Decision

Charity Inquiry: Nanaksar Thath Isher Darbar Trust

Published 9 June 2021

This decision was withdrawn on 10 July 2023

This Inquiry report has been archived in line with our policy.

Applies to England and Wales

The charity

Nanaksar Thath Isher Darbar Trust (the Charity) was registered on 14 September 1993. It is governed by a trust deed dated 7 January 1993, as amended by a supplemental deed on 12 July 2006 and a change of name deed dated 22 November 2019. The Charity’s objects are ‘the advancement of the Sikh religion throughout the UK by the provision of facilities for study and worship and by other such exclusively charitable means as the trustees shall from time to time determine; and the advancement of education amongst the students of the Sikh religion attending Guru Nanak Sikh College, or such other establishments of religious education as the trustees shall from time to time determine.’

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

Background and Issues under Investigation

On 25 April 2014 the Department for Education via the Education and Skills Funding Agency (ESFA), previously known as the Education Funding Agency (EFA), published a report into Guru Nanak Sikh Academy (GNSA) identifying multiple issues of concern in relation to GNSA and its relationship with the Charity.

GNSA is a multi-academy trust consisting of the Guru Nanak Sikh Academy and Nanaksar Primary School. GNSA is an exempt charity regulated by the ESFA. As a result of its concerns, the ESFA, then the EFA, had issued GNSA with a Financial Notice to Improve ^{[footnote 1]}.

At this time, the Charity’s trustees held the freehold and leasehold of the land occupied by GNSA. On 19 May 2014, the Commission then opened a compliance case into the Charity which identified a number of issues of serious regulatory concern in relation to the overall governance and administration of the Charity, such as the Charity’s trustees’ failure to submit annual reports and accounts to the Commission for the financial year ending 31 March 2013, in breach of their legal obligation.

The annual report and accounts for the financial year ending 31 March 2013 were then submitted on 15 December 2015, with the auditor’s report providing a qualified opinion on the financial statements in the accounts. The auditor reported that there was poor quality, and/or inadequate audit evidence, in respect to a number of matters, including weak and informal financial controls, procedures and processes, and unsatisfactory record keeping and classification of loans and donations.

The trustees were also in arrears on their repayments of loans and mortgages of £7.183 million, secured against the sites occupied by GNSA, and failing to engage with one bank to discuss their proposals in relation to the arrears; as at 27 January 2016 the balance outstanding to the bank was £3.35 million. The bank was seeking to take action to recover the funds. There was therefore a risk to the Charity’s property from foreclosure and a risk that the community could lose its temple and school. The Charity also had further unsecured loans of £850,000.

In March 2016, the London Borough of Hillingdon initiated legal action as the trustees failed to comply with the terms of an enforcement notice. On 14 July 2010 the trustees had purchased the freehold of a football ground site in Hayes for £1.4 million, planning to build a school on the site. The school could not be built due to the presence of an underground gas pipeline. The trustees then proceeded to turn the site into a car park at a cost of £50,000. The trustees failed to obtain planning permission for the car park, resulting in the London Borough of Hillingdon serving them with the enforcement notice in October 2015.

These matters raised serious regulatory concerns about whether the trustees had been adequately discharging their legal duties to act in the Charity’s best interests, manage the Charity’s resources responsibly and act with reasonable care and skill. They also raised concerns about the administration of the Charity and the risk to its property. The Charity’s trustees also failed to engage adequately with the Commission during the compliance case.

Therefore, on 12 April 2016 the Commission opened a Statutory Inquiry into the Charity. The scope of the Inquiry was to examine:

• the administration, governance, and management of the Charity by the trustees and whether or not the Charity trustees had complied with, and were fulfilling their duties and responsibilities as trustees under charity law, in particular by examining:
  • the trustees’ compliance with their legal obligations to submit annual returns, reports and accounts to the Commission
  • the Charity’s financial controls and management
  • issues arising from the purchase of land formerly used as a football ground
  • risks to the Charity’s beneficiaries, assets and activities arising from loans/mortgages secured on the Charity’s property
• whether and to what extent there had been misconduct or mismanagement in the administration of the Charity by the trustees

Findings

The administration, governance and management of the Charity by the trustees

The trustees’ compliance with their legal obligations to submit annual reports and accounts to the Commission

Whilst the inquiry was open, the trustees submitted the Charity’s outstanding accounts for the financial years ending 31 March 2014 and 31 March 2015 and the Charity is now up to date with its filing requirements.

The inquiry found that the Charity’s initial accounts for the year ended 31 March 2019 did not appropriately reflect a significant event; the transfer of the school and gurdwara to GNSA, which was completed on 28 September 2018. The inquiry raised this point with the trustees who resubmitted revised accounts.

