Decision

Charity Inquiry: Delapage Limited

Published 14 May 2020

This decision was withdrawn on 20 May 2022

This Inquiry has been archived as it is over 2 years old.

The charity

Delapage Limited (the charity) was registered with the Commission on 14 July 1978. It is governed by a memorandum and articles of association incorporated 29 March 1978 as amended 10 February 2004 and as amended by special resolution dated 29 August 2018.

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

Trustees

During the Commission’s engagement with the charity (since 2009) there have been numerous trustees in office. The trustees shown below were those in office during the Commission’s engagement with the charity (collectively referred to as the former trustees).

Trustees

Trustee A (Joseph Ackerman) was a trustee from 29 March 1978 to 1 September 2016

Trustees B (Naomi Ackerman) was a trustee from 3 October 1989 to 19 January 2012

Trustee C (Sally Glassman) was a trustee from 2 July 2007 to 4 October 2011

Trustee D (Clarence Guttentag) was a trustee from 30 September 2007 to 11 August 2010

Trustee E (Beryl Guttentag) was a trustee from 30 September 2007 to 6 January 2012

Issues under Investigation

Background

On 1 June 2009 the Commission opened a regulatory compliance case into the activities of the charity. At this stage the regulatory concerns identified related to the exceptionally low level of charitable activity, the accumulation of funds to an extent which appeared contrary to the charity’s reserve policy and unsecured loans (estimated to be approximately £74 million) being made at unnecessary risk from the charity to the private companies of two trustees, Joseph Ackerman (trustee A) and Naomi Ackerman (trustee B).

At this stage, trustee A and trustee B, jointly owned over 150 property companies (the property companies) in their private capacity. Some of these property companies had links to the charity and its wholly owned trading subsidiaries ^{[footnote 1]} by way of loan arrangements and/or common individuals (acting as trustees and directors).

The property companies had largely been inactive since 2006 ^{[footnote 2]} due to a dispute between trustee A and trustee B, which has resulted in a breakdown in governance which had spread to the charity and its two wholly owned subsidiary companies (together known as the charitable group). The charity was reliant on its two trading subsidiary companies for its income, which was given to the charity by way of Gift Aid ^{[footnote 3]}.

The charity’s draft accounts for 2009 indicated that the charitable group’s net incoming resources had fallen in 2009 to £601,000 from £21.2 million in 2007. The dispute had also impacted on the property companies’ ability to repay the loans to the charitable group and the charitable group’s ability to independently and effectively manage and monitor the loan repayments, causing a significant drop in the income of the charity.

On 24 August 2010 the Commission opened a statutory inquiry (the inquiry) into the charity under section 8 of the Charities Act 1993 (the 1993 Act) ^{[footnote 4]}.

The inquiry closed with the publication of this report.

The scope of the inquiry was to examine a number of issues including:

• governance arrangements in the charity, including financial controls and decision making on the trustee board
• the suitability of the current trustees (hereafter referred to as former trustees)
• the trustees’ level of compliance with their duties and responsibilities under charity law, particularly with regards to the management of the loan
• examining the transactions between the charity, its subsidiaries and the private companies owned by trustee A and trustee B

During the inquiry, an Interim Manager was appointed ^{[footnote 5]} to take over the management and administration of the charity to the exclusion of former trustees. Following the appointment and full governance review, a new board of trustees (the new board of trustees) was appointed on 26 March 2018 who are now responsible for the administration and management of the charity going forward. Significant progress has been made to address the governance issues and improve oversight and control by the new board of trustees.

Findings

Governance arrangements

There was evidence of poor management and lack of accounting records, poor internal financial governance and failure to follow the basic requirements of the governing document in relation to annual accounting duties. The charity was found to be in default of its filing requirements and had failed to comply with its statutory duties to submit accounts for the financial year ending 31 March 2009. This was misconduct and/or mismanagement in the administration and management of the charity.

