Decision

Inquiry into grant making charity

Published 20 February 2018

This decision was withdrawn on 2 November 2023

No longer current.

The Charity

The charity is a registered charity governed by a Memorandum and Articles of Association.

The charity fulfils its objects by providing grants to various charities on an annual basis.

Background

On 7 February 2017 the Commission opened a statutory inquiry into the charity under section 46 of the Charities Act 2011. The inquiry closed with the publication of this report.

The inquiry was opened after the charity’s newly-appointed solicitors wrote to the Commission seeking consent to a proposed transaction ^{[footnote 1]} and relief from liability ^{[footnote 2]} for the current and former trustees in respect of unauthorised benefits from the Charity to certain of its former trustees.

Charity Structure

At the time of opening the statutory inquiry the charity had its four current trustees and three recently resigned trustees (hereto after referred to as the Consultants).

The charity was the sole shareholder of its subsidiary limited company, (referred to as ABC Limited) which runs an unrelated non-charitable business.

At the end of December 2015 a decision was taken by ABC Limited (with the agreement of charity trustees) that the Consultants should receive payments from ABC Limited for services which they were providing to ABC Limited in relation to its business. The payments were considered by ABC Limited to be market rate for the services. As a result, from January 2016 to October 2016, the Consultants received payments from ABC Limited totalling approximately £650,000. As they were also trustees of the charity at the time in question, the Consultants were conflicted and were effectively in receipt of unauthorised payments from the charity.

The trustees were alerted that the payments from ABC Limited represented unauthorised payments/benefits by their newly appointed solicitors. On learning of unauthorised payments, the Consultants resigned from their positions as trustees of the charity in November 2016. The Commission were notified of the unauthorised payments in December 2016 by the newly appointed solicitors acting on behalf of the current trustees who also submitted an application for relief from liability for the trustees ^{[footnote 3]} in respect of payments received.

The charity also proposed to sell on 99% of the shares in ABC Limited to the three former trustees (the Consultants) and two of the current trustees for approximately £350,000. The remaining two independent trustees applied to the commission in December 2016 for an order pursuant to section 105 of the Act to authorise the proposed transaction, which would otherwise be in breach of the self-dealing rule. The charity also asked the Commission for its consent pursuant to sections 105 and 201 ^{[footnote 4]} of the Act to the transaction, since it related to a substantial non-cash property transaction with directions under section 190 of the Companies Act 2006. The independent trustees considered the proposed transaction to be in the best interests of the charity.

Issues under Investigation

The Commission’s regulatory concerns for the charity were:

• whether the trustees (current and former) have complied with and fulfilled their duties and responsibilities as trustees under charity law, with regard to:

  • the administration, governance and management of the charity, specifically decision making processes and management of conflicts of interest, and

  • whether the proposed sale of the subsidiary is in the best interest of the charity

• whether there has been any direct/indirect private benefit to the trustees (current and former) in the operation of the charity

• whether restitution of charitable funds is necessary

Findings

In practice the inquiry considered the issues under the following headings:

Issue 1 – Decision Making and management of conflicts of interest

In order to act in the best interest of a charity, trustees must only do what will best enable a charity to carry out its purposes. Part of acting in a charity’s best interests is to ensure personal interests which conflict with the best interests of the charity are properly managed to prevent them from interfering in a trustee’s ability to make a decision only in the best interest of the charity.

This means trustees must recognise and deal properly with conflicts of interest, including when considering any proposals that involves a trustee receiving payment from the charity for goods or services or as an employee or for owning a business which enters into a contract with the charity.

The inquiry identified that the Consultants as trustees of the charity were conflicted.

Where trustees have a conflict of interest in their role, they should identify it, follow any provisions in their governing document about how to manage it, prevent it from affecting decisions and record how it was dealt with. If a trustee stands to benefit directly or indirectly, they should withdraw from discussion and any decision making process.

The inquiry found the trustees’ decision making process relating to the management of conflicts in respect of remuneration to the Consultants was flawed, in that they failed to recognise, acknowledge or adequately manage conflicts of interest in regard to payments made to Consultants by ABC Limited which represented unauthorised benefits and were unable to demonstrate to the Inquiry that adequate records of their decisions had been maintained.

The inquiry found that the remuneration to Consultants by ABC Limited amounted to a breach of duty by trustees to act in the best interests of the charity and to avoid conflicts of interest. Additionally the Consultants failed to act in the best interests of the charity, not to profit and to avoid conflicts of interest.

