Decision

Charity Inquiry: Combined Funds Limited

Published 17 November 2020

This decision was withdrawn on 29 November 2022

This Inquiry has been removed as it is over 2 years old.

Applies to England and Wales

The Charity

Combined Funds Limited (‘the charity’) was registered with the Commission on 27 April 2020. It is governed by memorandum and articles of association dated 14 October 1981.

The charity operates by giving grants to other charities and individuals, in furtherance of its objects which include advancing the Orthodox Jewish Faith and the relief of poverty.

The charity’s entry can be found on the register of charities.

When the inquiry opened the charity had three trustees, Trustees A, B and C (‘the original trustees’). The original trustees are all connected. Trustees D and E were appointed in January and August 2018, respectively and Trustee B resigned in February 2019. Trustees A, C, D and E will be referred to as ‘the current trustees’ in this report.

The charity has nine trading subsidiaries of which Trustee A is the sole Director of eight and Trustee B is the sole Director of the other.

Background and issues under investigation

The Commission opened a Regulatory Compliance case in June 2017 following concerns that the charity needed to register with the Commission. During its engagement with the trustees at the time, the Commission identified further concerns about potential unauthorised trustee personal benefit, unmanaged conflicts of interest, and loans from the charity to four of the trading subsidiaries.

The Commission opened a statutory inquiry under section 46 of the Charities Act 2011 on 27 March 2018. The inquiry examined:

• whether the trustees had taken adequate steps to protect the charity, its interests in its trading subsidiaries and to prudently invest and manage the charity’s funds
• the application of the charity’s funds and potential unauthorised personal benefit
• failures in the charity’s management, governance and administration

The inquiry closed with the publication of this report.

Findings

Financial management and interest in trading subsidiaries

The inquiry found that between 2012 and 2017, the charity gave loans of over £1 million in total to four subsidiaries, of which Trustee A was (and remains) the sole Director.

The Commission’s initial concerns about the original trustees financial management, as well as the conflicts of interests/loyalty and administration of the charity, led to the inquiry issuing an order made under section 76(3)(d) of the Act to restrict the charity’s bank account in May 2018.

Charity trustees are responsible for ensuring that the interests of the charity remain paramount and that any loans to a subsidiary are a justified and appropriate use of the charity’s resources.

The inquiry was informed by the original trustees that these loans were to replace higher interest mortgages, which would allow the subsidiaries to have more money available for the charity. The original trustees therefore considered these loans to be in the best interests of the charity, and in June 2018, the charity formalised a written investments policy. The current trustees have confirmed that the loans have all now been repaid to the charity.

The inquiry did not see any evidence of a misappropriation of funds or of any loss to the charity and the section 76(3)(d) order was discharged in July 2019.

Conflicts of interest/loyalty and unauthorised personal benefit

Whilst the original trustees may have determined that the above-mentioned loans were in the best interests of the charity, the inquiry found that they did not appropriately manage the conflict of interests/loyalty that arose. Such conflicts should have been managed by the conflicted trustees absenting themselves from the decision-making process.

However, the original trustees’ connection to each other and Trustee A’s connection with the subsidiaries meant they were not able to make unconflicted, quorate decisions in relation to the charity’s subsidiaries. The failure to manage such conflicts of interest/loyalty was misconduct and/or mismanagement in the administration of the charity by the original trustees.

The inquiry further identified that between September 2015 and June 2016, the charity had made payments of over £250,000 for the private medical care of a person connected to the original trustees. To legitimately make these payments the original trustees would have had to have been satisfied that they were in furtherance of the charity’s objects and that the trustees had effectively managed the conflicts of interest/loyalty when making the decision. As the original trustees were connected to each other and the beneficiary, they were conflicted.

The current trustees have since retrospectively agreed that these payments were in line with the charity’s objects, as the beneficiary was in poverty and required treatment that was not available on NHS. However, a retrospective consideration is not an appropriate way to manage conflicts of interest/loyalty, and the original trustees’ failure to appropriately manage them at the time was misconduct and/or mismanagement in the administration of the charity.

