Trust linked with Northern Rock 'would have broken law on mainland'

The Jersey-based trust that owns many of Northern Rock's assets would have been breaking the law if it was based on the mainland because it did not sign a contract with the charity that it intends to benefit when the trust is wound up, according to a leading lawyer.

The trust, called Granite, named Down’s Syndrome North East as its beneficiary, but the charity was unaware of the situation until it was approached this week by The Guardian newspaper.

“Under English law this would be an offence,” said Lawrence Simanowitz, a partner at charity law firm Bates Wells & Braithwaite. “The 1994 regulations say that if you are a commercial participator you have to have a written contract with a charity. You have to have a contract in writing that has to set out all kinds of terms.”

A spokesman for Northern Rock admitted it would have been “courteous” to inform Down’s Syndrome North East about the arrangement and blamed a “communication oversight”.

“We have apologised for any embarrassment to the charity,” he said. “But if you are not sure whether you will leave anything in your will to someone, would you be obliged to let them know?”

The bank has emphasised that the charity was not exploited in any way and that its name was not used inappropriately.

Potential claim

According to Simanowitz, if the charity can show it suffered damage as a result of the arrangement, it might have a legal case.

“The charity would have a right, arguably, to defend its name under the laws of passing off, which stops someone using another organisation’s name where people would think falsely that there is an association between what is being sold and what it is doing,” he said. “But they would have to prove there was damage caused, which would be arguable. Of course small organisations very rarely have the resources to risk taking any action. They never will be able to afford it."

However, a spokeswoman for Down’s Syndrome North East said the trustees were reassured by Northern Rock’s explanation and that the charity was happy for the beneficiary arrangement to stay in place.

A spokesman for the Charity Commission confirmed it had received no complaint from Down’s Syndrome North East about Northern Rock but said the regulator would consider whether it needed to do anything. “We have power over charitable trusts even if there are not registered charities,” he said.

How the charity came to be named as a beneficiary

Down’s Syndrome North East became involved in 2001 when Northern Rock underwent ‘securitisation’, a financial process that allows companies to access money tied up in assets, such as buildings, that cannot easily be sold. The process, which is common in the lending and real estate industries, involves selling assets to a third party for use as security for bond issues.

Granite, which took on Northern Rock’s assets as part of a securatisation process, was set up as a trust. In order to become a trust, it was required to name a beneficiary for any surplus left after the trust was wound up.

A spokesman for Northern Rock said Down’s Syndrome North East was chosen as a beneficiary because it was one of three charities chosen by staff for their fundraising activities in 2001.

He said securitisation was very common across the banking sector and it was standard practice to name charities as beneficiaries.

An expert source, who asked not to be named, confirmed that other major financial institutions were likely to be involved in similar situations.

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