Following the Charity Commission's multiple findings of misconduct and mismanagement in the administration of the charity, in this article we explore the Charity Commission's recent report on the Beth Yosef Foundation (the Report) and consider what lessons it provides to other charity trustees. The full Charity Commission Statutory Inquiry Decision can be accessed here.

Background

The Beth Yosef Foundation was a charitable company with broad charitable objects to support the Orthodox Jewish religion, in particular as practised by Sephardi Jews. It was removed from the Charity Commission's register on 21 June 2022, following a statutory inquiry, which was launched in December 2016 following a failure by the trustees of the charity to file accounts for several years.

As is often the case, the filing failures raised concerns regarding the management and administration of the charity, and the remit of the statutory inquiry was therefore very broad, covering all aspects of the duties of charity trustees. Failures were found in respect of various matters, including:

  • Recognition and management of conflicts of interest
  • Sale of charity property to a connected person
  • Financial management and protection of charity assets

Conflicts of interest

The charity's main asset was a property in north London, and the Commission identified a number of transactions that gave rise to conflicts of interests that were neither identified nor properly managed by the three charity trustees:

  • The property was purchased using a secured loan of c.£670k borrowed in 2001, which was at some point assigned to an individual who was related to two of the three charity trustees (the "lender"). Under the terms of the loan, the lender was entitled to 80% of the sale price of the Property if it was ever sold.
  • At a later point the lender made a further loan to the charity of £150,000 to convert the upper floor of the property into residential flats. A company owned by the lender carried out the renovations and the lender's wife was then engaged by the charity to manage and let the flats. The income from letting the flats (c.£82,000 p.a.) was collected by the lender.
  • The charity also permitted another charity to have use of its property. Two of the charity trustees and the lender had connections with the other charity.

Sale of the property

To settle the loan owed to the lender, two of the charity trustees made the decision to sell the property to the lender. They did not obtain a surveyor's report and did not advertise the property for sale on the open market. Instead, they privately agreed a sale price of £1.3 million. They also failed to obtain Charity Commission consent, which was required because the lender was a "connected person", or to appropriately manage conflicts of interests.

The statutory inquiry was opened before the sale completed, and the Charity Commission instructed a Chartered Surveyor to provide a report on the proposed sale, but the charity trustees failed to discuss the report or consider the proposed sale in light of the report.

In the end, the sale of the property was triggered by the lender initiating High Court possession proceedings. The property was sold at auction and following completion, at the Charity Commission's instruction, c.£136k was held by the Official Custodian in trust for the charity.

Financial mismanagement and failure to safeguard assets

In addition to the issues mentioned above, the Commission found that the charity trustees had failed to comply with their legal duties to keep and maintain proper financial records.

The charity trustees had told the Commission that the charity was effectively dormant and that its bank account had been closed in 2016, but were unable to confirm what had happened to the balance of the account on closing. They kept no separate records of the income that was due to the charity from letting the flats, and allowed those monies to be collected in by the lender. The charity trustees also failed to ensure that appropriate records were kept and agreements were put in place to record and manage the various loans with the lender and the property management arrangements.

In addition, once the charity trustees became aware of the risk to the property resulting from the lender initiating possession proceeds, they did not appear to take any steps to try to resolve the situation with the lender and secure the property for the Charity going forward.

Conclusion

Findings

The Charity Commission found that the charity trustees had failed to:

  • fulfil their fundamental duty to act in the best interests of the charity;
  • meet their statutory obligations, particularly in relation to filings with the Charity Commission (which is a criminal offence);
  • keep and maintain proper accounting records for the charity;
  • protect the charity's assets from undue risk;
  • recognise and obtain appropriate authorisation for a sale of property to a connected person;
  • recognise and manage conflicts of interest;
  • show that decisions relating to the charity had been taken solely in the best interests of the charity; and
  • have adequate oversight of the administration of the charity and manage the charity's resources responsibly.

Perhaps not surprisingly, given the range and seriousness of the issues mentioned above, the Charity Commission made a number of findings of misconduct and mismanagement in the administration of the charity.

Regulatory Action

Having satisfied itself that there had been misconduct and/or mismanagement in the administration of the charity, the Commission took a number of steps to protect the charity's property, including directing the charity not to part with any property or enter into any transactions without the Commission's prior written consent.

The Commission also appointed an interim manager to the exclusion of the charity trustees, who ultimately concluded that the charity was not viable as a going concern and that it should be wound-up and any residual funds transferred to another charity.

The Birketts View

This case highlights the importance of having good, effective and compliant governance arrangements in place within a charity. It provides good examples of the types of issues that charity trustees should be alive to when managing a charity, including the importance of identifying and managing conflicts of interest, and keeping clear financial records.

In making decisions, charity trustees must:

  • act within their powers;
  • act in good faith and only in the interests of the charity;
  • make sure they are sufficiently informed;
  • take account of all relevant factors;
  • ignore any irrelevant factors;
  • manage conflicts of interest; and
  • make decisions that are within the range of decisions that a reasonable trustee body could make.

Loans taken out by a charity should always be properly documented. This should, as a minimum, set out the terms of the loan, when it is to be repaid and any interest to be added. As with all decisions, charity trustees need to be confident that entering into the loan on the terms offered is in the best interests of the charity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.