The inquiry also found that the Charity’s accounts for the year ended 31 March 2019 contained a number of inaccuracies and misleading statements regarding the Charity’s activities. Charitable projects recorded as current in the Charity’s accounts for the year ended 31 March 2019 had not received funds from the Charity since 2016. In addition, no appraisals appeared to have been undertaken of projects funded by the Charity and the trustees were unable to provide sufficient evidence of where funds had been applied to charitable projects. The inquiry also found that the 2019 accounts were misleading in that they implied that the Charity’s activities included activities that were actually being undertaken by other charities ^{[footnote 2]}.

The accounts for the year ended 31 March 2019 also stated that new trustees undergo an induction process and that all trustees are encouraged to attend external training seminars to advance their knowledge and gain skills to equip them in their role as trustees. When asked for a list of courses attended by trustees the Charity explained that it was unable to give a list of any training courses attended by the trustees since 1 April 2018.

The Charity’s financial controls and management

Nanaksar Thath Isher Trust Canada, New Zealand Nanaksar Thath Isher Trust and Anand Isher are related parties in that the Chair of the Charity is connected to those charities by either spiritual influence and/or trusteeship, although they operate independently from the Charity.

The Charity is understood to be currently owed over £3 million by Nanaksar Thath Isher Trust Canada (‘the Canadian Trust’) and to owe almost £3 million, in total, to New Zealand Nanaksar Thath Isher Trust and Anand Isher in Australia.

The trustees explained that these loans, for significant sums, between the Charity and the connected charities were mostly interest free and given as goodwill gestures with an understanding that the recovery would not be insisted upon within any fixed timescale. However, payment of a guarantee from the Charity to the Canadian Trust has been disputed and was recently subject to a court order requiring the Charity to pay interest and the costs.

Furthermore, on 15 October 2012 the trustees had agreed to take out a bridging loan of £530,000.The loan agreement clearly set out the terms and conditions of the nature of the loan as a rollover facility for an initial period of two months, after which the interest rate charged rose substantially. The Charity was unable to make the required payments when they fell due, which resulted in penalty interest being charged on the principal sum and increased the debt over time.

The Charity’s trustees met on 4 December 2017 to discuss this loan; minutes of the meeting indicate that the trustees had not fully understood the terms and conditions of the loan and that interest charges had accrued at a significant rate. The debt was settled in full on 8 January 2020 with a payment of £1.4 million.

Issues arising from the purchase of land formerly used as a football ground

The Charity had purchased a former football ground for £1.4 million with the intention of building a school. The trustees informed the inquiry that various preparatory searches and reports were undertaken before they purchased the Springfield Road football ground site and they were under the impression that there was a small gas pipeline under the ground, but that they thought this would not be a problem. They explained that it was not until later that they found out it was a much bigger pipeline.

The trustees maintain that the purchase was discussed at length but were unable to provide records of the meeting, and the inquiry understands that no records of the meeting were kept.

Having been unable to build the school as planned, due to the pipeline, the trustees had then spent £50,000 to turn the site into a car park. However, they did so without planning permission and so had to remove the car park, with the cost of the removal being met by the Charity’s benefactors who had paid for it to be laid in the first place.

The inquiry found that the trustees failed to undertake appropriate due diligence when purchasing the land, which resulted in additional expenditure. They subsequently failed to comply in time with a local authority enforcement notice to remove the car park. Trustees have an obligation to abide by the law and this failure to comply with planning law and a local authority enforcement notice is a breach of trustee duty.

Risks to the charity’s beneficiaries, assets and activities arising from loans/mortgages secured on the Charity’s property

At a meeting on 9 May 2016 the trustees confirmed to the inquiry that they had loans and/or mortgages totalling over £5.5 million with three separate banks, comprised of respectively £3.5 million, £1.7 million and £350,000. The majority of the mortgages and loans were secured against the school sites with the exception of the £350,000 loan. The trustees explained at the meeting that the bank to whom they owed £3.5 million had given the trustees until 13 May 2016 to come up with some proposals in respect of the outstanding arrears and the trustees were going to ask for an extension to consult with their legal advisors. The trustees also stated that they were in communication with the bank to whom they owed £1.7 million and confirmed that there were no deadlines at that time regarding the repayment of that amount and there were no arrears in respect of the loan for £350,000. The trustees explained that they would seek to restructure the mortgages secured against the school sites in the short term and in the longer term would look to secure funding to discharge the mortgages.

During the course of the inquiry the trustees began to engage with the banks and to make some payments. For example, they made a payment of £1.5 million to the bank to whom they owed £3.5 million in December 2016. However, it was clear that the Charity was still in significant financial difficulties.

On 6 July 2017 the Commission received an application made by the Charity for an Order that would enable the Charity to transfer the areas of land owned by the Charity and occupied by the school at an undervalue to GNSA.

