Decision

Charity Inquiry: Beth Yosef Foundation

Published 5 December 2022

Applies to England and Wales

The charity

The charity was incorporated on 20 July 1998 and is governed by a Memorandum and Article of Association dated 19 July 1998. The charity was registered with the Commission on 28 August 1998.

The charity’s primary objects are:

• to advance the orthodox Jewish religion, in particular as practised by Sephardi Jews in any part of the world
• to further education, including religious learning, in accordance with the orthodox Jewish religion, in particular as practised by Sephardi Jews, in any part of the world
• to relieve Jewish people, in particular Sephardi Jews, in any part of the world in cases of need, hardship or distress, and
• to further any charitable purposes for the general benefit of Jewish people, in particular Sephardi Jews, in any part of the world

The charity was removed from the Commission’s Register of Charities on 21 June 2022 and is recorded as a removed charity.

Trustees

At the time of the opening of the inquiry and during the Commission’s engagement with the charity, the following were shown, on the Commission’s records as being trustees:

Trustee A – Chair from 24 November 2016

Trustee B – from 24 November 2016 to 17 June 2019

Trustee C – from 24 November 2016

This information is inconsistent with records held by Companies House which record trustee A and trustee B as Directors of the charity since 10 July 2012 and information provided by trustee C confirming their appointment since 29 April 2015.

There has been no direct communication from trustee B during the inquiry, despite several attempts being made to contact and confirm their whereabouts. The inquiry was informed that trustee B had left the UK and was unlikely to return for the foreseeable future.

The trustees listed above are collectively referred to as the Board of Trustees.

Background

The Commission’s Regulatory Compliance Team proactively opened a case into the charity on 13 September 2016 because of its failure to submit annual returns and accounts to the Commission since February 2012.

On the 22 November 2016 (“the meeting”), the Commission met with trustee A and identified a number of serious regulatory concerns, relating to the administration and financial management of the charity. These concerns included but were not limited to a failure by the Board of Trustees to fulfil their statutory duty to submit accounts to the Commission, the way trustees had been appointed, loan agreements entered into by the charity and their intended sale of charity property.

During the meeting the Commission was informed that the charity was in the process of disposing of its property at 8 Queens Road, London, NW4 2TH (“the property”).

The purchase of which had originally been financed by a loan. Trustee A was unable to provide any specific details regarding the loan, including the amount, when it had been provided or by whom. The Commission was informed that the sale of the property had been triggered by the calling in of the loan, the terms of which included a provision that the lender was entitled to 80% of any sale proceeds. The trustees had also agreed a sale price of £1.3 million with a purchaser but advised the Commission that due to other loans the charity would still have debts of about £100,000 following sale of the property.

Issues under Investigation

On 21 December 2016, the Commission opened a statutory inquiry into the charity under section 46 of the Charities Act 2011 (the Act).

The scope of the inquiry was to examine:

• whether the trustees were properly appointed and whether decisions made by the trustees regarding the administration and management of the charity had been validly made, in particular in relation to the disposal of charity property
• whether any potential conflicts of interest had been identified and correctly managed by the trustees
• the financial management of the charity and application of charitable funds, in particular relating to rental income received from 8 Queens Road and how rental income had been applied
• whether or not the trustees have complied with and fulfilled their duties and responsibilities under charity law
• whether there has been any misconduct and/or mismanagement by the trustees

The inquiry closed with the publication of this report.

Findings

Whether the trustees were properly appointed and whether decisions made by the trustees regarding the administration and management of the charity had been validly made, in particular in relation to the disposal of charity property

Clause 31 of the charity’s Articles of Association stipulates that the number of trustees shall be not less than 3 and clause 32 states that additional or replacement trustees may be appointed by the Founder.

Trustees A, B and C were not the original trustees and they failed to provide any evidence that their appointments had been made in accordance with the charity’s governing document, which consequently raised further concerns about the validity of actions and/or decisions taken by them in the administration and management of the charity.