The inquiry was made aware of a family dispute between trustee A and trustee B, which both parties acknowledged had resulted in the breakdown of effective governance. Due to the breakdown in governance, accounts had also not been filed with Companies House for the charity, its trading subsidiaries or the property companies for the financial year ending 31 March 2009, as a result of which the charity risked being struck off. If the companies were struck off the Companies House register they would cease to exist and any assets would pass to the Crown as bona vacantia. This presented a serious risk to the charity’s current assets and future property and the trustees’ ability to secure its proper application.

Poor governance arrangements were evidenced by the former trustees’ difficulties in calling or conducting proper trustee meetings. The former trustees were not able to demonstrate that decisions were made in the best interests of the charity, that the former trustees were acting independently or on the basis of professional advice obtained solely for the purpose of the charity.

Discussions held with the former trustees and representatives from both sides of the dispute showed that some of the former trustees were unable to put the interests of the charity first. The Commission is not satisfied that all former trustees understood the separation of the charity from the property companies of trustee A and trustee B. The document, “A Revised Further Agreed Way Forward”, set out proposals on how to divide their business interests. The inquiry found that the proposals encompassed the charitable group (i.e. the charity and its trading subsidiaries), neither of which are assets of trustee A and trustee B and do not form part of their personal property portfolio. This was confirmed by the Interim Manager (the IM), on his appointment following the IM’s examination of the charity’s books and records and based on discussions with the former trustees and their key advisors. The IM confirmed there was a lack of documentary evidence in respect of financial controls within the charity and the decision making process of the board of former trustees, which is misconduct and/or mismanagement in the administration of the charity.

The suitability of the former trustees

As a result of the breakdown in governance, there was uncertainty as to who remained on the board of trustees and whether the former trustees had:

• always acted in the best interests of the charity, not allowing personal interests, views or prejudices to affect their conduct and decision making
• whether they had only used the charity’s income and property for the purposes set out in its governing document and for public benefit

During the course of the inquiry, it was established that the charity was primarily managed and administered by trustee A and that the other 4 trustees played little active role in the day to day management and administration of the charity. The inquiry found evidence indicating that the former trustee body did not make collective decisions in respect of the charity’s management, with key decisions being made, predominantly by trustee A. Key decisions were either not recorded or not adequately recorded by the former trustees to demonstrate that they were in the best interests of the charity.

Additionally, the former trustees were not able to demonstrate a clear understanding of their responsibilities as charity trustees or that their personal or wider interests had not influenced their decision making. From discussions held with former trustees it was unclear whether there was any effective discussion or collective decision making by the board of former trustees. This was demonstrated by the following examples:

(i) Trustee C’s explanation of her trustee duties as mainly involving writing cheques and facilitating distribution of funds. Although not a signatory to the charity’s bank account, the inquiry was informed that trustee C was instructed by trustee A and trustee B who to give monies to

(ii) Despite having taken up trustee positions in 2007, the inquiry was informed that trustee C, D and E had only met on one occasion at a trustee meeting in February 2009

(iii) Trustee C stated to the Commission that she would, in her capacity as a trustee, put the interests of trustee A and trustee B before the interest of the charity.

As a result of the findings of the misconduct and/or mismanagement the inquiry found that the former trustees were unsuitable to be trustees.

As trustee D had resigned prior to the opening of the inquiry and trustee B, C and E resigned during the inquiry, the Commission did not find it necessary to exercise its powers under section 79(2)(a) of the Act to remove trustees. The remaining trustee A was declared bankrupt during the inquiry and is therefore disqualified from being a trustee of the charity and charities more generally.

The trustees’ level of compliance with their duties and responsibilities under charity law, particularly with regards to the management of the loan

On his appointment, the IM conducted a review of the major risks to the charitable group. The IM found there were myriad debtor and credit balances between, on the one hand, the charity and the two trading subsidiary companies and on the other hand, the property companies of trustee A and trustee B. The majority of the loans were assigned to the charity’s trading subsidiaries, to be set off against corresponding creditor balances, with the aim of recovering that element of the loans. The IM found the charity was owed £13.6 million from its trading subsidiaries and a further £90,000 from a connected property company of trustee A and trustee B.