The application explained that the Charity had contributed around £2.87 million to the purchase and development of the school site and had borrowed significant sums to fund the school and its development. Without a regular source of income other than donations the Charity had difficulty in repaying its debts. There were two registered financial charges on the freehold site in favour of two banks. The amounts that the Charity was paying to service the debt was not effectively paying down the sums outstanding. The ESFA had indicated that they were willing to pay the Charity up to £2.76 million on the condition that the freehold and leasehold were transferred to GNSA and that GNSA would be fully separated from the Charity. GNSA would hold the freehold and leasehold titles subject to a first charge in favour of the Department for Education to protect the continued use of the land for educational purposes and a second charge in favour of the Charity to protect occupation for the provision of education connected to the support of the Sikh faith. The proposed terms of sale included that the land would be transferred only on the redemption of both formal legal charges in favour of the two banks. The value of the site was stated to be around £5.8 million. The sale price was significantly below the value of the land, but the terms of the transfer would clear the Charity’s principal debts and further its objects.

On 7 September 2017 the Commission made an Order under sections 105 and 117 of the Act authorising the disposal of the Charity’s land ^{[footnote 3]}. The Order was varied on 12 July 2018 and 2 August 2018. The Order authorised the trustees to transfer land to GNSA for the sum of up to £2.76 million on the following terms:

• the ESFA would make a capital grant payment of up to £2.76 million to Guru Nanak Sikh Academy Limited ^{[footnote 4]}

• in return for the sum of up to £2.76 million the Charity’s trustees would sell the land to GNSA
• the Charity’s trustees would use the proceeds of sale to pay the sums owed by the Charity to the two banks with charges over the land
• GNSA would hold the freehold and leasehold titles subject to a first charge in favour of the Secretary of State for Education to protect the continued use of the land for educational purposes and a second charge in favour of the Charity reflecting its contributions to GNSA

The land transfer was completed on 28 September 2018 in accordance with the terms set out in the Commission’s Order as an undervalue sale to a related party, in order to secure the future of the school for the beneficiaries.

It was clear to the inquiry that a lack of financial oversight by the trustees had caused the Charity to experience severe financial problems. Of additional concern was the inquiry’s finding that the trustees had initially been slow to engage with its lenders when it was clear that the Charity was in financial difficulties and unable to meet all of its financial obligations to them. Whilst the school was transferred to GNSA during the inquiry, thus protecting the interests of the Charity’s beneficiaries, the assets had been placed at risk by the actions of the trustees in taking out loans that it was unable to repay and failing to tackle this at the earliest opportunity.

Whether or not the Charity trustees have complied with and are fulfilling their duties and responsibilities as trustees under charity law

The inquiry found that the trustees had failed to fully comply with charity law in that they had failed to submit accounting records to the Commission within ten months of the end of the financial year for the years ending 31 March 2013, 31 March 2014, 31 March 2015, 31 March 2018 and 31 March 2019. Aspects of the accounts submitted were misleading, for example in relation to charity projects. The accounts for the year ended 31 March 2019 had to be resubmitted as they failed to appropriately reflect a significant event. The trustees therefore failed in their duty to be accountable and transparent.

The inquiry found that the trustees lacked the necessary skills to manage the Charity in line with Commission guidance and best practice. For example, there had been insufficient record keeping in relation to major decisions made by the Charity, including when entering into loans and buying land. Decisions made were not in the best interests of the Charity, for example the bridging loan created a significant financial liability and the trustees appear to have been unaware of the risk of this. There is no evidence that the trustees assessed risks involved before taking out other substantial loans and mortgages which put the assets of the Charity and the interests of the beneficiaries at risk. Prior to the opening of the inquiry the trustees had failed to communicate adequately with the banks after running into financial difficulties and being unable to make repayments. The trustees therefore failed to act with reasonable care and skill, to manage the Charity’s resources responsibly or to act in the best interests of the Charity.

The inquiry found that conflicts of interest and loyalty were not managed adequately. The Chair of the Trustees is described in the Charity’s accounts for the financial year ending 31 March 2019 as the single most influential person in the charity and is also connected to a number of similar and unrelated international charities that have received interest free loans from the charity. There appears to be very little documentation in relation to these loans and the trustees have not provided any evidence that conflicts of loyalty were managed effectively. The Charity currently employs two family members of one of the trustees and again it is unclear as to whether conflicts of interest were managed effectively when those employees were recruited and in relation to decisions about their employment ^{[footnote 5]}.

During the inquiry the Charity’s engagement with the Commission and with its lenders improved significantly. The trustees also sought professional advice and applied for the transfer of land to GNSA which ensured the Charity’s assets were protected from recovery action and also protected the interests of its beneficiaries. The trustees are now keeping records of meetings and decisions made.