The trustees also confirmed that the decision to wind up and sell the property was only made by 2 trustees which they contested was the minimum number of trustees required under Clause 41 of their governing document to form a “quorum for the transaction of the business of the Trustees”.

Despite irregularities and/or defects around their appointments, the trustees relied on Clause 44 (saving clause) of the charity’s governing document which states that “directors can act effectively even if there are defects in their appointment”. Whilst the saving clause is acknowledged, meaning that defects in appointments on their own may not invalidate decisions made by the trustees, additional questions raised relating to their management of conflicts of interest and whether the charity had sufficient numbers of unconflicted trustees to form a quorum. As a result, the inquiry is not convinced of the validity of actions and decisions taken by the trustees with regard to the disposal of the charity’s property (as outlined below).

Whether any potential conflicts of interest had been identified and correctly managed by the trustees

The charity’s lender was also the prospective purchaser and is referred to in this report as the “lender” although it should be noted that he was not the original lender. The original lender had assigned the loan some years earlier. The inquiry found that the ability of the trustees to effectively operate and manage the charity and avoid conflicts of interest was seriously compromised by the fact that two of the trustees were connected to the lender. Trustee C was the brother-in-law of the lender and trustee A was the lender’s aunt.

It was additionally discovered that the trustees were linked to another Charity - (Charity A), which had been permitted use of the charity property. Trustee A was recorded on the Register of Charities as a trustee of Charity A (from 10 July 2012 to 18 June 2019). Trustee B was recorded on the Register of Charities as Charity A’s designated contact during the period 12 March 2011 to 10 July 2012. In addition one of Charity A’s other trustees was also related to the lender.

The charity did not have a conflicts of interest policy and despite the relationships and connections between the parties, the trustees did not consider a conflict of interest existed in their dealings with Charity A or the lender. They did not appear to understand how to identify and manage such conflicts or the importance of doing so, despite having been directed to the Commission’s guidance about conflicts of interest which explains how to take appropriate steps to address the identified deficiencies.

It was clear at the meeting in November 2018 with trustee C, that he did not have a clear understanding of “conflicts of interest”. He did not appreciate that the trustees’ relationship with the lender, meant that they were connected parties which in turn gave rise to a conflict of interest if the charity entered into any agreements, contracts or transactions with the lender and/or his companies. He failed to demonstrate that the trustees had correctly identified or managed such matters of “conflict”. He was also unable to demonstrate to the inquiry that the trustees were aware of their obligations under section 117 of the Act regarding their obligations when selling charity land. In particular the requirement to obtain prior authorisation from the Commission when disposing of property to a connected person. This indicates that the trustees were in breach of their duties to act in the charity’s best interest and avoid conflicts of interest.

The inquiry found that the trustees failed to properly identify and manage conflicts of interest when administering and managing the charity and were unable to demonstrate that decisions relating to charitable funds, disposal of charity property and/or winding up of the charity had been taken solely in the best interests of the charity. The inquiry considers these failings to be misconduct and/or mismanagement in the administration of the charity.

The financial management of the charity and application of charitable funds, in particular relating to rental income received from 8 Queens Road and how rental income had been applied

Statutory filing obligations

The inquiry found the trustees had a serious disregard for, and/or lack of understanding of, the importance of proper financial controls and record keeping.

The Commission requires trustees’ annual reports and accounts to be prepared and submitted in accordance with the framework for charity reporting; Accounting and Reporting by Charities: Statement of Recommended Practice (the Charities SORP). The charity trustees were advised on a number of occasions that abbreviated financial statements as provided to Companies House are not sufficient and did not meet with the Commission’s filing requirements.

The inquiry found that the trustees consistently failed to meet their statutory reporting requirements to file annual accounts and a Trustees Annual Report within ten months of the charity’s financial year end (“FYE”). Notwithstanding assertions made by the trustees during the inquiry that they had submitted accounts to the Commission, our records showed that the charity was in default. The trustees failed to comply with their statutory duty to file annual reports and accounts with the Commission for the FYE 2013-2016 within 10 months of the year end. It is acknowledged that the charity did however go onto file outstanding accounts for FYE 2013-16, using the Commission’s online services on the 4 June 2017, but they were significantly late.