In June 2005, trustee A caused the two trading subsidiaries to each grant security over certain of their assets in support of a Standby Letter of Credit facility granted to another company, under the control and/or influence of trustee A. The company was owned by a Trust of which both trustee A and trustee B were beneficiaries. In October 2009, the company was placed in provisional liquidation at which point £5 million had been drawn under the Standby Letter of Credit. Trustee B informs the Inquiry that she was not aware of these loans and did not give her consent for them, although this is disputed by Trustee A.

Additionally the charity’s two trading subsidiaries had taken out secured bank loans in 2006 amounting to £74 million to finance its two trading subsidiaries. Profits from the trading subsidiaries were donated to the charity allowing it to make a series of unsecured loans to companies connected to trustee A and trustee B.

Minutes of meetings between 2005 and 2006 ^{[footnote 6]} would indicate that trustee A and trustee B were both involved in the original decisions to provide these loans from the charity to the companies and roll them over but trustee B has no recollection of the meetings at which the decisions to provide the loans were made or giving her consent to the loans.

These loans, from the charity were due to be repaid on 31 March 2011. However based on information/documents inspected by the IM, he considered it was unlikely that these loans could be repaid by the due date. Additionally, contractual Interest on these loans of 10% had not been paid by the connected companies since 2008.

It can be argued that these loan agreements were entered into by the charity for the eventual benefit of the charity as the interest payable by the companies would form the income of the trading subsidiaries which would then be passed to the charity.

It is unclear to the Inquiry, how the former trustees had effectively managed and monitored loan repayments. The matrix of loan arrangements also exposed the charity and its trading subsidiaries to undue risk of harm and financial loss, in that, in the event of the insolvency of one or more of the property companies, the trading subsidiaries could be required to settle the loans to the companies while there would be little prospect of recovery by the charity of its unsecured lending.

The former trustees failed to act in the charity’s best interests and with reasonable care and skill in terms of their decision making to enter into these loan arrangements and in failing to use the charity’s resources responsibly.

Examining the transactions between the charity, its subsidiaries and the private companies owned by trustee A and trustee B

The inquiry became aware of loans that the charity had entered into with connected parties (as indicated above) and found that the charity’s former trustees failed to identify, record or adequately manage conflicts of interest, particularly in regard to the property companies connected to trustee A and trustee B.

It should be noted that trustee A and trustee B, as individuals whose conduct is the subject of our investigatory findings, have been given the opportunity to comment on the facts and findings in the report. The Commission has fully considered representations made by trustee A and trustee B when making its final decision and it is noted that some of the finding and conclusions reflected in the report are not accepted by some of the parties.

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 the former 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 as a result exposed the charity to harm or undue risk of financial loss
• ensure sufficient financial controls and procedures to protect the charity’s property
• ensure that conflicts of interest were identified, recorded and managed
• ensure proper decision making processes and failed to properly record their decision making
• file annual accounting information, in accordance with their statutory obligation, on time

A number of the charity’s former trustees ^{[footnote 7]} resigned during the inquiry. In light of the findings and evidence of misconduct and/or mismanagement, the inquiry considered exercising its legal powers under section 79(2)(a) of the 2011 Act to remove trustee A (the remaining trustee).

However this was not necessary as trustee A was declared bankrupt ^{[footnote 8]} during the inquiry and as of 15 May 2019 he has been automatically disqualified from being a trustee for a charity and from holding an office or employment with senior management functions.

