Decision

Charity Inquiry: Citygate Christian Outreach Centre

Published 8 July 2024

Applies to England and Wales

The charity

Citygate Christian Outreach Centre (‘the charity”) was registered on 29th May 2005.  It is governed by a memorandum and articles of association incorporated on 22nd March 2005 as amended by Special Resolutions dated 4th September 2005 and 21st December 2022. In summary, the charity’s primary objects are:

• the advancement of the Christian religion in particular but not exclusively by and through the following means: worship, preaching and teaching of Christian doctrine and principles, fellowship, and the distribution of Bible teaching in all forms of media. The instruction and pastoral care of Christians including young people and children and the evangelism of non-Christians
• the advancement of education on the basis of Christian doctrine and principles and without prejudice to the generality of the foregoing the provision of such education and educational establishment: and
• the relief of persons who are in conditions of need including those experiencing financial hardship, poverty or who are in need because they are aged or sick

The charity’s principal activities are maintaining a church in Beckenham, subsidising a community enterprise, serving the local community with hall hire facilities and community support programmes.

The charity’s entry can be found on the Register of Charities

Background and Issues under Investigation

The charity was placed into the Commission’s double defaulter class inquiry on 22nd March 2021 as it failed to submit its annual report, accounts and return as required for the Financial Year Ending (‘FYE’) 31st March 2020. Its accounting information for the FYE 31st March 2019 was submitted just before the inquiry opened, on 21st March 2021.

The charity’s accounts for the FYE 31 March 2019 and 31 March 2020 were submitted in March and May 2021, respectively. Both sets of accounts included ‘qualified opinions’ from an independent auditor relating to significant unsecured loans to an individual, a property developer, who was not connected to the charity.

The independent auditor stated: “that the non-payment of loans identified may cast significant doubt on the Group’s ability to continue as a going concern.” The unsecured loans were made by the charity to the property developer purportedly to fund a real estate project in Dubai, United Arab Emirates.

In total, £948,450 was loaned to the property developer without security. With the property developer having repaid some funds in 2018, there was a balance of £915,450 outstanding, not including interest, when the charity entered the double defaulter class inquiry in August 2021.

In addition to the loans, the Commission identified further regulatory concerns including that the charity’s previously submitted accounts listed significant related party transactions between the charity and former trustees, as well as individuals connected to them, over several years. The accounts also showed that the chair of trustees and his wife were paid for their role as pastors in the church and for which they received significant increases in salary in the FYE 31st March 2019.

There were also concerns that at the time of the inquiry opening, the Commission’s records showed the charity as only having two trustees which breached the requirement within the charity’s Articles of Association which stipulated that there should be a minimum of three trustees. The Commission opened a statutory inquiry into the charity under section 46 of the Charities Act 2011 on 20th August 2021.

The scope of the inquiry was to examine the administration, governance, and management of the charity by the trustees with specific regard to:

• decision making in relation to making unsecured loans
• whether the trustees’ conduct resulted in a financial loss to the charity,
• handling of potential conflicts of interest in relation to related party transactions
• whether there was any unauthorised private benefit to the trustees and/or connected parties
• whether the trustees complied with their governing document and fulfilled their duties and responsibilities under charity law

The inquiry closed with the publication of this report.

Trustees

When the inquiry was opened, the charity had two trustees, Mr Alan Samways and Mr Julian Melfi, who will be referred to as ‘the former trustees’ within this report.

Mr Olawale Dada was a trustee between December 2018 and March 2021, and is referred to as ‘the third trustee’ within this report.

As will be detailed below, these individuals are no longer trustees of the charity, and a new board of trustees has been appointed during the inquiry.

Findings

Decision making in relation to making unsecured loans

The inquiry found that the former trustees had demonstrated poor judgement and inadequate decision making in relation to the issuing of loans to the property developer between February 2018 and March 2021 when the loans were first recalled (“the loan period”).

The property developer was an associate of one of the former trustees who, in 2018, proposed an investment opportunity to the former trustees wherein the charity would invest charitable funds with him, by way of a loan, to finance an overseas real estate project. The loans were to be repayable within 60 days of recall and attract interest at the rate of 10% per annum. The property developer did not provide any paperwork to the former trustees about the proposed investment that evidenced how the loans would be used or how the interest would be generated.