The trustees also failed to file the charity’s accounts for the financial year ending 2017-19 within ten months of the year end, despite the ongoing statutory inquiry into the charity. Annual reports and accounts for the FYE 31 July 2017 were submitted 888 days late; Annual reports and accounts for FYE 31 July 2018 were submitted 525 days late and FYE 31 July 2019 were submitted 159 days late. Additionally, despite the considerable, ongoing advice and guidance provided to the trustees regarding their filing obligations, they filed accounts on the 7 September 2020 which did not include all disclosures as required by the Charities SORP and did not comply with the Commission’s filing requirements.

The inquiry considers this failure to comply with statutory duties demonstrates an unwillingness and/or inability by the charity trustees to act with reasonable care and skill to fulfil basic trustee responsibilities in the best interest of the charity and the inquiry finds it to be misconduct and/or mismanagement in the administration of the charity.

Failure to submit accounts and accompanying documents (including the annual return) to the Commission is considered a breach of a trustee’s statutory obligations under section 162,163 and 164 of the Act. It is also a criminal offence, under section 173 of the Act. It is also considered misconduct and/or mismanagement in the administration of the charity.

Charitable property, income and expenditure

Charity trustees are under a legal duty to keep and maintain proper financial records and to ensure that their charity is publicly accountable to people with an interest in their charity.

Section 130 of the Act requires charity trustees to ensure that accounting records are kept in respect of the charity which are sufficient to show and explain all the charity’s transactions. This is so as to be able to disclose the financial position of the charity at any given time and to ensure the accuracy of any statement of accounts prepared by them. This is central to a trustees’ legal duty to account for any charitable funds and how they have been applied.

The inquiry found that the trustees failed to keep and maintain proper financial records, which is evidenced by the trustees failing to be able to provide sufficient records of their arrangements for unsecured loans and rental income.

The inquiry was informed that the charity had entered into a number of unsecured loans with the lender, which included a £150,000 loan relating to the cost of converting the upper floor of the charity’s property into residential flats (“the flat conversions”) which had been completed by Company Z, also owned by the lender. On completion, the flats were managed and rented out on behalf of the charity by the lender’s wife and rental payments were collected by the lender. The trustees were unable to provide the inquiry with any records documenting their decision making regarding these matters.

Additionally the inquiry was informed that a “secured loan” of £667,876.77 borrowed by the Charity in 2001 to finance the purchase of the property had been assigned to the lender. To settle this secured loan, the trustees intended to sell the property but decided not to put the property on the open market, having agreed a private sale price of £1.3 million with the lender.

In order to address regulatory concerns, the inquiry instructed Chartered Surveyors to carry out an independent and up to date valuation in respect of the property. The Valuation Report dated 25 September 2018 was shared with the trustees. Trustee C informed the inquiry ^{[footnote 1]} that the trustees had not met to discuss the contents of the report or to consider its findings and/or what impact these may have on the intended disposal of the property.

The lender called in the secured loan and initiated High Court possession proceedings in order to force a sale and recover his money. In settlement of the secured loan a possession order was granted to the lender on 5 December 2018. The court was aware of the ongoing statutory inquiry. The court order provided for the property to be sold at auction, and at the Commission’s request for any surplus funds owed to the charity (from the proceeds of sale) to be held by the Official Custodian. Following completion of sale, £136,034.45 was received by the Official Custodian and held in trust for the charity.

Despite the trustees being aware of the potential risk to the charity’s property as a result of possession proceedings (initiated by the lender in June 2018), it was unclear to the inquiry what steps the trustees had taken (if any) to resolve matters with the lender and/or to protect the assets of the charity.

