Animal welfare and charity law by Moira Protani - September 2021

17 September 2021

This article concerns charities which are involved in promoting animal welfare which might include:

• animal sanctuaries
• veterinary care and treatment
• care and re-homing of animals that are abandoned, mistreated or lost
• feral animal control, eg, neutering.

They share some characteristics and governance issues and may be situated in the United Kingdom or overseas.

Some of them rescue and give refuge to animals which have been abandoned or cruelly treated and then either house, re-house, foster or arrange for their adoption. Others are grant-making charities dedicated to the financial support of animal rescue and refuge charities.

The reader is reminded that like any other type of charity, the trustees are bound to observe their legal duties. The primary duties of trustees are to observe the terms of their governing document for the public benefit, to apply their resources in furthering their objects for the public benefit and to avoid conflicts of interest.

In this article I will share some of my recent experiences of advising animal rescue and refuge charities and provide commentary on those things which trustees should look out for and, where necessary, take action to ensure that their governance practices and procedures are conducted to an appropriate standard. Shared characteristics and practises of animal rescue charities may be:

1. ownership or use of land belonging to a founder or a connected party
2. unincorporated status
3. the active involvement of a founder
4. fund-raising from the general public
5. remuneration of trustees and connected parties
6. contractual arrangements with trustees and connected parties.

Land and Buildings

An animal rescue charity operates from land and buildings which may be owned by the charity or occupied under a lease or informal license arrangement. The land may belong to the charity’s founder, a member of the founder’s family or a trustee who permits the charity to occupy it rent-free or for a low rent in return for carrying out the maintenance, repair and renewal of the buildings. This can give rise to difficulties where a charity's security of tenure is uncertain or where repair and renewal of buildings is necessary – who is responsible for it? If the charity is considering or has already spent considerable sums on the repair and renewal of the buildings but has no security of tenure, the trustees may have been derelict in their duties and need to take steps to secure the charity’s best interests. On death, or where there is a dispute, the founder or the founder’s successors may want to sell the land leaving a cash-strapped charity with nowhere to go and unable easily to rehouse the animals in its care.

In other cases, the founder or a trustee may occupy the charity’s property rent free. The justification is that someone needs to live on site to deal with emergencies. However, trustees should seek professional advice to ensure that the founder or other occupant ceases to live there when they are no longer responsible for the emergency care of the animals. Unless the governing document permits a trustee to charge rent to the charity, the consent of the Charity Commission is usually required.

Trustees will find Charity Commission guidance useful. In particular, the guide entitled "Sales, Leases, Transfers or Mortgages: what trustees need to know about disposing of charity land (CC28)" provides excellent information for charity trustees.

Unincorporated status

Until the 1980s it was commonplace to establish a charity in unincorporated form. If a charity is unincorporated, it means that the trustees are personally liable to comply with contractual obligations and tortious acts carried out on the premises and if there are insufficient funds to meet liabilities, the trustees are financially exposed. The charity may be governed by a trust deed or scheme of the Charity Commission. Others are governed by a set of rules and have a membership. The members may be the same persons as the trustees but may also be derived from a wider range of members of the public who may pay a subscription in return for which they might appoint trustees at an annual meeting and receive a newsletter and updates on the work of the charity.

Operating any kind of public facing facility or visitor attraction carries a risk of injury to staff, volunteers or visitors to the premises and trustees who are responsible for the care of animals should be familiar with and manage the risks as required. Whether or not the charity is incorporated, the trustees should have adequate public liability insurance cover in place. It can, however, be easier to recruit new trustees if, in addition, the charity is incorporated. The conversion from unincorporated status to a charitable incorporated organisation (CIO) is usually a straightforward process.

After the new corporate body is registered by the Charity Commission, the existing unincorporated charity’s assets must be transferred to it and this may be the time when some of the defects in a charity’s property ownership and other affairs become apparent but also presents trustees with the opportunity to resolve them. Professional advice may be required concerning, amongst other things, the transfer of the land and buildings, the transfer of the charity’s operations including employees, and ensuring that future legacies and donations are preserved before the unincorporated charity is wound up. Tax advice may be needed as well as the assistance of the Charity Commission to perfect the transferof the undertaking, restricted funds and permanent endowment property and possible a charity’s shop premises and business.

The Founder

From small beginnings the charity may have grown in size and stature but, depending upon its age, the founder (and extended family members) may still be alive and actively involved in the charity’s operations.

There are advantages to having a strong Founder but there can also be disadvantages. On the one hand, the Founder's passion, drive and ambition to meet a need which generated the enthusiasm for establishing the charity can continue to good effect and facilitate the best care for the animals, help the charity’s fund-raising efforts and enable the charity to secure free or low-cost accommodation and other benefits-in-kind.

On the other hand, the role of a founder, which may or may not be enshrined in the governing document, may sometimes become over-bearing if the founder exudes a sense of entitlement or “ownership” of the charity. If not checked by the trustees, this can lead to poor governance practices and procedures and the involvement of the Charity Commission in its regulatory capacity. There can also be neglect of the animals the charity is established to protect, financial abuse and the loss of donor confidence leading to a reduced income. The reader is referred to extensive Charity Commission guidance on public benefit (PB1, PB2 and PB3).