However conflicts associated with the proposed sale of shares of the Charity’s subsidiary, ABC Limited were correctly identified and managed by the trustees. The independent trustees were able to demonstrate that conflicted trustees were removed from the decision making process, a new independent trustee was appointed.

During the course of interviews with the trustees, the inquiry explored alternatives to the proposed transaction which were considered by the trustees. The inquiry established that the charity sought independent professional advice to ensure that the agreements being considered were in the best interest of the charity; negotiating better terms and conditions as necessary.

The trustees were able to show the Inquiry copies of minutes of meetings where conflicts relating to the proposed transaction had been correctly identified and managed. Records of their decision making in this regard had been correctly recorded and maintained.

Issue 2 – Whether there has been any direct/indirect private benefit to the trustees (current and former) in the operation of the charity.

The trustees were subject to duties as charity trustees and in addition were also subject to various statutory and fiduciary duties because the charity was also a company of which they were directors.

The trustee duties include in particular the duties to act in accordance with the charity’s governing document and to avoid conflicts of interest unless authorised in accordance with the governing document. Charity trustees are obliged to act in the best interests of the charity and are not allowed to place themselves in a position where their personal interests or interests or loyalties in another fiduciary capacity, conflict or may conflict with that duty.

In light of their fiduciary duties and voluntary nature of trusteeship, trustees may only receive a benefit from a charity if it is specifically authorised by the governing document, the commission or the court.

The charity’s governing document sets out that trustees cannot receive any fees, payments or other remuneration for providing services to the charity (unless expressly permitted within its articles, which it was not).

The charity’s governing document also required the trustees to manage conflicts of interest, specifying that where conflicts arose, “he or she must absent himself or herself from any discussions of the trustees and any decision. In the event of any doubt as to whether a trustee should absent himself or herself, he or she must do so”.

Additionally the trustees, as directors are required to ensure records are made of their decisions and retained for at least ten years in accordance with Company law.

The inquiry established that the three trustees (now resigned) had been engaged as Consultants and paid for their services to ABC Limited. A total of £650,000 was paid to the Consultants by ABC Limited, the charity’s wholly owned subsidiary between January 2016 to October 2016. Prior to January 2016, they were remunerated privately by an individual who was one of the original promoters of the charity.

The inquiry met with trustees and the charity’s newly appointed solicitors in March 2017 and were informed that the trustees (including the Consultants) in place at the time the decision to pay the Consultants was made had not been aware that the payment could represent unauthorised benefit. They had not appreciated that payment by a charity’s wholly owned subsidiary to the Consultants (who were trustees at the time) would be seen as a payment to the trustees by the Charity and as such remuneration was prohibited by their governing document.

During engagement with the Commission, the trustees acknowledged that they now realised that remuneration constituted unauthorised benefits and that they were a breach of trust. However they described their actions as “honest mistakes”.

In mitigation they informed the Commission that the trustees (current and former) had been transparent regarding payments to the Consultants and the set of facts giving rise to the unauthorised trustee payments had been included in published material relating to the business of ABC Limited. The trustees made representations to the inquiry that they had a reasonable expectation that their advisors in relation to other aspects of the proposed transaction would include an analysis and advice on the Charity’s relationship with ABC Limited and that the trustees honestly believed that ABC Limited was sufficiently separate from the charity for the trustees (acting as consultants to ABC Limited) to be legitimately paid for services provided by them.

The trustees informed the Inquiry that as soon as they became aware of the position, the three Consultants ceased receiving payments from ABC Limited for their services and stepped down as trustees (November 2016).The remaining trustees accepted the advice of their newly appointed lawyers (with expertise in charity law) and informed the Commission of unauthorised payments that had been made to Consultants; they instructed their lawyers to assist in rectifying matters by submitting an application to the Commission under section 191 Charities Act for relief for breach of trust in relation to the payments.

The Inquiry asked the trustees to provide evidence of records kept of their decision making in relation to these payments. Although the trustees were able to provide the Inquiry with copies of minutes of meetings and records of decision making, the inquiry found no records relating to any decision making by them as trustees of the charity, in relation to remuneration by ABC Limited to the Consultants.

When asked for further explanations, the Inquiry were informed that no records existed regarding the remuneration because “none of the trustees thought of it (in error, as they now know) as being a decision for the charity to make”.