The trustees informed the Commission that the charity was effectively dormant and had no income or bank account, however, the inquiry’s findings are not consistent with these assertions. The inquiry found that the charity’s bank account had been closed in April 2016 with a closing balance of £6,843. Trustee A, was chair of the Board of Trustees at that time but was unable to confirm the existence of the bank account or how the closing balance of £6,843 was expended. Due to a lack of clear and complete information from the trustees, the inquiry found it difficult to determine the full extent of charitable assets and liabilities.

Contrary to the trustees’ assertions that the charity was dormant and had no income, the inquiry found that the trustees had permitted the lender to renovate the charity property into 6 residential flats, which had been rented out by his company. Rental income had been collected by the lender since at least 2012, which was identified during the valuation process to be in the region of £82,383 pa. The charity trustees did not maintain their own records of rental payments due to the charity. The inquiry found that the charity had been in receipt of rental income and substantial funds had been collected on its behalf by the lender’s company. The charity’s lack of basic financial controls or procedures and their apparent unwillingness and/or inability to have proper oversight and control of these matters exposed the charity’s funds to undue risk. This is misconduct and/or mismanagement in the administration of the charity by the trustees. It also confirms that the trustees did not have adequate supervision of the administration of the charity and were in breach of their duties to manage the charity’s resources responsibly.

Conclusions

The Commission concluded that there was serious misconduct and/or mismanagement in the charity’s administration and management. There was evidence of both poor governance and poor financial management of the charity and its affairs. The inquiry concluded that the trustees had not complied with or fulfilled their duties as trustees under charity law. There was a failure to:

• exercise reasonable care and skill in the execution of their roles and to manage the charity’s resources responsibly solely in the best interests of the charity
• ensure that conflicts of interest were identified, recorded and managed
• ensure proper decision-making processes were followed and to properly record their decision making
• ensure sufficient financial controls and procedures to protect the charity’s property
• file annual accounting information, in accordance with their statutory obligations, on time

Regulatory Action Taken

During the course of the inquiry, the Commission exercised its legal powers ^{[footnote 2]} to issue various orders and directions for the purposes of information gathering to charity trustees, private individuals and other parties, including financial institutions.

The inquiry directed trustees to a meeting on 29 November 2018 to discuss regulatory concerns and seek further explanation. As only trustee C complied with section 47 Direction and attended the meeting, further Directions were served on the remaining trustees directing them to a meeting on 17 January 2019.

The inquiry issued regulatory advice and guidance to the charity trustees on a range of issues including governance and filing obligations under section 15(2) of the Act so that they could effectively discharge their duties to the charity going forward.

The inquiry, being satisfied in accordance with section 76(1) of the Act, that there had been misconduct and/or mismanagement in the administration of the charity and that it was necessary or desirable to act for the protection of property of the charity, used a number of regulatory powers, under the following sections of the Act:

• 21 December 2016: section 76(3)(d) order, directing the charity not to part with any charity property without the Commission’s prior written consent
• 21 December 2016: section 76(3)(f) order, restricting the charity from entering into any transactions without the Commission’s prior written consent
• 11 June 2019: section 337(6) discharging the order restricting the charity from entering into transactions, following the sale of charity property at 8 Queens Road by Order of the Court
• 9 February 2021: section 76(3)(g) appointing an Interim Manager to the exclusion of the trustees
• 14 April 2021: section 337(6) discharging the order not to part by further order, once the Interim Manager assumed control of the charity’s property
• 26 July 2022: section 337(6) discharging the Interim Manager

Following the dissolution of the charity on 7 June 2022, the charity was removed from the Register of Charities on 21 June 2022 and the Interim Manager discharged from his appointment.

Appointment of an Interim Manager

On 9 February 2021, the inquiry used its temporary protective power under section 76(3)(g) of the Charities Act 2011, to appoint Guy Hollander of Mazars, a chartered accountant and insolvency practitioner, as Interim Manager (the IM), to take over the management and administration of the charity to the exclusion of trustees.