The original trustees informed the inquiry that the charity did not have formal systems in place for receiving and assessing applications for grants. Applicants would make requests either by phone, letter or in person, or they would be identified from the trustee’s knowledge of the community. If the request was from a charity, the trustees would complete minimal checks, for example checking that the charity was registered with the Commission. The original trustees did not keep a record of the requests, any checks carried out, or the decision-making process but did maintain a record of receipts after grants were issued and had an arbitrary monitoring procedure for larger donations. In June 2018, the charity formalised a written grant making policy.

During the inquiry, two independent trustees (Trustees D and E) were appointed and the charity formalised a conflicts of interest policy in June 2018.

Governance and administration of the charity

The Commission found that the original trustees had been running the organisation as a charity since its formation and despite it having wholly charitable objects, they had only registered with Companies House. The original trustees were therefore under a legal obligation to register the charity on the Commission’s Register and their failure to do so prior to the Commission’s engagement in 2017 was misconduct and/or mismanagement in the administration of the charity.

The Commission also found that, prior to its engagement with the charity, the original trustees had not been preparing accounts that were compliant with the Statement of Recommended Practice (‘SORP’). It was found that the accounts failed to provide a detailed explanation of the charity’s activities or an explanation of the structure of the charity and its subsidiaries. The charity’s accounts had also not been independently scrutinised and could therefore not be relied upon to provide an accurate view of the charity’s position or affairs. SORP requires that all charities that prepare accruals accounts should give a true and fair view of a charity’s financial position and financial activities regardless of their size, constitution or complexity.

Regardless of whether it was registered with the Commission or not, as the organisation had been operating as a charity, SORP complaint accounts should have been prepared. The failure to do this was misconduct and/or mismanagement in the administration of the charity by the original trustees.

Conclusions

The inquiry found that the original trustees failed to adequately manage a number of conflicts of interests and/or loyalty in relation to both the charity and its subsidiaries and failed in their legal obligations to register the charity and prepare SORP compliant accounts. These failings were misconduct and/or mismanagement in the administration of the charity and an Official Warning was issued to the two remaining original trustees to address this.

The inquiry recognises the positive steps taken by the charity so far to resolve the regulatory concerns and is satisfied that the current trustees are aware of their legal duties and responsibilities. The Commission will now monitor the trustees’ progress in consistently adhering to their obligations outside of an inquiry.

Regulatory action taken

Information gathering powers under sections 47 and 52 of the Act were used throughout the inquiry. On 18 May 2018, the inquiry used the protective power under section 76(3)(d) of the Act to protect the funds of the charity, which was discharged on 30 July 2019.

On 3 July 2020, an Official Warning was issued to the two remaining original trustees under section 75A(1)(a) of the Act to address the identified misconduct and/or mismanagement.

On 16 July 2020, an Action Plan was issued to the charity under section 15(2) of the Act providing regulatory advice and guidance. The Commission will continue to monitor the charity’s progress with the Action Plan in a separate case.

Issues for the wider sector

The trustees of a charity are collectively responsible for its management. They must always bear in mind their over-riding duty to take decisions that are in the best interests of the charity. Trustees are under a legal duty to ensure that their charity’s funds are applied solely and reasonably in furtherance of its objects.

Find out further information on charity finances in Managing charity assets and resources (CC25).

Conflicts of interest and/or loyalty 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 and trustees have a legal duty to act only in the best interests of their charity. The trustees should put in place policies and procedures to identify and manage such conflict.

Further information is available from our guidance on Conflicts of interest: a guide for charity trustees (CC29).

A trading subsidiary is a separate company controlled by the charity. The charity can raise money from trade without exposing its assets to risk or being liable for income or corporation tax. There are, however, risks which trustees need to be aware of and manage which includes circumstances where conflicts of interests and/or loyalty arise when a trustee of the charity is also the director of the trading subsidiary.

Further information is available from Trustees trading and tax: how charities may lawfully trade (CC35) and Charities and investment matters: a guide for trustees (CC14).

The Commission has a duty to maintain an accurate register of charities. Where it has an annual income of over £5,000 the duty to register a charity rests with the trustees of the charity. Failure to register a charity where there is a legal obligation to do so does not exclude the charity from the Commission’s jurisdiction.

Trustees are expected to follow the requirements and recommendations in the charities SORP when preparing annual reports and accounts. A charity’s annual report and accounts should help users of the information to understand what the charity is set up to do, the resources available to it, how these resources have been used and what has been achieved as a result of its activities.

More information is available from Charity reporting and accounting: the essentials (CC15c).