and delegated to a PB3 who has been appointed an Assistant Commissioner.

Glossary of Terms used in this Guidance
	the 1993 Act
	body corporate
	Court
	custodian trustee
	governing document
	Official Custodian
	Order
	Scheme
	testator
	trust corporation
	trustees

Index to further related information