Decision

Charity Inquiry: The Knightland Foundation

Published 15 November 2024

Applies to England and Wales

The Charity

The Knightland Foundation (‘the charity’) was registered with the Commission on 27 July 2011. It is governed by a memorandum and articles of association incorporated 18 February 2011 and amended by special resolutions dated 7 July 2011 and 17 January 2023. The charity’s objects are:

• the relief of financial hardship, either generally or individually, amongst the elderly or in conditions of need, hardship and distress in particular but not exclusively within the Jewish community by making grants of money for providing or paying for items services or facilities or providing such persons with goods or services which they could not otherwise afford through lack of means
• to advance the Orthodox Jewish religion for the benefit of the public through the holding of prayer meetings, study sessions, lectures, public celebration of religious festivals in accordance with the tenets of the Orthodox Jewish religion
• to advance the education of Jewish pupils according to the tenets of the Orthodox Jewish religion by providing and assisting in the provision of appropriate facilities needed for such purposes
• to promote any purpose that the trustees may decide and that is legally considered charitable

At the time the Commission’s inquiry into the charity opened, the charity had four trustees: trustee A, who had been a trustee from the inception of the charity; trustee B, appointed 26 January 2012; trustee C, appointed 31 March 2017 and trustee D, appointed 30 December 2020. A further trustee, trustee E, who is the wife of trustee A, was in post from 15 April 2011 to 21 December 2017. (Together known as “the former trustees”).

The charity held several residential and commercial investment properties in its own right, in London and in Hartlepool, Teesside. In addition, the charity had four active trading subsidiaries, each of which also owned property.

Company	Ownership
Canvey Housing Ltd	The Knightland Foundation
Bellview Management Ltd	The Knightland Foundation
Rowe Lane Estates Ltd	The Knightland Foundation 50% Trustee A 50%
Bellview Land Ltd	The Knightland Foundation 50% Goldheart Charity Ltd 50%

On 26 April 2023 five suitably qualified, independent trustees were appointed to the charity (“the current trustees”).

Background and Issues under Investigation

In January 2016 the Commission engaged with the charity following its failure to submit accounting information for the financial year ending (FYE) 31 January 2015.  The accounting information was subsequently provided and in March 2017 the Commission issued the former trustees with an action plan requiring them to take specified actions to address issues with the charity’s governance. The actions required included the appointment of additional independent trustees, the adoption of a conflicts of interest policy, and the formalising of existing and future loan arrangements, including those with the charity’s own subsidiary companies. The action plan also required the former trustees to ensure that the charity’s future accounting submissions complied with the required accounting standards.

The former trustees largely complied with the requirements of the action plan, however a review by the Commission of the charity’s accounts for the 2017 and 2018 accounting years noted significant transactions between the charity and its subsidiary companies resulting in substantial sums being owed to the charity by its trading subsidiaries. In March 2020 Commission staff undertook an inspection of the charity’s books and records and met with one of the former trustees, trustee A. An analysis of material provided by trustee A, both at the books and records inspection and subsequently, highlighted further regulatory concerns including the transfer of funds to a private company owned by trustee A, improper use of charity funds and unmanaged conflicts of interest.

On 24 February 2021 the Commission opened a statutory inquiry (‘the inquiry’) under section 46 of the Charities Act 2011 (‘the Act’) to investigate:

• the extent to which the trustees are complying with their legal duties in respect of the administration, governance and management of the charity
• the extent to which the trustees have responsibly managed the charity’s resources and financial affairs
• whether potential conflicts of interest and connected party transactions have been properly managed
• whether there has been any unauthorised trustee benefit

The inquiry closed with the publication of this report.

Findings

The Commission found multiple instances of serious mismanagement arising from the former trustees’ repeated failure to comply with their legal duties and responsibilities, the consequence of which was that the charity’s funds were placed at considerable risk, albeit for short periods, and with no ultimate loss to the charity. The serious mismanagement was:

When the charity needed to make large payments the funds for these transactions were routinely transferred to Bellview Estates Ltd, a private company owned by trustee A, and with shares held by trustee A on trust for trustee E. This was done to take advantage of that company’s banking arrangements, which offered cheaper rates for transfer of funds. However, this placed charitable funds at considerable risk as they were not under the control of the former trustees. The former trustees had not taken advice as to whether the transfer to the private company was in the charity’s best interests or how to address the risk to the charity’s funds.

In February 2020 trustee A transferred £2.5m from the charity’s subsidiary Bellview Land Ltd to Bellview Estates, to use as proof of available funds for that company (which belongs to trustee A) to acquire property on behalf of the charity.  Whilst the funds were returned to the charity on the next working day, they were at risk whilst out of the former trustees’ control and there was neither evidence of any action to address that risk nor of agreement from the other former trustees that trustee A could undertake the transfer to a company under his control.

