Where a charitable trust held donations intended for other charities nominated by members of the public, and there was a shortfall between the funds held by the charitable trust and the donations, it was just and appropriate to treat the unpaid charities as participants in a common misfortune brought about by the management of the donation scheme. Those charities should bear that burden equally as to the distribution of the remaining funds.

Henderson J so held in the Chancery Division when determining an application by the claimant, the Charity Commission for England and Wales, pursuant to section 78(5)(b) of the Charities Act 2011, for directions as to the nature and distribution of funds paid by members of the public to the defendant, the Dove Trust.

The charitable trust operated a website, the purpose of which was to facilitate charitable giving by members of the public by inviting them to make donations to the trust for the benefit of other charities of their choice. The Charity Commission initiated an inquiry into the trust and appointed an interim manager, who identified a substantial shortfall between the funds held by the trust for charitable purposes and the amounts due but unpaid to the designated charities.

HENDERSON J held that the arrangements under which the website operated gave rise to both a contract and a trust. There were three potentially applicable techniques for distributing the remaining funds: a “first in, first out basis”: see Devaynes v Noble; Clayton’s Case (1816) 1 Mer 572; a rolling charge method: see Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 or on a pari passu basis. The rule in Clayton’s Case was probably still the default rule in England and Wales to be applied in the absence of a better alternative although it could be displaced with relative ease in favour of a solution that produced a fairer result. The interim manager suggested a modified version of the rolling charge method whereby the available funds should be divided into two pools: one constituting the sum available for distribution after the final run of payments under the scheme prior to his appointment, and the other constituting all payments received after that date. Each pool would then be distributed pari passu among those entitled to share in them. Henderson J said that the fairest method in the present case was to distribute the entire remaining funds pari passu. There was no good reason to differentiate between the victims depending on the timing of their donations or to seek to divide the available pool of assets on the basis of an extremely precise examination of changing beneficial entitlements as to when payments were made in and out of the fund. The rolling charge method must be applied in its entirety or not at all throughout the period when a fund has been operated in objectively similar conditions. The court must in all normal circumstances make a choice between pari passu distribution and the rolling charge method, on the assumption that it was appropriate to depart from the rule in Clayton’s Case. Accordingly, his Lordship accepted the Charity Commission’s contention that distribution should be made on a pari passu basis.