On 6th February 2018, the former trustees, on behalf of the charity, signed an agreement to lend up to £100,000 to the property developer. They did so without considering or seeking to secure the loan or applying a charge on any of the property developer’s UK properties. They did not seek professional independent advice on the risks involved of loaning significant amounts of the charity’s money to the property developer or about ensuring there was adequate security for the charity.

Between February 2018 and March 2021, the former trustees signed more loan agreements on behalf of the charity, agreeing to loan increasing amounts of the charity’s money to the property developer. Each time, the former trustees failed to consider securing the loans, demonstrating seriously poor decision making and a failure to act in the charity’s best interests. In addition, at no time during the loan period, did the trustees seek independent, professional advice.

By March 2021, the charity had made over 80 separate payments to the property developer under the terms of the loan agreements. Before making each payment, the trustees should have sought updates and evidence from the property developer as to the progress of the proposed development and how the money from the loans was being expended to ensure that it was still in the charity’s best interest. The former trustees informed the inquiry that they were not interested in whether the property was being developed and were only concerned in knowing that the loans and interest would be repaid. But the former trustees failed to make any enquiries even at the most basic level to establish how the loans were being used, and saw no evidence that properties were being developed or any progress being made, and therefore no evidence that the loans would be repaid with interest. Nonetheless, the former trustees continued to sign loan agreements on behalf of the charity and to send charitable funds to the property developer.

In March 2021, following the qualified opinion from the auditor reported in the charity’s accounts for the FYE 31st March 2020 which documented the potentially serious damaging effects of the unsecured loans on the charity’s viability, the third trustee resigned from his position as trustee. Though he had not signed any of the agreements or arranged payments to the property developer, he also had not taken any action to mitigate the risks of these agreements. At the same time as this resignation, the charity decided to call in the loans together with the interest.

In April 2021, after having already made a request for repayment of the loans from the property developer, which was not complied with, the former trustees signed an agreement on behalf of the charity to loan, and did loan, a further £40,000 to the property developer. This further demonstrated to the inquiry the former trustee’s inadequate decision making and inability to grasp the seriousness of the auditor’s qualified opinions.

Between April 2021 and August 2022, the charity made several requests to the property developer for full repayment, and each time the charity was promised that payment would be forthcoming, but no repayment materialised.

In August 2022, the inquiry directed the trustees, under section 84 of the Act, to take reasonable steps, including seeking independent professional advice, to recover the loans.

Trustees have a duty to act in the charity’s best interests, including demonstrating sound decision making, and to manage the charity’s resources responsibly. Whilst the former and third trustee may have acted in good faith, the lack of due diligence and failure to seek advice about the property developer’s proposal, followed by poor decision making throughout the loan period, and inaction in recovering the loans resulted in charity funds being exposed to prolonged undue risk. This is serious misconduct and/or mismanagement in the administration of the charity over several years.

Whether the trustees’ conduct resulted in a financial loss to the charity

In January 2023, the charity, having taken professional legal advice as directed by the inquiry, issued a statutory demand for repayment to the property developer, with a 21-day window for repayment. Following the filing of a bankruptcy petition by the charity against the property developer on 20th July 2023, the charity reached a settlement agreement on 3rd November 2023 with the property developer for “the full return of the original loan value plus some recovery of interest and costs”. The charity has already recovered over £500,000 through the settlement agreement, and the inquiry is satisfied that, if the property developer continues to adhere to the settlement agreement, the charity will not have suffered a financial loss.

Handling of potential conflicts of interest in relation to related party transactions

Under the charity’s governing document applicable at the time, the senior pastor of the church was also the chair of trustees and could be remunerated for their work as pastor. In 2019, the salaries for the senior pastor and their wife– who also worked for the charity – rose significantly. The charity demonstrated to the inquiry that a special salary review meeting was held, and that the senior pastor was not party to the meeting or the discussions around their salaries. An external consultant was brought into the salary review meeting to consult the non-conflicted trustees on staff salaries. The inquiry is satisfied that these payments were allowed under the terms of the governing document and were therefore authorised, and the potential conflicts of interest were appropriately managed.

The inquiry is satisfied that potential conflicts of interest arising from significant related party transactions, as detailed below, were handled appropriately.

Whether there was any unauthorised private benefit to the trustees and/or connected parties

The inquiry examined the accounts of the charity for FYE March 2021 and preceding years, which showed that the charity had paid trustees and related parties.

