UK: Why Charity Trustees Face Unseen Hazards

Last Updated: 31 August 2017
Article by Jimmy Nicholls

Potential disqualification for Kids Company directors shows charity trustees must be aware of their liabilities.

The secretary of state’s decision to bring disqualification proceedings against the former leaders of Kids Company is feeding hope that long-term governance concerns around charities that are also companies may attract deserved attention.

Nine former directors of the charity, who are also trustees, are facing possible bans from running or controlling companies for two-and-a-half to six years, following an investigation by the Insolvency Service.

Also targeted for possible disqualification is Camila Batmanghelidjh, the founder of the charity and former chief executive, who is accused by the government of being a ‘de facto director’, despite not sitting on the board.

The proceedings will be brought under the Companies Act and insolvency legislation, despite the fact that under the Charities (Protection and Social Investments) Act 2016 the Charities Commission has enhanced powers to disqualify trustees for mismanagement rather than simply for a breach of trust.

“In short, you can be held directly accountable where financial failings by the organisation are exposed”

Stephen Bubb, the chief executive of Charity Futures, which advocates for charity governance, told Governance and Compliance: ‘It does serve as a welcome warning to trustees of charities that they have responsibilities and they need to take the job seriously.

‘If you take on a charity role, you have to read the [board] papers, turn up to meetings and so on. It is right that people realise they have important responsibilities.’

Similar liability

The Kids Company case flags the fact that charity trustees can face similar liabilities to those of company directors.

Louise Hebborn, partner and commercial solicitor at law firm Stephensons, said: ‘The risks of becoming a voluntary director of a charitable organisation that is also a company limited by guarantee are very much the same as becoming a director of a PLC or limited company.

‘In short, you can be held directly accountable where financial failings by the organisation are exposed.

‘And should investigation deem your conduct as a director to have been “unfit”, you could be disqualified from holding the position of director for up to 15 years. This would also affect any directorships you currently hold outside the organisation under investigation.’

Disqualification as a director will also disqualify a person from acting in similar roles, such as a charity or academy trustee or as a non-executive director of a NHS Foundation Trust.

Personal financial risk

Other commentators noted that in the case of insolvency, charity directors can face a personal financial liability, even if they are not being paid for their work.

‘Many trustees assume that if they are not being remunerated they are immune, which is not the case,’ said Ed Husband, the head of litigation and recovery at the law firm Veale Wasbrough Vizards.

‘It is also worth remembering that if a charitable company goes into an insolvency process and it has not been run properly by its trustees and management team, the liquidator or administrator can bring personal proceedings against them seeking financial compensation.’

“Historically insolvency practitioners have been reluctant to seek financial compensation”

Husband added that difficulties relating to previous British governments’ public funding cuts had lent weight to such concerns. ‘We have seen a lot of situations where trustees have come to us concerned with the viability of their charity, but also concerned over their potential personal exposure,’ he said.

‘But historically insolvency practitioners have been reluctant to [seek financial compensation], not least because trustees are usually volunteers.’

According to Hebborn: ‘Where a company is insolvent and it continues to trade, the directors can become personally liable for the company’s debts as well as face disqualification in the most serious of instances after an investigation by the Insolvency Service.’

Discouraging charity

In the wake of the case, some are asking whether potential charity trustees will be reluctant to take up the role – particulalry given the level of risk and liability for a traditionally unpaid position.

‘I would continue to expect an initial reluctance to get involved from charity trustees that understand the implications of being a charity trustee,’ said Eric Baijal, managing director of BBM Solicitors.

‘But if there are appropriate governance procedures in place and they are carrying out their duties as they should, they should not have anything to worry about.’

Some welcome the idea that legal fears might discourage a few people from becoming charity trustees. ‘If it is putting people off, it is putting off people who are not going to be good trustees anyway,’ said Bubb. He added that many who struggle to recruit lack good processes for finding suitable candidates.

Baijal added that the sector faces other problems concerning education about trustee duties, and many do not bother to take out insurance to protect against negligence.

‘We have a number of charities where the trustees have not been trained and do not know what their duties are, including where the charities are companies limited by guarantee,’ he said.

‘It ties into the amount of trustees generally that do not carry trustee insurance. You can often insure against your own negligence. Many trustees do not, but they should.’

ICSA advises trustees to check the terms of such cover to ensure it gives the protection expected.

Hidden directors

The government’s decision to bring the proceedings against Batmanghelidjh also highlights the risks of operating as a de facto or shadow director – acting as a director without sitting on the board.

Although the Kids Company founder was not a trustee or director when it collapsed, the Insolvency Service said in a statement: ‘The proceedings will allege that she acted as a de facto director and should therefore also be disqualified from running or controlling other companies.’

“The proceedings will allege that she acted as a de facto director and should therefore also be disqualified from running or controlling other companies”

Husband said: ‘As the Kids Company case reflects, it is possible for a trustee to face disqualification or personal liability, if he or she is acting as a director or if the other trustees act in accordance with that person’s directions or instructions.’

While directors are known publicly, shadow directors operate outside of the public sphere, according to BBM’s Baijal, who said: ‘They are somebody whose involvement is not known publicly.’

He added: ‘Again, they could find themselves in trouble.’

Do not panic

Despite some of the problems, Bubb did not advocate further regulation for charities. ‘I think there is enough regulation. I would not say the problem lies in lack of regulation,’ he said. ‘It is about the charities themselves out there being prepared to put enough support behind this.

‘I do not want government interfering in charities, frankly. The government should be providing enough underpinning and support.’

Husband also cautioned against an alarmist interpretation of the proceedings. ‘It is important to remember that proceedings against trustees are still rare and there are lots of things that charities and trustees can do to act appropriately, ensuring they are not affected by this sort of thing,’ he said.

‘There is some very clear guidance from the Charity Commission as to what charity trustees should and should not do, and professional advice should be taken at an early stage.’

Louise Thomson, head of policy, not-for-profit, at ICSA said: ‘This is a difficult subject. The duties relating to the trustees of charities and the directors of companies are similar, but different issues can arise where a charity is also a company. The board must ensure that they fully comply with both sets of duties.’

Jimmy Nicholls is deputy editor of Governance and Compliance

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.