Many founders have a positive impact on a charity and it does not follow that a founder’s involvement is a bad thing. In all cases, however, trustees should establish good governance practices which ensure that a founder and, indeed, any trustee, employee or volunteer is subject to supervision and the control of the trustees acting together. In particular:

• It is not acceptable for charitable funds to be paid into the private bank account of a trustee without a legitimate reason. Money belonging to the charity should only be paid into the charity’s bank account. The only legitimate reason for paying a charity’s money to a trustee would be to reimburse a trustee for reasonable expenses incurred and which have been authorised in advance by the trustees.
• The trustees should exercise control over payments into and out of the charity’s bank account and take decisions collectively over how the charity’s money is to be spent.
• If the charity pays rent for occupation of premises owned by a trustee, the arrangement should be fully authorised in the charity’s governing document and the other trustees should be advised independently on the appropriate level of rent to pay and other terms and conditions. The arrangements should always be conducted at arms’ length and it may be necessary to obtain the approval of the Charity Commission. In all cases, conflicts of interest should be managed properly. There is a significant amount of guidance on the Charity Commission website on the subject of conflicts of interest.

Failure to implement good governance practices, control expenditure and manage conflicts of interest can lead to loss of grant-funding and reputation and regulatory action by theCharity Commission. The consequential costs can be very high and, in some cases, the Commission appoints an interim manager to act to the exclusion of the trustees. This can lead in extreme cases to the closure of the facility and the re-housing of the animals. “Conflicts of interest: a guide for charity trustees (CC29)” is available on the Charity Commission’s website. In order to illustrate some of these difficulties, I have summarised below an inquiry published by the Charity Commission into The Alternative Animal Sanctuary.

Fund-raising

Charities established to protect animals have high costs associated with the maintenance of their properties and they sometimes engage the services of a fund-raiser who is either an employee or, more frequently, a third-party commercial fund-raising agent. Trustees should ensure that the fees and commission of third-party fund-raisers are reasonable and proportionate having regard to the sums raised from the general public.

The trustees are legally responsible for supervision of fund-raising activities. They should set the plans and agree the overall approach to take account of risks and the reputation of the charity as well as their income needs.

There is a significant amount of law applicable to fund-raising and, in particular, the requirements placed upon commercial participators and professional fund-raisers and the trustees who use their services. Trustees should have regard to the following publications which are available on the Charity Commission’s website:

Charity Fundraising: a guide to trustee duties (CC20)

Trustees, Trading and Tax: how charities may lawfully trade (CC35)

The Charity Commission also expects trustees to have regard to The Code of Fundraising Practice.

Remuneration of Trustees and Connected Parties and Self-dealing

Trustees are reminded that they (or their businesses) may not be remunerated by the charity they serve either as an employee or as an independent contractor for the provision of goods or services unless either:

• the remuneration is authorised under their governing document and/or
• they comply with the requirements of the Charities Act 2011 and guidance published by the Charity Commission; and/or
• they obtain the prior consent of the Charity Commission.

Please refer to the guide entitled "Trustee expenses and payments (CC11)" for the detail.

A separate rule is that trustees cannot self-deal without a clear authority in the governing document or the prior authorisation of the Charity Commission. Self-dealing arises usually where a trustee (or a person connected to a trustee) is the landlord or tenant of land and buildings which are let from or to a trustee (or connected person) in return for payment of rent. Trustees should seek professional advice before becoming involved in self-dealing. In addition, any conflicts of interest must be properly managed.

The Alternative Animal Sanctuary

The charity was registered on 22 September 2005. It was unincorporated and governed by a trust deed. Its objects were to relieve the suffering of animals in need of care and attention, to promote humane behaviour towards animals and to provide and maintain facilities for the reception and care of unwanted animals.

The auditors had raised concerns about the charity’s 2015 accounts, identifying a lack of internal financial controls and bad governance including no evidence of trustee meetings or collecting decision-making, lack of financial records and a failure to segregate personal funds from the charity’s funds. The Commission established that the charity was in a contractual arrangement with a direct mailing agency which had raised £8.1 million from 2009 to 2016 of which only £905,000 was paid to the charity. The remainder was retained by the agency to meet costs and fees. The agreement did not comply with legislative fundraising rules or good practice and the public was not informed that a large proportion of the funds raised would accrue to the agency and not the charity. No legal or accountancy advice was sought by the trustees who did not negotiate terms with the agency which were unfavourable to the charity. The Charity Commission opened a statutory inquiry and found that:

