Find me on LinkedInNewsletter - August 2017
Charity Law and Governance
9 August 2017
It has been another eventful year for charities.
Should your charity incorporate?
For those charities which are unincorporated, there is a pre-occupation in the minds of some trustees with the desirability of incorporation either as a CIO or as a company limited by guarantee. Before they embark on this exercise, which can be time consuming and costly, the trustees should consider whether or not it is really necessary to incorporate. Establishing a company means that it is the company rather than the individual trustees that contracts with third parties and employees – this may reduce the liability of the individual trustees although this is not always the case.
The main reasons to incorporate are either where the charity’s contractual obligations leave the trustees exposed to personal liability to third parties or where the charity’s property interests are held by individuals – in the latter case this can make property dealings unwieldy, especially if the legal owners of the property are no longer involved with the charity but they must be located when it is necessary to dispose of the property. Both of these situations can often be managed without the need for incorporation, eg, by taking out adequate insurance and, of course, by exercising good governance practices to ensure that contractual obligations and property interests are well-managed. Trustees should review their risk register – the risks of being unincorporated are often not addressed or referred to on the risk register which means that either there are no risks or that they have been ignored or forgotten when reviewing the risk register. It is the first thing that I ask to see when trustees tell me that they want to incorporate. The risks are often more illusory than real but if it is difficult to recruit new trustees on the grounds of nervousness about liability, that is more often than not the reason why trustees elect to incorporate.
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Good and bad governance
There is an increasing emphasis on good governance with plenty of material to help trustees through the process. In particular, the Charity Governance Code has been updated and it is a very useful “tool” for trustees setting out 7 Principles of Good Governance with useful pointers to other resource material. www.charitygovernancecode.org. I commend it to charity trustees.
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Delegation
One area where trustees commonly struggle is the delegation of their powers and functions to employees and third parties. Trustees most commonly delegate to their co-trustees acting in committee, to their staff and to external advisers such as property and investment managers. The level of responsibility placed on delegates can be considerable and have financial consequences for a charity. Here is an example:
Charity A is very successful with fund-raising initiatives and it receives legacies. It has a junior employee whose task is to administer the legacies received and to liaise with executors and solicitors who are administering estates in which Charity A is a beneficiary. In that capacity, the employee instructs solicitors to help where, for example, there are complexities in the administration of an estate or where the executors are not giving an explanation for failure to distribute the estate to the charity in a timely manner. The executors of an estate may ask the employee if, instead of paying cash, they can transfer a building owned by the testator to the charity. The employee accepts it without considering whether the charity is receiving an asset or a liability. The building is occupied by several residential tenants who have security of tenure and who brought legal proceedings against the testator for injuries caused by the testator’s failure to repair and maintain the building. The testator had made an application for change of use of the building and was going to redevelop it entailing significant expenditure in the process. The employee commits the charity to do the same without seeking advice and without referring the matter to his line manager or the trustees.
One starts with examination of the power to delegate which should be in the governing document and/or statute. Without this the decisions must be taken by the trustees at their meetings – this is not usually very practicable for non-executive trustees and trustees should propose amendments to their governing document to facilitate delegation. If there is a power to delegate, trustees should have regard to their duty to preserve the charity’s assets. This means that they should exercise careful oversight of delegates, especially where money is being spent. Delegates should report to the trustees on a regular basis. Principle 4 of the Charity Governance Code provides helpful insight for trustees and adherence to recommended practices. Most commonly trustees delegate to their co-trustees acting in committee, to their staff and to external advisers such as property and investment managers.
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Charity Commission inquiries
The Catalyst Trust
If trustees do not exercise vigilance and oversight of delegates they could find themselves in the position of the trustees of the Catalyst Trust who were the subject of a statutory inquiry by the Charity Commission. The Commission found that the charity was being managed and administered by one of the trustees (the Principle Trustee) – the other trustees did not play an active role in the day to day running of the charity and neither did they make collective and adequately informed decisions. Decisions were not recorded. Over a period of four years, the vast majority of the charity’s money was not spent in furtherance of the charity’s objects. Loans and investments were entered into with entities in which the Principal Trustee had a personal interest and the trustees had failed to recognise, acknowledge or manage the conflicts of interest. In consequence, the charity lost money. The Charity Commission concluded that the conduct of the Principal Trustee had placed the charity’s assets at serious risk and resulted in significant losses to the charity. The Commission found that there had been misconduct and mismanagement and exercised its power to remove the Principal Trustee from office. This means that the Principal Trustee is disqualified from acting as a charity trustee of any charity. The trustees decided to wind-up the charity and it was removed from the register on 10 November 2016.
Fresh Start Housing
The Charity Commission found that this charity was acting as a conduit for a private business – it paid housing benefit it had received to a private letting agency connected to the charity. The charity also referred new business to the letting agency with significant private benefits accruing to the letting agency. The charity was wound up.
Manchester New Moston Congregation of Jehovah’s Witnesses
The Commission found that the charity’s trustees did not deal adequately with allegations of child sexual abuse in 2012 and 2013 against one of the trustees (who was convicted of child abuse and imprisoned) in that they
- Failed to identify an allegation as potential child sexual abuse
- Did not take account of an earlier allegation of child sexual abuse when considering new allegations made in 2012
- Did not manage potential conflicts of interest within the trustee body
- Did not keep adequate written records of decisions made to manage potential risks to beneficiaries
The trustees had also brought legal proceedings against the Charity Commission challenging the opening of a statutory inquiry. This was rejected by the First-tier Tribunal and also by the Upper Tribunal to which they had appealed.
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Kids Company
The sad tale and very public collapse of the charity known as Kids Company has been well documented in the press and in reports published by the Public Accounts Committee and the National Audit Office. The Charity Commission, which has opened a statutory inquiry, has not yet published a report. I suspect that it has been delayed pending the outcome of the legal proceedings being brought by the Insolvency Service to disqualify the directors and the chief executive from being directors of any company for a significant period of time.
You can be fined, prosecuted or banned (‘disqualified’) from being a company director if you don’t meet your legal obligations as a director. In this case the chief executive Camilla Batmanghelidjh also faces being disqualified on the basis that whilst she was not a director, she behaved as though she was a director.
A director may be disqualified if he or she is guilty of ‘unfit conduct’ which includes:
- allowing a company to continue trading when it can’t pay its debts
- not keeping proper company accounting records
- not sending accounts and returns to Companies House
- not paying tax owed by the company
- using company money or assets for personal benefit
Somel of these elements were present in the case of the Kids Company. The various investigations and published reports reveal that, like many charities, Kids Company lived from “hand to mouth” and used its considerable fund-raising and PR skills to obtain funding from grant-giving charities, individual donors and public-sector sources and in doing so may not have disclosed fully the precarious nature of the charity’s finances. Such was the “pulling power” of the charity that it secured funding by direct approaches to Ministers who pressurised civil servants to give more money to the charity. There were significant failures in the governance of the Kids Company.
This was a high-profile collapse of a charity and the outcome of the legal proceedings (if they get to that stage) will not be known for a considerable period of time.
For trustees who have concerns about the solvency of their charity, there is an excellent guide published by the Charity Commission entitled “Managing a Charity’s Finances; planning, managing difficulties and insolvency”.
Notes