In consequence, the inquiry found that there was significant private advantage and financial benefit to the Consultants. This remuneration was not authorised in accordance with the terms of the charity’s governing document and amounted to a breach of duty under charity law.

Issue 3 – Whether restitution of charitable funds is necessary

As part of their fiduciary duties, trustees must comply with the charity’s governing document and law and can only receive a benefit from a charity if it is authorised by the governing document, the Commission or the Court. In the absence of such authorisation, a trustee must account for any benefit that he or she has obtained as a result of a breach of fiduciary duty: that is to say, he or she must hand over to the charity any financial or other profit gained, and the other trustees when on notice of a breach have a responsibility to regularise the matter.

This strict rule may be subject to some reprieve under the equitable relief principle ^{[footnote 5]} however that principle will not apply if there is a strict prohibition against trustee benefits in the governing document ^{[footnote 6]}.

There is also a principle of relief from personal liability if trustees have acted honestly and reasonably and ought fairly to be excused from any breach of trust ^{[footnote 7]}. Neither the courts, nor the Commission, can retrospectively override a prohibition in a governing document ^{[footnote 8]}.

Initially, the trustees had sought relief from liability in respect of unauthorised benefits received by the Consultants. However following discussions and further engagement with the Commission, the independent trustees agreed to seek recovery of payments.

The charity has now recovered the unauthorised trustee benefits, in the form of payments made to the Consultants amounting to approximately £650,000.

Any further restitution and recovery of funds in this particular case and circumstances was therefore not considered necessary by the Commission in accordance with its policy on restitution.

Conclusions

As part of their duties, trustees must comply with the charity’s governing document and the law and can only receive a benefit from a charity if it is authorised by the governing document, the Commission or the Court.

Where such authorisation does not exist, a trustee must account for any benefit obtained as a result of a breach of fiduciary duty. This strict rule may be subject to some reprieve under the equitable relief principle but that principle will not apply where there is strict prohibition (as in this case) against trustees benefit in the governing document ^{[footnote 9]}.

The inquiry considers that those involved did what they felt at the time to be in the best interests of the charity in respect of remuneration to the Consultants from ABC Limited. Nevertheless, the trustees acted in breach of trust for enabling the Consultants, who were also trustees at the time, to be paid from ABC Limited, the charity’s subsidiary, for services provided to ABC Limited, given the strict prohibition on trustee benefit.

The inquiry has concluded, based on the evidence provided that the trustees acted in good faith and took steps to rectify matters once they had been made aware of breaches.

The Commission’s engagement with the charity has resulted in the repayment of approximately £650,000 representing the full amount of unauthorised benefit.

The inquiry concluded that the transaction to sell 99% of the shares of the charity’s subsidiary (referred to in the report as ABC Limited) was within the range of reasonable decisions for the charity to take. The inquiry was satisfied that the trustees had taken reasonable steps to obtain the best price for the charity and followed the principles of a properly taken decision ^{[footnote 10]} in respect of the transaction.

Having completed its assessment, and following confirmation that the unauthorised remuneration had been repaid in full to the charity, the Commission authorised the sale transaction being satisfied that it was expedient and in the best interests of the charity. As a result the charity received approximately £350,000 from the sale of shares from the subsidiary.

In total the charity received approximately £1 million as a result of the Commission’s involvement arising from the repayment of the unauthorised remuneration and the authorisation of the transaction to sell 99% of the trading subsidiary’s shares.

In regularising the position with regards to repayments and seeking appropriate permissions from the Commission for the sale of the shares, the inquiry concluded that the trustees subsequently fulfilled their duties and responsibilities under charity law.

Regulatory action taken

The following regulatory action was taken whilst the Inquiry was open.

The Inquiry met with trustees and the charity’s newly appointed solicitors in March 2017. Having discussed the concerns with the trustees at length, the trustees offered full co-operation to the Commission and agreed a way forward by taking appropriate action to rectify matters.

Following the Commission’s intervention the charity has now recovered unauthorised trustee benefits, in the form of payments made to the Consultants, recovering approximately £650,000.

The Inquiry was kept open to ensure repayment took place and the Commission verified evidence that this was the case ^{[footnote 11]}.

The Commission granted consent under s105 and s201 of the Charities Act to facilitate the sale of shares since it related to a substantial non-cash property transaction with directors under section 190 of the Companies Act 2006. The Charity has received approximately £350,000 from the authorisation of this transaction.