On 26 November 2020 the inquiry issued an Action Plan to the trustees. This includes the following actions that the trustees must take:

• exclude any mention of projects not funded in the year from its next set of accounts and send a correction statement to charity members about incorrect information in previous accounts regarding the funding of projects
• undertake appraisals on projects that have received funds from the Charity
• review outstanding loans, including whether terms can and should be amended to better protect the financial position of the Charity
• appoint additional trustees and ensure all trustees understand the duties of a trustee
• establish open and transparent procedures for future staff appointments which set out how to deal with conflicts of interest

The trustees have provided evidence and information to the inquiry that indicates that they have taken steps towards complying with the Action Plan. On the closure of this inquiry if any actions in relation to the Action Plan remain outstanding the Commission will set up a monitoring case to ensure that the trustees fully comply with the Action Plan.

Conclusions

There has been significant mismanagement and/or misconduct in the administration of the charity by the trustees. The trustees have failed to understand the duties and responsibilities of a trustee and their actions have fallen well below the standards of governance that the Commission expects.

The mismanagement and/or misconduct had the impact of putting the Charity’s assets at risk and creating a risk that its beneficiaries would lose access to the school and temple. The transfer of the school to GNSA has protected the interests of the Charity’s beneficiaries and reduced the risk to the Charity significantly. The Charity still has outstanding loans where there is inadequate record keeping in relation to the decisions to initially take out the loans; it is therefore unclear as to whether these loans are in the best interests of the Charity.

During the inquiry the governance of the Charity improved but the Commission still has some concerns about the ability of the trustees to run the Charity effectively. The Commission will continue to monitor the trustees’ compliance with the Action Plan issued in November 2020 in order to assess the performance of the trustees.

Regulatory Action Taken

On 7 September 2017 an Order under sections 105 and 117 of the Act authorising the disposal of charity land was provided to the trustees. The Order was varied on 12 July 2018 and 2 August 2018 in exercise of the power in s337(6) of the Act, with the disposal being completed on 28 September 2018.

Orders under section 52 of the Act and Directions under section 47 of the Act were used during the inquiry to obtain information from the trustees and other parties.

An Action Plan was issued to the trustees under section 84 of the Act on 26 November 2020 requiring the trustees to undertake specified actions by specified dates.

Issues for the wider sector

The purpose of this section is to highlight the broader issues arising from the Commission’s assessment of the issues raised publicly that may have relevance for other charities. It is not intended as further comment on the Charity in addition to the findings and conclusions set out in the earlier sections of this report but is included because of their wider applicability and interest to the charity sector.

Trustees of charities are under a legal duty as charity trustees to submit annual updates, returns, annual reports and accounting documents to the Commission as the regulator of charities depending upon the level of the charity’s income. Failure to do so is a criminal offence. The Commission also regards it as mismanagement and misconduct in the 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. The report and accounts, when read together, 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.

All charities must have an effective trustee body to control and administer the charity in accordance with charity law and Commission guidance. 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. Trustees must be aware of and act in accordance with their legal duties. Trustees must actively understand the risks to their charity and make sure those risks are properly managed. Holding the position of trustee in name but failing to fulfil the legal duties and responsibilities of a trustee may amount to misconduct and mismanagement in the administration of a charity.

If a loan has been made to a charity, we would expect the charity to have some form of agreement in place to cover this arrangement. This should, as a minimum, set out the terms of the loan, when it is to be repaid and any interest to be added. This helps to protect charitable funds from potential abuse. As such, any failure by the trustees to take this action potentially puts charitable funds at risk and so would be a breach of a trustee’s duty to safeguard the charity’s assets.

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. Trustees have a legal duty to protect charity property and funds with the necessary care and properly assess risk. Trustees must actively understand the risks to their charity and make sure those risks are properly managed.

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

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 meets the requirements of charity law and their governing documents. This includes 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.

The Commission recognises that it is inevitable that conflicts of interest will occur. The issue is not the integrity of the trustee concerned, but the management of any potential to profit from a person’s position as a trustee, or for a trustee to be influenced by conflicting loyalties. Even the appearance of a conflict of interest can damage the public’s trust and confidence in the charity, so conflicts need to be managed carefully. 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 your duty to your charity competes with a duty or loyalty you have to another organisation or person. Trustees have a legal duty to act only in the best interests of their charity and must prevent any conflict of interest from affecting the decision making.

1. The Financial Notice to Improve remained in place until 13 August 2019 when the ESFA were satisfied that the conditions had been met. ↩

2. The Charity subsequently published a correction statement which was incorporated within the 2020 accounts. ↩

3. The ‘land’ which was subject to the Order made by the Charity Commission relates only to land occupied by the GNSA. ↩

4. The ESFA capital grant was issued only for the purpose of purchasing the land occupied by GNSA. ↩

5. The Charity has advised that new HR policies have been adopted to ensure such occurrences are not repeated. ↩