Regulatory Action Taken

During the course of the inquiry the following regulatory action was taken:

• a number of directions were made under section 9 of the 1993 Act in order to gather information relevant to the inquiry
• on 3 September 2010 orders ^{[footnote 9]} were made under section 18(1)(iv) and section 18(1)(vi) of the 1993 Act directing the trustees not to part with any charity property held on behalf of the charity and restricting them from entering into any transactions without the Commission’s prior written consent
• the charity’s books and records were inspected on 6 September 2010
• on 19 October 2010 an order was made under section 18(1)(viii) of the 1993 Act appointing an IM
• on 17 November 2010, discharged the orders not to part with any property and restricting transactions, once the IM assumed control of the charity’s property
• under section 26 of the 1993 Act, being satisfied that it was expedient in the interests of the charity, orders were made authorising the IM to assign debts due to the charity to its wholly owned trading subsidiaries
• under section 115 of the 2011 Act, ^{[footnote 10]} authorised the IM to take court proceedings in order to seek the sanction of the court for the IM to enter into restructuring transactions and enter into a scheme (if necessary) for modifying the administrative provisions of the charity to enable the restructuring transaction

Appointment of an Interim Manager

The inquiry appointed an IM, Rod Weston of Mazars LLP, on 19 October 2010 under section 18(1)(vii) of the 1993 Act 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 general management and administration of the charity and its property, including the charity’s investments in its two wholly owned trading subsidiaries’
• taking any necessary steps to secure the property of the charity
• reviewing the charity’s financial controls, systems and reporting procedures and ensuring they were compliant with the filing requirements under charity law
• taking all reasonable steps to prevent any action being taken by Companies House which would jeopardise the status of the charity, its two wholly owned trading subsidiaries or any other company from which money was owed
• to determine and properly secure the charity’s relations, in particular its financial position, in relation to its two trading subsidiaries and to any company owned or controlled by either trustee A or trustee B, in their private capacity, to which the charity has a connection
• to establish and review the assets, liabilities and creditors of the charity and manage all outstanding loans and any other contracts under which money is both due to or owing from the charity
• to ensure the submission of annual accounts for the charity for the year ending 31 March 2009
• to resolve any outstanding tax liabilities of the charity
• reviewing the governance of the charity and taking remedial action in the best interests of the charity
• consider the extent to which there may be a possible claim against the current trustees or former trustees of the charity for breach of trust and breach of duty

The costs of the IM’s appointment, including legal advice and fees that would have been necessary and incurred by any trustee, amounted to £1,373,147.41 excluding VAT. The costs of the IM’s appointment were met out of the charity’s funds and are itemised as follows:

Fees directly related to work as Interim Manager: £673,158.00

Professional fees: ^{[footnote 11]} £700,740.41

In addition £403,849 of work was undertaken by the IM on a pro bono basis.

As part of his appointment, the IM completed a full governance and infrastructure review of the charity and its activities.

Remedial actions were taken to regularise the charity’s governance to ensure it was fit for purpose. This encompassed the following:

• introduction and implementation of financial controls, systems and reporting procedures, regularising the management of income and expenditure
• severing, to the extent possible, the charitable groups financial links to property companies connected to trustee A and trustee B and applying to the court for sanction for the financial restructuring
• reviewing loan arrangements to ensure repayment of loan interest and capital repayment instalments as agreed
• extensive liaison with HMRC resulting in settlement of the charity’s tax liabilities
• appointing new independent directors to the wholly owned subsidiary companies
• liaising regularly with the directors of the trading subsidiaries in relation to complex financial restructuring with the property companies connected to trustee A and trustee B, the repayment of the trading subsidiaries’ secured debt, the realization of assets and the pursuit of litigation claims and the return of the trading subsidiaries to a sound financial footing
• submitting annual accounts for the charity for the years ending 31 March 2009-2017
• recruitment of a new board of trustees
• induction and training of new trustees

Restitution

On 1 September 2017, the IM considered professional advice and the particular circumstances of this case, including the bankruptcy of trustee A and decided that the issue of court proceedings by the charity for restitution by way of civil claims against the former trustees for breaches of duties and losses to the charity was not in the best interests of the charity.

Sufficient progress having been made to address governance matters by the IM led to the appointment of a new Board of Trustees on 26 March 2018. The new Board of Trustees have control and oversight of the charity since the IM’s discharge on 26 March 2018.