The trustees have also agreed to adopt a formal conflicts of interest policy and is working with its newly appointed lawyers to ensure that it improves its management of conflicts of interest.

In total the charity received approximately £1 million as a result of the Commission’s involvement arising from the repayment of the unauthorised remuneration and the authorisation of the transaction to sell 99% of the trading subsidiary’s shares.

Issues for the Wider Sector

Conflict of Interest/ Trustee Benefit

Trustees have a legal duty to act only in the best interests of their charity. If there is a decision to be made where a trustee has a personal or other interest, this is a conflict of interest and you won’t be able to comply with your duty unless you follow certain steps.

For example, if you are a trustee, you would have a conflict of interest if the charity is thinking of making a decision that would mean:

• you could benefit financially or otherwise from your charity or your charity’s subsidiary trading company, either directly or indirectly through someone you’re connected to

• your duty to your charity competes with a duty or loyalty you have to another organisation or person

Trustees must actively manage any conflicts of interest. They should step back from or avoid any situation where a conflict exists or is likely to arise. If it is clear the conflict cannot be adequately managed, even if this means, for example, that additional disinterested trustees are appointed or that the affected trustees resign. It is vital that trustees avoid becoming involved in situations in which their personal interests may be seen to conflict with their duties as trustees.

The Commission recognises that it is inevitable that conflicts of interest will occur. The issue is not the integrity of the trustee concerned, but the management of any potential to profit from a person’s position as a trustee, or for a trustee to be influenced by conflicting loyalties. Even the appearance of a conflict of interest can damage the public’s trust and confidence in the charity, so conflicts need to be managed carefully.

Charity trustees should ensure that they have a conflicts of interest policy in place to ensure that they are fully aware of their responsibilities and that any conflicts that do arise are appropriately managed.

Where a charity trustee has a conflict of interest they should follow the basic checklist set out in the Commission publication Conflicts of interest: a guide for charity trustees (CC29) and where necessary or appropriate take professional advice.

The law states that trustees cannot receive any benefit from their charity in return for any service they provide to it or enter into any self-dealing transactions unless they have the legal authority to do so. This may come from the charity’s governing document or, if there is no such provision in the governing document, the Commission or the Courts. Further information is available from Trustee expenses and payments (CC11).

Trustees who receive an unauthorised payment or benefit from their charity have a duty to account for (i.e. repay) it. The Commission cannot relieve trustees from this duty.

Trustees’ decision making and record keeping

Charity trustees are responsible for governing the charity and making decisions about how it should be run. Making decisions is one of the most important parts of the trustees’ role. Some decisions are simple and straightforward; others can be complex and far reaching in their consequences.

Trustees can be confident about decision making if they understand their role and responsibilities, know how to make decisions effectively, are ready to be accountable to people with an interest in their charity, and follow the 7 principles that the courts have developed for reviewing decisions made by trustees.

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

• make decisions that are within the range of decisions that a reasonable body could made

It is important that charity trustees apply these 7 principles when making significant or strategic decisions, such as those affecting the charity’s beneficiaries, assets or future direction. Trustees’ must be able to show that they have followed these principles and keep adequate records to evidence that their decisions have been properly made, particularly for important or controversial decisions.

1. Section 105 of the Charities Act 2011 gives the commission the power to authorise dealings with charity property where it is expedient in the interests of the charity whether or not it would otherwise be within the powers exercisable by the charity trustees in the administration of the charity. ↩

2. Section 191 of the Charities Act 2011 gives the commission the power to relieve trustees and others from liability for breach of trust or duty where they have acted honestly and reasonably and ought fairly to be excused for the breach. ↩

3. Current and former trustees including the Consultants. ↩

4. Section 201 of the Charities Act 2011 states that any approval given by the members of a charitable company under section 190 of the Companies Act 2006 is ineffective without the prior written consent of the Commission. ↩

5. See House of Lords decision in Boardman v Phipps [1967] 2 AC 46. ↩

6. See Guinness v Saunders [1990] 2 AC 663 at 691 to 692. ↩

7. See footnote 2. ↩

8. See footnote 6. ↩

9. See Boardman v Phipps [1967] 2 AC 46 and Guinness and Saunders [1990] 2AC 663. ↩

10. As set out in the CC guidance ‘Its your decision: charity trustees and decision making’ CC27. ↩

11. Evidence of full repayments into the Charity’s bank account were shared with the Commission in August 2017. ↩