The scope of the IM’s appointment included:

• to take over the general management and administration of the charity and to take any necessary steps to secure and take control of the charity
• to determine whether the charity is financially viable and can continue to operate
• if viable, to conduct a thorough governance review of the charity and its activities, including review of the charity’s financial controls, systems and reporting, taking appropriate remedial actions to regularise the charity’s governance and activities and to improve the effectiveness and financial management of the charity
• if not viable, to wind up and dissolve the charity, and transfer any remaining property to a charity or charities with similar purposes, by taking all actions necessary for this purpose (in accordance with the charity’s governing document and the law)

Following his appointment, the IM determined that the charity was not viable. The final account balance, after settling outstanding liabilities, amounted to £88,498. The IM identified a charity that was willing and able to apply the remaining funds in line with the charity’s objects and residual funds were transferred to the receiving charity in February 2022.

The Charity was removed from the Register on 21 June 2022 on the basis that it ceased to exist following the IM dissolving the charity in accordance with its Governing Document.

The IM was discharged by the inquiry on 26 July 2022 by virtue of section 337(6) of the Act.

The costs of the IM’s appointment were met out of the charity’s funds. The total costs of the IM’s appointment amounted to £32,500 plus VAT. The IM’s actual time costs for the appointment totalled £41,607 however, costs in excess of the fee approved by the Commission were written-off by the IM.

Issues for the wider sector

Governance

All charities must have an effective trustee body to control and administer the charity in accordance with a charity’s own governing document, charity law and Commission guidance. Holding the position of trustee in name but failing to understand and or failing to fulfil the legal duties and responsibilities of a trustee may amount to misconduct and mismanagement in the administration of a charity. Public trust and confidence depend on the conduct of trustees and how they safeguard charity funds and undertake the objects and activities of the charity.

An effective charity is run by a properly appointed and clearly identifiable board or trustee body with a minimum number of trustees. Trustees are responsible for following the rules in the governing document for how trustees are appointed and can resign their positions.

Trustee Decision Making

The trustees of a charity are collectively responsible for its management and making decisions about how it should be run. Making decisions is one of the most important parts of the trustees’ role. 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 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 trustee body could make

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 take decisions in a way that meet the requirements of charity law and their governing documents. This includes:

• taking decisions jointly (collectively), making sure all trustees have the opportunity to participate
• following any specific requirements in the governing document about making decisions and conducting meetings
• recording decisions properly, so there is no doubt about what was decided and why. Written records should be sufficient to allow someone to understand the issues involved, decisions made and the reasons for them, particularly for important or controversial decisions

Further information can be found in the Commission guidance:

The essential trustee: what you need to know, what you need to do (CC3)

It’s your decision: charity trustees and decision making (CC27)

Managing Conflicts of interest and loyalty

Conflicts of interest are more likely when there are only a small number of trustees on the board, when trustees are closely related, or when the charity has dealings with organisations in which the trustees have interests. 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 trustees should put in place policies and procedures to identify and manage such conflict.

Charity trustees are required to actively manage conflicts as they arise by following the Commission’s four stage checklist (declare, remove, manage and record the conflict). This applies to conflicts of interest (where for example a trustee or a person connected to them has an interest in a proposed arrangement) as well as conflicts of loyalty (where trustees owe competing duties to the charity and another person or organisation). 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.

The Commission recognises that it is inevitable that conflicts of interest will occur. The issue is not the integrity of the trustee(s) 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.

The inquiry demonstrates the importance of robust trustee decision making and record keeping in case queries are raised by the Commission in the future.

Further guidance and advice on conflicts of interest can be found on GOV.UK.

Managing finances: the important message for trustees

Understanding and managing the financial health of a charity is a vital part of trustees’ compliance with their legal duties to:

• act in the interests of their charity and its beneficiaries
• protect and safeguard the assets of their charity
• act with reasonable care and skill

It is essential for a trustee body to have a good knowledge and understanding of the charity and its finances so that, as far as possible the continued viability of the charity and its charitable activities can be assured.