A plan for the repayment of the debts owed to the charity from the property companies of trustee A and trustee B (but now owned wholly by trustee B) has been agreed. Trustee B has assisted the charity, working with the IM and the trading subsidiaries, to put this in place and repayments pursuant to the plan have been received by the charity.

Issues for the wider sector

Trustees’ decision making and record keeping

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. 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 trustee body could make.

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

• taking decisions jointly (collectively), making sure all trustees have the opportunity to participate
• 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

It is part of a trustee’s role to exercise independent judgement, constructively question and challenge proposals. No one should be able to direct trustees or drive decisions through without discussion. Trustees who simply defer to the opinions and decisions of one person are not fulfilling their duties.

Conflicts of Interest

Trustees have a legal duty to act in the charity’s best interests when making decisions as a trustee. If there is a decision to be made where a trustee has a personal interest 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, either directly or indirectly through someone you are connected to
• your duty to your charity competes with a duty or loyalty you have to another organisation or person

Conflicts of interest affect charities of all types and sizes. They can lead to decisions that are not in the best interests of the charity and which are invalid or open to challenge. They can also damage a charity’s reputation or public trust and confidence in charities generally. 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. These harmful effects can be prevented where individual trustees can identify conflicts of interest, and the trustee body can act to prevent them from affecting their decision making.

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.

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).

Trading

Charities need to use a trading subsidiary if they carry out commercial (non-charitable) trading which exceeds the threshold for paying income or corporation tax, or involves significant risk.

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 incomeor corporation tax. There are, however risks which trustees need to be aware of and manage:

• the charity exists for charitable purposes, but the trading subsidiary exists to generate income; their aims and interests are different; charity trustees need to distinguish between them
• if the trading subsidiary starts to fail, the charity must not bail it out; this would be putting the charity’s funds at risk
• charity trustees who are also directors of the subsidiary have a conflict of interest
• if a charity trustee is also a director of the trading subsidiary, the restrictions on payments and benefits to trustees also apply to any payments or benefits as a director

Although the directors of a trading subsidiary are responsible for its management, the charity as shareholder and therefore the charity trustees must ensure sufficient oversight and review its performance.

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).

Trustees’ Accounting and Financial Duties

Proper financial controls are a necessary feature of any well-run organisation. Because of the special characteristics of the charitable sector, they play an essential part in helping to show potential donors and beneficiaries that a charity’s property is safeguarded, and that its management is efficient.

Trustees are equally responsible for the overall management and administration of the charity. Every charity’s accounting records must be sufficient to show and explain its transactions and disclose with reasonable accuracy its financial position. Trustees should ensure that financial controls are not only adequate but provide sufficient information to satisfy the trustees that the controls are being observed. Therefore, in order to show that they are complying with their legal duties, trustees must keep records and an adequate audit trial to show that the Charity’s money has been properly spent on furthering the charity’s purposes for the benefit of the public.

1. The charity has two trading subsidiaries, whose principal activities are investment and trading. At the opening of the inquiry these subsidiary companies held a large property portfolio, the current market value of which was unknown as the properties were valued at cost price in the charity’s accounts. ↩

2. Although the inactivity of the property companies since 2006 is acknowledged by Trustee A, it is not accepted by Trustee B. ↩

3. Financial Year Ending 31 March 2008 accounts: gift aid amounting to £2,750,000 was received from the charity’s two trading subsidiaries. ↩

4. The Charities Act 1993 was consolidated into the Charities Act 2011. ↩

5. On 19 October 2010 under section 18(1)(vii) of the Charities Act 1993. ↩

6. For example the meetings which took place on 16 January 2005, 15 March 2006 and 29 March 2006. ↩

7. Trustee B,C and E. ↩

8. Bankruptcy order dated 1 September 2016 and dated 15 May 2019; section 80(1)(a)(i) permits the Commission to remove trustees appointed within five years of being discharged as a bankrupt. ↩

9. These orders were discharged on 17 November 2010, once the Interim Manager assumed control of the charity’s property. ↩

10. 24 October 2013. ↩

11. Relating to work conducted by third parties on behalf of the IM. ↩