The former trustees reported to the inquiry that between 2005 and 2020 the charity had paid £619,986.96 to trustees and related parties. The former trustees informed the inquiry that the charity had been unable to secure sufficient bank loans to purchase and renovate property so, between 2005 and 2015, they, family members and charity members took out a number of credit agreements in their own names and passed the funds and repayments terms onto the charity. The former trustees and related parties then made the repayments, and the charity reimbursed them for those payments. Therefore, the £619,986.96 paid to trustees and related parties was the reimbursement of loans and interest made by those individuals to the charity.

The charity’s governing document at the time permitted the payment of interest on loans from trustees. The inquiry is satisfied that the payments to trustees and related parties were authorised by the charity’s governing document, the interest paid on the loans was reasonable, and that conflicts of interest were appropriately managed. The repayments from the charity to the trustees and related parties were completed in 2020. By the time the inquiry opened in August 2021, all loans had been repaid and the charity was no longer making payments to trustees.

The inquiry also considered whether there was any private benefit to the former trustees and third trustee from the loans made to the property developer. The inquiry found that no trustees and/or related parties benefitted privately from this arrangement.

Conclusions

The inquiry concluded that there was serious misconduct and/or mismanagement by the former trustees, and to a lesser extent the third trustee, in the charity’s administration and management, in respect of their conduct in connection with the loans made to the property developer.

The former trustees, had not complied with or fulfilled their duties as trustees and demonstrated a failure to:

• act in the charity’s best interests
• manage the charity’s resources responsibly and avoid exposing the charity’s assets to undue risk
• exercise appropriate decision-making
• take advice and be sufficiently informed
• act with reasonable care and skill

In light of the findings and evidence of misconduct and/or mismanagement, the inquiry exercised its legal powers under section 79(4) of the Act in June 2023, to remove the former trustees.

The Commission is satisfied that, unlike the former trustees, the third trustee was not directly involved with making the arrangements for the various loan agreements with the property developer. However, during his tenure as a trustee for over two years, the third trustee was collectively responsible for, contributed to or facilitated misconduct or mismanagement in the charity or knew of the misconduct and/or mismanagement and failed to take any reasonable step to oppose it. In February 2024 he was disqualified for two years from acting as a trustee or taking a senior management position within a charity.

The charity now has an entirely new trustee board. The current trustees have demonstrated to the Commission that they are taking steps to recover the charity funds, and in November 2023 a settlement was reached between the charity and the property developer to repay the full amount of the loans plus interest over 12 months.

Regulatory Action Taken

The Commission’s information gathering powers under sections 47 and 52 of the Act were used throughout the inquiry.

On 9th August 2023, the Commission issued an Order, under section 84 of the Act, directing the trustees to implement a number of actions within one month of the date of the Order, aimed at improving the governance and financial management of the charity. The charity complied fully with the Order.

On 16th May 2023, the Commission issued notice of its intention to remove Mr Alan Samways, a former trustee from acting as a trustee of the charity under section 79(4) of the Act. He was subsequently removed as a trustee under s79(4) of the Act on 15th June 2023.

On 16th May 2023, the Commission issued notice of its intention to remove Mr Julian Melfi, the other former trustee from acting as a trustee of the charity under section 79(4) of the Act. On 14th June 2023, representations were submitted by Mr Melfi regarding his proposed removal. These representations were considered by an independent reviewer as part of the Commission’s decision review procedure. The decision review concluded that the removal of the former trustee met the statutory legal test and was proportionate and that the Commission should proceed to make the removal Order. On 8th January 2024, the Commission made an Order under section 79(4) of the Act to remove Mr Julian Melfi as a trustee of the charity.

The consequence of removal is automatic disqualification from being a trustee of or for any charity without a waiver from disqualification from the Commission or the courts. It is an offence to act as a trustee or hold a senior management position in any charity in England and Wales whilst disqualified.

On 15th February 2024 the Commission exercised its powers under s181A of the Act to disqualify Mr Olawale Dada from being a charity trustee and/or trustee for a charity and from holding an office or employment with senior management functions in charities generally for a period of 2 years.

The disqualified individuals’ names have been added to register of removed trustees.

Issues for the wider sector

When considering high risk decisions particularly those involving significant sums of money, it is difficult to see how trustees could discharge their legal duties without taking and properly considering independent professional advice as they would be exposing the charity and its property to significant risk by failing to do so. Donors and beneficiaries have a right to expect trustees to take appropriate steps to protect property of the charity.

Trustees are jointly and equally responsible for the management of their charity. They must ensure that their charity has adequate financial and administrative controls in place, and that the funds of their charity are applied for the benefit of the public for which it has been set up.