We answer some common questions on personal liability and personal benefits.
Question: “We are a charitable trust and our trustees are concerned about personal liability. What should we do?”
Answer: This is a very common issue for unincorporated charities, such as trusts and unincorporated associations. They do not have separate legal personality, so cannot own property or enter into contracts in their own name. Instead, individuals do so in trust for the charity.
The key issues with not having separate legal personality are the administrative burden of transferring assets and contracts on a change of trustees, and concerns regarding personal liability for trustees. This might not be a problem for very small charities or grant-making charities with limited activities and risk exposure. However, for larger charities with extensive activities and/or greater exposure to risk, it is advisable to consider incorporating the charity.
You might wish to consider incorporating the charity as a company or Charitable Incorporated Organisation (CIO). This will provide the charity with separate legal personality and limited liability status to limit the personal liability of the trustees or management committee, provided that they have acted properly. It will also avoid the need to transfer ownership of assets whenever there is a change in the trustees.
Charitable companies are regulated by both company and charity law, so are registered with both Companies House and the Charity Commission. In contrast, CIOs are only regulated by charity law, so are only registered with the Charity Commission. CIOs were introduced in 2013 and have proven to be very popular.
If you are considering incorporating your charity, please do get in touch to discuss your specific circumstances with us, after which we would be delighted to provide a fee estimate for the legal work involved.
Question: “We have a situation where a trustee might receive a personal benefit from an arrangement we are proposing to enter into - how do we deal with this?”
Answer: There is a general principle in charity law that the trustees of a charity should not personally benefit from the charity. So, unless a benefit is expressly authorised by your governing document or by statute, you will need to apply to the Charity Commission for authorisation of the benefit before you proceed. If a charity trustee (or connected person) receives an unauthorised benefit, the charity trustee will have acted in breach of trust and may be liable to repay the benefit to the charity.
A benefit is interpreted widely to mean any (direct or indirect) financial or other measurable benefit of any nature, including any ‘benefits in kind’ such as the free use of a charity’s facilities or services that users would normally pay for. It also benefits extends to persons connected to the trustees, such as a trustee’s children, parents, grandchildren, grandparents, siblings, spouses and civil partners, and companies in which a trustee or connected person has a substantial interest.
It is common for governing documents to permit certain benefits (e.g. payment of expenses to trustees) and the Charities Act also permits trustees and connected persons to be paid for the supply of services to the charity, provided that the procedure set out in the Act is followed. If your governing document does not already include provisions to reflect this, you might wish to consider updating it (but, please note that for most charities it is necessary to obtain Charity Commission consent to any amendments to provisions in a governing document that authorise the trustees or persons connected to them to receive benefits from the charity).
Even if your governing document does permit the benefit, it is important to ensure that you manage all conflicts of interest appropriately in accordance with the requirements of your governing document. The trustees should properly assess any potential risks and manage the conflicts of interest arising from the personal benefit to that particular trustee. It is important to be open and transparent about any decisions to allow a trustee benefit, and be prepared to justify the decision if challenged.
This article is from the January 2019 issue of Essential Trustee, our newsletter for charity trustees and senior management. To download the latest issue, please visit the newsletter section of our website. Law covered as at January 2019.