The charity made unsecured, interest free loans to each of its subsidiary companies. The loans were repayable on demand and initially were not formalised by written loan agreements (loan agreements were put in place as a result of the Commission’s 2017 action plan). There was no record of the former trustees’ decisions to make the loans, the sole signatory in respect of the loans was trustee A. The Commission’s published advice to trustees states that HMRC takes a critical view of loans not made on proper commercial terms. Such loans may well be deemed non-charitable expenditure by HMRC, potentially restricting the charity’s tax exemptions and therefore unnecessarily placing the charity’s funds at risk.

The charity’s subsidiary company, Bellview Land Ltd, was originally wholly owned by trustee A. Whilst it was in trustee A’s ownership Bellview Land entered into a contract with Bellview Housing Ltd (a company owned by trustee A), a real estate development company, to develop a site owned by Bellview Land, requiring the payment of a ‘developer’ fee to Bellview Housing. Trustee A donated his shares in Bellview Land to the charity for nil consideration, the consequence of which was that the charity was obligated to pay the developer fee to his company Bellview Housing. At the time of the transfer to the charity, the charity’s trustees were trustee A and trustee E (trustee E resigned as a trustee in 2017), and trustee B. The obligation to pay the developer fee was not disclosed in Bellview Land’s accounts. There are no records setting out the former trustees’ discussions relating to their decision to accept the Bellview Land shares and in particular there is no documentation relating to the taking on of the obligation to pay the developer fee. A developer fee of £1,190,484 was ultimately paid.

In addition to the inadequate records surrounding the transfer of the shares in Bellview Land and the liability for the developer fee to the charity, there was a substantial failure to manage the conflict of interest between the charity and trustee A when it came to the developer fee actually being paid. Trustee A was the director and majority shareholder in the company to which the developer fee was to be paid, and it was therefore incumbent on the other trustees of the charity in post at the time (trustees B and C) to satisfy themselves both that the payment should be made, and of the amount of the payment, and to do so without the involvement of trustee A. In fact legal advice on behalf of the charity was obtained by trustee A rather than the other former trustees. The advice was not provided directly to the other former trustees but was summarised to them by trustee A. At the trustee meeting at which payment of the fee was approved, trustee A spoke to set out his position as to why the fee should be paid, and then left the meeting whilst the other former trustees decided the matter. There is no contemporaneous note of the meeting, the minutes having been prepared in advance by the lawyers instructed by trustee A.

In addition to the issues surrounding the agreement to pay the fee it is highly significant that the charity’s ledgers show payments of £975,000 in respect of the developer fee being made to Bellview Estates (a company owned by trustee A, which subsequently transferred the fee to Bellview Housing) in February and March 2020, several weeks before the meeting at which payment of the fee was agreed by the former trustees.

The charity entered into a loan agreement, which was formalised in writing on 1 February 2018, with a subsidiary company, Rowe Lane Estates, which was jointly owned by the charity and by trustee A. The agreed loan facility was £1.25m, to be drawn as required and repayable upon demand. The agreement was signed by trustee A on behalf of both parties. There is no satisfactory evidence that the former trustees discussed granting the loan facility, the terms of the loan, or that they assessed the potential risks or benefits to the charity. Again, there is no evidence of the former trustees’ consideration of potential conflict of interest arising from trustee A’s position as 50% shareholder in the subsidiary company.

The charity transferred 50% of the shares in its subsidiary Bellview Land Ltd to The Goldheart Charity Ltd, in February 2017. Whilst the shares in Bellview Land were a valuable asset to the charity, their transfer to another charity with similar objects was a legitimate application by the charity of charitable funds. However on receipt of the transferred shares Goldheart advanced a loan to the charity, initially of £215,000, at an interest rate of 5% and the monies received were then loaned by the charity interest free and without security to Bellview Land, a company jointly owned by both charities. There is no record of the former trustees’ decision making process in respect of the disposal of a valuable asset in return for an interest-bearing loan, nor in respect of the decision to make the unsecured and interest free loan to Bellview Land.

The Commission considered that instances of serious mismanagement by the former trustees, including the failure to identify and manage conflicts of interest, continued despite the imposition of the action plan in March 2017. Trustee A led the operation of the charity but the other former trustees proved either unwilling or unable to regularise the governance of the charity and they bear their share of the responsibility for the charity’s mismanagement throughout the relevant period.