As the charity regulator, the Commission expects trustees to discharge these duties by regularly assessing and monitoring the overall financial position of their charity and by taking steps to ensure that its funds can continue to be used for the purposes for which they were given. Where the charity has to close, the Commission expects trustees to have planned for an orderly shutdown.

Trustees must also ensure that their charity has adequate financial controls in place. It is important that the financial activities of charities are properly recorded, and their financial governance is transparent. Charities are accountable to their donors, beneficiaries and the public. Donors to charity are entitled to have confidence that their money is going to legitimate causes and reaches the places that it is intended to, this is key to ensuring public trust and confidence in charities.

Charity trustees have a general duty to manage their charity’s resources responsibly, reasonably and honestly. This means not exposing their charity’s assets, beneficiaries or reputation to undue risk. It is about exercising sound judgement and then taking decisions that a reasonable body of trustees would do.

It is a fundamental duty of all charity trustees to protect the property of their charity and to secure its application for the objects of the charity. They are also under a duty to account, to collect, care for and apply charitable funds in accordance with the trusts of their charity. To demonstrate compliance with their legal duties, trustees must keep records and an adequate audit trail to show that the charity’s money has been properly spent on furthering the charity’s purposes for the benefit of the public. They must not only exercise sufficient control over their charity’s financial affairs but be able to demonstrate how they have ensured that funds have been spent properly, in a manner, consistent with the purpose and objectives of the organisation. This includes holding secure records of bank and building society accounts, monitoring accounts and regular review of outstanding debts and creditors. Failure of a trustee(s) to protect charitable funds and show how the charity’s funds have been properly applied in accordance with the objects of the charity amounts to misconduct and mismanagement.

If loans are made to a charity, we would expect the charity to have receipts and some form of agreement in place to cover this arrangement. This should, as a minimum, set out the terms of the loan, when it was to be repaid and any interest to be added. This helps to protect charitable funds from potential abuse and any failure to take this action potentially puts charitable funds at risk.

Disposal of Charity Property

Charity trustees must always act in the best interests of their charity. How they demonstrate this is usually left to their discretion, but when it comes to selling, leasing or transferring their charity’s land, the law sets out clear requirements to ensure that these important transactions are properly managed in the charity’s interests and that the charity trustees obtain the best price reasonable in the circumstances.

For most disposals involving a sale, lease or other disposal of an interest in land, the law requires that charity trustees obtain and consider a written report from a qualified surveyor, advertise the disposal following advice from the survey, and decide whether they are satisfied that the proposed terms are the best that can reasonably be obtained in the circumstances of the disposal. The surveyor must be appropriately qualified, and the charity trustees must follow his or her advice on how to market the disposal (or not, if that is the advice). They must receive a written report that complies with the Charities (Qualified Surveyors’ Reports) Regulations 1992. Charity trustees must ensure that the surveyor, that they intend to appoint is appropriately qualified and understands the requirements of these regulations. They must also ensure that the surveyor they propose to appoint is able to act exclusively for, and in the interests of, their charity.

Charity accounting requirements

There are legal requirements for charities relating to the preparation of charity accounts and annual reports, the audit or independent examination of accounts and the submission of these to the Commission. Trustees must familiarise themselves with the appropriate requirements.

The duty to file accounts and the trustees annual report with the Commission applies to all registered charities whose gross income exceeds £25,000 per year. Even if the charity’s income is not greater than £25,000 trustees are under a legal duty to prepare annual accounts and reports and should be able to provide these on request. All charities with an income over £10,000 must submit an annual return.

The Commission has produced guidance to assist trustees in implementing robust financial controls that are appropriate to their charity.

Further guidance on charity accounting can be found on GOV.UK

Failure to submit accounts and accompanying documents to the Commission is a criminal offence. The Commission also regards it as mismanagement and misconduct in the administration of the charity.

1. At the November 2018 meeting. ↩

2. Sections 47 and 52 of the Charities Act 2011. ↩