• Three of the four trustees, including the chair, were members of the same family. The chair managed the finances and ran the charity on a day-to-day basis. There was no internal reporting from the chair to the trustees and decisions were made by the chair acting alone.
• Record-keeping was inadequate and decisions of the trustees were not recorded.
• The charity had repeatedly failed to keep and maintain financial records resulting in a consistent failure to meet financial reporting obligations.
• Conflicts of interest were not managed. The sanctuary was run on a property owned by the chair with no formal lease in place. According to the report, another property was acquired for the charity financed in part by the charity but largely by a loan arranged between the chair and a private individual. It was sold at a loss in 2020.
• The charity paid monthly sums to the chair for the use of the sanctuary and to meet the chair’s personal expenses which were paid initially by the chair using a credit card. The Charity Commission ordered the trustees to formalise these arrangements but they failed to do so. The trustees also failed to comply with an order of the Commission restricting payments of more than £2,000 without the Commission’s consent.
• The chair had financial autonomy and failed to segregate personal and charity finances. The charity paid £360,000 to the chair between 2010 and 2017 to meet the chair’s expenses without verifying that the expenditure had been incurred legitimately on behalf of the charity. For example, some of the expenditure related to personal items of clothing and food for the chair.
• Conflicts of interest arising out of the relationship between three of the trustees were not managed, despite the advice on the matter from the auditors. In particular, large sums of the charity’s money were spent on work to the chair’s property without the management of conflicts of interest. A majority of trustees who were unrelated to the chair should have been appointed and taken such decisions. Likewise, the payment of regular sums to the chair should have been made by independent trustees.

The Commission had appointed interim managers who terminated the fund-raising agreement with the agency.

The Charity Commission identified comprehensive failures in governance and financial management resulting in significant losses to the charity. The Commission considered that the chair had been mostly responsible having been in charge but that the trustees bore collective responsibility for the failures and weaknesses. The Commission found that the trustees had failed to understand their legal duties and the importance of complying with them and that this, combined with a failure to address the deficiencies and comply with the orders and directions given by the Commission amounted to misconduct and/or mismanagement in the administration of the charity.

The interim managers determined that it was appropriate to wind-up the charity on the basis that there were significant underlying issues which could not have been addressed by a newly appointed board if one were appointed. The charity’s residual funds of £407,000 were transferred to ten similar charities which operated in the area. The chair appealed to the Charity Tribunal against the decision to wind up the charity. The appeal was dismissed.

The chair and one other trustee were disqualified from acting as trustees The Chair was disqualified for a period of 15 years.

The full report, which was published on 2 September 2021, is available on the Charity Commission website. The report, the detail of which is unclear, is deficient in one material respect. It does not explain what happened and when to the animals in the sanctuary! There is, however, some information available, via search engines, in newspapers in the Lincolnshire area if the reader wishes to find out.

The Retreat Animal Rescue

The charity was registered with the Charity Commission on 27 August 2004. It is governed by a trust deed dated 14 April 2004 (as amended on 8 August 2004).

The charity’s objects are to relieve the suffering of unwanted, abandoned and neglected animals that are in need of care and treatment, by the provision of a rescue and re-homing service and the accommodation of such animals, and to advance public education in matters concerning animal welfare.

Initially, the charity came to the attention of the Charity Commission as it was placed into the Double Defaulter Class Inquiry which investigates charities that have defaulted on their statutory filing obligations on two or more occasions in the last five years. The charity had failed to submit its annual accounts and returns for the years ended 26 August 2016 and 26 August 2017. Having submitted the information, the charity again failed to submit information for the year ended 26 August 2018.

Additional regulatory concerns were identified including related party transactions. The Commission then opened a formal statutory inquiry on 13 November 2019 and found:

• The initial trustees were composed of Trustees A, B, C and D. Trustees B and D resigned and three new trustees were appointed to act with A and C. A and C are siblings and A and B were married to each other.
• Accounts and returns were filed late for five consecutive years ending on 31 July 2019.
• The charity remunerated trustee B in the sum of £2,925 for working at the charity’s café. This was contrary to the trust deed which provides that a trustee may not be remunerated without the consent of the Charity Commission. Trustee B said he was unaware of the restriction and repaid the monies to the charity.
• The trust deed requires that there should be a minimum of five trustees and where there are fewer trustees than five, none of the powers conferred on the trustees are exercisable except the power to appoint new trustees. This called into question decisions taken between 2015 and 2020 when there were fewer than five trustees in office.
• Brickyard Farm, which comprises a detached house and 35-40 acres of land, is owned by Trustees A and B who occupy the house. In the beginning, the charity occupied the adjoining land rent free. A loan from a private individual facilitated the purchase of the house by A and B. Another charity donated £200,000 to the charity. However, the donated funds were used to re-pay a part of the loan to A and B from the private individual. A and B granted a 25-year lease of the land to the charity and the donated sum was treated as a premium payment for the lease. A and B acted as both superior landlords and tenants in their capacity as trustees. As a technical matter this is not legally possible and the lease would probably be void and even if it was not void, it would have been made in breach of the self-dealing rule. Conflicts of interest were not managed.

The Commission concluded that the initial trustee board were responsible for misconduct and/or mismanagement in the administration of the charity and in breach of their duties.

This article is part of an occasional series of charity law related topics by Moira Protani who is a solicitor (non-practising with effect from 1 April 2021) specialising in charity law and good governance advice.

Moira Protani, Moira Protani Limited
charityadvice@moiraprotani.com
07824 448236 / 01273 276078
www.moiraprotani.com

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