Conclusions

The Commission concluded that there had been serious mismanagement in the administration of the charity by the former trustees over an extended period of time, which had continued despite Commission scrutiny. There had been a lack of transparency and openness in the way the charity was operated, particularly with regard to decision making underlying the transactions involving substantial sums of charity funds. Trustee A largely drove the operation of the charity and to that extent he bears substantial responsibility for its mismanagement. However trustee A’s fellow trustees failed to offer any challenge or to exert governance and their failure to do so enabled the identified mismanagement to take place.

Trustees have a legal responsibility for their charity’s management and administration and the former trustees of the charity were under a duty to manage the charity’s resources responsibly and to act in its best interests. Their repeated failure to do so, demonstrated in failure to identify and manage conflicts of interest and wholly inadequate record keeping, resulted in substantial charity funds being placed at risk.

The Commission accepted that there had been no misapplication of funds by trustee A or by any of the former trustees, although funds had been placed at unnecessary risk when they were transferred outside the control of the charity. The Commission also noted the finding of the Tribunal that trustee A (and trustee B, who also gave evidence) believed they had at all times acted in the best interests of the charity.

The Inquiry has now closed. The charity is now on a stronger footing to deliver its objects and activities effectively and in compliance with its statutory duties.

Regulatory Action Taken

During the inquiry, the Commission used its powers under s47 of the Act on two occasions to obtain information.

On 7 April 2021 the Commission appointed interim managers under section 76(3)(g) of the Act to take over the management and operation of the charity to the exclusion of the trustees. The interim managers’ appointment was appealed to the First-tier Tribunal by the charity, the appeal being dismissed by the Tribunal following oral evidence and written submissions. In a written judgment handed down on 6 October 2021 the Tribunal noted that there had been no significant alteration in the approach of the former trustees, and that serious mismanagement of the charity continued, throughout the time the charity was under the scrutiny of the Commission.

Five new trustees were appointed to the charity on 26 April 2023. On the same date trustees B, C and D resigned. On 27 April the Commission exercised its powers pursuant to ss.76 and 83 of the Act to suspend trustee A as a trustee and as a member of the charity, whilst its Inquiry continued.

The interim managers remained in post to provide training and oversight of the wholly new trustee board and retained a power of veto over resolutions passed by the new trustees (this oversight was appropriate because the entire trustee board was replaced at the same time; it was not a reflection of mistrust or misgivings regarding the new trustees, and the interim managers’ power of veto was never exercised). The interim managers were discharged from their appointment on 31 October 2023.

Following his suspension trustee A acknowledged that the newly appointed independent trustees needed to be given the opportunity and time to implement the governance improvements brought about under the supervision of the interim managers and he voluntarily resigned as a trustee on 3 November 2023 and stated that he will not seek reappointment as a trustee for a period of 2 years from the date of his suspension by the Commission.

Interim Manager Appointment

On 7 April 2021, the Commission made an Order under section 76(3)(g) of the Act to appoint John Dickinson and Joseph Colley of Carter Backer Winter LLP as Interim Managers to the exclusion of the former trustees. The interim managers were charged amongst other duties with securing and managing the charity’s property, conducting a full review of connected party transactions and of the relationship between the charity and its subsidiary companies, and considering the charity’s future viability with a view to its restructure or winding up.

On 28 April 2023, following the appointment of the new trustees, the terms of the interim manager appointment order were varied to permit the new trustees to become involved in the operation of the charity whilst the interim manager provided oversight and training and maintained a power of veto over resolutions passed by the new trustee board. The interim manager was fully discharged on 31 October 2023.

The interim manager was appointed on a capped fee basis. The total cost of the appointment to the charity was £211,000 plus VAT plus disbursements (actual costs incurred by the IM were in the region of £316,000 but the balance was written off in accordance with the fee structure agreed on appointment).

Issues for the wider sector

Trustees are jointly and equally responsible for the management of their charity. They must ensure that their charity has an effective trustee body to control and administer the charity in accordance with a charity’s own governing document, charity law and Commission guidance. All trustees are equally responsible for the decision making in the charity. The Commission’s guidance The essential trustee clearly sets out the key duties for trustees and is available on GOV.UK.

Trustees have a legal duty to act only in the best interests of their charity and for ensuring its funds are used properly for legitimate charitable purposes. Conflicts of interest should be clearly identified and recorded in the charity’s records. Trustees should have in place policies and procedures to identify and manage any such conflicts of interest. Further guidance and advice on conflicts of interest can be found on GOV.UK.

Trustees must ensure that their charity has adequate financial and administrative controls in place, and that charitable funds are applied in line with their charity’s objects. The Commission has produced guidance to assist trustees in managing their charity’s finances on GOV.UK.